A month or so ago there was a very interesting item on New Zealand’s TV3 network, in the local version of 60 Minutes. Reporter Guyon Espiner decided to take a closer look at the operation of non-resident trusts, and the role that these might play in tax avoidance. The New Zealand system allows foreigners to utilise New Zealand law firms, to create trusts whose income is not located in New Zealand, and not subject to income tax, but also avoids paying tax in their own jurisdictions. Espiner, following up on some newspaper financial opinion columns, came to the view that this was tax avoidance, legal but not moral, and this made New Zealand a tax haven.
The story was not really followed up politically, no real scandal here, and so it was not widely reported. But there were also a couple of problems with the reporting, even though the package was worthwhile and informative. The two specific things involved how the legislation creating the rules for non-resident trusts came about, which apparently dates from 1988. The second problem was the concept of a tax haven, and the interview with the Minister of Revenue in New Zealand, who appeared rather confused by the whole question.
Firstly the issue of what the legal position is in New Zealand since changes in 1988, which involved residents creating trusts and companies overseas. There are a number of factors, but the regime is called the Controlled Foreign Companies, or CFC, legislation. The problem is that Espiner clearly stated that the creation of non-resident trusts was related to the 1988 legislation, but was an unintended consequence. This must be wrong, it was quitely clearly known at the time how the changes to non-resident trusts would work. The changes meant that the world-wide income of the trust would not be assessed by New Zealand tax authorities, as long as the ‘settlor’ was a non-resident. The concept of settlement is probably quite complex but the effect is not: no income tax is paid in New Zealand nor in the foreign jurisdiction, unless the latter can legally enforce it.
The reason we know that the change to non-resident trusts was intentional is clear from an unlikely source in 1988, but one which becomes obvious given the role of tax avoidance. A paper for a European Pacific Investment Ltd’s seminar in May 1988 stated: “the New Zealand Government desires to make New Zealand a financial centre and to encourage competition amongst trust companies in the provision of domestic trustee services.” European Pacific was of course at the centre of the Winebox Inquiry in the mid 1990s, based on dodgy activites in the Cook Islands. While the Cook Islands was a tax haven, EPI simply relied on New Zealand’s Overseas Investment Commission being sufficiently liberal to allow companies to create non-resident trusts. Thus:
“The proposed changes to New Zealand tax law create significant arbitrage opportunities; given the fundamental taxation criteria for trust income in New Zealand will differ from the rules in other jurisdictions. Where a New Zealand trustee administers a non-resident trust, then the ownership by that trust of ‘vehicles’ in other jurisdictions would not be subject to the proposed New Zealand CFC legislation.”
This gives an insight into the room for manouevre for tax avoidance, though EPI was able to use the Cook Islands for tax evasion, so had bigger fish to fry.
The second problem in the programme was the attempt to interview the revenue minister, Peter Dunne, over the role of non-resident trusts. Dunne, who has been revenue minister for many years under different administrations, appeared completely confused. The issue was continually presented as one of tax avoidance, and therefore of the operation being like a tax haven. Dunne kept referring to tax avoidance being legitimate, and therefore New Zealand couldn’t possibly be a tax haven. But all of his examples involved tax in the New Zealand jurisdiction, such as the tax treatment of donations to charity. He did not seem to get that the tax assessment should be in the foreign jurisdiction where the non-resident was based, and that the trusts being based in New Zealand could therefore facilitate tax evasion.
The key point is that the changes made to facilitate tax avoidance by non-resident trusts was deliberate, and part of making New Zealand an international financial centre. We can call this a tax haven if we like. Fortunately there are ‘useful idiots’ like Peter Dunne, who, despite being in charge of the Inland Revenue Department, has no idea how tax evasion actually works. But since the trusts are legal, in Dunne’s view, it must be legitimate tax avoidance as far as the New Zealand government are concerned. And some clever lawyers and accountants earn good fees from foreigners, which are actually subject to tax, so lucky us.