It came as a surprise to most people here in New Zealand that a tax haven was being run by a few law firms out of Auckland. Who knew? Well the National Party and officials in the Inland Revenue Department knew, except they say it isn’t a tax haven. The Auckland law firms advertise their services by stating that it is a tax haven for offshore trusts. The Prime Minister, John Key, says it isn’t, and all the critics are wrong. But his lawyer, Mr Whitney, is running the Antipodes trust service, and they are advertising their services for setting up trusts. He even got the IRD stop a review of the tax haven, after talking to John Key.

So is it a ‘Claytons’ type arrangement, named after a drink that would taste like alcohol, but didn’t actually have any alcohol in it. Does the foreign trust regime in New Zealand appear to be a tax haven, but actually isn’t because we are a first world country adhering to OECD guidelines, as the Prime Minister claims. The truth is that it is a tax haven regime, and the tax law was changed in 1988 which created the trust company opportunity. It might have been an unintended consequence, but it was foreseen as a consequence, at least by the New Zealand Treasury at the time. The non-residents trusts do not have to pay any tax in New Zealand, but the same Treasury has always resisted more overt attempts to create a tax haven. This includes John Key’s own policy of creating a fully functioning ‘financial hub’.

Here is some history on the creation of a Claytons tax haven for foreign trusts. Indeed, 1987 was a big year for tax policy, most often remembered for the December income tax plan by then finance minister, Roger Douglas, which involved the imposition of a flat tax. That idea failed, and led to a split in the Labour Party. But there were big changes in the international taxation regime. The 1987 Budget had announced plans to crack down on tax avoidance by New Zealand companies using tax shelters, or shell companies in known tax havens. The new regime was created to introduce a workable Controlled Foreign Company policy, and something called Foreign Investment Funds in tax law, which would ensure that New Zealand residents couldn’t shift funds offshore with impunity. There was some talk about something called the “Raro run-around” type of caper, that referred to the use of the tax haven in the Cook Islands. We also know from the ‘Winebox’ papers that this happened.

The law around trust formation was changed along with the CFC and FIF regime. And the change to trust creation was meant to be fundamental, and reflect the assumed success in curbing tax avoidance in tax havens. The fundamental change was to create a ‘worldwide’ system of tax collection from New Zealanders which would also be world-leading, at least in the sense that no other country had this system, apart from the United States. The other countries would still have a ‘territorial’ system of taxation, tied to the legal form of trust regulation, and not recognise the economic substance of trust formation. The form versus substance distinction is obviously crucial in law, but in New Zealand the Treasury were the dominant force in policy formation, and they were ‘economic rationalists’. Their argument was that the main economic agent in setting up a trust is the ‘settlor’ not the actual ‘trustee’, and the trustee is merely an agent for the settlor. So when the settlor is not a New Zealand citizen, and the trust’s income is not based in New Zealand, it doesn’t matter if the trustee is an Auckland lawyer. For tax purposes a foreign trust is not our problem, say the New Zealand officials, it is a matter of the foreign countries having anti-avoidance laws.

So how did a lengthy exercise in creating a regime that would outlaw tax avoidance by New Zealand citizens using tax havens also lead to the creation of a tax haven for foreign citizens to utilise in New Zealand? It is undoubtedly true that Treasury officials recognised that this was the consequence of the trust law change. In September 1987 the Treasury’s tax policy head, Greg Dwyer, wrote this to the finance minister: “New Zealand has no reason to tax foreign source trustee income of a trust that has a New Zealand trustee but which was set up by non-residents and whose beneficiaries cannot include New Zealand residents.” He then goes on to state that this “may result in New Zealand becoming, in effect, a tax haven for such trusts.” So it would be a trust tax haven, not a fully fledged tax haven, like the Cayman Islands or Jersey. Dwyer then stated at the end of the memo that he was about to leave Treasury, and work for an ‘enterprise’ that would be ‘significantly’ affected by the law changes. A number of Treasury officials at the time joined the private sector, usually in merchant banks like Fay Richwhite, which was systematically rorting the New Zealand tax system through a trust company in the Cook Islands. And, while the anti-avoidance law changes obviously failed, the new trust regime proved a nice little earner for the former public servants and Auckland lawyers, until it all came to light in the Panama Papers.

There is still a story to tell about how New Zealand did not become a full-fledged tax haven, despite continual pressure since 1987 to remove the non-resident witholding tax. More on that later, the point for now is that Treasury believed that it had clear principles, based on its economic doctrine, and a policy that could be explained as a  worldwide tax system. Yet the result was a half-baked tax haven that facilitates tax evasion and worse, and a regime that the IRD does not admit to be a tax haven, even when the law firms advertise its wares.