The Dim-Post

May 7, 2016

Ah ha!

Filed under: Uncategorized — danylmc @ 4:27 pm

A couple of days ago someone asked me how, exactly, New Zealand’s foreign trust regime allowed its clients to avoid paying tax in their home country. And I had to admit that I had absolutely no idea. But there’s a meandering article in the Australian Financial Review that touches on that very subject:

In 2013 Mossack Fonseca had been on a marketing drive, cutting its prices to build up its New Zealand office.

“Chase the money,” head office in Panama urged its New Zealand staff.

Mossack Fonseca offered two New Zealand products to its overseas clients: an NZ foreign trust, and a Look Through Company (LTC).

As long as the trust and the LTC had no income in New Zealand and had no New Zealand beneficiaries, then they paid no New Zealand tax.

But there was another advantage because technically the LTC was taxed, it’s just that the tax rate was set at zero.

One French investor who moved his holding company from Luxembourg to a New Zealand LTC knew he would pay no tax.

But New Zealand has a double-tax treaty with France, which meant that he could repatriate the profit to France where it was not taxable because it had already been “taxed” in New Zealand.

Usual disclaimer. I know absolutely nothing about foreign trusts, or tax law. Maybe there’s a totally reasonable explanation for this. But a tax rate set at zero percent sounds like a law that has been specifically designed to enable tax avoidance for offshore trusts. Does it play some other role? What’s the rationale? And when did that specific part of the law come into effect?

24 Comments »

  1. That’s not quite right for the foreign trusts. They’re not taxed here, because we have a settlor regime. They’re not taxed in other jurisdictions, because other jurisdictions have a trustee regime.

    Proper explanation here: What’s going on with foreign trusts?

    Comment by Deborah — May 7, 2016 @ 5:15 pm

  2. The real question is on this issue is: What did Helen know and when did she know it?

    Comment by Tinakori — May 7, 2016 @ 6:14 pm

  3. @Tinakori, was it Helen who made that speech about turning NZ into the Jersey of the South Pacific ?

    I wonder if our zero tax gift allowance is a factor. National changed the gift tax to 0%. I asked a mate who is a partner in an accounting firm to check out whether this means you could avoid tax by, say, “gifting” funds rather than being paid an income. He checked with the tax partner – the answer is “Yes, yes you can”.

    Comment by Mikaere Curtis — May 7, 2016 @ 6:29 pm

  4. How does any law in New Zealand change the duty of a foreign national not resident in New Zealand to declare his global income in his home country?

    How does any foreign law change the duty of any New Zealand tax resident to declare their global income as required by New Zealand tax law

    Comment by Jim Rose — May 7, 2016 @ 6:32 pm

  5. Danyl, I know marginally less than you do about foreign trusts or tax law. However, I do pay taxes in two different countries under tax treaties. The following phrase stood out to me:

    > But New Zealand has a double-tax treaty with France, which meant that he could repatriate the profit to France where it was not taxable because it had already been “taxed” in New Zealand.

    That does not sound correct – at the least, it’s not how it works for regular income. A tax treaty doesn’t mean you pay the lower amount of the two taxes; typically (certainly for the US in my case) I have to pay the higher amount. Maybe it’s different for trusts; but it’d be interesting to hear why so.

    Comment by sam s — May 7, 2016 @ 6:52 pm

  6. A cursory search of NZ trusts and tax advice throws up the Income Tax Act 2007.

    Seems a lot of the advice on how to use NZ tax laws to avoid tax is based on that.

    Comment by NeilM — May 7, 2016 @ 6:53 pm

  7. But there was another advantage because technically the LTC was taxed, it’s just that the tax rate was set at zero. One French investor who moved his holding company from Luxembourg to a New Zealand LTC knew he would pay no tax. But New Zealand has a double-tax treaty with France, which meant that he could repatriate the profit to France where it was not taxable because it had already been “taxed” in New Zealand.

    I’m not meaning to let NZ off the hook, especially since the legal and accounting issues are beyond my understanding and I highly doubt there are simple fixes against well resourced people wanting to avoid tax, but is it possible that maybe France also needs to accept some responsibility here for apparently not having rules which take into account extremely low tax rates overseas? When I fill in my personal IR3 for IRD, tax I’ve paid on earnings from overseas only offsets possible tax to New Zealand…. and if overseas taxed at 0% then that tax would offset nothing. How come it’s not working like this for that “French investor”?

    Unrelated: Danyl I reckon your blog worked better without the comments. Most threads here get out of control and irrelevant after the first few days.

    Comment by izogi — May 7, 2016 @ 10:08 pm

  8. Interesting stuff, thanks for the link Deborah

    I wonder what would happen if the disclosure rules were amped up. Would most of these trusts disappear? I wonder if some of them might be hard to wind up?

    Would another approach be to start taxing foreign trusts where the trustee lives here, like everyone else in the OECD? We might pick up a bit of tax revenue off that?

    A.

    Comment by Antoine — May 7, 2016 @ 10:44 pm

  9. LTCs were designed to pay no tax – that’s why they are called Look Through Companies.

    The IRD looks through them at the those that control the company – in order to tax them as individuals.

    It was a measure to counter tax avoidance happening under LAQCs and one of many measures the National govt has introduced to make property investment less attractive.

    Comment by NeilM — May 7, 2016 @ 11:10 pm

  10. Having just read the manifesto in which leftists claim Key was the only world leader mentioned – apparently Obama who is mentioned as well doesn’t get to be considered a world leader – and claims Key has is responsible for whatever happens in the Cook Is, I’m waiting for Greenwald and Hager to start trumpeting the people’s revolution against The Establishment like last time.

    Comment by NeilM — May 7, 2016 @ 11:27 pm

  11. Mikaere Curtis has suggested that if you were “gifted” your income would you be able to avoid tax.
    You will have to look at it from the viewpoint of your employer as well. If someone pays you a salary or wages that you have to pay tax on they can deduct that payment from their, or probably their companies, taxable income. There is no such deduction for a “gift” unless they could somehow argue that you were a charity, and get you registered as such.
    There would be no deduction from taxable income and the business would have to pay tax on the amount.
    In practice the amount you avoided would be the amount extra your employer would have to pay.

    Comment by alwyn — May 7, 2016 @ 11:39 pm

  12. Mikaere Curtis has suggested that if you were “gifted” your income would you be able to avoid tax.

    One could try but avoiding tax by any method is avoiding tax and the IRD will hit you hard if they catch you.

    I don’t quite understand how people thing the IRD isn’t out to catch tax avoiders . Maybe they don’t run a business of they naively think they themselves won’t get caught.

    Comment by NeilM — May 7, 2016 @ 11:51 pm

  13. NeilM – you can draw a pretty obvious conclusion from the law relating to offshore trusts and LTCs that the IRD isn’t allowed to care about pursuing tax avoidance efforts by those who utilise such vehicles.

    If you are a local on the other hand…

    Comment by Gregor W — May 8, 2016 @ 8:43 am

  14. I don’t quite understand how people thing the IRD isn’t out to catch tax avoiders .

    It’s out to catch NZ tax avoiders. The post is about trusts used by people who aren’t NZers.

    Comment by Psycho Milt — May 8, 2016 @ 9:24 am

  15. @Tinakori, was it Helen who made that speech about turning NZ into the Jersey of the South Pacific ?

    No but it was Helen’s government who passed the current law relating to use of trusts by foreigners. Maybe Helen and John were working together even at that stage? Now there’s a conspiracy investigation for the Witchfinder General Nicky Hager to pursue.

    Comment by Tinakori — May 8, 2016 @ 9:57 am

  16. “As long as the trust and the LTC had no income in New Zealand and had no New Zealand beneficiaries, then they paid no New Zealand tax.

    But there was another advantage because technically the LTC was taxed, it’s just that the tax rate was set at zero.”

    ??? It had no NZ Income … so it was levied no NZ Tax… so it paid no NZ TAX. That doesn’t mean its NZ Tax Rate was ZERO. That is a maths fail I am sorry…

    Income/Loss x Tax rate = Tax paid/Refund Received/Tax Loss carried forward…… If Income or Loss is ZERO then the TAX RATE can be 100% and the TAX PAID is still zero…… because anything times by zero is zero

    Tax treaties allow offsets on Tax paid in your non resident country, as I understand them so the above scenario of zero NZ Tax leading to clean repatriated funds that are not taxable in France seems very, very odd…

    So please provide more detail on this part “But there was another advantage because technically the LTC was taxed, it’s just that the tax rate was set at zero” to make it clear how no NZ income leading to no NZ tax due leads to Income in France being untaxable…

    Comment by dave1924 — May 8, 2016 @ 12:28 pm

  17. “There are no restrictions on the business that a Look through company may carry out. Being a regular Limited Liability Company at the first instance, it is treated similarly, may trade, open bank account all over the world and in New Zealand, own assets, become a shareholder of another company etc. As the LTC must be a New Zealand Tax resident, it could also enjoy the benefits of the Double Taxation Treaties signed by New Zealand. And no limits on the amount of foreign income that may be earned! Thus, this structure can be used for trading as all profits are deemed to be distributed amongst the shareholders who file a tax return each year indicating no income is derived from New Zealand sources.

    “In order to not being taxed in New Zealand, a LTC should have the following requirements:
    1. The shareholders are non-resident physical persons or trustees;
    2. The shareholders receive their share of profit and loss from non New Zealand sources”
    http://www.trust-nz.com/look-through-companies.html

    My understanding is that LTCs set their own tax rate, which could mean zero, and then tell the other country that they’ve “paid tax in NZ” – and there is no way of proving they have.

    Comment by RHT — May 8, 2016 @ 1:03 pm

  18. No but it was Helen’s government who passed the current law relating to use of trusts by foreigners

    And the law hasnt been amended since , specifically to ‘make it easier’ ? There are heaps of changes to tax acts every year, some are even written specifically by the big accounting firms

    Comment by dukeofurl — May 8, 2016 @ 3:55 pm

  19. I’m a solicitor who used to work in the NZ foreign trust industry. I think there are some significant issues with the industry but not for the reasons quoted by Little et al.

    It’s not well known that many developing, but also developed countries don’t tax their citizens vis a vis their interests in offshore trusts / companies unless and until the individual receives a payment from the trust (including the UK and most Latin American countries). So, foreign trusts essentially serve as an offshore untaxed money pot and the individual will only be taxed at the point the trust makes a payment to an individual (if this ever happens). One of the quirks of our trust taxation regime is that this treatment is not allowed for New Zealand citizens – but this tax treatment is very common in lots of other countries. So it is silly and uninformed to assume a foreigner must be avoiding tax by having a trust established here.

    Believe it or not (and no doubt many will choose not to) tax is often well down the list of establishing an offshore trust. Most people using NZ are from Latin America and issues like identity theft and personal security are very high – I personally know a NZ trustee who had a Mexican client who wanted to establish a NZ trust after being kidnapped by a drug cartel when their tax information (along with that of thousands of other people) was sold to them by a corrupt Government official.

    Tax aside, I think the much more concerning issue is the use of NZ trusts for money laundering. Currently under NZ’s anti-money laundering laws, a NZ trustee has a duty (under threat of imprisonment) to report any “suspicious transactions” to the FMA. However, in practise what happens is that the trust is only the top holding entity in a large web of structures all around the world, which are controlled and managed by either the client or by trust and corporate administrators in other, higher-risk jurisdictions such as Panama, the BVI, Cayman Islands etc. Physical funds or assets are virtually never held at the actual trust level (for various reasons) and the trust only generally holds shares in a holding company.

    Think of this in corporate governance terms with the trustee being akin to the board of directors only and having only indirect involvement in the actual activities of the structure and no real power to interfere in the substantive activity and flow of funds within the (sometimes hundreds) of entities “underneath” the trust. A trustee can’t report suspicious transactions if they don’t know what is going on (even if some would say this is wilful blindness).

    I think that is really the nub of the matter, and is why there is a story every few months about various politically exposed persons or oligarchs having links to a NZ trust.

    Comment by Expat — May 9, 2016 @ 12:53 am

  20. Interesting thanks Expat

    Do you have thoughts on how the situation could be improved?

    A.

    Comment by Antoine — May 9, 2016 @ 1:32 am

  21. Antoine,

    If you proceed on the basis the $25m contribution to the economy is worth the potential reputational damage, then first and foremost we need a register of beneficial owners which can be accessed by IRD to pass on to foreign governments on request. The trustee will be collecting this information already so it is just a matter of passing it to IRD on the existing form which must be submitted upon the formation of the trust.

    Regulation of foreign trust providers could also be considered to try to weed out the out maniac operating out of some back street selling these structures to North Korean arms dealers.

    If you proceed on the basis $25m is not worth it, simply follow what 99% of the rest of the world does and tax trusts based on the residence of the trustee. Industry closes overnight as people move their money elsewhere.

    Comment by Expat — May 9, 2016 @ 7:27 am

  22. > it is just a matter of passing it to IRD on the existing form which must be submitted upon the formation of the trust.

    What about trusts that are already in existence? Require resubmission of the form?

    A.

    Comment by Antoine — May 9, 2016 @ 8:20 am

  23. LTC don’t pay “zero tax”: the tax is paid by the shareholders. The LTC “regime” effectively replaced Qualifying companies and Loss Attributing Qualifying companies. And https://en.wikipedia.org/wiki/Look-through_company for further brief info.

    Expat: “then first and foremost we need a register of beneficial owners which can be accessed by IRD” but settlors often word these quite widely, don’t they? Wide enough to avoid overlooking some family member, but still giving some certainty to the trust’s objects. Did you mean settlor rather than beneficiai owner”?

    Comment by Clunking Fist — May 9, 2016 @ 2:51 pm

  24. Thanks for the explanation, Expat. So would the ‘avenue’ in the AFR article about the French company that was avoiding tax entirely still be available? Because it is quite concerning and quite elementary. If people like us can understand (when it’s explained) I can imagine it is already quite widespread. Also, I’ve been reading our double tax agreements and have identified six that have a similar ‘method for avoiding double tax’ articles. Is this worth investigating?

    Comment by Ian — May 14, 2016 @ 3:04 pm


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