Written By: - Date published: 6:51 am, April 11th, 2016 - 287 comments
Categories: accountability, capitalism, class war, Gerry Brownlee, International, john key, making shit up, tax - Tags: broken by design, lies, one law for the rich, panama papers, tax haven, white collar crime
Slightly Updated in response to a useful discussion with Nadis in comments – the original version of this post was too strongly worded.
New Zealand is a tax haven. We became a (much more attractive) tax haven in 2011 as a result of a law change directly instituted by John Key. Chapman Tripp – “New Zealand’s leading full service law firm” – helpfully explains:
New Zealand now an attractive tax location for offshore managed funds
10 October 2011
Foreign investors in a New Zealand fund with only foreign investments will now bear no New Zealand tax on their income, whether or not the fund distributes that income. The tax change, which came into force in September 2011, should make New Zealand managed funds an attractive alternative to funds resident in Luxembourg, Ireland or the Caymans.
In 2008 when the PIE tax regime was introduced, it did not treat non-resident investors well. They could not be zero rated. Instead they had a PIR equal to the top tax rate (currently 28%). This made them unattractive to foreign investors, especially for a fund with income from non-New Zealand sources.
The Government recognised that this tax treatment was not sensible from a policy perspective. … Accordingly, the tax change now allows a New Zealand fund to elect to pay tax at 0% on foreign income attributable to foreign investors. The fund will treat the foreign investor as if it were a New Zealand company or trust. However, unlike a New Zealand company or trust, the foreign investor will have no New Zealand tax liability on the income attributable to it, either when earned by the fund, or when distributed. [My emphasis]
The proposal to change to 0% tax was the direct instruction of John Key:
“I have told Gerry to deliver me a paper that has zero rating of funds and we’ll work on that.”
If you want the gory details, the “paper” was the work of the International Funds Services Development Group, see their report here (pdf). The Cabinet paper in response to the report is here (pdf). Here are just a couple of extracts from the response:
Cabinet established the IFSDG to report back to Government on what would be required for New Zealand to successfully position and market itself as an international funds domicile. They were also asked to explore opportunities for the development of any associated financial activities.
The Treasury are fully supportive of measures that are already underway to establish a zero percent PIE tax rate on foreign sourced income for non-residents and to review the existing securities law.
note that it is intended that the zero percent PIE tax changes will be progressed in legislation later this year.
The change to 0% tax went ahead (here’s the IRD’s page on Foreign investment PIEs). Making NZ an “attractive” tax haven was a necessary part of Key’s (ultimately failed) plan to turn NZ into a “financial hub”.
*On the secrecy aspects of havens see the earlier post by Deborah Russell, and this piece on “reports Mossack Fonseca bragged about lax NZ tax laws”.
The rest of this post is too long, you don’t need to bother. It’s a timeline of some of the events and broader context to the above.
2007 / 2008: Portfolio Investment Entity (PIE) tax regime established:
When the portfolio investment entity (PIE) rules were originally developed in 2007, the focus was ensuring that the rules operated properly for resident investors in KiwiSaver funds. The rules were designed so the tax treatment of a resident investor in a PIE roughly matched that of direct investment into the PIE’s underlying assets. This required reasonably complex rules in a number of areas.
This regime (Labour’s law) had a 28% tax rate for foreign investors.
2008: New National government. Key is in a position to pursue his plans to turn NZ into a “financial hub”. This piece outlines Key’s considerable experience (mainly relating to Ireland) in this kind of process.
Dec 2010: Key rubbishes objections to his plans and directly specifies a 0% tax rate:
Key itching for quick action on financial hub
Prime Minister John Key has slammed bureaucratic pin-pricking over the proposed New Zealand financial services hub as “absolute rubbish” and stepped in to put the project on the fast-track.
The Prime Minister’s frustration with Ministry of Economic Development officials spilled over publicly during a question session at an Auckland dinner on Tuesday night where he stressed New Zealand needed to be more optimistic and back success. … Key went on to say MED’s approach was “absolute rubbish”.
“I don’t need the Magna Carta of documents – just get on and do something – which is why I have told Gerry to deliver me a paper that has zero rating of funds and we’ll work on that.” [My emphasis]
Feb 2011: Gerry Brownlee (Minister for Economic Development) delivers, with the Cabinet response to the report discussed in the main post above.
May 2011: The international financial “advisors” start drooling:
Tax reforms set New Zealand on course for non-resident funds boost
Last month, the kiwi government tabled a bill that would remove the current 28% tax rate on income incurred by non-residents investing in funds held in New Zealand.
Revenue minister Peter Dunne said the government considered these investors were being overtaxed under the current legislation, and he hoped the bill would remove the barriers for non-domestic fund investment.
“The news is that there is actually draft legislation now which is a final step towards implementation – before, the quango set up to analyse the situation may have recommended that such legislation not be implemented or the quango’s findings may have been ignored for politically expedient reasons. In fact, what is even better news is that this is receiving little publicity in New Zealand – which means there is a higher likelihood the PM will nudge it through without too much meddling from the country’s left wing camp. [My emphasis] ”
Pesky left-wingers wanting to ruin rich folks’ fun by making sure they pay taxes like everyone else.
Sept 2011: Change to 0% tax (for foreign investors using a New Zealand PIE with no domestic investments) makes NZ an attractive tax haven, as in the main post above.
Sept 2011: Simon Power (Commerce Minister) raises concerns about our regulatory framework:
NZ unable to help international agencies combat fraud: Simon Power
Links between a local company and a Panamanian financier alleged to be involved in crime have fuelled fears that overseas criminals are favouring New Zealand registered companies to perpetrate fraud, launder money and evade taxes.
Simon Power acknowledged New Zealand’s reputation as a good place to do business had been harmed by overseas individuals using New Zealand registered companies “to commit or facilitate crime such as money laundering, tax evasion and fraud, in overseas jurisdictions”.
He said the misuse of company structures by “a small number” of overseas individuals and New Zealand-based agents “threatens our international reputation as a good place to do business”.
This article gives some details of the scale of the problem:
“…a $1.5 billion a year business that has tarnished New Zealand’s financial reputation.
“Those who wish to conduct unlawful activities are increasingly seeking to incorporate companies in New Zealand”
A major investigation by Fairfax Media into the misuse of New Zealand shell companies uncovered links between entities on our Companies Register and the looting of hundreds of millions of dollars from a state-owned bank in Kyrgyzstan, millions of dollars in laundering by Mexican drug cartels and the rorting of the Ukrainian Ministry of Health.
In fact, such is the scale of the problem that the Reserve Bank says it has identified 1000 entities “potentially involved in frauds in overseas jurisdictions.”
May 2012: Official advice forces Key to back off his grandiose plans:
Key backs off ‘hub’
John Key’s plan for a financial services hub in New Zealand would require years of taxpayer support and risks transferring wealth offshore, Treasury has warned the Government. The Government’s lead economic and financial policy agency advised that plans to pay international banks to move here represent “a wealth transfer from New Zealand taxpayers to overseas financial institutions”. Further, the touted benefits were highly uncertain.
Following queries from the Sunday Star-Times last week, Key distanced the government from the controversial aspects of the plan. “The more costly aspects of the [hub] plan were not seen as an effective use of taxpayer money,” a spokesman said.
RIP to both the Hub and Key’s credibility. Continuing from the above…
The financial services hub proposal emerged after banker Craig Stobo told the Government’s 2009 Jobs Summit an economic boost would result if the Government created a zero tax rating for foreign investors who invested in international funds based here. … Stobo’s appointment came after the Government’s Capital Markets Taskforce expanded the initial zero-tax idea into an ambitious plan to compete directly with tax havens Luxembourg, the Cayman Islands and Ireland to host international funds investing in the Asia-Pacific region. [My emphasis]
Treasury analysts also noted potential hub competitors Ireland and Luxembourg were being forced to change their financial hub regimes after an OECD crackdown on tax havens.
May 2012: The EU takes action:
New Zealand removed from EU ‘white list’
New Zealand and Russia have been struck off a prestigious European Union banking and corporate “white list” over this country’s weak money laundering and terrorism financing controls.
Craig Elliffe, professor of Taxation Law and Policy at Auckland University Business School, says this country’s foreign trust structure effectively provides a vehicle for foreigners not to pay tax and therefore, in a broad sense, we are a tax haven.
The tax haven that isn’t called a tax haven. A rose by any other name.
See also the interesting range of quoted marketing material advertising our “clean” haven status.
2013: IRD warning. As summarised by Vernon Small:
However, in a 2013 report IRD warned that “our foreign trust rules continue to attract criticism, including claims that New Zealand is now a tax haven in respect of trusts”.
IRD said this was largely because “the mismatch between our rules and those of other countries may result in income not being taxed either in New Zealand or offshore”. “To protect our international reputation, it may be necessary to strengthen our regulatory framework for disclosure and record-keeping.” “This, in turn, raises the question of whether our foreign trust rules are sustainable.”
Key misleading over OECD tax haven report
Prime Minister John Key has again been caught out misleading the public over New Zealand’s role as an international tax haven for the world’s mega-wealthy and elite, Leader of the Opposition Andrew Little says.
“John Key today claimed a 2013 OECD report gave New Zealand a ‘clean bill of health’ over trusts and tax laws.
“That is nonsense. The report (page 8, par 5) actually recommended our laws be made more transparent around who owns foreign trusts and who holds the assets of such trusts. “It also raised concerns that enforcement provisions to ensure correct information is given to the Companies Registrar don’t necessarily apply to companies with non-resident directors.
“John Key also conveniently forgot to mention another 2013 OCED report – this one into bribery – which criticised New Zealand’s use of shell companies and failure to prosecute anyone for foreign bribery. “Of most concern is the report’s finding that ‘New Zealand shell companies have been reported as being fronts for international laundering of drug money, fraud and terrorism’. …
July 2013: Tighter laws come into effect (without changing the 0% haven):
NZ’s anti-money laundering laws now in effect with banks expected to pry more into customer identity and account activity
New Zealand’s long awaited anti-money laundering laws are now in place, almost four years after Parliament passed the Anti-Money Laundering and Countering Financing of Terrorism Act.
Passed by Parliament in October 2009, the Act’s aims are to detect and deter money laundering and the financing of terrorism, maintain and enhance New Zealand’s international reputation by adopting, where appropriate in the New Zealand context, recommendations issued by the Financial Action Task Force, an inter-governmental body established by the Group of Seven (G7), and to contribute to public confidence in the financial system.
October 2015: Well and good, but it looks like the new law didn’t go far enough:
Gareth Vaughan wonders whether a sign saying ‘welcome to John Key’s South Pacific money laundering paradise’ should be hoisted at Auckland International Airport
On the surface such a question might seem preposterous for what remains a well respected little first world country at the bottom of the world. But when you dig below the surface it’s entirely possible that it may be.
It’s only just over two years ago, on June 30 2013, that the AML/CFT Act finally took effect having been passed by Parliament in 2009. This move saw NZ removed from a regular follow up list (effectively the dogbox) by the Financial Action Taskforce (FATF), the key global anti-money laundering oversight body, in October 2013.
Although the likes of our banks, financial advisors, and casinos are now knee deep in AML/CFT compliance, plans to extend the Act to the likes of real estate agents, lawyers, accountants and potentially to jewelers and precious metal dealers, have progressed at the speed of an asthmatic snail.
Meanwhile, the territorial guidance for the AML/CFT Act means dozens, or possibly hundreds, of NZ registered financial services providers that operate overseas but not within NZ, aren’t supervised by our regulators for compliance with the AML/CFT Act. This means we are, undoubtedly, facilitating money laundering overseas, or if you prefer, exporting money laundering to the world. …
April 2016: Release of the leaked “Panama Papers” drags all of this out into the sunlight. John Key claims that “New Zealand has had the same tax laws when it comes to trusts since 1988”. And different laws for the crucial PIEs since 2011.
April 2016: The NZ tax haven features in this story:
The Panama papers: NZ – the quiet tax haven achiever
Both countries [Malta and NZ] are quiet achievers in the ranks of global tax havens, and both are determined to keep it that way.
While Malta has been fiercely resisting pressure to close tax avoidance loopholes used by foreign companies, including Australian firms, to move profits out of the European Union, New Zealand has fought just as hard to protect its laws that make foreign profits tax-free and invisible for beneficiaries of its offshore trusts. But what Key didn’t know, as he and Australia’s Prime Minister Malcolm Turnbull mingled with Muscat at CHOGM, was how deep those links really ran. [My emphasis] …
Today: In news this morning:
NZ urged to act on Panama Papers
New Zealand is being accused of dragging its heels in response to the Panama Papers as the rest of the world starts to crack down on tax avoiders and money launderers.
Britain’s banks have until the end of the week to say whether they have ties with Mossack Fonseca, the United States will force banks to identify who is behind shell companies and more than 800 Australians are under investigation across the Tasman.
European Union tax commissioner Pierre Muscovici has vowed to close loopholes, and wants to set up a blacklist of tax havens. “We don’t have that at the moment, I want the EU to have one in six months time,” he said.
Even the country at the centre of it all, Panama, was creating an international panel to help clean up its offshore financial industry.
[However], New Zealand Prime Minister John Key has resisted calls for action, despite further evidence this country was being used as a tax shelter.
NZ as tax haven, all part of the Key legacy.