Panama tax rort stirs world leaders but not Key

Contrast John Key’s response to revelations in the “Panama Papers” tax evasion scandal to that of most leaders and you understand where the prime minister and National stand on tax and a fair society.

Key’s response was to state that New Zealand has a “robust, legitimate tax regime that requires foreigners to fully disclose”. Nothing needs to change.

As was soon revealed, full disclosure was not only a very economical version of the truth (disclosure did not extend to financial disclosure for example), but exposed Key and National as content to do nothing to prevent multinationals and foreign entities ripping off the New Zealand tax base, to say nothing of swindlers, crooks, money launderers and the mafia using our deregulated, lax laws for nefarious purposes.

US President Barack Obama ordered Treasury and Congress to investigate ways and means to prevent companies setting up offshore shelf companies to avoid tax.

He noted that “a lot of it is legal, but that’s exactly the problem.”

It’s not that they are breaking the laws, it’s that the laws are so poorly designed that they allow people, if they have enough lawyers and caveats, to wriggle out of responsibilities that ordinary citizens are having to abide by.”

People had to know that the wealthy weren’t playing by a different set of rules and not gaming the system, he said.

Tax avoidance is a big global problem. Lost revenue has to be made up somewhere.”

Whether or not Treasury or Congress actions are effective, at least Obama recognises the issues.

Leaders of France, Spain, Austria and the Netherlands also pledged their governments would investigate the shady offshore trust business revealed in the leaks of Panama-based law firm Mossack Fonseca.

Meanwhile, Key denied the “Panama Papers” had embarrassed his Government or created a reputational risk for New Zealand.

New Zealand was a signatory to international tax treaties which allowed information exchanged between jurisdictions and a review of New Zealand’s foreign trust rules by the OECD in 2013 gave New Zealand a “clear bill of health”, he said.

The $24 million of fees generated annually made our lax tax regime worthwhile.

He also denied New Zealand was a tax haven.

Despite this, Inland Revenue warned in 2013 that New Zealand’s foreign trusts posed a reputational risk, adding that “our foreign trust rules continue to attract criticism including claims that New Zealand is now a tax haven in respect of trusts.”

It specifically warmed that New Zealand tax rules were a mismatch with other countries, even where there were doubled tax agreements, which, “may result in income not being taxed either in New Zealand or offshore.”

Use of NZ Trusts

The Panama Papers, the leak of over 11 million Mossack Fonseca documents, reveal New Zealand-based trusts have been used by clients of that firm, many of whom have used the murky route for money laundering, tax dodging and other illegal purposes.

Owning an offshore company or trust, is not illegal, but the Panama Papers reveal that concealing the identities of the true company owners was the primary aim in the vast majority of cases of the 214,000 entities leaked. Criminals, mafia groups, drug barons, human traffickers, oligarchs, highly ranked officials of some governments, have all been shown to be involved.

One New Zealand trust used by Maltese government minister Konrad Mizzi was one of nearly 12,000 foreign trusts in New Zealand, most of which do not pay tax on foreign income.

The “full disclosure” John Key claims for New Zealand trusts, amounts to registering the name of the trust and providing the name of the New Zealand trustee, usually a professional nominee who is adept at being economical with the truth if you can ever contact them.

IRD powers very limited

Further information, such as settlements and distributions, can legally be requested by IRD and passed on to one of 40 nations where New Zealand has double tax agreements (plus 11 others which have information sharing agreements), but IRD has to have reason to suspect before requesting such information. In practice, that just doesn’t happen. And if the trustees come from some murky jurisdiction outside the 51 above, then IRD is whistling in the wind.

University of Auckland Law Professor, Michael Littlewood, said IRD’s ability to collect information is very limited. With the exception of Australian residents, the trustee of New Zealand foreign trusts did not have to disclose the identities of the people putting assets into the trusts, where they come from, what the assets were, or their value, or who benefitted from them.

“As currently provided for, they (the disclosure requirements) are woefully inadequate.”

The do nothing option

Initially, Revenue Minister Michael Woodhouse ruled out any changes, saying New Zealand had “world-class” tax rules but as the revelations of the Panama Papers gained traction, amended his position to stating, “the Government wouldn’t rule out changes”.

However, instead of taking the initiative, he said the government would await OECD-led reform.

Woodhouse’s predecessor, Todd McClay, sought advice following the IRD’s 2013 warning of reputational damage, but was put off because “it would require a lot of hard work” and “the argument was, ‘was it worth it in terms of all the other issues on the IRD work programme?’.”

Multinationals’ tax avoidance even more damaging

A similar, and more financially damaging, fiddling-while-Rome-burns attitude has been taken in respect to multinationals like Facebook, Apple, McDonalds, and Coke rorting different tax rates around the world so they play virtually no tax here or anywhere else.

Law Professor Craig Elliffe, author of the book International and Cross Border Taxation in New Zealand, said 20 top multinationals paid just $1.8 million of tax on over $10 billion in turnover. Even John Key didn’t think that was totally fair, he said.

Former Google chief executive Eric Schmidt infamously defended such accounting tricks that had allowed it to funnel billions of dollars of profits to Bermuda each year, saying it was “called capitalism”.

When the OECD surprised the world by rapidly coming up with a set recommendations on its Beps (Base Erosion Profit Sharing) project to prevent avoidance of an estimated US$100 billion to $240b of corporation tax by the likes of Google, McClay promised that New Zealand would implement these before the end of this year.

Answering questions about how the legislation was progressing, current Revenue Minister Woodhouse pointed to the legislation introduced in November covering GST on online purchases.

This was an important first step in the government’s efforts to deal with increasing volumes of online services and other intangibles purchased from overseas suppliers, he told The Standard.

“Consultation had also been undertaken to seek feedback on proposals to strengthen our non-resident withholding tax rules which currently could provide the ability for non-residents to shift profits out of New Zealand with no or minimal New Zealand tax paid.

“Feedback from the public has been analysed and considered and I expect to introduce legislation on this matter in the near future,” he said.

“I would note that the most effective way to ensure that multinationals cannot exploit differences in tax rules lies in ensuring that there is consistency between jurisdictions. If there is little difference between tax rules, then profit shifting becomes pointless. And that is why we have committed to an OECD led, global response to this global problem.” Woodhouse said.

He told The Standard that a strong network of double tax agreements, tax information exchange agreements and such agreements were crucial in getting multinationals to pay their fair whack of tax.

Double tax agreements actually a threat

Prof Elliffe said such treaties were actually “the most significant threat because they are being used in a way that significantly reduces the ability of New Zealand to tax New Zealand-sourced business profits.”

New Zealand only had the right to tax these profits when a foreign multinational operates through what is known as a “permanent establishment” in New Zealand.

“At the heart of the problem is that some multinationals can operate without triggering a tax liability due to the way in which they can step around the taxation of business profits using (legitimately) these permanent establishment provisions of double tax agreements,” Elliffe says.

This is because they can sell or deliver their goods online and have them delivered without breaching the permanent establishment threshold.

Elliffe says that many multinational have structured their affairs so that double tax treaties are “creating a situation of double non-taxation”.

He suggested New Zealand should follow the example of Australia and the UK which had enacted measures of “unilateral legislation treaty override” which means that where a multinational abuses the intent of tax laws or treaties, they will have to pay up anyway.

However Woodhouse dresses the measures the government is considering, they appear to fall far short of dealing with the issues of full disclosure of foreign trusts, or of multinationals having billions of dollars of sales with commensurate profits in New Zealand and paying next to next to no tax.

The lack of intent to act comes down to ideology – that tax is anathema to the Right. The less tax the better and therefore the idea of closing tax loopholes at the bottom of National’s agenda.

John Key’s background was with the now defunct bank Merrill Lynch, which like other US investment banks, was instrumental in designing aggressive tax avoidance plans. Many in National’s constituency will be using offshore trusts and aggressive tax planning to minimize their tax. Why would he act to stop such behaviour?

(Simon Louisson formerly worked for The Wall Street Journal, NZPA, Reuters and was most recently a political and media adviser to the Green Party)