While we have mainly been occupied with containing the current Covid-19 outbreak, world news has been looking at 11.9 million documents revealing dirty or questionable flows of capital and tax dodging by the affluent. Frequently it also looks like corrupt and criminal.
What was most interesting to me was Matt Nippert pointing out that we still haven’t closed off these flows into NZ. “Pandora Papers: Plans to reform a NZ tax loophole stalled ‘due to lack of resources’“. Unfortunately it is paywalled at the NZ Herald.
While the explosive revelations about prominent figures set off political tremors in dozens of countries yesterday, the investigation has also raised serious questions about how successive New Zealand governments approached international tax and offshore finance.
Four years ago, the National government promised to close a loophole that enabled New Zealand foreign trusts to become tax-free vehicles after an earlier massive leak, the Panama Papers, revealed they had been widely used by overseas residents.
Officials at Inland Revenue had long flagged concerns that “jurisdictional arbitrage”, whereby company service providers and their clients took advantage of a quirk in New Zealand law that meant they could set up trusts that would not be taxed anywhere in the world.
After the Panama Papers were uncovered in 2016, it was revealed that more than 12,000 New Zealand foreign trusts had been set up, which were subject to minimal scrutiny.
Judith Collins, the Revenue minister at the time, announced a suite of reforms the following year, including closing the loophole by making foreign trusts subject to New Zealand tax if the people using them were not paying tax elsewhere in the world. The government initially set a deadline of 2019 to allow the trust industry to prepare its clients for this new regime.
However, documents obtained by the Herald through the Official Information Act reveal that the proposal has languished.
NZ Herald: “”Pandora Papers: Plans to reform a NZ tax loophole stalled ‘due to lack of resources’“
However Nippert details that this set of reforms has not been done yet. It is on the pile of work to be done. But no legislative action has happened yet. That is unacceptable.
There are several issues with having this kind of money come into NZ from its sources to the tax avoidance and money laundering aspects. From the whiff of corruption, tax evasion
But for me, the primary problem is that it is just detrimental to actual investment in the NZ economy and we don’t receive any benefit from the practice. Except for the few law firms and companies dabbling in this “cottage industry”, it does nothing but harm to the rest of our economy.
Mostly the capital just passes through, and doesn’t productively rest in NZ for any length of time.
The actual money or assets are actually held offshore. Where it does lie in NZ , from my understanding, it seems to mostly go into unproductive speculative activity. Raising property prices on unused mansions or buying estates in tourism destinations.
We don’t collect much if any tax on the money flow. Moreover we simply aren’t in a position to collect any tax on it. As the Matt Nippert article shows from the papers coming from the IRD is that we simply don’t have any capacity to chase tax on these kinds of trusts, and it is unlikely that possible returns will ever get large enough to develop that capacity.
All we are doing is depriving other countries with legitimate tax or legal claims from collecting it. What it does do is to undercut the NZ position on multilateral controls on tax rates worldwide, reducing tax havens, and major companies running no or minimal tax regimes. Like Google or Amazon or many of the tech giants have been doing.
It also means that anyone wanting to actually invest legitimately in productive enterprises in NZ has the authorities in source tax areas looking at those investments as being probable tax evasion. After all NZ now has a reputation of being some kind of tax haven or path on the laundering of dirty money or assets.
I can’t think of a single good reason why the New Zealand public should support this regime. If we don’t have the capacity to modify the scheme to our benefit in a timely manner – then the course of action is obvious.
Treat this as another bad idea from the 4th Labour government and another vague and useless aspiration supported by John Key (he has a lot of those).
Just kill the supporting legislation immediately, and replace it with legislation by the current lawyers on the trusts that forces the open declaration of all assets held to the IRD, and retrospective taxation back to 2019.
After all, everyone was warned that the gravy train would get closed off in 2019. I’m sure that we will get a cross-party support to do this expeditiously.
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