Foreign trusts in IRD sights

University of Auckland tax expert Craig Elliffe says there isn't enough information to assess the extent of the problem. Photo / Chris Gorman

Department aims to report to Revenue Minister Todd MClay before the end of the year.

The Inland Revenue Department is taking aim at the use of New Zealand trusts by foreigners to shield their income and assets from tax in their own countries following pressure from its overseas counterparts, the Business Herald understands.

IRD yesterday released two reports on its work around moves to curb tax avoidance and minimisation by multinational businesses.

Although the reports note much of the efforts in this area will follow the lead of OECD's Base Erosion and Profit Shifting (BEPS) work programme, it also details areas where New Zealand could act to unilaterally improve its international tax settings. That included a review of the taxation of foreign trusts.

IRD says it intends reporting to Revenue Minister Todd McClay on that issue before the end of the year and will release consultation documents in mid-2015.

New Zealand-based "foreign trusts" have been actively marketed overseas for benefits including their exemption from New Zealand tax on foreign sourced income, minimal compliance and reporting requirements, and no requirement for public disclosure of the beneficial owners.

However, they have been increasingly regarded with suspicion by tax authorities in other countries including the Australian Tax Office which is understood to have voiced its concerns to the IRD.

Staples Rodway tax expert Andrew Dickeson said there had been concerns for a number of years that New Zealand's reputation may be tarnished by our foreign trusts regime.

Dickeson said tax advisers had often observed there was a cottage industry in New Zealand around providing foreign trust services.

"That could just be eliminated by the minister's signature, just something going through Parliament getting rid of the tax advantages to foreigners through the foreign trust regime, so there might be some people a little bit nervous about that."

The Government is considering recommendations from the Law Society on greater regulation of trusts.

University of Auckland tax expert Craig Elliffe said while it wasn't clear there was widespread international tax abuse of New Zealand's foreign trusts, "there has to be a reasonable probability that they are".

"There is significant potential for them to be used as major tax avoidance techniques in other jurisdictions."

However, there hadn't been any major work to date to assess the extent of such activity.

"It's almost been as if it's a question that's too hard to ask, we've never collected the information adequately on who the settlors are for foreign trusts."

The documents released yesterday also discuss further changes around thin capitalisation rules which are intended to limit the extent to which foreign investors can minimise the tax bill on New Zealand profits by gearing up their local businesses so that much of their earnings are paid out in interest. Earlier changes limited debt levels for foreign-owned New Zealand business but the IRD is considering how to limit interest rates on such debt.

The IRD documents also discuss progress in instituting an "automatic exchange of information" regime which would require financial institutions to collect information about customers who have tax obligations offshore. That information would be shared with other tax authorities in a multilateral version of the controversial US Foreign Account Tax Compliance Regime.

See the IRD tax policy report here: