Plans by ministers to close a loophole that allow wealthy foreigners to use New Zealand-registered legal structures to avoid paying taxes have stalled, a Herald investigation has found.
New Zealand's role in offshore finance is again in the spotlight after the publication yesterday of the Pandora Papers, a major international investigation by the Herald and 150 other media organisations.
Based on the biggest data leak in history, the investigation reveals how the rich and powerful, including 35 country leaders and 133 billionaires, use complex and secretive financial structures to hold assets and move money around the world.
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.
In a 2018 briefing to Stuart Nash, Labour's Revenue minister at the time, officials said that while ministers had approved closing the loophole and legislation had been passed, "enactment was deferred for further design work…"
"This work has not progressed yet, due to lack of resources," the briefing stated.
Inland Revenue did not enact the proposal under the last Labour-led government, and it has not done so this term under current Revenue minister, David Parker, either.
Parker told the Herald the proposal is not dead.
"This proposal remains on the Government's tax work policy programme," the minister said.
A spokesperson for Nash this week said of his previous role as a revenue minister: "It is the Minister's recollection that he took advice from Inland Revenue at the time."
Green Party revenue spokesperson Chlöe Swarbrick said: "The Pandora Papers provide detail to what we've known for decades. Now is the time to take action – and the first thing this Government can do is act on this plan from four years ago to tax foreign trusts."
The briefings also reveal that representatives of the professional firms who set up and manage foreign trusts pressed Inland Revenue officials to keep the loophole open on several occasions.
But tax officials were unconvinced by the industry's arguments, the documents suggest.
Wider measures have been taken to stop multinational corporations using tax havens to reduce their liabilities and similar policies should apply "where well-resourced private individuals engage in similar types of transactions", officials said.
The current tax treatment of foreign trusts was introduced in New Zealand under Labour in 1988. They then became popular internationally because they offered a combination of minimal tax and a high degree of secrecy.
Documents obtained in the Pandora Papers show that offshore providers marketed New Zealand structures to their wealthy clients as "'low profile' and unlikely to attractive adverse attention". Investors could hold money or assets here discreetly without the stigma of using a tax haven or falling foul of international blacklists.
But the popularity of the foreign trusts came at a cost to New Zealand's international reputation as transparent and free from corruption.
By 2006, Australia was frustrated its citizens were secretly setting up trusts here. New Zealand responded to pressure from its neighbour by requiring trust providers to tell Inland Revenue if Australian residents were involved. For residents of other countries, however, disclosure requirements continued to be minimal.
All that had to be revealed from this time was the name of a trust and the lawyer acting as a trustee — not the identities of the settlor or beneficiary or details of assets held by the trust.
The penalty for trust providers failing to provide this basic information to Inland Revenue was potentially steep: A criminal conviction with up to five years imprisonment and a $50,000 fine. But no one was ever prosecuted, Inland Revenue confirmed last month.
Whatever information Inland Revenue did collect about these trusts went nowhere, according to former staff. For decades, it wasn't uploaded or integrated and available alongside other databases available to staff at Inland Revenue.
"There was no procedure, there was no register," said one IRD insider. "It was just a random Excel spreadsheet."
Former IRD staff told the Herald that, at this time, the tax department did not consider any damage that the use of the trusts by foreigners could do to New Zealand's international reputation. Because Inland Revenue could not collect taxes from the trusts, it had little incentive to look closely at them.
The foreign trust industry that began under Labour continued to grow under Sir John Key's National-led government, the documents show.
Key said he believed the growth of the foreign trust industry was consistent with his vision for diversifying New Zealand's economy.
"My relationship with the industry was and remains superficial," Key said. "I had for years given speeches that argued New Zealand had to create new industries away from food production, becoming the Switzerland of the South was just one of them. To this day I remain a supporter of this concept."
After the Panama Papers in 2016, Key ordered an independent inquiry which found that the disclosure rules relating to foreign trusts were inadequate. New rules on transparency were introduced in response to the report.
Peter Dunne, minister of revenue between 2005 and 2013, said the size of the trust industry meant that it was never high on the agenda for ministers.
"Because this was seen as a cottage industry, this stuff very seldom made it in my direction," Dunne said.
Later, when New Zealand was embarrassed by the Panama Papers – with the subsequent Shewan Review saying it was "reasonable to conclude" foreign trusts were being misused to hide illicit funds and evade, finally prompting Inland Revenue be allowed to collect information on where the offshore money was coming from and going to – Dunne said he regretted not taking a closer look.
"In retrospect, and hindsight is a wonderful thing, the answer would be yes. Had we known that at the time, there is no question that action would have been taken.
