The Prime Minister was too quick to declare his confidence in this country's treatment of foreign trusts following the "Panama papers". The inquiry he commissioned from tax policy specialist John Shewan has found the disclosure required of these trusts to be "light-handed" and the rules governing them "not fit for purpose" when it comes to "preserving New Zealand's reputation as a country that co-operates with other jurisdictions to counter money laundering and aggressive tax practices".
Mr Shewan's report provides a clear account of how New Zealand came to be a tax haven though, like John Key, Mr Shewan rejects that term. But he describes how and why New Zealand overhauled its international tax rules in 1988. Previously, New Zealand residents used overseas trusts to avoid tax on income they earned offshore. The offshore trustee would invest the funds and the earnings of the investments could be distributed to beneficiaries in New Zealand as tax-free capital after a short period. To close this loophole in 1988, our tax law became based on the principle that tax was payable on all income received by New Zealand residents and all income earned in New Zealand.
That principle obviously excludes from tax any income which is neither earned in New Zealand nor paid to New Zealand residents, but merely held in trust in New Zealand for overseas beneficiaries. That has permitted lawyers and finance managers in New Zealand to set up trusts with no connection to New Zealand except that they are administered here. The funds are not invested here, the pay-outs are not made here, they generate no employment, wages and taxes except for the fees charged by their administrators.
However small the benefit to New Zealand may be, it would be reason to welcome the business if its value is not outweighed by its costs. Mr Shewan has found there is a cost to New Zealand's reputation as a country that co-operates with others against money laundering and tax evasion. We have no examples of those from the reports of journalists here and abroad who have had access to the deluge of documents that "leaked" from the Panama-based international law firm, Mossack Fonseca. But it is clear from references to New Zealand that this country was seen as a tax haven for foreign wealth where their clients' identities would be secure.
Mr Shewan reports that no disclosure was required of foreign trusts here until 2006 when Australia expressed concern. Thereafter they had to be registered and some record kept. He notes there is now virtually no Australian money in foreign trusts here. But the number of registrations has climbed steadily since 2010. Among his recommendations to improve New Zealand's reputation he suggests a register of foreign trusts "searchable only by regulatory agencies". This appears to mean only domestic agencies. The problem remains that trusts would not be transparent to foreign tax authorities unless they know what to ask for. Some users of foreign trusts will have good reason to hide wealth from criminal extortionists and corrupt regimes but we have to ensure we are not serving the criminal and corrupt.