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Changing New Zealand's tax laws relating to foreign trusts will not be easy, despite calls from opposition MPs and others calling for tax loopholes to be closed.
The easiest way to solve the problem would be for overseas countries to adopt tax rules similar to New Zealand's, rather than trying to change the trust laws in this country, tax professionals say.
The Otago Daily Times canvassed tax professionals, asking why foreign trusts had suddenly become such a hot topic.
They said foreign trust laws were there to protect New Zealand taxpayers and ensure the correct amount of tax was paid by New Zealand residents.
A foreign trust can have a New Zealand resident trustee but will not be taxed on income earned overseas.
Labour Party leader Andrew Little yesterday lambasted the Government's inquiry into foreign trusts saying Transparency International had warned the inquiry into trust disclosure rules failed to address fundamental issues raised by the Panama Papers.
Transparency International warned the narrow terms of reference meant the inquiry "will merely investigate foreign trusts rather than tackle the broader spectrum of financial crime risks associated with New Zealand companies and trusts'', he said.
"Transparency International has also raised concerns about the inquiry's limited scope, short deadline and the fact it ignores substantial government policy work already done in this area.''
The criticism came amid revelations about the influence Prime Minister John Key's lawyer and adviser had on the Inland Revenue's decision not to clamp down on foreign trusts, Mr Little said.
Tax professionals contacted by the ODT said the problem was not so simple.
"I think it's fair to say they [opposition MPs] sense a political opportunity to fire a shot at the PM without understanding the big picture. It's not unusual for IRD to have things on their work list and then remove them just as quickly as other priorities come up,'' one expert said.
Governments around the world were concerned about big companies circumventing tax laws by parking profits offshore and about multinationals not paying enough tax.
Australia this week moved to close some loopholes those companies were using to avoid paying their share of tax, modelling the law on Britain's "Google tax'' - an anti-tax avoidance framework.
Governments were saying they did not like "profit-shifting'', but the release of the Panama Papers revealed world leaders and prominent people were doing exactly what governments were saying they did not want to happen.
New Zealand's foreign trust laws had a loophole that could be exploited by overseas people, despite the law being in place to protect New Zealand's tax base.
Because of the way New Zealand's law worked, overseas people could set up a New Zealand foreign trust to park profits that New Zealand could not tax.
If the trust had no New Zealand resident beneficiaries, no tax would be paid.
And because the trusts had to be set up and administered correctly under New Zealand law, some New Zealanders had made money by setting up trustee services to run the trusts.
Some New Zealanders are now saying this country should be seen as having a regime that allows tax avoidance.
But unlike a tax haven, which attracts capital, the foreign trust regime was not put in place to do that, tax professionals said.
"This is not easy to change as it is a fundamental building block of our tax system. We want New Zealand residents to pay tax here.''
As an example, if a young American moved to New Zealand and their parents had established a trust in the United States, the parents who settled the trust were not New Zealand tax residents and the trust was then considered a foreign trust.
The present foreign trust rules treated distributions to the young person as a taxable distribution unless it was a distribution of the capital on the trust or an "arm's length'' capital gain.
The most typical distribution from a foreign trust to be taxed was a distribution of income derived in the previous year.
The income would not have been taxed in New Zealand in the year it was derived.
New Zealand could tax the distribution of the income when it was distributed to the New Zealand resident beneficiary.
"This is a massive problem to fix. Even trying to tax New Zealand resident trustees . . . it is hard to imagine how to implement that change. I suspect this is the reason the Government is taking a hands-off approach - the Government doesn't see it as its problem,'' one tax professional said.
Most tax experts believed the foreign trust issue was not a New Zealand problem and the Government should be telling overseas administrations to tighten their rules which allowed their residents to set up foreign trusts to avoid paying tax.
Even if New Zealanders had investments in a tax haven overseas, eventually the money could find its way back to New Zealand and be taxed.
At a glance
The Panama Papers are an unprecedented leak of 11.5 million files from the database of the world's fourth-biggest offshore law firm, Mossack Fonseca. The records were obtained from an anonymous source by German newspaper Suddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists (ICIJ). The ICIJ then shared them with a large network of international partners, including The Guardian and the BBC.
What do they reveal?
The documents show the myriad ways in which the rich can exploit secretive offshore tax regimes. Twelve national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens.