Monday, November 05, 2012

Tax Haven New Zealand: a (dirty) rose by any other name

Let's get two things straight from the start. First, New Zealand is a tax haven - and a dirty one too. Take a look at this, or this, or this, or . . . (etc.) Second, all tax havens deny being tax havens. Take a look at this, for instance.

Now the New Zealand Herald has weighed into the debate with a considered and thoughtful article on the subject (with not enough shredding of the arguments of those defenders of tax haven activity, for our tastes, but still an interesting exploration.)

The article starts by citing NZ Revenue Minister Peter Dunne, who recently said:
“The key identifying characteristics of tax havens are secrecy and lack of transparency. Those are simply not factors here in New Zealand."
Click on those first links at the top of the story, and you will see that either Dunne is deliberately trying to mislead the New Zealand public, or he has no idea what he is talking about - which should raise questions about his competence and the people who are briefing him. In short, his statement is utter nonsense. The story contains so many silly statements like this that we will only select the most egregious here.

Anyway, the latest discussions have been sparked by a 60 Minutes programme (citing TJN's James Henry and others) that strongly suggested New Zealand was indeed a tax haven. Back to the clueless (or worse) Dunne:
"The term tax haven is a gross exaggeration because it implies illegality. It implies tax evasion rather that legitimate tax avoidance." 
He's wrong again; on three counts. First, the term 'tax haven' generally implies both evasion and avoidance - plus that huge grey area in between. Second, tax avoidance may be legal by definition, but that does not make it "legitimate." Apartheid was legal in its day, but that didn't make it "legitimate." Third, this is not a gross exaggeration, not at all. The cap fits New Zealand perfectly.

The 60 Minutes segment cites Professor Craig Elliffe of Auckland University as saying that using the  term 'tax haven' when referring to New Zealand "is probably the best way to describe it. We would effectively be a vehicle for foreigners not to pay tax - and in a broad sense, we are a tax haven." The programme digs up offshore promotional material that says "New Zealand is actually a tax haven, at least in respect of certain trusts." (Take a look at this.) The programme also provides some interesting history: the business began during the economic reforms of the fourth Labour government in 1988; trusts have only had to register their existence with Inland Revenue since 2006. By 2009 there were 4,500 foreign trsusts in NZ, that number has today nearly doubled to more than 8,000 (over 7,500 according to the Herald story); experts the programme spoke to said the trusts hold assets worth tens of billions of dollars.

Interestingly, a big part of the NZ trusts explosion happened in the 1990s when Mexico began to blacklist tax havens - but New Zealand wasn't on their list. So wealthy mexicans began to look to new tax havens, and many other Latin Americans began to follow. As Henry notes:
"The great advantage of NZ is that it is practically lily white. In addition, it has first class secrecy. It is not surprising that there has been this enormous explosion in the demand for foreign trusts in the last five years."
Given the enormous concerns of drugs money laundering that surround many wealthy Mexicans, and the extensive evidence that New Zealand company formation agents and trustees are less than diligent in conducting background checks on ultimate beneficial owners, this is a big, big, red flag. This jurisdiction needs urgent attention from international bodies, and urgent blacklisting.

The Herald story highlights the role of what appears effectively to be a shadowy bankers' lobby - the International Funds Services Development Group (IFSDG). We are prepared to stand corrected on our characterisation of the IFSDG, but this is how it is described:
"The IFSDG, which was established by Cabinet in 2010 to look at financial services opportunities for New Zealand, concluded that this country could build on its capability as "an exporter of financial services". A number of tax and regulatory changes were proposed for New Zealand to become a financial services hub."
One to watch. We don't have a problem with financial services per se, but taking a particular interest in financial services exports are an instant warning of potential tax haven activity.

The story goes on with weasel-worded quotes such as this one:
"While New Zealand is NOT an offshore haven, it is nonetheless recognised among informed practitioners as a first rate jurisdiction for certain financial structures. It provides all the advantages of traditional 'offshore' financial centres, but is regarded as a true 'onshore' financial centre which is NOT blacklisted by any jurisdiction or authority in the world."
(To summarise this statement, in less than a line: "New Zealand is NOT a tax haven . . . . but it IS a tax haven!" Or, as the Herald story puts it: A rose by any other name) It is also saying that they are not blacklisted, so everything is hunky dory!

The correct response to this is that the international standards and processes for white-listing tax havens are a disgrace. Note that when G20 leaders in April 2009 vowed that 'the era of banking secrecy is over" and mandated the OECD to crack down on tax haven secrecy via its blacklist system, it turns out that the OECD blacklist used was completely empty in the grand total of . . . . . wait for it . . . . drumroll . . . . five days. Yes, that's days. The whole process is a joke (read all about that here: we have documented the flaws in this process in exhaustive detail). Here is a more honest appraisal, from an offshore practitioner:
"Many low tax jurisdictions are blacklisted by OECD nations, who have implemented a wide range of regimes, rules and other measures aiming to prevent citizens from using them. As a result of this attitude, many practitioners and wealth holders are looking at other jurisdictions, with less scrutiny attached. One such country is the Southern Pacific nation of New Zealand."
 Yes indeed. The real story here is that New Zealand is a particularly dirty tax haven - but everyone thinks it is clean, so it has escaped the blacklist.  And guess what opinion comes spewing out of Geoff Nightingale, a partner in PWC - a global multinational that has played almost a greater role than any other in promoting, supporting, protecting and whitewashing the global offshore system? Well, consider this:
"If someone in Mexico uses New Zealand as a tax haven, they are breaking Mexico's laws. So what degree of care does New Zealand have as an international citizen? We can't be the tax police for the world." Rather than shut down foreign trusts, Nightingale argues New Zealand does enough to meet its international responsibilities through its disclosure arrangements."
What this PWC partner is saying, in essence, is that if a murderous Mexican drugs smuggler wants to use New Zealand as a base for stashing his or her illicit wealth - then that would be OK with him. (He would of course deny that particular drugs-related meaning, but this example does accurately reflect that statement.)  And the Herald has more:
"The actual information Inland Revenue collects about foreign trusts is scant. All that is required on the IRD disclosure form is the name of the foreign trust - or, if no name is available, some other identifying particular - plus contact information for the New Zealand-based trustee. No information about the settlor or the beneficiaries is gathered - the only exception being a question asking whether the settlor is a resident of Australia."
This is very ugly indeed, and, at least on this evidence, it is hard to know if or how New Zealand trustees will even start to screen out money that is tax evading, or worse. Back to the Herald:
"Secrecy, subterfuge or turning a blind eye? The big picture issue with New Zealand's foreign trusts is that nobody really knows what they represent. Inland Revenue knows there are 7586 active trust registered, and of those 126 have declared Australian settlors. But it doesn't know much else - certainly not the scale of the wealth the trusts contain."
Time for sunlight to start to pierce this very, very dark and noxious black hole of global finance.  TJN will be including New Zealand in the 2013 version of the Financial Secrecy Index.  On the basis of what we already know about New Zealand's trust laws and international treaty network for tax information exchange, we are not anticipating a rosy assessment. 


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