The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill, submitted to parliament on July 8, proposes to strengthen the disclosure requirements for foreign trusts. It follows the recommendations made by former PwC New Zealand chairman John Shewan in an independent inquiry report published on June 27. The proposals intend to “deter offshore parties from using New Zealand trusts for illicit purposes” and “provide a clear signal about the importance of complying with the disclosure rules”, the explanatory memorandum accompanying the Bill said.
“Following the Shewan Inquiry, the government committed to moving quickly on the changes to foreign trust disclosure rules and the inclusion of those changes in this Bill reflects that,” said Revenue Minister Michael Woodhouse.
The government commissioned the inquiry after its rules were deemed inadequate following the Panama Papers revelations in April 2016. The scandal asserted that New Zealand foreign trusts are being used extensively by wealthy individuals to either avoid or evade tax, facilitate aggressive tax planning or launder money.
Registration
Foreign trusts will be required to formally register with Inland Revenue under the proposed changes.
The registration requirement will apply to all trusts formed after the Bill is enacted. In addition, all existing foreign trusts will be required to meet the new information requirements by June 30 2017.
Registration will cost trusts NZ$270 ($193) and a further annual filing fee of NZ$50 paid to Inland Revenue. Failure to register will result in the foreign trust losing its exemption from New Zealand tax. “This means that a foreign trust that fails to meet these requirements will be taxable in New Zealand on its worldwide income. The proposed amendment is intended to provide a sanction for non-registration,” the explanatory memorandum said. However, the Bill proposes a regulation making power to enable the amount of the fees to be adjusted through an Order in Council if necessary.
Inland Revenue will share information contained in the foreign trusts register, for law enforcement purposes, with the Department of Internal Affairs and the New Zealand police from the date the Bill is enacted.
Disclosures and annual filing requirements
The registration process comes with a number of additional disclosure requirements.
On registration, the names, e-mail addresses, foreign residential addresses, country of tax residence, and taxpayer identification numbers of all those associated with the trust have to be declared to Inland Revenue, including for:
The settlor(s);
The protector (if there is any);
Non-resident trustees:
Any other natural person who has effective control of the trust;
Beneficiaries of fixed trusts, including the underlying beneficiary where a named beneficiary is a nominee; and
Each person with a power under the trust deed to control the dismissal or appointment of a trustee, to amend the trust deed, or to add or remove a beneficiary.
The registration process will also require the trust to declare that the individuals establishing the foreign trust, the settlor(s), and the trustees have all been advised of, and have agreed to comply with the applicable requirements in the Tax Administration Act 1994, Anti-Money Laundering and Countering Financing of Terrorism Act 2009 and associated regulations, and the automatic exchange of tax information requirements proposed in the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill.
The proposed amendments also require the deed of the trust to be filed with the registration form, and that, discretionary trusts are required to describe in the registration any class of beneficiary not listed in the trust deed.
For registered foreign trusts, annual returns would have to be filed with Inland Revenue, which would have to include:
Any changes to the information provided at registration;
The trust’s annual financial statement; and
The amount of any distributions paid or credited and the names, foreign address, taxpayer identification number, and country of tax residence of the recipient beneficiaries.
“Qualifying resident foreign trustee” exemption to be removed
The Bill also proposes repealing the “qualifying resident foreign trustee” definition in the Tax Administration Act 1994 and the attached tax exemption. To be a “qualifying resident foreign trustee”, the trustee must be a member of a specified professional body.
The proposed change would mean that foreign trusts would lose their New Zealand tax exemption if a “qualifying resident foreign trustee” is guilty of an offence.
At present, when a “qualifying resident foreign trustee” is convicted of a “knowledge offence”, the foreign trusts does not lose its New Zealand tax exemption privileges. However, when a trustee of a foreign trust, who is convicted of an offence of not providing information requested by Inland Revenue, then the foreign trust loses its exemption and is subject to New Zealand tax on its worldwide income. The changes would align the above so that a foreign trusts could lose its tax exemption in both cases.
Other measures
The Bill also includes a number of additional tax proposals, such as:
Implementing the common reporting standard (CRS) and the automatic exchange of financial account information in tax matters (AEOI);
Amending FATCA implementation legislation to align the FATCA anti-avoidance rule with the AEOI anti-avoidance rule, and align the obligations and penalties for non-financial institutions that must comply with FATCA and the AEOI;
Introducing specific record-keeping requirements for financial institutions under an anti-avoidance provision that applies to arrangements and practices entered into or by financial institutions, persons, or intermediaries with “a main purpose” of circumventing CRS due diligence or reporting requirements;
Amending the tax secrecy rules to allow Inland Revenue to disclose information about a taxpayer’s significant tax debts to approved credit reporting agencies;
Removing the 1% monthly incremental late payment penalty from new GST, income tax, and Working for Families tax credit overpayment debt from April 1 2017; and
Introducing a number of measures to make taxation simpler for businesses.
The Bill will require scrutiny by a parliamentary select committee, and a second and third reading in parliament before being passed and receiving Royal Assent to enter into force.
