The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill passed its third reading on February 14. It will enter into force on the date it receives Royal Assent, which is anticipated to be in the coming days.
“Trustees of foreign trusts should talk to their advisers to gain a full understanding of the rules and will need to assess how the rules may impact on the administration of affected trusts,” said Tim Stewart, senior solicitor at Russell McVeagh in New Zealand. “The rules will require trustees to hold, and disclose to Inland Revenue, information such as the trust deed, contact details, jurisdiction of tax residence, and the tax identification number of each settlor and each trustee. On an on-going basis, [trustees must share] the financial statements of the trust, details of any further settlements, and the details of distributions and the beneficiaries receiving those distributions.”
“The new legislation tightens the disclosure rules for foreign trusts as recommended by the Shewan Inquiry,” Revenue Minister Judith Collins said in a statement. The rules 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.
Former PwC New Zealand chairman, John Shewan, recommended changes in an independent inquiry report published on June 27 2016. The government commissioned the inquiry after its rules for foreign trusts were deemed to be inadequate following the Panama Papers revelations in April 2016. The scandal asserted that New Zealand foreign trusts were being used extensively by wealthy individuals to either avoid or evade tax, facilitate aggressive tax planning or launder money.
“Strengthened disclosure requirements on registration of a foreign trust along with the requirement to file an annual return will give Inland Revenue greater information about foreign trusts in New Zealand,” said Stewart. “Such information may be shared with the authorities in other countries under double taxation agreements, tax information exchange agreements and the Convention on Mutual Administrative Assistance in Tax Matters, which will significantly increase the prospects of detection of any evasion that might be occurring.”
Politicians claim legislation is weak
Although the new legislation implements a strict compliance criteria for foreign trusts, politicians from opposition parties said it falls short of the necessary changes and a public searchable register for foreign trusts should have been introduced.
During the parliamentary debate on the third reading of the bill Grant Robertson, Labour MP for Wellington Central, said that although “we will actually be able to see who the trustees are, who the settlers are, who the beneficiaries are, and where they are coming from … we believe we should aim for the highest-possible levels of transparency”.
“That means a searchable public register. We do it for charitable trusts and we do it for companies; there is absolutely no reason why we should not shine the light on what is going on here, and do that when it comes to foreign trusts,” Robertson said.
Barry Coates, an MP for the Green Party of Aotearoa New Zealand, added that the legislation fails to provide the “antidote” to hot money, tax evasion and other forms of international regulation. “Unfortunately, the device—the mechanism—that is included in this bill for foreign trusts is a register that is limited in its transparency,” he said. “There is an insufficient basis for being able to understand what these foreign trusts are doing in New Zealand. I think that is a huge missed opportunity with regard to this bill. We need to crack down on tax havens.”
Several other MPs from the Labour and Green political parties echoed similar views.
However, Stewart said politicians are missing the point of why these changes were introduced. “The suggestion that a public register be established perhaps misconstrues what is necessary to achieve transparency in the tax context. The move towards greater transparency, in which New Zealand has actively participated, is intended to prevent assets and income from being concealed from the relevant tax authorities. This does not require a public register, but does require the relevant information to be available to be exchanged with the relevant tax authorities. The changes made in the bill achieve this objective.”
Registration required by all trusts
Regardless of the debate over transparency, foreign trusts will be required to formally register with Inland Revenue under the new rules.
The registration requirement will apply to all trusts established after the bill receives Royal Assent, which must supply the required information to Inland Revenue within 30 days of being formed.
In addition, all existing foreign trusts will be required to meet the new information requirements by June 30 2017. “Well before that date, trustees should ensure they have, and will continue to have, access to the required information and that they can honestly give the declaration required to register,” said Stewart.
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, introducing a sanction for non-registration.
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 once the bill is enacted.
Disclosures and annual filing requirements
The registration process also 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 changes 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, including the names, foreign address, taxpayer identification number, and country of tax residence of the recipient beneficiaries.
“Qualifying resident foreign trustee” exemption removed
The bill also repeals 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 change would mean that foreign trusts would lose their New Zealand tax exemption if a "qualifying resident foreign trustee" is guilty of an offence.
The legislation also includes a number of additional tax measures, 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.
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