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New Zealand: New Foreign Trust Disclosure Rules to be Developed Following Release of Panama Papers

On July 13, 2016, the New Zealand government released its response to recommendations that resulted from a review of the country’s foreign trust disclosure rules.  (Press Release, Bill English & Michael Woodhouse, Government to Adopt Shewan Recommendations, BEEHIVE.GOVT.NZ (July 13, 2016); GOVERNMENT INQUIRY INTO FOREIGN TRUST DISCLOSURE RULES (Inquiry Report) (June 2016), Treasury website.)  The review was initiated in April 2016 following the leaking of documents created by Panamanian law firm Mossack Fonseca and popularly referred to as the “Panama Papers.“  These documents were reported to include a number of references to the use of foreign trusts in New Zealand, resulting in allegations that such trusts were being used to facilitate tax evasion, money laundering, and hiding of assets.  (Establishment of the Government Inquiry into Foreign Trust Disclosure Rules, NEW ZEALAND GAZETTE, No. 33 (Apr. 19, 2016); Press Release, Bill English & Michael Woodhouse, Review of Foreign Trust Disclosure Rules (Apr. 11, 2016), BEEHIVE.GOVT.NZ;  & Gyles Beckford et al., NZ at Heart of Panama Money-Go-Round, RNZ (May 9, 2016).)

Relevant Legislation

Under the Income Tax Act 2007, a trust is considered to be a “foreign trust” in relation to a distribution “if no settlor is resident in New Zealand.”  (Income Tax Act 2007, s HC 11, New Zealand Legislation website.)  A settlor of a trust is a person who transfers value to the trust or for the benefit of the trust.  (Id. s HC 27(2).)  In line with New Zealand’s policy of not imposing taxes on foreign source income derived by non-residents, foreign trusts that do not derive New Zealand source income or distribute income to New Zealand resident beneficiaries are exempt from taxation in New Zealand.  (Id. ss CW 54 & HC 26(1); Inquiry Report, supra, at 2 & 13.)

The disclosure obligations of a New Zealand resident foreign trustee of a foreign trust are contained in the Tax Administration Act 1994.  The relevant provisions were added in 2006 and include a requirement to disclose to the Commissioner of Inland Revenue the name of the trust or other identifying particulars; the name and contact information of the resident foreign trustees; and whether a settlor is resident in Australia.  (Tax Administration Act 1994, s 59B, New Zealand Legislation website.)

A form that is based on these requirements, known as IR 607, must be submitted to the Inland Revenue Department (IRD) within 30 days of the establishment of a foreign trust.  The IRD maintains a log of these forms.  (Inquiry Report, supra, at 20-22; Foreign Trust Disclosure IR607 (Oct. 2012), IRD website.)  Other disclosure requirements relate to the record-keeping requirements in the Tax Administration Act 1994 and the requirement to supply certain information to comply with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (New Zealand Legislation website).  (Inquiry Report, supra, at 20.)

New Zealand is subject to a range of obligations under multiple international agreements to which it is a signatory, including information exchange agreements with 90 jurisdictions and agreements related to to anti-money laundering and countering of financing of terrorism.  (Id. pt 8.)

Inquiry into Foreign Trust Disclosure Rules

John Shewan, a former chairman of PricewaterhouseCoopers New Zealand, was appointed to constitute the Government Inquiry into Foreign Trust Disclosure Rules.  The Inquiry was tasked with examining and reporting on New Zealand’s existing foreign trust disclosure rules in relation to several areas: record-keeping requirements, enforcement, exchange of information with foreign jurisdictions, and compliance practices.  (Establishment of the Government Inquiry into Foreign Trust Disclosure Rules, supra.)  It was also asked to consider “whether the existing foreign trust disclosure rules and the enforcement of those rules are sufficient to ensure New Zealand’s reputation is maintained” and any options for enhancing the foreign trust disclosure rules and their enforcement.  (Id.)

Shewan’s report was released on June 27, 2016.  (Press Release, Bill English & Michael Woodhouse, Govt Releases Foreign Trusts Inquiry and Steps to Strengthen International Tax Rules (June 27, 2016), BEEHIVE.GOVT.NZ; Government Inquiry into Foreign Trust Disclosure Rules, THE TREASURY (last updated June 27, 2016).)  The report stated, “[t]he Inquiry concludes that the existing foreign trust disclosure rules are inadequate.  The rules are not fit for purpose in the context of preserving New Zealand’s reputation as a country that cooperates with other jurisdictions to counter money laundering and aggressive tax practices.”  (Inquiry Report, supra, at 1.)  While the Inquiry found that “[t]he foreign trust regime does not appear to be inconsistent with any specific obligations under current international agreements to which New Zealand is a party,” it did consider that “as there is a reasonable likelihood that the regime is facilitating the hiding of funds or evasion of tax in some instances … New Zealand’s tax treaty partners would have a legitimate expectation that some action will be taken.”  (Id. at 2.)

Inquiry Recommendations

The Inquiry considered four options for reform and recommended that the government adopt the option that would involve a significant increase in the information disclosure requirements for foreign trusts.  It recommended that there be a formal registration requirement, involving an expanded version of the current IR 607 form, and that the IRD maintain a register of foreign trusts that could be searchable only by regulatory agencies.  (Id. at 2.)  The information disclosed on this form would include the “name, email address, foreign residential address, country of tax residence and Tax Identification Number of”:

  • the settlor or settlors
  • the protector (if there is any)
  • non-resident trustees
  • any other natural person who has effective control of the trust (including through a chain of control or ownership)
  • beneficiaries of fixed trusts, including the underlying beneficiary where a named beneficiary is a nominee.  (Id. at 3.)

The Inquiry did not recommend changing the tax treatment of foreign trusts, other than to state that the current exemption should apply only to registered foreign trusts that have fulfilled the disclosure obligations.  (Id.)  It did recommend that foreign trusts be required to submit annual returns that include certain information (id.); such returns are not currently required.  Other recommendations related to expanding the scope and application of anti-money laundering rules, revising suspicious transaction reporting requirements, and reviewing current legislative arrangements for information sharing between certain New Zealand agencies.  (Id. at 4.)

Government Response

The government’s response to the Inquiry’s recommendations, released on July 13, 2016, indicated agreement to all of the recommendations, with some modifications with respect to aspects of their implementation.  The government intends to introduced a bill in August 2016 that will include amendments related to foreign trust registration and disclosure requirements.  (Government Inquiry into Foreign Trust Disclosure Rules: Government Response, BEEHIVE.GOVT.NZ (July 2016).)

In addition, the Inquiry’s recommendations related to anti-money laundering and countering financing of terrorism (AML/CFT) rules will be considered as part of an existing project to enhance the current legislative regime, which will result in a bill to be introduced later in 2016.  (Id.)  The government stated, for example, ”lawyers and accountants will be included in AML/CFT requirements as soon as practicable.  However due to issues around legal privilege and regime supervision this will form part of the more substantial AML/CFT reform programme already underway, which is being expedited.”  (Government to Adopt Shewan Recommendations, supra.)