Government releases foreign trusts inquiry
On 27 June 2016, the Minister of Finance, the Hon Bill English, and the Minister of Revenue, the Hon Michael Woodhouse, released tax expert John Shewan’s independent inquiry into Foreign Trust Disclosure Rules, and the steps the Government is taking to strengthen the tax rules as part of its work with the OECD to clamp down on base erosion and profit shifting (BEPS).
The Inquiry was announced by the Ministers on 11 April 2016 in response to the release of the “Panama Papers” the previous week. The Ministers considered that in light of the Panama Papers it was appropriate to look at whether the disclosure rules were fit for purpose and whether practical improvements could be made.
Mr Shewan’s inquiry was required to examine New Zealand’s foreign trust disclosure rules and to report on whether the rules, and the enforcement of them, were sufficient to ensure New Zealand’s reputation was maintained when considered alongside the country’s commitment to various OECD and other international agreements.
The Inquiry noted that foreign trusts, like domestic trusts, were a legitimate vehicle used primarily to manage family wealth and that New Zealand’s tax treatment of foreign trusts was appropriate. The Inquiry concluded, however, that the existing foreign trust disclosure rules were inadequate and should be strengthened. The Inquiry considered that strengthened disclosure requirements should act as a deterrent to offshore parties looking to use New Zealand foreign trusts for illicit purposes.
A brief summary of the Inquiry’s recommendations is as follows:
• Foreign trusts be required to register on establishment using an expanded version of the current disclosure form, IR 607.
• A register of foreign trusts, searchable only by regulatory agencies, be maintained.
• The registration document include a signed declaration that the person establishing the foreign trust, the settlor(s) and the trustees have been advised of and have agreed to provide the information to comply with the record keeping requirements in the Tax Administration Act 1994, the Anti-Money Laundering and Countering Financing of Terrorism Act and Regulations, and the Automatic Exchange of Information /Common Reporting Standard requirements (once enacted).
• The registration requirement apply to all trusts formed after enactment of the enabling legislation.
• A transitional rule that requires existing foreign trusts to register, and to supply the information required, be implemented by 30 June 2017.
• The registration process to be the responsibility of the IRD initially.
Strengthened disclosure on registration
• The information required to be disclosed to the IRD when a foreign trust registers be expanded from the current IR 607 disclosures to include the name, email address, foreign residential address, country of tax residence and Tax Identification Number of the settlor or settlers, 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 of ownership), and beneficiaries of fixed trusts, including the underlying beneficiary where a named beneficiary is a nominee.
• For discretionary trusts, any class of beneficiary not listed in the trust deed be listed on the registration form.
• The trust deed be required to be filed with the registration form.
Ongoing tax obligations
• The exemption from New Zealand tax on foreign source income apply only to a foreign trust that has registered and fulfilled the associated disclosure obligations at that time.
• Foreign trusts be required to file an annual return with IRD that includes:
o any changes to the information provided at registration
o the trust’s annual financial statements, and
o the amount of any distributions paid or credited and the names, foreign address, Tax Identification Number and country of tax residence of the recipient beneficiaries.
• The annual return requirement to apply to foreign trusts formed after the enactment date and to all foreign trusts from the income year commencing 1
• The basis for foreign trusts that have a qualifying resident foreign trustee being exposed to lesser sanctions than other foreign trusts be reviewed to determine whether it should remain.
The Inquiry also recommended that:
• foreign trusts be required to pay a registration and annual filing fee
• the expansion and scope and application of the Anti-Money Laundering rules
• the legislation or regulations that govern suspicious transaction reporting to the Financial Intelligence Unit of the New Zealand Police be revised, and
• a review be undertaken of the current legislative arrangements for the sharing of information between the three agencies (IRD, FIU and DIA) with supervisory responsibility for disclosures by foreign trusts and other entities.
The Minister of Revenue noted that a lot of work had already gone into strengthening New Zealand’s tax rules but that there was always room to improve. He said that the Government has already strengthened New Zealand’s controlled foreign company rules, thin capitalisation rules, bank minimum equity rules, and, more recently, legislation has been introduced to improve non-resident withholding tax rules.
The Minister said that the next steps included stronger rules preventing excessive payments from a New Zealand company to its foreign parent, greater disclosure requirements for multi-nationals, and further sharing of tax data with foreign authorities.
The Shewan Inquiry into Foreign Trust Disclosure Rules can be found at www.treasury.govt.nz/publications/reviews-consultation/foreign-trust-disclosure-rules.