Aide Memoire
Briefing note
Reference:
BN2017/568
T2017/2450
Date:
7 November 2017
To:
Minister of Finance (Hon Grant Robertson)
ACT
Minister of Revenue (Hon Stuart Nash)
THE
cc:
Naomi Ferguson, Commissioner
Cath Atkins, Deputy Commissioner
Matt Benge, Chief Economist
Emma Grigg, Policy Director
David Carrigan, Policy Director
Government & Executive Services (Ministerial Services)
UNDER
Policy records management (PAS RM)
From:
Carmel Peters and Steve Mack
Subject:
‘Paradise Papers’ information leak
INFORMATION
This note relates to the recent media articles on the latest releases of the ‘Paradise
Papers’ regarding the Bermuda-based legal firm, Appleby. This involved the leaked
release of numerous financial documents outlining how some multinationals and
investors are avoiding tax by investing in offshore havens.
Inland Revenue is currently working with the relevant agencies and international treaty
partners to understand if any New Zealand taxpayers have had contact with Appleby.
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Key Messages
Media reports on the leak have not identified any New Zealand links that we were
OFFICIAL
not previously aware of, although media has repeated links made at the time of
the Panama Papers release;
Inland Revenue is continuing to work with treaty partners on the released
information;
We will keep Ministers updated on any major developments (subject to tax
secrecy rules).
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Information Disclosure and Base Erosion and Profit Shifting
The OECD has led a program to improve information sharing to reduce the ability
of taxpayers to hide their activities offshore to enable tax evasion or other elicit
activity (including Automatic Exchange of Information). New Zealand has actively
supported this effort and is implementing these changes.
The foreign trust inquiry led by John Shewan identified gaps in disclosure rules for
foreign trusts which have since been closed. Inland Revenue will begin to actively
share information on foreign trust activities which should greatly reduce their
ability to be used to hide elicit activity.
New Zealand has actively cooperated with the OECD’s Base Erosion and Profit
Shifting (BEPS) program to tighten up our rules to reduce the ability of
multinationals to reduce their tax. These include:
Measures already enacted (raising approximately $100 million per year)
Strengthening how we apply withholding tax to interest payments paid to
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non-residents;
Charging GST for digital downloads from offshore
THE
Measures currently in progress (expected to raise an additional $200 million per
year)
Restricting the amount of interest that can be deducted by a New Zealand
company when paid to an offshore related person;
Strengthening transfer pricing rules;
Introducing a rule to counter some avoidance of permanent establishments
(to capture in the tax base more sales by non-residents to New Zealand
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residents);
Measures to counter the interaction of different countries tax rules that
result in the ability have some income escape tax anywhere (hybrid
mismatches)
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Officials will report to you on these additional measures this week.
Discussion
The key themes canvassed in this note are:
Use of Tax Havens and Exchange of Information developments The key concern arising from the use of tax havens is secrecy.
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In recent years there have been huge international developments in exchange of
information, with all tax havens now eliminating secrecy and agreeing to
exchange tax-related information with other jurisdictions.
OFFICIAL
New Zealand's network of exchange of information arrangements in tax treaties
currently extends to over 100 jurisdictions, including all of the tax havens
mentioned in connection with the Paradise Papers.
New Zealand Tax Transparency
Following the implementation of the Shewan Inquiry recommendations, foreign
trusts are subject to comprehensive disclosure obligations.
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The previous Government agreed that foreign trusts and limited partnerships
should be subject to the hybrids rules, meaning that New Zealand will look to tax
them to the extent that they are not paying tax elsewhere.
Base Erosion and Profit Shifting (BEPS) structures
New Zealand proposals to prevent base erosion and profit shifting based on the
OECD Action Plan are well advanced. We are reporting to you on those proposals
before the end of this week. They include new hybrid mismatch rules, rules to
limit interest deductions, and stronger transfer pricing and permanent
establishment rules. The aim is to introduce a bill containing these measures next
month.
EU directives that are also based on the OECD Action Plan together with changes
to Irish law and proposed changes to US law should impact the use of structures
by US multinationals
In particular, US multinationals should
pay more tax in the US on their offshore activities.
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Use of Tax Havens and Exchange of Information developments
The term ‘tax haven’ is often used in reference to low (or no) tax jurisdictions. More
correctly, however, it refers to low tax jurisdictions that operate on the basis of secrecy.
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If a low tax jurisdiction offers secrecy in tax matters, information relating to an entity
that a taxpayer establishes in that jurisdiction is effectively ‘hidden’ from the taxpayer’s
home jurisdiction. This creates a significant incentive for the taxpayer to not declare
income or to misrepresent the nature or value of business transactions derived or
conducted through the entity, in their home jurisdiction.
In recent years, the G20 and OECD have been at the forefront of international efforts to
eliminate tax secrecy, by requiring the global implementation of standards for full
transparency and exchange of information in tax matters. This involves ensuring that
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jurisdictions enter into tax treaties that provide for exchange of information for tax
purposes. It also involves ensuring that jurisdictions have legal and administrative
frameworks in place to access the information needed to verify tax compliance. This
work is well advanced, and virtually all jurisdictions that had previously been identified as
tax havens have eliminated their secrecy rules and are now regularly exchanging tax-
related information.
INFORMATION
As an OECD member, New Zealand has supported and been involved in the tax secrecy
work. New Zealand itself currently has tax treaty exchange of information relationships
in place with over 100 jurisdictions, and continues to build its network as more
jurisdictions come to light as operating international financial centres. The tax treaty
network includes double tax agreements, tax information exchange agreements, and a
multilateral tax assistance convention.
A low tax rate on its own does not necessarily signify tax avoidance or evasion. It is a
sovereign decision for each country to make as to how much revenue it needs to raise
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through taxation, and the tax system that it should adopt to raise that revenue. In
addition, there can be valid reasons for business structures to include one or more
entities located in a low tax jurisdiction. For example, a joint venture or private equity
OFFICIAL
firm involving investors from several jurisdictions may wish to establish an entity in what
is termed a ‘tax neutral’ jurisdiction to establish a vehicle through which to make an
investment. Provided that each party to the joint venture or investor in the private
equity firm declares their share of the income in their home jurisdiction (as required),
and pays the correct amount of tax in that jurisdiction, no ‘mischief’ has taken place.
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New Zealand tax transparency
New Zealand's involvement in the Panama Papers was largely limited to the use of tax
transparent entities, particularly foreign trusts. However, limited partnerships are
another vehicle that provide tax transparency.
Foreign trusts
New Zealand taxes trusts based on the residence of the “settlor”, being the person or
persons that contributed the trust property. This ensures that New Zealand residents
cannot put money into trusts established overseas to avoid New Zealand tax. Under
current settings, this also means that a trust with no New Zealand settlor is not subject
to tax in New Zealand on its foreign-sourced income. However foreign jurisdictions often
base their tax treatment on the residence of the trustee, not the settlor. This means that
income retained by a foreign trust can be non-taxable in both New Zealand and
overseas.
In response to the Panama Papers, the previous Government accepted the major
recommendations of the Government Inquiry into Foreign Trust Disclosure Rules, led by
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John Shewan. These recommendations introduced comprehensive disclosure rules for
foreign trusts, which are expected to deal with the issue of foreign trusts being used to
‘hide’ assets. The disclosure rules are now in effect and Inland Revenue has received
approximately 3,500 applications for registration from foreign trusts.
THE
The disclosure changes did not alter the underlying tax treatment of foreign trusts. More
recently, the previous Government announced that foreign trusts would be subject to the
hybrids rules, which form part of BEPS project. This decision would mean that New
Zealand would tax the income of foreign trusts to the extent that it is not subject to tax
in another jurisdiction (subject to a small
de minimis threshold).
The details of the proposal are still being worked through, but officials consider that
these rules would subject some, but not all, foreign trusts to New Zealand tax. However,
the interaction between foreign trusts and the hybrids rules is very complex and we
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intend to cover this further in the broader BEPS report we will provide you later this
week.
Limited partnerships
Limited partnerships are transparent for New Zealand tax purposes, meaning the income
INFORMATION
derived by the partnership is deemed instead to be derived by the partners in their
relevant shares. Like foreign trusts, this means that New Zealand does not tax foreign-
sourced income of non-resident partners. Because a New Zealand limited partnership is
a separate legal person, overseas countries may treat it like a company. This can result
in a double non-taxation of the limited partnership’s income.
The Registrar of Limited Partnerships is the Registrar of Companies holding office under
the Companies Act 1993. Therefore, the disclosure requirements for limited partnerships
are the responsibility of the Ministry of Business, Innovation and Employment (MBIE).
RELEASED
From a tax perspective, limited partnerships are within the recent hybrids announcement
meaning, like foreign trusts, they would be taxed in New Zealand to the extent that
income is not subject to tax in another jurisdiction.
OFFICIAL
Base Erosion and Profit Shifting (BEPS) structures
The structures used by multinationals rely on the use of tax havens and exploiting
deficiencies in countries’:
•
tax residency rules – which allow companies to manipulate their tax residence or
escape being tax resident anywhere;
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•
transfer pricing rules – which allow profits to be stripped out of high tax countries
into tax havens through inflated related-party payments, such as royalties and
interest;
•
controlled foreign company (CFC) rules – these rules are designed to ensure that
profits of companies headquartered in, for example the US, cannot be “parked” in
tax haven companies without being subject to tax in the US. However, these
rules are ineffective and currently, US companies build up large stockpiles of
untaxed income in tax havens, however the US companies have been unable to
repatriate the cash without paying tax and therefore the cash reserves remain
offshore; and
•
transparency rules – companies have been able to obtain secret rulings from tax
authorities.
The structures that have been used historically should be harder to achieve in future as a
result of domestic law reforms undertaken by many countries and the OECD BEPS
project.
Ireland has changed its law to address the tax residency rule deficiency that facilitated
the arrangement known as the “double Irish” (although companies have until 2020 to ACT
phase out its use).
Last week the US introduced the Tax Cuts and Jobs Act which proposes wide-ranging
reform to the US international tax settings. This Act includes measures to strengthen the
THE
taxation of outbound investment from the US – specifically, improvements to CFC rules,
limitation on interest deductions, a 20% excise tax on certain related-party payments
and a one-off deemed repatriation of untaxed profits held offshore by US headquartered
companies subject to tax at either a 5% or 12% rate. If passed, these measures would
be expected to affect the amount of tax multinationals pay in the US on their offshore
activity.
More generally, the OECD has issued a 15 point Action Plan that includes
recommendations on improving transfer pricing rules, CFC rules, interest limitation rules
and eliminating harmful tax practices. The European Union has also issued directives
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along the same lines as the OECD recommendations.
New Zealand’s tax rules already meet many of the OECD minimum standards (for
example, our CFC rules are robust and we have no harmful tax practices). We have
significantly progressed reforms to:
INFORMATION
•
improve transfer pricing by incorporating OECD best practise into our domestic
law;
•
strengthen our existing interest limitation rules;
•
prevent “permanent establishment” (PE) avoidance (a PE is a taxable presence in
a country, and is required before the profits of an overseas enterprise are taxable
in New Zealand);
•
address hybrid mismatch arrangements, these measures will prevent companies
avoiding tax by structuring their businesses or financing arrangements to take
advantage of differences between New Zealand’s rules and the rules of other
countries.
RELEASED
These measures are scheduled to be included in a Bill to be introduced in December this
year, with an application date of 1 July 2018.
OFFICIAL
In June this year, New Zealand also signed the Multilateral Convention to Implement Tax
Treaty Related Measures to Prevent BEPS, which amends a worldwide network of several
thousand double tax agreements to prevent their use to facilitate tax avoidance.
Carmel Peters
Steve Mack
Policy Manager
Principal Advisor
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