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Panama Papers Q&A: Is NZ a tax haven or not?

What is a New Zealand based overseas trust?

The Panama Papers are a joint investigation between ONE News, Radio New Zealand and investigative journalist Nicky Hager. Source: 1 NEWS

It's a legal structure to hold assets - money, shares, land, gold bars, paintings, even a stamp or wine collection. The person(s) putting the assets into the trust and the beneficiaries are overseas residents.

Trusts are a long established means of organising and protecting financial assets and wealth. The New Zealand approach has come out of British law and is broadly similar to that which applies in other countries such as the UK and Australia.

The current trust system was set up in the mid-1980s when New Zealand deregulated and freed up much of its financial sector.

The trusts have a local agent, usually an accountant or lawyer, who acts as the New Zealand officer.

Why are they set up in New Zealand?

New Zealand's international standing as a reputable country with a stable political system, and independent and established legal and financial systems, are offered as the main selling points by local firms.

The trusts are marketed as offering high degrees of asset protection, discretion and flexibility, along with their tax-free status.

The overseas interests controlling the trust can buy and sell assets and make investments, and as long as the business deals are all done overseas then the resulting gains will not be taxed in New Zealand.

Why are they not taxed in New Zealand?

The approach is that if it the trusts don't do business and don't earn money in New Zealand then they shouldn't pay tax here.

So payouts made by New Zealand based offshore trusts - of foreign sourced income or foreign sourced capital gains to its foreign resident beneficiaries - will generally attract no income tax, capital gains tax, gift or estate duty.

Is that why Mossack Fonseca are keen on New Zealand?

Yes. So much so, that it started actively promoting New Zealand to its customers, mainly in Latin America, from late 2013.

So what's in it for New Zealand?

The Prime Minister, John Key, has made no apologies about his desire to establish New Zealand as a global financial hub.

There are no exact figures about the foreign trust industry, but it's growing.

The best estimate is it earns the country between $25 million and $50 million in professional fees a year, which the industry claims makes it as valuable as the avocado industry.

How do you set up a trust in NZ?

The Panama Papers show it's relatively easy.

Potential customers, or their lawyer or accountant, would contact the Panamanian-based Mossack Fonseca.

They include Ecuadorian bankers, Colombian car dealers, wealthy Mexican celebrities and Brazilian lawyers.

Mossack Fonseca passed on much of the work to its agent in New Zealand, Bentleys New Zealand, and its co-founder Roger Thompson who would organise the paperwork to set up the trust here.

His tasks also included acting as a nominee for the trusts, hiding the real owners from view.

Why would they want to do that?

A variety of reasons.

People may have very good and legitimate reasons to protect their assets from an unstable government, or doubts about the financial integrity of banks, or even avoid death duties.

Of course, some individuals or groups may use them for illegal purposes, including evading tax or laundering money.

OK, who keeps an eye on the trusts in New Zealand?

Inland Revenue (IRD) has oversight of the trusts, which are required to be registered. The trusts are not required to file an annual return, but if asked by IRD they must give details on their make up and transactions.

Do we share information on the trusts with any other countries?

Countries with whom New Zealand has a double taxation treaty, an information sharing agreement, or is a signatory to the OECD tax information sharing agreement, will be given information if they ask.

There is one notable exception. IRD automatically passes on information to Australian tax authorities of anyone from there using such trusts to manage their assets.

So we're not a tax haven then?

The Prime Minister John Key and IRD are adamant New Zealand is not a tax haven.

Mr Key says New Zealand has full disclosure.

Others disagree.

Auckland tax law professor Michael Littlewood says New Zealand is allowing itself to be used as a means of avoiding other countries taxes, and therefore, it's a tax haven.

I'm confused. Are we or aren't we?

The OECD says tax havens have the following features: no or nominal tax on the relevant income, a lack of effective exchange of information, lack of transparency and no substantial activities.

Foreign trusts pay no tax on overseas income, but the OECD says that's not enough on its own to classify a country as a tax haven.

But critics argue it's difficult for countries to find out more about what their citizens are up to, unless they have the name of the trust and the trustee in New Zealand. And who's going to tell them?

In the light of the Panama papers, is the Government doing anything?

Mr Key initially insisted there was nothing wrong with the foreign trust regime when the papers first came out.

Indeed, The Government has decided against a review only last year following IRD concerns New Zealand may be perceived as a tax haven.

But within a week, Mr Key had executed a u-turn, appointing former PWC chair and tax expert, John Shewan, to carry out a review of the disclosure rules.

He's due to report back at the end of June.

The investigation into the Panama Papers New Zealand is a journalistic collaboration by reporters from ONE News, RNZ News and investigative journalist Nicky Hager.