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The money matters of the wealthy elite have been put into the spotlight with the release of the Panama Papers. Early April, saw the publication of 11.5 million previously unreleased confidential documents (2.6 terabytes) by the International Consortium of Investigative Journalists (ICIJ). These documents contain evidence on how companies and wealthy individuals avoid tax and hide their money in offshore companies in tax havens like the British Virgin Islands.
The leak saw more than 100 media organisations spend a year poring over the leaked files, which contained 40 years’ worth of data that implicated more than 214,000 offshore companies to people in 200+ countries. The documents were sourced from Panamanian law-firm and corporate service provider Mossack Fonseca.
The documents included financial details of people such as British Prime Minister David Cameron and Icelandic Prime Minister Sigmundur Gunnlaugsson; with further government leaders and officials, relatives, and associates being implicated as having benefited from tax havens. These havens include the British Virgin Islands, Panama, and other places areas where taxes are levied at a low rate.
How to hide your money and avoid tax and attention
The practice of avoiding tax and hiding monetary assets is carried out by individuals and companies. Money that is taken from within a country that has strong financial regulation and a higher tax rate, and is invested in what are called “shell companies.”
Shell companies hold financial assets on behalf of other people in states that have low tax rates such as Panama, Monaco, and the British Virgin islands. These states also have low regulations meaning money coming in and out is not scrutinised. In these states it is legal to create a company without disclosing who owns it. This means that company and individual assets are not able to be seen by their home governments. Home governments cannot regulate what they cannot see.
Why is this bad?
Rather than keeping wealth in their home nation where they would be required to pay capital gains tax on the wealth, people using tax havens avoid their full tax obligations. This means that there is less revenue for social services such as schools and hospitals, and the middle class pay higher percentages in tax than the super wealthy.
While the use of offshore business is not illegal in the jurisdictions in which they are registered in, some of the shell companies have been linked to illegal and unethical activities like drug trafficking and fraud. The BBC has recently reported on Mossack Fonseca setting up shell companies for North Korean diplomats and Syrian businessmen, and these companies are linked to terrorist activities and other illegal activity.
Does this implicate New Zealand as a tax haven?
The Panama Papers reveal New Zealand is a tax haven, with Panama law firm Mossack Fonseca bragging to clients about how easy New Zealand laws make it for foreign investors to hide their tax-free profits.
In New Zealand, there is no requirement to register who put assets into a foreign trust. This means that it is possible to create shell companies within New Zealand. A Staples Rodway lawyer explained another advantage to New Zealand Herald.
“The New Zealand definition of ‘beneficial owner’ is different to that of many other jurisdictions, in that we do not require due diligence on the person/s who will benefit from the funds.”
A case that has come to light through the Panama Papers is that of Malta’s Energy Minister, Konrad Mizzi, and the Prime Minister’s Chief of Staff, Keith Schembri, setting up secret holdings in Panama and New Zealand linked to a Dubai bank account.
The director of the ICIJ told Radio New Zealand on April 8 that New Zealand is a well-known tax haven and a “nice front for criminals.”
The revelation of New Zealand as a tax haven has not been received well amongst opposition political parties, with Labour Party leader Andrew Little saying it had tarnished New Zealand’s reputation.
“Kiwis are famous for our sense of fair play. We believe everyone should pay their share. We don’t want to get the kind of reputation that countries like the Cayman Islands have. It’s time our government admits there is a problem and resolves to do better.”
While originally dismissive of the effect of the revelations of the Panama Papers, Prime Minister John Key is now saying an independent review of the legislation around foreign trusts should be undertaken. “We will go and get an internationally recognised expert to go away and have a look at the disclosure rules in New Zealand and make sure we’re ticking all the boxes.”