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Calls from tax expert John Shewan to radically expand the disclosure rules on foreign trusts will be implemented, Prime Minister John Key says.In his report, released on Monday, Shewan said the current rules were inadequate and "not fit for purpose" to preserve New Zealand's reputation as a country that co-operates with others to counter "money laundering and aggressive tax practices".
In theory the current rules should be sufficient to deter tax abuse and existing anti-money laundering rules should ensure funds held are from legitimate sources.
"However, under current law and enforcement practices the risk of detection by authorities is low... Strengthened disclosure requirements should act as a deterrent to offshore parties looking to use New Zealand foreign trusts for illicit purposes."
Although there was no direct evidence of illicit funds being hidden in foreign trusts here "it is reasonable to conclude that there are cases where foreign trusts are being used in this way" and the current regime allowed that to occur.
Shewan recommended foreign trusts reveal to IRD their beneficiaries, settlors, trustees and country of tax residence, as well as other details, and that a register be established. However the register should be searched only by regulatory agencies, not the public or the media.
They should also file returns and pay an annual $500 fee.
The current rules require only the name of the New Zealand-based trustee and whether the settlor was resident in Australia.
His report, commissioned by the Government after the leak of the so-called Panama Papers, also called for changes to anti-money laundering laws.
Key said the recommendations were sensible and well-reasoned and there had been "no real push-back" by Cabinet.
"Most" would be put in place, though anti-money laundering law changes would be covered by laws already in the pipeline.
Shewan said foreign trusts were a legitimate vehicle, primarily to manage family wealth. They were consistent with the Government's policy of an open economy that welcomed foreign investment.
Meanwhile, the Government has released planned changes to address profit shifting and base erosion - the ways multinationals exploit gaps to reduce their taxes - based on the OECD's action plan.
They would ensure all revenue earned in New Zealand was reported and any deductions from revenue "should reflect actual costs of production, and not be designed to reduce tax".
The "Panama Papers" are 11.5 million leaked documents from Panama-based trust firm Mossack Fonseca.
New Zealand was pitched to its clients as an attractive location due to its stability and the secrecy that shrouds its trust regime.
Companies are reaping tens of millions of dollars servicing more than 12,000 offshore trusts based in New Zealand - an industry set to shrink if Shewan's changes are made.
Key came under fire from the Opposition in April when it was revealed his personal lawyer lobbied the Government over a potential crack down on foreign trusts.
Labour finance spokesman Grant Robertson supported Shewan's recommendations, but said they were a rebuke to Key and National who had protected the industry at the expense of New Zealand's reputation.
However, he called for the register of trusts to be publicly available, but with safeguards for those who would be compromised by being identified.
Green co-leader James Shaw said the Shewan inquiry had concluded what the Greens and IRD had called for in 2012.
"Foreign trusts are a likely vehicle for tax abuse and need to be opened up with increased disclosure and reporting requirements."
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