If the Prime Minister is hoping yesterday’s announcement of an inquiry into foreign trusts will take the matter off the political agenda he may be disappointed.

His setting up of the inquiry comes as protests continue in Malta demanding that the Prime Minister, Joseph Muscat, resign after the Panama Papers said two of his political allies had offshore accounts in New Zealand.

And Mr Key revealed that he had spent the weekend being briefed by Inland revenue Manager (International Revenue Strategy) John Nash on the implications of the revelations in the papers.

As a consequence he maintains that New Zealand is not a tax haven because details of what are in the trusts when foreign jurisdictions request them.

Mr Nash is the IRD’s top expert on international tax avoidance and also chairs the OECD’s Committee that deals with tax base erosion.

He has a long record of involvement with the OECD on international tax avoidance.

Last week he told RNZ that the IRD had swapped information on foreign trusts registered in New Zealand with 20 countries involving at least 100 inquiries in the past few years, though he did not know how many of those inquiries involved tax avoidance or money laundering. 

“We get on average only a small number [of queries] a year,” he said. 

“I can’t [identify the illegal trusts]. That’s something for the treaty partners themselves to determine. 

“We don’t necessarily receive that feedback from our treaty partners at the end of the day.” 

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Mr Nash said IRD also continuously audited foreign trusts to ensure they complied with the law.

He said most of the nearly 12,000 had been scrutinised, and few problems had been found.

“We certainly have a strong programme looking at trust and company services providers. And I think the key point is that we do exchange information, we’re open to enquiries from our treaty partners and we do satisfy them.”

But this has not been enough for NZ First Leader Winston Peters who questioned Mr Nash’s suitability to conduct a review of the trusts when he had been one of the IRD officials who had rejected claims made in the Winebox about tax avoidance by New Zealand companies using the Cook Islands.

And within hours of the announcement of Wellington tax expert, John Shewan, to head the inquiry both Labour and New Zealand First were criticising the decision too.

Perhaps more ominously, NZ First Leader, Winston Peters, was recalling Mr Shewan’s previous involvement in some tax cases to cite his lack of suitability for his role.

Mr Shewan has been a long recognised tax expert in Wellington; he was chair of PWC and holds a number of other board appointments in the city.

However he was criticised by the Court of Appeal over evidence he gave in the Penny/Hooper case which involved two Christchurch surgeons who minimised their income tax by using a company structure.

Judge Tony Randerson found that substantial parts of Mr Shewan’s evidence amounted to legal submission or advocacy “which should have no place in the evidence of an expert witness. “

“But I see no objection to his evidence about taxation practice, based as it was on his extensive experience in that field,” his judgement said.

The Prime Minister yesterday indicated a willingness to legislate to tighten up the disclosure requirements on foreign trusts if that was recommended by Mr Shewan.

“If there are things that we can do better, if there are improvements that can be made; the Government is more than happy to make those changes,” he said.

Mr Shewan’s brief will be to review New Zealand’s existing disclosure rules and practices in the following areas as they relate to foreign trusts:

  • Record-keeping, including records required to be provided to the Government
  • Enforcement
  • Exchange with foreign jurisdictions. 

He will also report on whether the existing rules, when considered alongside New Zealand’s:

  • Commitment to the OECD action plan on base erosion and profit shifting (BEPS)
  • Commitment to the Convention on Mutual Administrative Assistance in Tax Matters
  • Commitment to implementing the global standard for the automatic exchange of information (AEOI) and
  • Existing and planned bilateral tax treaty network (including tax information exchange agreements)
  • Anti-Money Laundering framework
  • Other related regimes 

“are sufficient to ensure our reputation is maintained. “

Ironically  during the Parliamentary debate in 2007 which passed the Income Tax Act which allowed for foreign trusts to pay no tax and to meet only limited disclosure requirements, the Prime Minister did discuss international  tax avoidance  specifically transfer pricing.

.”Only a few months ago one of the world’s leading experts came to New Zealand and warned our country that we would be subject to a major deterioration in our corporate tax base if we did not recognise that issue.

“We need look only, for instance, at the position in Ireland, where so much revenue is booked because the corporate tax rate is low, and at where expenses are booked in the United States where corporate tax rates are higher—absolutely higher. That is the issue of transfer pricing.”

Mr Key’s revelation that he spent the weekend working on the issue plus the appointment of Mr Shewan yesterday suggests he is alive to the political damage the trust issue could go if it gets out of control.

And with Mr Peters on the warpath the potential for it to get out of control is high.