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Havens for th
e taxpayers(2)
–The hidden world
Clement Chak

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  2.1.5 Double Tax Agreements

  New Zealand has 30 double tax agreements (“DTA”) with its main trading and investment partners aimed at reducing tax impediments to cross-border trade and investment and assisting tax administration.

  Contrary to what the name implies, they do not tax the same income twice, they can save taxpayers a lot of money by ensuring that they don’t pay twice when dealing with two countries that have signed treaties. In some instances, they can be used to the taxpayer’s advantage, by paying tax in a country with lower tax than say another that may have otherwise been the taxpayer’s country of residence. The point of DTA is that taxpayers only pay tax once.

  The principal problem, as you read through this paper, is exchange of information between DTA countries. The exceptions to the “Gossip Rule” are Switzerland, Israel, South Africa, Third World countries and Non-DTA countries. The worst offenders when it comes to exchange of information is Australia followed by the EC, Canada, New Zealand and the US.

  2.1.6 Tax Avoidance

  Is there a general New Zealand Government Policy on Tax Avoidance?

  Absolutely, this policy is wide ranging, complex, and controversial. The general anti-avoidance provision under s BG 1 of the Income Tax Act 2004 apply to an arrangement which has tax avoidance as either its sole purpose, or, if it has two or more purposes, one purpose of tax avoidance which is more than incidental. Such an arrangement is void as against the Commissioner[26] and s BG 1(2) gives the Commissioner power to reconstruct the tax accounts of taxpayer in order to counteract any tax advantage obtained by virtue of such an arrangement.

  2.2 Conclusion to Tax Matters in A Nutshell

  The general gist of New Zealand Tax Law in relation to offshore dealings is basically to make sure taxpayers pay tax at rates similar to New Zealand if they don’t pay tax here. Since the Government introduced legislation in 1987, the opportunities to pay less tax by investing offshore have nearly dried up.

  It is best in the “Open World” to comply with the Tax Law and pay the tax unless someone can afford a team of tax consultants and the possibility of fines.

  Without being dishonest and hiding one’s affairs from the Tax Department by using the often impenetrable secrecy barriers established by certain jurisdictions, taxpayers have very little room to move being a New Zealand resident. But there are legal ways to achieve tax savings and they are:

  • Seek residency offshore

  The loophole which is a little on the radical side is to adopt Perpetual Traveller status or cease being a resident of New Zealand, just enjoy long holidays here. This is definitely a desperate move, but on the other hand if someone playing with millions, may be it is worth it, ask Mr Watson and Mr Murdoch.

  • New Zealand, a possible tax haven for Foreign Trusts

  Unlike many jurisdictions where the tax treatment of a trust is determined by the residency of the trustee(s), the tax treatment of a trust under New Zealand tax law is determined by the residency of the settlor(s). As a consequence, more and more foreign (i.e. non New Zealand tax) residents are considering the establishment of a “Foreign Trust” in New Zealand, being one that has never had any New Zealand resident settlor. A Foreign Trust that has New Zealand tax resident trustee(s) but no New Zealand tax resident settlor(s) or beneficiaries, only pays tax on its New Zealand sourced income and does not pay tax on any income derived from outside New Zealand.

  The trustee must be paid for trustee services at a market rate or the trustee could be deemed to be a settlor of the trust. The trust could then be treated as a “non-qualifying trust” rather than a “Foreign Trust” for tax purposes, with different tax consequences applying from those described above.

  • Ensure offshore income is not attributable and use the income for offshore holidays and purchasing assets offshore

  Of course there will always be those people with absolutely no conscience at all that will set up an offshore company and bank account in a “high secrecy and low tax” country. They will arrange for that company to earn a sizeable income, possibly through foreign investments or transfer pricing, and not advise the Tax Department of their offshore company’s existence. Obtain a cash card from their offshore bank that is connected to Cirrus or Maestro international banking networks and draw down cash from local ATMs completely undetected and undetectable. And what is more astonishing, they have been doing it for years.

  The Situation So Far……………

  We have looked at some of the more relevant New Zealand Tax issues like the Controlled Foreign Companies regulations and the Accrual System that was also introduced. We also know that the Foreign Investment Fund and the Foreign Trusts legislations were introduced to stop foreign nationals owning or appearing to own, companies or trusts for New Zealand beneficiaries. We also now know that any transactions we have between our business onshore and any business we have offshore, must be transacted on a legitimate and commercial basis to avoid the Tax Avoidance rules.

  At this point we have enough coverage of New Zealand Tax Laws to see whether there is still any room that Tax Havens can be used.

  We now embark on our journey to seek how best to utilize Tax Havens in relation to international tax planning and New Zealand.

   CHAPTER 3

  What is a Tax Haven?

  The utility of any international tax planning in this area is premised upon the ability of tax advisers to readily identify various countries and jurisdictions as potential “Tax Havens”. But how is this done? Is there a set of guidelines that can be readily employed by a tax professional in order to determine whether a particular country can or should be classified as a “Tax Haven”?

  In addition to answering those questions, it is important to examine and understand the policy considerations usually cited as relevant to the taxation of earnings derived from a tax haven-based entity. Such an enquiry may well shed some light on the forces, which have dictated how the current legislation in this area is to be implemented.

  3.1 Questions of Definition

  It is somewhat difficult to provide a completely satisfactory definition of a “Tax Haven” which is capable of meeting all the potential demands, which might be placed upon it. To the layman, a tax haven is simply a country that levies little or no tax. Like so many generalisations, this definition is to a certain extent correct, but it is not particularly helpful in terms of identifying the criteria by which either tax authorities or tax planners deem a certain country to be a tax haven.

  Professor Arnold has noted that any analysis of the concept of a tax haven will be premised on two general points[27] :

  (1) Whether a particular country is a tax haven or not must be judged from the perspective of a particular investor or taxpayer. In other words, “ the burden of taxation is relative and so, therefore, is the definition of a tax haven”[28] . Thus, a person resident in a country with a high effective tax rate may well view other jurisdictions with lower effective tax rates as tax havens. It is this act of comparison that is in fact crucial to the recognition of another country as a potential tax haven.

  (2) Given that fact, any definition of a tax haven will also depend on the “specificity of the comparison between the tax rates of two countries”[29] . In other words, a taxpayer may view another jurisdiction as a tax haven on the basis of how that jurisdiction taxes a specific source of income, as opposed to a comparison based solely on a general effective tax rate. This is obviously a more subtle analysis, and as a result, the question of whether one country can properly be termed a “Tax Haven” as against another will be predicated to a great extent by the exactness of that comparison.

  Nevertheless, Professor Arnold does attempt to postulate a reasonably broad definition of a “Tax Haven”, which incorporates both of the above points :

  “In general, a country that levies no tax, or that levies no tax on particular sources of income, or that levies tax at a significantly lower rate will likely be considered by taxpayers and the tax authorities of another country to be a tax haven.”[30]

  According to the Organization for Economic Co-operation and Development (OECD), a tax haven can be described as a jurisdiction actively making itself available for the avoidance of tax, which would otherwise be paid in relatively high tax countries. The term “tax haven” covers three classes of jurisdiction:

  1. Countries where there are no relevant taxes (tax paradises such as the Cayman Islands, Bahamas and Bermuda).

  2. Countries where taxes are levied only on internal taxable events, but not at all, or at very low rates, on profits from foreign sources (tax shelters such as Hong Kong, Panama and Liberia).

  3. Countries, which grant special tax privileges to certain types of companies or operations (tax resorts such as Channel Islands, Liechtenstein, Luxembourg, Isle of Man and Monaco).

  3.2 Policy Issues & The Use of Tax Havens

  When faced with the question of whether taxpayers should be able to take advantage of the benefits offered by those jurisdictions classified as tax havens because of their comparatively low income tax rates, it is important to examine the policy issues which inspired the enactment of the CFC legislation in the first place. As McIntyre[31] put it:

  “The asserted goal of CFC legislation, in the United States and elsewhere, is to prevent domestic taxpayers from avoiding tax through the use of a foreign entity. Every tax system needs protection against the tax avoidance machinations of clever taxpayers. Anti-avoidance measures must be justified, however, by reference to substantive policy goals.”[32]

  The purpose of such an inquiry is to step behind the legislation for a moment, in an attempt to gauge and understand the sometimes subtle pressures placed upon the CFC regime by its various users, whether investors, immigrants, or revenue authorities. In recognising which policy considerations are the most important to the Government, one is perhaps also able to identify which structures will be the least offensive to those objectives, thereby reducing the likelihood of subsequent dispute following the implementation of a particular scheme.

  Income tax legislation has traditionally been motivated by three broad policy objectives: Equity, Neutrality, and Efficiency (or Simplicity)[33] . As Professor Arnold notes, these objectives “generally apply also to the taxation of foreign source income”[34] . But what do they mean?

  3.2.1 Equity

  In Cohen’s words, “[a] tax system is said to be equitable where the tax burden is distributed fairly so that the tax load of individuals is related to their capacity to pay”[35] . This definition may be somewhat refined however, by recognising that the concept of equity has two facets : Horizontal equity, which relates to the equal treatment of taxpayers in similar circumstances; and Vertical equity, which relates to a particular person’s taxation burden to their ability to meet it, in terms of both their income and financial status in society.

  Generally speaking, modern taxation systems are equitable in only a very broad sense. Tax preferences and incentives for special interests groups abound in the legislation of most developed countries.

  Nevertheless, the goal of horizontal equity in particular is important in the context of an international taxation regime. It requires that domestic taxpayers earning domestic source income should bear the same tax burdens as otherwise similarly situated domestic taxpayers earning foreign source income. To achieve this, it is generally accepted that “a country’s income tax system should impose a current tax on the foreign source income of domestic taxpayers, subject to the allowance of a credit for foreign taxes paid”[36] . If such a scheme is not implemented, then tax biases in favour of economic activity producing low-taxed foreign-sourced income may well appear, thereby threatening that country’s domestic tax base by effectively encouraging the export of capital overseas through investment.

  The importance of an equitable international taxation regime has been recognised in both New Zealand and Australia :

  3.2.1.1 New Zealand

  On 17 December 1987 the Government issued a Consultative Document on International Tax Reform[37] as part of its general economic statement. This paper stated clearly that the taxation of income earned by residents through offshore entities was “manifestly in need of reform”[38] , and identified two main objectives as part of the proposed reform process :

  “(a) [To] protect the domestic tax base from arrangements which seek to avoid or defer New Zealand tax by the accumulation of income in off-shore entities; and

   (b) [to] reduce the extent to which the tax system encourages off-shore investment relative to investment in New Zealand and biases the form in which off-shore investment is made.”[39]

  In making such a statement, the Government was undoubtedly conscious of the seeming absence of horizontal equity in New Zealand pre-1988. In this sentiment it was not alone, for the concerns raised in the first objective at least had been the subject of much analysis throughout 1987 :

  For example, in a New Zealand Society of Accountants Seminar in that year, on the proposed changes to tax haven legislation, John Waugh stated :

  “Protection of a home country’s tax revenue base is undoubtedly the principal purpose of anti-tax haven legislation. That protection needs to extend to off-shore income and profits which might otherwise have accrued to a resident but which, by one technique or another, leave the home country powerless to tax such income or profits either until some time after its derivation or, perhaps, at any time whatever.”[40]

  The Consultative Document echoed his words :

  “The deferral or avoidance of New Zealand tax on foreign income earned through non-resident companies and trusts is unacceptable. It constitutes an incentive for foreign investments by New Zealand residents in countries with tax rates lower than in New Zealand. … More generally, it undermines the integrity of the tax system by permitting the New Zealand tax base to be easily eroded.”[41]

  The challenge in 1987 was thus quite clear – to draft New Zealand’s CFC legislation in such a way as to reverse the erosion of the national tax base. In that respect, at least, commentators at the time thought that new regime was quite effective :

  “New Zealand’s CFC legislation … quite clearly has been designed to achieve horizontal equity. It applies to all foreign income without distinction. New Zealand policy makers expressly rejected making a distinction between active and passive income [unlike the United States] on the ground that such a distinction makes no sense in a tax regime designed to achieve [horizontal equity].”[42]

  

  3.2.1.2 Australia

  Australia also adopted a sophisticated CFC regime with the enactment of the so-called foreign source income (“FSI”) measures, which came into effect as from the 1990/91 tax year. This regime, contained in Part X of the Income Tax Assessment Act 1936, was designed to tax Australian residents on a current year basis on certain foreign source income derived by a foreign entity.

  Prior to the implementation of such legislation, however, the Australian Government had also followed a sustained consultation process throughout the late 1970’s and early 1980’s, in much the same way, as had its New Zealand counterpart. The results of this process were instrumental in determining the structure of the new regime.

  In terms of equity, numerous commentators called upon the Government to ensure that Australia’s international taxation regime was also founded upon equitable principles. In 1985, for example, after a detailed analysis of the parallel American legislation in this area, Cohen, echoing similar sentiments from across the Tasman, stated simply :

  “As far as the objective of implementing taxpayer equity, the Government should ensure that its residents are treated equally under the Australian tax system whatever the source of the income of the taxpayer.”[43]

  Also highly influential was the Report of the Asprey Committee[44] , which had reviewed the taxation system in Australia in 1975 and made substantial recommendations for reform. It explained the concepts of horizontal and vertical equity as notions “that it is fair that persons in the same situation should be equally treated, and those in different situations differently treated, with those more favourably placed being required to pay more”[45] .

  3.2.2 Neutrality

  Neutrality may be defined as “the situation that exists when the tax system does not affect or interfere with personal or investment decisions”[46] . Thus, a neutral tax system is one, which will promote the most efficient allocation of scarce resources in an economic system.

  International tax neutrality exists when the pattern of taxation in a country does not affect a person’s choice to reside or invest domestically or abroad. This objective can be addressed in terms of the criteria of “capital export neutrality”, which holds when foreign-sourced and domestic-sourced income are taxed in the same way so that residents are indifferent on tax considerations between investing off-shore or domestically, and “capital import neutrality”, which holds when the tax treatment of foreign investments is determined solely by the rules applying in the country where the investment is located.[47]

  3.2.2.1 New Zealand

  As discussed earlier, New Zealand was definitely not “capital export neutral” pre-1988. At that time, New Zealand resident individuals and companies could effectively defer domestic tax on foreign income simply by earning such income through a non-resident company. This concept of “deferral” arose from the fact that a company was, and still is, considered to be a legal and taxable entity separate from its shareholders. As a result, any income derived by a non-resident company could not constitute income from the point-of-view of the shareholders until distributed in the form of dividends.

  The 1987 Consultative Document recognised this lack of neutrality :

  “The fundamental deficiency in the tax system … is the lack of neutrality. In principle, residents are subject to New Zealand tax on their income derived from all sources – that is, their worldwide income. In practice, however, foreign income derived by residents is not subject to New Zealand tax. Whether it is, depends on whether the income is realised directly or realised indirectly through the use of interposed entities such as companies or trusts, and on whether it is earned in a country that levies high or low income taxes.”[48]

  But did the enactment of New Zealand’s CFC legislation actually solve this problem? Davidson & Simcock[49] thought not:

  “[The legislation] emphasises tax avoidance and revenue gathering at the expense of neutrality and investment implications.”[50]

  

【注释】
  26. Section BG 1(1) of the Income Tax Act 2004. 
  27. Supra at note 1, at 114. 
  28. Ibid. 
  29. Ibid. 
  30. Ibid. 
  31. McIntyre M.J., “Australian Measures to Curb Tax Haven Abuses: A United States Perspective” (1988) 5 Australian Tax Forum 419. 
  32. Ibid, 421. 
  33. See Arnold (supra at note 1) at 52-57; McIntyre (supra at note 31) at 421-7; Cohen G.M., “Controlled Foreign Corporations – Subpart F of the Internal Revenue Code 1954 – A Blueprint for Australia?” (1985) 19(4) Taxation in Australia 833, 834-6; Consultative Document (infra at note 37) at 11-14. 
  34. Supra at note 1, at 52. 
  35. Cohen, supra at note 33, at 834. 
  36. McIntyre, supra at note 31, at 423.  
  37. “Consultative Document on International Tax Reform”, (Wellington, Government Printer, 1987). 
  38. Ibid, at 11 (Para 3.2). 
  39. Ibid, at 1 (Para 1.2). 
  40. Waugh J., “Government Moves on Tax Havens : A Background Paper”, (Wellington, New Zealand Society of Accountants, 1987 Residential Taxation Seminar) 6. 
  41. Supra at note 37, at 13 (Para 3.3). 
  42. Supra at note 31, at 424. 
  43. Supra at note 33, at 839.  
  44. “Full Report of the Taxation Review Committee” (Canberra, 31 January 1975). 
  45. Ibid, at Para 3.7. 
  46. Supra at note 1, at 54. 
  47. Taken from the Report of the Consultative Committee on Full Imputation & International Tax Reform (Wellington, Government Printer, March 1988) 9 (Para 1.5.10). 
  48. Supra at note 37, at 12 (Para 3.3). 
  49. Davidson P.S. & Simcock D.H., “New Zealand Taxation of Offshore Trusts, Controlled Foreign Companies and Foreign Investment Funds” (1989) 1(4) CCH Journal of Asian Pacific Tax 18. 
  50. Ibid, at 21.
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