CHAPTER 5

　　Likely Havens for New Zealanders

　　5.1 Vanuatu

　　Vanuatu can be said to be a pure tax haven. No tax is imposed on either resident or non-residents. No exchange controls exist nor does any form of tax including gift tax, income tax, capital gains or estate duty. It offers all the ingredients of a successful tax haven and for this reason is probably the most attractive jurisdiction for New Zealand taxpayers.

　　Vanuatu gained its independence from Britain in 1980, however its International Finance Centre had begun as early as the 1970s. As a result, Vanuatu currently can boast of the most established international finance centre in the South Pacific region.

　　Vanuatu was a British-French condominium prior to its independence. Besides its history of English law, documents need to be filed in both English and French and as such a number of European financial planners find Vanuatu an attractive offshore centre due to its French-speaking contingent. Both English and French comprise the principal languages of education, business and law.

　　Vanuatu also has extensive secrecy provisions and as a pure tax haven does not participate in any tax treaties. Legislation provides for secrecy in respect of exempted companies and extends to directors, officers, employees, auditors and government officials.

　　Utilising a Vanuatu holding company to fund operating subsidiaries in various countries has the advantage of the subsidiaries being able to benefit from tax deductions on the interest paid to the Vanuatu parent.

　　The most common entities utilised in Vanuatu are exempt companies and trusts. The company legislation attracted increasing numbers due to the low fee structure, a reduction in reporting requirements and increased penalties for breach of Vanuatu’s tough secrecy laws.

　　The trust legislation eliminated the law against perpetuities, provide for forced heirship exclusion, indefinite accumulation period and in general allow for greater flexibility in the drafting of trusts.

　　Currently trusts are popular in the jurisdiction and may be created for and by persons resident in any part of the world. There exists no requirement to register a trust and once stamped never needs to be reported to the authorities. The trust deed remains in the hands of the trustees and as such complete secrecy is guaranteed. Currently the perpetuity period of a trust is 80 years.

　　Banks and Finance companies are permitted in Vanuatu. Many offshore banks act as cash management centres for their groups. Under the Banking Regulation provisions, a company may be licensed as a local bank, an exempted bank or an exempted financial institution. Unless a license has been granted from the Minister of Finance, banking business may not be carried on from or within Vanuatu. Advantages for offshore banking in the jurisdiction include:

　　• no minimum level of paid up capital or unimpaired reserves. Paid up capital does not have to be subscribed in Vanuatu.

　　• no transfer of net profits to a reserve fund prior to declaration of a dividend.

　　• no statutory debt-equity ratios.

　　• may carry on non-banking activities.

　　• no statutory arms-length lending restrictions.

　　• other than filing audited financial accounts, there is no need to report to the Minister of Finance.

　　Nominee Accounts is one in which the assets are held in the name of the nominee for and on behalf of the beneficial owners. This type of account is useful to beneficiaries who wish to remain anonymous. A nominee declaration is provided to the beneficial owner to allow proof of ownership to be documented. Nominee accounts are often combined with companies and/or trusts, adding additional privacy and ease of administration of such assets.

　　5.2 Hong Kong

　　Hong Kong is a tax shelter rather than a tax paradise, levying tax up to a maximum of 17% for companies, 16.5% for self-employed persons, and 15% for individual employees, on all income earned from local sources. Income originating from foreign countries is not taxed. Although, by levying tax on its residents, Hong Kong would appear to be less popular than other tax havens, which levy no tax, it is still a popular choice for New Zealand taxpayers.[59] All the ingredients of successful tax havens are offered: bank secrecy is reasonable and there are no double tax agreements in force; first class banking and professional facilities; excellent communications; geographical convenience; a large and cheap labour force; first class shipping facilities; and a free currency exchange market.

　　Hong Kong is a major transit point for dealing with the Chinese mainland. Under the Basic Laws of the Hong Kong Special Administrative Region (“HKSAR”), the social, legal, and economic systems of Hong Kong will remain unchanged for 50 years after 1997.

　　Hong Kong has developed with a low tax structure, a free port, a free exchange market and a strong currency. It has evolved in this way largely because the former British colonial government had encouraged the growth of the trading, manufacturing and finance industries, believing that the detrimental effects of the colony’s limited resources and large population could be countered if controls over finance were averted.

　　As the third most important financial centre in the world, Hong Kong has few competitors in the Pacific region and a New Zealand company seeking a base for finance house operations or a manufacturing plant in China for export ventures could find little better.

　　5.3 Other Jurisdictions

　　Although they are pre-eminently suited for most transactions, the New Zealand tax planners should not restrict their choice of tax havens to Hong Kong or Vanuatu. These countries may not necessarily meet a tax avoider’s needs. Other possibilities include the following countries:

　　5.3.1 Nauru

　　Nauru, an independent group of islands in the central Pacific some 2,200 miles north of New Zealand, has been trying to establish itself as a popular tax haven since 1972. Due to extensive Phosphate mining since 1906, the island has virtually no chance of replacing it’s mining industry with tourism. The only industry that seems to have some chance of survival is the offshore company business. Offshore companies and trusts are very welcome. It does not impose any income, estate, and property taxes, and must therefore be considered to be in competition with established tax paradises. Bank secrecy is offered against foreign enquiries by the state owned Bank of Nauru.

　　The Republic’s trust law is largely based on English law but has been modified by the Foreign Trusts Estates and Wills Act 1972. The company law is based on common law and the British and Australian Acts.

　　Since 1972 when it was established as a tax haven, Nauru’s progress towards providing any real competition with Vanuatu has not been substantial.

　　5.3.2 Switzerland

　　No analysis of the merits of the various tax havens would be complete without at least a brief note on Switzerland. When people mention tax haven or secret bank accounts, they immediately think of Switzerland. And with good reason, the place is still the benchmark for most countries involved in attracting offshore funds. When I researched this paper one thing became obvious to me, the section on Switzerland would be complicated. This is due to the fact that the country is a federation of other smaller states or cantons. Some of these cantons have their own banking and local tax regulations. In an attempt to simplify the issue I have divided this section into subsections concentrating on some of the more important issues on Switzerland.

　　Swiss Bank Accounts

　　According to the London Times, Swiss financial institutions manage 40% of all private assets worldwide. Although the days of anonymous Swiss bank accounts are gone, they are still protected by the best bank secrecy laws in the world.

　　The new “Form A” Swiss accounts introduced in September 1992 require greater disclosure on the opening of bank accounts beneficially held by trustees. Beneficiaries now must be disclosed as well as their interests in the trust.

　　If an anonymous bank account is required, Austrian banks still provide the totally anonymous bearer bank accounts.

　　Bank Secrecy

　　The cornerstone to opening a Swiss bank account is bank secrecy.

　　In Articles 27 and 28 of the Swiss Civil Code, a banker’s breach of confidentiality is deemed to be an offence, and is therefore regarded as an unauthorised act according to Articles 41 and 49 of the Swiss Law of Contracts. The bank client can thus easily justify a claim for damages.

　　In addition, Article 47 of the Federal Law on Banks and Savings Banks promulgated in 1934 and amended in 1971, threatens bank employees who pass on information about their clients to third parties with severe punishment. Even the government can only find out something about bank accounts in Switzerland in very rare circumstances.

　　In requests for legal assistance, foreign courts can theoretically ask a Swiss civilian judge to undertake certain actions (e.g. summoning a bank director as witness) as long as these are of a particular significance for the court case pending overseas. The Hague Convention on Civil Procedure dated 1904, which most countries of the Western world signed, governs legal assistance for civil suits. The extradition treaties signed by Switzerland with all the EC countries govern legal assistance in criminal cases. Tax, political, military as well as foreign exchange offences are excluded from such legal assistance, but only simple tax evasion and not tax fraud is excluded. However, what may constitute tax fraud (e.g. false invoices) in many other countries may only be considered a minor violation in Switzerland. In the case of an emergency, Swiss banks still have another way out of appearing in court as a witness against their clients, by calling on Article 273 of their Revenue Code. This article strictly forbids so called commercial espionage. And according to precedents set by the Federal Court, this can cover virtually any business information passed on where interests are to be protected.

　　Even the Nicaraguan achieved nothing when they asked the Union Bank of Switzerland for information about the return of $500 million that Nicaragua’s former dictator, Somoza, had extorted from the country and put into a Swiss bank via the bank’s Panama branch.

　　Ethiopia’s Emperor, Haile Selassie, may have lost his freedom and life to the military, which staged a coup but not his 15 billion dollar nest egg, which he built up little by little in Switzerland. He was able to do so by depositing 500 kilos of gold every year in the cellar of his Swiss bank.

　　The Swiss, on principle, never grant legal assistance to foreign authorities in debt collection and bankruptcy cases. Which means, Switzerland will not hand over any assets from a foreign bankrupt’s estate stored in their foreign territory, nor will Swiss banks give out any information to foreign bankruptcy authorities.

　　Companies

　　There are three major types of company in Switzerland: Holding, Operational and Domiciled.

　　A Holding company must have at least 75% of its interests outside of Switzerland. If this is achieved, the company can remain almost tax-exempt. Even if the company fails to meet the 75% rule, tax is still quite moderate depending on which canton it is operating from.

　　Operational companies are normal trading companies that manufacture watches, etc. They are subject to normal taxation of around 38% but this can vary depending on which canton they are situated.

　　Domiciled companies can operate from only a few cantons. These companies are the typical “paper” companies. They are not permitted to trade or employ staff in Switzerland. All their income must be derived outside the country. While these companies are basically tax-exempt, due to the restrictions the Swiss place on domiciled companies, they would be hard up convincing the tax authorities that this was a legitimate trading base.

　　5.3.3 Liechtenstein

　　Liechtenstein is one of the most popular tax havens. The principality of Liechtenstein offers the benefits of financial stability and financial expertise similar to that of Switzerland. The Swiss Franc is also the official currency. Perhaps the major feature of its law is the wide range of available forms of business entities. As elsewhere it is possible to set up limited companies, limited and unlimited partnerships and trusts. The law governing companies and partnerships is that that is generally applied in all civil law countries. The law and practice governing trusts is similar to that of Britain.

　　Provision is also made for two forms of organization having some of the characteristics both of companies and trusts. These are the Anstalt (establishment) and the Stiftung (foundation). These entities operate as if they were bodies corporate with limited liability when acting as investors or in the conduct of their business, but when they distribute their income they may do so in accordance with the flexible rights conferred by the equivalent of a discretionary trust deed. The important difference between the two organizations is that the Anstalt is treated as a body corporate (and used commercially) whereas the Stiftung is not and is used more in family transactions like a discretionary trust.

　　Holding and domiciliary companies trading outside Liechtenstein are exempt from tax on income and are liable to a net worth tax of 0.1% per annum. Anstalt and Stiftung organizations not trading within Liechtenstein also pay 0.1% on net worth but this is reduced to 0.075% on assets in excess of Swiss Franc 2 million, and to 0.05% on assets in excess of Swiss Franc 10 million.

　　5.3.4 Bahamas

　　The Bahamas is perhaps the best-known and most widely used tax haven of all. It became familiar to many New Zealanders as the base of operations of the Pan-Eastern Refining Company Limited, a company at the centre of the wrangle between Europa Oil (N. Z.) Limited and the Commissioner of Inland Revenue in the 1970s.

　　The Bahamas is classified as a tax paradise. Historically, it has always been a leading centre for banking. Banking confidentiality is a cornerstone of the law. There exist no tax treaties between the Bahamas and any foreign jurisdiction. It is a truly tax free jurisdiction with no imposition of personal or corporate tax, no gift tax, no inheritance tax and no sales tax.

　　The introduction of the International Business Companies Act of 1990 signalled the beginning of a new commitment to the enhancement of the Bahamian financial services sector. In essence, an IBC is a company incorporated in the Bahamas that does not carry on business with the residents of the Bahamas, does not own any real property or a leasehold on property (with the exception of its own office lease), does not carry on trust, banking, insurance, reinsurance or company formation businesses.

　　An IBC is a flexible corporate entity that offers confidentiality and the minimum of red tape. An IBC can be incorporated in as little as 24 hours, with minimal or no share capital, a minimum of two shareholders, with bearer shares if desired, at least one director and shares of no par value. No annual returns need be filed and the scope of an IBC’s operations may change without any problems. There is no requirement for the filing of annually audited accounts, thus the names of directors and shareholders in the company are not registered for public inspection. Many owners of IBC use an overlying trust to control the IBC for an extra measure of confidentiality.

　　5.3.5 The Cayman Islands

　　The Cayman Islands have no income, capital gains or inheritance taxes. Whoever establishes an “Exempted Company” there also doesn’t have to worry about company tax either. Tax holidays of 20 years are guaranteed in writing. Many of these companies are established to minimise, avoid or defer taxation arising in other jurisdictions. Since the country has not signed double tax agreements with any other country and has solid bank secrecy which is guaranteed by law, one can operate from there in complete confidentiality.

　　Sometimes called the “Geneva of the Caribbean”, the Caymans boast about 600 banks managing a huge amount of money. In 1976, the Cayman Government passed the Confidential Relationships Preservation Law, which is very similar to the Swiss banking code. It makes it a criminal act in the Caymans for anyone to reveal someone’s financial or banking information. The US Government has an agreement with the Caymans that in cases of fraud and the drugs trade, the Caymans Government will cooperate to expose the affairs of these people. The trouble is in the interpretation, the US Government regards tax fraud as criminal, and the Caymans Government does not. US tax evaders appear to be totally safe in the Caymans.