Client Briefing Note: Tax bill to implement foreign trust disclosure recommendations and automatic exchange of information regime

The Taxation (Business Tax, Exchange of Information and Remedial Matters) Bill was introduced into Parliament on 8 August 2016. , The bill includes provisions to put in place the recommendations from the Government’s recent inquiry into New Zealand’s foreign trusts disclosure rules. It also includes provisions to implement the G20/OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters (“AEOI”), which is a global initiative to promote fiscal transparency and address offshore tax evasion. 
 
A copy of the bill and its commentary can be reviewed online.
 
Foreign trusts disclosure regime
 
The bill proposes rules to effect the recommendations of the Government’s inquiry into foreign trusts disclosure rules which we have previously reported on here.
 
Under the bill New Zealand resident trustees of foreign trusts must:
  • register the trusts with Inland Revenue;
  • provide to Inland Revenue certain information about the trusts, including the trust deeds and details of the settlors, protectors and in some cases, beneficiaries of the trusts;
  • submit to Inland Revenue an annual return advising of changes to information provided at the time of registration and details of any settlements or distributions made during the year, together with the trust's financial statements.
 
The information collected by Inland Revenue may be shared with the Department of Internal Affairs and New Zealand Police for regulatory or law enforcement purposes.
 
The current rules which exempt a foreign trust from tax on foreign sourced income have also been amended.  A foreign trust will lose that exemption unless it has registered with Inland Revenue and fulfilled the other disclosure obligations under the regime. The previous “safe harbour”, whereby a foreign trust could keep its tax exemption so long as one of its trustees was a "qualifying resident foreign trustee", is to be removed.
 
Existing foreign trusts will need to register with Inland Revenue by 30 June 2017.
 
AEOI implementation
 
Those countries who have committed to AEOI, including New Zealand, are required to put in place an element of AEOI known as the Common Reporting Standard or CRS. The Common Reporting Standard sets out rules that require “financial institutions” to undertake due diligence about non-resident holders of accounts maintained by the financial institutions. Certain information must be passed on to Inland Revenue, and it will exchange that information with the relevant tax authorities of other countries who have committed to CRS. The regime and information to be reported is broadly similar to that required by the United States under the Foreign Account Tax Compliance Act, although there are differences. 
 
In some cases trusts may be financial institutions and therefore required to obtain and report information about their settlors, protectors and, in some cases, beneficiaries, to Inland Revenue. Even if trusts are not financial institutions, they will be required to provide information about the trusts, and the individuals who control the trusts, to financial institutions that maintain accounts for those trusts.
 
The bill proposes specific penalties for non-compliant financial institutions, and individuals and entities who do not respond to requests for information from financial institutions.
 
Under the bill, it will be mandatory for financial institutions to obtain information on all non-New Zealand resident account-holders, not only those who are resident in countries who have committed to CRS. This is referred to as the “wider approach” under CRS.  However, only information relating to account-holders in CRS committed countries is required to be reported to Inland Revenue.
 
The CRS regime is set to apply from 1 July 2017. 
 
Our view
 
The implementation of the foreign trusts disclosure regime, together with the wider approach taken to CRS due diligence and reporting, reflects the Government's support for measures that are aimed at greater transparency and preventing the use of New Zealand structures for the purpose of tax evasion and other illegitimate activity.
 
As both regimes are set to apply from mid-2017 onwards, trustees and their advisers need to understand, and be in a position to comply with, the obligations in those regimes. 
 
The bill is open for submissions from the public until Friday, 9 September 2016
 
If you wish to obtain further advice on any aspect of the above regimes, please get in contact with your usual TGT Legal adviser.
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