Analysis: Panama Papers and a foreign squatters tax

Although the Panama Papers issue has caught a number of public figures on the hop for not truthfully declaring their interests, its main substance involves the secrecy afforded users of offshore trusts. For sure, this makes it easy for the unsavoury to hide ill-gotten gains but, as well, there are many users who have bona fide reasons for taking advantage of such structures, for instance, those trying to get their property beyond the reach of totalitarian regimes.

The issue then becomes whether by creating public registers of the beneficial ownership of such entities the baby is thrown out with the bathwater. As much as transparency outs the guilty, it will also expose the innocent and their families to the ravages of despotic regimes. Therein lies the dilemma of such structures whose primary service is secrecy. Importantly, the activity itself is not anything like criminal – although of course some of those utilising it could be.

It reminds me of the kerfuffle over decoding of the Apple iPhone owned by the San Bernardino jihadist. If all iPhones were readily decoded, then yes there would be some guilty parties revealed. But also millions of innocent would have their privacy compromised as well. Here’s another example – how many criminals are the beneficial owners of bank accounts in Australasia’s commercial banks? The answer is we don’t know. To find out we could make public the details of all bank accounts.

Get the point? Where is the line drawn between privacy and outing the bad people? How many innocents are you willing to bury in the pursuit of the guilty? It comes down to pragmatism versus the moral question. But the case for shutting down the offshore trust sector sounds a bit flimsy to me, and as for making it all totally transparent – well that would be shutting it down.

The argument that this is damaging to our international reputation needs to be set in context. I would argue that in international circles the sources of reputational damage to New Zealand are far greater elsewhere – and have undoubtedly been self-inflicted. For instance the recent Climate Cheats scandal – where we have and still are knowingly benefitting from the proceeds of organised crime – is far more an indictment of New Zealand’s morals.

With the Panama Papers, the political storm in New Zealand seems to be more over “appearances” than substance. So far at least, there has been no outing of vast criminal activity by anyone remotely connected to New Zealand so from that perspective it’s more steam than smoke, and no fire has been uncovered. It is as i f the opposition parties are just trying to whip it up into a major conspiracy and a platform to attack National as the Government. For the rest of us, frankly it’s a bit of a yawn.

Having said that, there is a revenue opportunity here that New Zealand could exploit more intelligently – the $25 million of so of business for the local bean counters and form fillers is hardly a great return for the competitive advantage a New Zealand base seems to offer for these offshore administration structures. Rather than simply ban or destroy them so the business goes elsewhere, why don’t we tax them? Remember the wider the tax base the less tax the rest of us have to pay and here New Zealand is undoubtedly providing a service, so why should all the gains be privatised.

The real loopholes
At the core of the annoyance here is the thought that yet again more (rich) people are getting away with tax avoidance. Sure, they’re not Kiwis but what the hell, we still feel aggrieved because they’re using us. I presume we don’t need reminding how extensive the list of loopholes in our current income tax regime is.

For instance, the recent “Google Tax” imposed in the UK and Australia is one attempt to clamp down on the age-old practice of cost shifting, which is used by corporates to reduce taxable income. And for a long time we have been talking about the tax loopholes around housing and lifestyle businesses, which were the subject of our research in The Big Kahuna. That is an enormous tax loophole. I also think we have issues in the creation of our approved issuer levy that are leading to unnecessary loss of tax revenue. And then there’s another big one – what is a charity and what isn’t really? I can go on all day about where we should be focusing our efforts on shutting down tax loopholes.

But the foreign trust regime offers an opportunity for the empire to strike back. It actually could be a new source of tax revenue – I would look at it that way rather than trying to outlaw it. Imagine the revenue if we levied an annual tax on the balance sheet of such trusts as recompense for use of our good name?

There you go, if you can’t beat them, join them and let’s all benefit – bring on the “squatters tax.”

Gareth Morgan is a New Zealand economist and commentator who in previous lives has been an investment manager. This post first appeared on Gareth's World.

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