RA 08/02
Issued
2008

Revenue Alert

IR and overseas tax authorities are investigating tax haven structures in Liechtenstein used by NZ residents to avoid or evade New Zealand tax obligations.

Explanation

A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about significant and/or emerging tax planning issues that are of concern to Inland Revenue. At the time an alert is issued risk assessments will already be underway to determine the level of risk and to consider appropriate responses.

A Revenue Alert will identify:

  • the issue (which may be a scheme, arrangement, or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy;
  • the common features of the issue;
  • our current view; and
  • our current approach.

An alert should not be interpreted as being Inland Revenue's final position. Rather, an alert outlines the Commissioner's current view on how the law should be applied. For any alert we issue it is likely that some investigatory work has already been carried out.

If people have entered into an arrangement similar to the one described or are thinking about it, they should talk to their tax advisor and/or to Inland Revenue for advice about tax implications.

ISSUE: Tax Haven Holding Structures (including those established in Liechtenstein)

Inland Revenue has always been concerned about arrangements used by New Zealand resident taxpayers to evade their New Zealand tax liability by concealing income producing assets, and resulting income, in offshore accounts and investments. Such offshore accounts and investments may be subject to the CFC, FIF, offshore trusts, or other tax rules.

Specifically, we have recently become aware of arrangements under which New Zealand residents use legal structures established under the laws of Liechtenstein to attempt to avoid or evade New Zealand tax obligations. We are now actively investigating these arrangements together with overseas tax authorities.

Equally of concern is the use of similar structures based in other tax haven jurisdictions.

Taxpayers should be aware of the risks involved in using such arrangements or structures to evade New Zealand tax obligations, and should also be aware that it is common for information to be shared between tax authorities under international tax treaties.

Inland Revenue is working with other tax authorities to address tax avoidance and evasion, with investigators focussed on aggressive international structures designed to misuse tax havens, and legal rules which assist the concealment of income.

Description

This alert highlights Liechtenstein-based arrangements, but is equally applicable to the misuse of tax haven structures in other countries. Such arrangements or structures are generally marketed to wealthy individuals. The use of such a structure does not, alone, amount to tax avoidance or evasion. Rather, it is the use of such a structure, or a similar type of structure, for the purpose of evading a New Zealand tax liability that is of concern to Inland Revenue.

Features of a Liechtenstein structure

The Liechtenstein structures or arrangements that are of concern may exhibit some or all of the following features:

  1. A New Zealand resident taxpayer, usually with the assistance of a promoter, establishes a Liechtenstein legal structure, or acquires or uses an existing structure. The promoter may provide a 'paper trail' of documents that do not truly reflect the substance of the transactions and the taxpayer's interest in, or involvement with, the structure.
  2. The structure will typically include entities which do not have direct equivalents under New Zealand law. Features common to a Liechtenstein structure include:
    1. An Establishment (Anstalt),
    2. A Foundation (Stiftung), and/or
    3. Other legal structures, such as Liechtenstein corporations
  3. The promoter operates the structure on behalf of the taxpayer under by-laws and other constituent documents and supporting arrangements (such as agency agreements or approval function).
  4. The taxpayer directly or indirectly transfers assets to the structure. The assets may include cash and investments in term deposits, bonds or equities. In some cases, the transferred assets themselves may also consist of undisclosed income or gains, or the actual transfer of the assets may give rise to undisclosed income or gains. The structure may also be used as a holding company for other entities in which the taxpayer has an interest.
  5. The structure then uses the asset to generate passive (i.e. non-trading) income, which is retained by the structure. The taxpayer and/or associates are ultimately entitled to the economic benefits from the structure, often in a disguised form.
  6. The taxpayer does not disclose their involvement to Inland Revenue and does not pay New Zealand tax under, depending on the structure adopted, the CFC, FIF, trust rules, or other applicable provisions, on the income or gains that are generated by the structure.
  7. The documentation supporting the transactions may be absent, inconsistent, incomplete or falsified. In addition, such documents may not disclose the taxpayer's interest or involvement in the structure. In many cases, the documentation that is lodged with the relevant authorities does not accurately reflect the involvement of the taxpayer with the structure (e.g. control, ownership, or beneficial interest).

In addition, such a structure or arrangement may be acquired or operated by a person other than the person who originally set it up. Again, it is the purpose for which the arrangement is being used that will bring it within the ambit of tax evasion.

Current view

We consider that arrangements with these, or similar, features may constitute tax evasion. Taxpayers who are involved with such structures or arrangements may be liable for both the evaded tax and shortfall penalties, pursuant to the Income Tax Act 2004, the Income Tax Act 2007 and the Tax Administration Act 1994. A taxpayer who is found to have evaded tax may also be subject to prosecution under the Tax Administration Act 1994, or under criminal law.

Current status

Inland Revenue has already investigated, and continues to investigate, a number of these, and other similar, arrangements. In appropriate cases, we will take steps to counteract the tax benefits obtained from such arrangements or structures.

New Zealand tax residents have New Zealand tax obligations in respect of their world wide income. This includes income from foreign sources, including income held in offshore structures which they control, or which generate certain income directly or indirectly. A number of potential tax rules could apply, depending on the structure used.

The use of structures or arrangements, such as those described above, in order to hide assets or income using otherwise legal structures (whether in Liechtenstein or any other similar tax haven) in an attempt to avoid or evade New Zealand tax obligations may attract serious penalties, including shortfall penalties for evasion (at 150% of the tax shortfall) and possible prosecution action. Such penalties are in addition to being required to pay the tax shortfall itself.

Late payment penalties and use of money interest may also be applied to people entering into the type of arrangement described in this Revenue Alert.

Where shortfall penalties apply, these may be reduced if a voluntary disclosure is made. Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and Standard Practice Statement INV-251 Voluntary Disclosures (April 2002).

Going forward

If people have entered into an arrangement similar to the one described above, or are thinking about entering into such an arrangement, they should talk to their tax advisor and/or Inland Revenue for advice about the likely tax implications.

References to consider

The following related references will assist taxpayers with determining whether their arrangement is subject to the avoidance provisions in the Revenue Acts.

Standard practice statements: INV-251 Voluntary Disclosures (April 2002)
Other policy statements: Appendix C - Explanation to the application of section 99 of the Income Tax Act 1976 Tax Information Bulletin Vol. 1, No 8 (February 1990).
Revenue Alerts items: N/A
Media Releases: Media Release - Liechtenstein (27 February 2008)
Date issued: 7 May 2008
Authorised by Graham Tubb
Group Tax Counsel
Legal & Technical Services
Contact (via email): revenue-alerts@ird.govt.nz
Media queries: mediaqueries@ird.govt.nz
(04) 890 1698