Scoop | 12 April 2016
Prime Minister John Key could have dealt with the clamour for an independent inquiry into the Panama Papers scandal in a variety of ways. He could have – for instance – set up a public inquiry, as was done in the mid 1990s, in the wake of the Winebox tax shelter revelations. Not a chance. Instead, while living in denial that any problem even exists, Key has announced a one person “independent” inquiry, which will be conducted by… John Shewan, the Establishment’s reliable workhorse on tax matters for the past 30 years.
For nine years, Shewan fronted the Tax Education Office set up in 1988 by Roger Douglas. A veteran of 35 years service with Pricewaterhousecoopers including a stint as its chairman, Shewan served as a tax adviser to Westpac – in which role he advocated that the bank should pay tax at a rate well below the nominal 30% corporate tax rate. Ultimately, the bank was successfully prosecuted for tax avoidance in 2009.
Inland Revenue welcomed the judge’s ruling that the structured finance transactions were tax-avoidance arrangements and that the IRD had correctly adjusted tax owed. They had effectively allowed Westpac to choose a tax rate substantially below the country’s 30 per cent corporate tax rate. Evidence in the seven-week case showed Westpac’s tax adviser, John Shewan (now chairman of PricewaterhouseCoopers), advised not paying a rate below 15 per cent but in the end the amount he advised was 6.5 per cent.
In the early 2000s Shewan also publicly supported the government’s Lord of the Rings tax provisions – whose (a) cost/benefit ratios and (b) related Pacific Island tax loops were covertly marketed by the BNZ (among others)… and with both aspects being cloaked with as much secrecy as the workings of any Caribbean tax haven. Shewan also served on the Tax Working Group in 2009 that was tasked with reforming our tax system. Finally in 2012, he was made a Companion of the New Zealand Order of Merit for his services to business. Experienced? No doubt. But a new pair of eyes, able to offer a fresh and independent evaluation? Not this guy.
Let me make a wild guess. When he reports back on June 30, we can be pretty sure that Shewan will find that there is much to admire and few causes for concern in the New Zealand rules to do with foreign trusts. Let me also bet that Shewan’s analysis will limit itself entirely to the formal framework – it will be an “on paper” evaluation – and will not examine how the system works in practice. How the system actually works is the sort of thing that can emerge only if and when a public inquiry was held, and people were invited to come out of the woodwork.
This point is especially relevant since the bill of health that the Key government has been leaning so heavily on for the past week – the OECD evaluation of 2013 – was itself an “on paper” inquiry. The OECD 2013 analysis of New Zealand was carried out by the Financial Action Task Force (FATF) set up by the G7 to combat criminal money laundering and terrorism financing. It is well worth reading.
In this report, the FATF/OECD warned more than once about the limited “paper-based desk review” nature of its analysis quite explicitly. On page 4 of its review for instance, it says:
As a general note on all applications for removal from regular follow-up: the procedure is described as a paper-based desk review and by its nature is less detailed and thorough than a MER. [mutual evaluation report]…..Such analysis essentially consists of looking into the main laws, regulations and other material to verify the technical compliance of domestic legislation with the FATF standards. In assessing whether sufficient progress had been made, effectiveness is taken into account to the extent possible in a paper-based desk review and primarily through a consideration of data provided by the country….they are based on information which was not verified through an on-site process and was not, in every case, as comprehensive as would exist during a [full] mutual evaluation.
Meaning: for the past week, Key has been relying on an OCED bill of health that the OECD itself said at the time was partial, purely paper-based and largely reliant on material supplied by the New Zealand authorities. Briefly, the 2013 report was a follow-up to the utterly damning full OECD evaluation of our anti-money laundering/terrorism financing regime carried out in 2009.
Now, to be fair, it should be kept in mind that some of the 60,000 references to New Zealand in the Panama Papers probably do relate to this “Wild West” period pre- 2012, when this country was in the throes of one of its periodic and ideologically-driven spasms of free market idiocy. Yet it is clear from a reading of the 2013 report that many of the upticks we got from the FATF in 2013 for correcting the situation were for steps that had only been put in place in 2012 – which was why, to repeat, the OECD was stressing that its report was only an “ on paper” bill of health, and not to be taken as a verdict on whether the new system would be properly resourced, or how well it would work in practice.
If Shewan now proceeds to give us another “on paper” evaluation, it will be a sheer (and cynical) diversion, and a big fat waste of time. Is Shewan going to hold an inquiry on the scale of the Winebox inquiry? No, of course not. And remember, the Winebox was only about tax avoidance loops being run through the Cook Islands. The Panama Papers reveal a far wider, global system of much greater complexity. In sum, the Shewan review is tokenism, and a political gesture set up to fail when measured against the public’s reasonable expectations.
Footnote: The alleged ‘ reputational risk’ to New Zealand from the Panama Papers revelations is really not the point. We have a tendency in this country to assume that other countries take notice of New Zealand whenever we perform well – or badly – on the world stage. In fact, other countries usually have other things on their minds, closer to home.
Regardless, New Zealand has fretted about our role in the Panama Papers tax scandal, and agonised about the ‘reputational risk’ to this country of being seen as a tax haven. In the circumstances, it seems legitimate to query whether anyone offshore – apart from the Australian Financial Review – has even noticed that New Zealand is involved. We do not feature, for instance, in the published lists of the ten major tax havens used by the clients of the Mossack Fonseca law firm at the centre of the scandal. Anyone offshore working in the tax avoidance industry has been well aware of our vulnerability to tax exploitation for years. Beyond them, there is hardly any sign that the wider public in other countries are linking New Zealand to the Panama Papers
That doesn’t mean we’re not a tax haven. Clearly, some firms have been exploiting our image as a First World country to tout for dodgy, tax sheltering business. Even so, care should be taken as what activities belong to the pre-2012 era – when we were gullible naïfs wide open to all kinds of predatory behaviours – and those activities which belong to the post 2013 period, when things have supposedly improved. (It would be nice to know how much they actually have, and what loopholes still remain. The government seems to be no hurry to find out. If it was, it would re-open the MBIE discussion paper process on the subject, which closed in late February. )
Yet this imagined risk to our national reputation – which is an interesting example of national insecurity – seems somewhat beside the point. This fixation doesn’t help to identify how and why New Zealand exposed itself to risk in the 2000s – and nor does it help us to prove the extent to which we are currently meeting our international obligations to prevent money laundering and terrorist financing. Fundamentally, worrying about what foreigners think of us is less important than what we think about ourselves. Do we think its OK that the tax system enables the wealthy to avoid paying their fair share of tax – via tax shelters and other means that are well beyond the reach of ordinary wage and salary earners? On paper, the rich are supposed to pay a certain rate of tax – but the John Shewans of the world earn their living by ensuring they never have to do so, in practice. That’s the real problem.
Disney To The Rescue
Since the Key government is fobbing us off with a Mickey Mouse review, it seems appropriate to bring on Donald Duck – to remind us of a more innocent time, when those in power were actively promoting the idea that it was actually patriotic to pay your taxes, and evil to put your own selfish desires for wealth, pleasure and lavish consumption ahead of this essential social duty.