Inquiry powers exercised at the request of a foreign tax authority
On 16 August 2018 the Court of Appeal considered an appeal by the Commissioner of Inland Revenue (“CIR”) from the High Court judicial review in this case, undertaken by Wylie J. The appeal decision is not yet to hand and this note has been prepared to provide a summary of the various stages through which this litigation has passed to date. At issue are important principles about the extent to which Inland Revenue (“IR”) can be held to account for it actions in seeking information on behalf of a foreign tax authority under a double tax agreement (“DTA”).
Chatfield & Co Limited (“Chatfield”) is a firm of accountants who act as tax agents for New Zealand companies connected with Korea. It has assiduously resisted an information request from IR on behalf of the Korean National Tax Service (“KNTS”). Because of the stance taken by IR over the secrecy of its dealings with the KNTS, Wylie J quashed IR’s information request. That decision came after a series of interlocutory outings in which the Courts sided for the most part with IR. It is instructive to review those steps and the High Court’s decision on the substantive review as background to the pending appeal decision.
The KNTS requested that IR furnish information about the New Zealand companies pursuant to Art 25, the information sharing provision, of the DTA between Korea and New Zealand. The CIR exercised her powers under s 17 of the Tax Administration Act 1994 (“TAA”) and requested information about the companies form Chatfield. The CIR has consistently refused to provide documents exchanged with Korea, expected to outline the reasons for the request and the CIR’s justification for the decision to seek information from Chatfield. The original reason given for this was that the documents are not relevant, and that they relate to “matters of state”. This resulted in Chatfield seeking to review the IR decision to request information.
The Commissioner’s Broad Powers to Request Information
The powers available to the Commissioner to request information under s 17 are well recognised as being broad. Briefly, the only documents which the Commissioner cannot demand are those covered by legal privilege, and documents subject to tax advice non-disclosure rights. Otherwise there is a vaguely defined test of necessity and relevance as to which the CIR is generally regarded as the arbiter. In the past, this broad power has included requiring lists of large clients, their ledgers, investment portfolio details, personal addresses and names. It is well known that inquiries by the CIR can extend to fishing expeditions as long as those are conducted for the purposes of fulfilling IR responsibilities under the revenue Acts. Even knowledge not recorded can be demanded.
In past cases information requests have been deemed partially invalid because of imprecise requests, rather than the CIR over-reaching her powers. In 2011, the Court of Appeal offered a minor limitation by confirming that the Commissioner is usually barred from extracting information exclusively for use in concurrent legal proceedings, but apart from this the background to the Chatfield cases suggests that the CIR’s powers of inquiry are subject to little practical interference by the Courts.
First Outing - discovery
The first outing concerned the extent to which, in preparation for review, Chatfield was entitled to discovery of the KNTS request to IR, to be able to assess the extent to which it conformed to the requirements of Art 25 of the DTA. It was noted by Ellis J at  that the “power conferred on the Commissioner by s 17 is a wide-ranging and intrusive one.” It was noted that a taxpayer usually can ask for the CIR’s grounds for making a request, and that a “blanket and undifferentiated claim of confidentiality” was not a sufficient response by IR. Instead, the High Court found that the Commissioner could only claim confidentiality under the DTA if that was specifically requested by Korea, noting at  that “it would be prudent for at least brief reasons to be given by Korea for any refusal.” Even if secrecy was requested by Korea, Ellis J still considered it appropriate that the taxpayer’s interest in disclosure would need to be weighed against the interests of Korea (and by extension NZ as Korea’s treaty partner) in maintaining secrecy regarding its inquiry.
The CIR went back to Korea because of the Judge’s observations, but Korea maintained that all documentation should be kept confidential. The reasons supplied by Korea were shared only with the Court and are not on the public record. Having been provided with that information, Ellis J found that confidentiality must be maintained.
Second outing – strike out
In the second outing, IR followed up on Ellis J’s decision over secrecy by applying to have Chatfield’s application for judicial review struck out, claiming it was not reasonably arguable. This application came before Lang J. Chatfield posited three claims, focused in part on the effect of IR’s Operational Statements (“OS”) covering the circumstances in which accountants would be required to respond to section 17 information requests. Chatfield argued that such requests should be a last resort, whereas the requests made at the behest of the KNTS had come without any prior inquiry.
Addressing the first claim, Lang J observed that an OS could not be enforced against the Commissioner on the grounds of legitimate expectation of the taxpayer, rendering the discussion of how it might have applied moot. The same approach undermined the second claim, as the Commissioner could not be expected to consider her OS when serving a s 17 notice – this finding raises other concerns as to the value of the Commissioners non-statutory guidance and concessions. This left Chatfield with only the third claim which Lang J regarded as having legs: that the Commissioner had sought information without adequately considering Article 25 of the DTA.
Chatfield appealed Lang J’s decision to the Court of Appeal. In addition to the arguments presented to the High Court, Chatfield claimed the Commissioner did not properly consider the OS, the relationship between the tax agent and the taxpayer, or the DTA. Lang J had already expressed doubts that the first two heads of this claim were reasonably arguable.
In the Court of Appeal, Harrison J considered whether an OS could give the taxpayer a legitimate expectation of the CIR’s approach to a s 17 request. Again, the court held that such a statement cannot limit the extent or nature of the CIR’s powers. Similarly, Art 25 of the DTA could not be seen to limit the CIR’s powers to request information under s 17. The Court of Appeal opined that the CIR had appropriately considered Art 25, however the Commissioner had not cross-appealed Lang J’s decision concerning this claim, so it remained live. The possibility that the OS could have contained an unambiguous commitment on the part of the Commissioner was not denied, however this was not the case in OS 13/02, on which Chatfield was relying. This offers a slim possibility that the Commissioner could be restricted by explicit statements in guidance – though it is unlikely IR will forget to caveat statements with a generous sprinkling of ‘may’ and ‘might’.
Chatfield applied to the Supreme Court for leave to appeal, again one that would deal with the extent to which its review application could or should be struck out (so not the substantive review yet). The Supreme Court declined leave. It noted that the Court of Appeal had considered the claim that Art 25 was not properly considered and supported the observation that the Commissioner had considered the Article. It also considered Ellis J’s denial of discovery of the KNTS materials. It upheld the decisions of the lower courts and found that the materials sought on discovery were not ‘relevant’ for Chatfield to comply with the request or appeal it. This was because only the issue of whether Art 25 was properly considered was still at issue, and the Supreme Court confirmed the Court of Appeal’s decision that the alleged failings would need to be particularised.
All of this might have suggested that the chances of Chatfield succeeding in its application for review were slim. But there were two positive elements that were still in play for Chatfield and for other taxpayers.
First, the Supreme Court decision to decline leave to appeal was based upon the lack of factual basis to allow a claim that the Commissioner might be bound by her guidance. While only implied, this suggests that in other cases, where IR guidance is more specific, a legitimate expectation may arise that could found judicial review of a departure by IR from its published guidance. Secondly, the remaining ground of review, once particularised, allowed Chatfield to fight again, this time arguing its case on the substantive judicial review.
Third outing – judicial review in the High Court
Having been up to the Supreme Court on the CIR’s strike out application, Chatfield came back to the High Court to argue its case on the grounds that had been left to it after the preceding hearings. These were expanded in a new statement of claim, the crux of which was that the CIR did not properly assess the facts or exercise her discretion appropriately when considering the applicable law – both domestic and international.
Against this, the CIR argued that it was “simply not in the public interest for judicial review to be available in the circumstances of this case.” And she continued to resist any access by the Court and the taxpayer to the KNTS information. The suggestion that review should not be available was flatly denied by the High Court, with Wylie J noting that the courts have a long-standing role of being available to taxpayers when they have a genuine grievance, despite the complex duties and management decisions which this presents for IR. This affirmed that taxpayers continue to have the right to appeal the Commissioner’s decisions without being curtailed by considerations of New Zealand’s international reputation or the inconvenience and cost borne by IR.
As to the KNTS materials, Chatfield proposed that IR had not correctly determined if the information requested by the KNTS was “necessary”, a requirement they claimed was established in Art 25 of the DTA. The CIR responded by supplying affidavits from the involved members of IR staff who handled the request and assessed it. Wylie J noted that these were “long on generalities but short on specifics.” Notably, Wylie J also noted that the “days when a Court will accept an official’s simple assertion that a power had been exercised lawfully are long over.” Instead, he noted that, if a public authority is being investigated, there is an expectation that the authority will explain itself. Further, Wylie J considered that the benefit of any doubt would rest with the taxpayer if IR could not satisfy the court. Because Chatfield had raised a number of grounds on which the IR request might exceed the scope of Art 25, and IR had not been prepared to provide the Court with evidence from the KNTS that would address those, Wylie J quashed the information requests.
The progress of this case through the Courts was marked initially by the taxpayer having at least one hand tied behind its back when seeking to test IR’s request for information on behalf of another country. The taxpayer was not entitled to see the basis on which IR had been requested by the KNTS to seek information from NZ entities. The statements made by IR as to how it would engage with a firm such as Chatfield were not binding on IR and did not found any legitimate expectation that could be the basis for review. The focus for any review could only lie in the limits of Art 25, as to which key material from the KNTS was still withheld.
The ground changed when it came to testing the limits of Art 25. Chatfield having laid a foundation suggesting a number of shortcomings in the way the CIR may have addressed Art 25, IR had to respond with more that bland assurances. It could not do so without running up against the obligations it had undertaken to the KNTS to keep its information confidential. Those obligations were perhaps consistent with IR performing obligations as a treaty partner but they were inconsistent with IR’s obligations as a litigant. Because it was charged with assessing whether IR had correctly considered the scope of its DTA obligations, the Court considered it was entitled to more by way of evidence of the CIR’s process. When that was not forthcoming, the taxpayer, who established at least the possibility of IR having exceeded its DTA mandate, won.
The Court of Appeal will doubtless have to consider whether, when the CIR may have to litigate her DTA process, the obligations of secrecy that arise under DTAs must be carried into the Court room. At the heart of this is whether IR can seek information here solely on the assurance of a foreign tax authority that its request to IR is within the scope of the relevant DTA. If the Court decides that is the case, then a taxpayer may face such litigation having no real basis to test an official’s simple assertion that a power has been lawfully exercised.
There are aspects of Wylie J’s decision that arguably do not sit well with the earlier decision of Ellis J. She ultimately decided that discovery of the KNTS request should not occur when the KNTS required confidentiality of its material as a matter of state. If discovery could not be required of IR, why would the absence of the KNTS information have been fatal to IR’s position in the substantive review? Consistency might suggest that if the KNTS information was ruled out of contention at the discovery stage, the Court should not inquire into it at the substantive hearing.
In this author’s opinion, IR’s DTA obligations ought to be undertaken on the clear understanding that, if they come to be litigated in NZ, treaty obligations of secrecy are set aside in favour of a robust and open testing of IR’s process in exercising its domestic powers in the interests of a foreign tax authority. Such an approach would allow the interlocutory and substantive stages of such litigation to be dealt with just as consistently, but in a manner more aligned with expectations of open justice.
© G D Clews 2018