The Court of Appeal has upheld the High Court decision of Wylie J, that requests for information issued to Chatfield & Co Limited by IR, to allow IR to respond to a DTA request for information from the Korean National Tax Service (“KNTS”), were unlawful. To see my previous commentary on the progress of this case, click here. Despite its findings, the Court of Appeal’s analysis of the matter does not follow all that the High Court said and provides a blueprint for IR and foreign tax agencies as to how some of the issues raised in Chatfield can be avoided in the future.
The overarching contest in this case tested the assumption that IR championed, that its dealings with other states’ revenue authorities should either not be scrutinised at all or should only be reviewed lightly. At the heart of this argument is the view that, under a double tax agreement (“DTA”) that follows the OECD model, as New Zealand’s do, a country receiving a foreign request for information should keep that request confidential. This view comes from paragraph 11 of the OECD commentary on Article 26 of the model DTA. The article makes it clear that information exchanged between requesting and requested countries can be disclosed for limited purposes relating to litigation, but that if the requesting state declines to have its request made available beyond the requested Revenue, that restriction should be honoured. As referred to in my prior commentary, a fundamental issue at play in the case was whether this international treaty obligation should shape judicial review of the information gathering process under New Zealand law or whether a New Zealand Court should undertake review on orthodox principles, regardless of the treaty obligation to keep the foreign request confidential.
IR argued that an orthodox approach to review would lead the Court into a mini-trial on Korean law, which should not occur. Broadly speaking, when testing international requests for the exchange of information, most Courts of requested states that have considered this issue have expressly tried to avoid the risk of such a mini-trial. This prompted IR’s argument that, if review was to be undertaken, it should not be on the basis of a “correctness" standard but at a lesser level of inquiry by the Court.
In the end, the Court of Appeal has upheld the justiciability of the issues in Chatfield and the right of the New Zealand Courts to apply a correctness standard of review. It declined the IR invitation to limit its consideration on review to a light handed approach, preferring to take the position that, if IR does not act correctly, it acts unlawfully.
However, that has not mandated the possibility of a mini-trial on the law of a requesting state. That is because the case was argued very clearly on the basis that only matters of New Zealand law were pertinent. The harder edged issue of whether a new Zealand Court would intervene if, for example, it appears that the requesting state had proceeded on a demonstrable factual error, was not dealt with.
As Chatfield illustrates, the expectation that another country’s request for information will be kept confidential can lead to problems. That is because the domestic legal procedures of the requested country may require openness to be able to determine if a request made in that jurisdiction is correctly framed by, and limited to, the circumstances envisaged under the applicable DTA. That is what happened in Chatfield.
An early attempt by the taxpayer’s representative to gain access in discovery to the KNTS request for information was unsuccessful. KNTS and IR refused to disclose the request and, at that time, the KNTS material was not shown to be relevant to the way Chatfield’s challenge to the local IR request was being mounted. Access to the material by way of discovery was therefore denied.
When the shape of the proceedings changed and the KNTS request became relevant, the KNTS continued to refuse access to it. IR felt duty bound by the model commentary to maintain the confidentiality of the KNTS request. But the KNTS refusal to disclose meant that IR could offer no direct evidence of the information it had received and considered before issuing its local requests for information.
This necessitated IR arguing the case less directly. Hence, its arguments that the lawfulness of the IR action based on the KNTS request was not justiciable and that, if it was, the intensity of review should be light. Once it became apparent neither of these arguments would fly, IR’s next line of argument was to try to limit access to the KNTS material to the Court or to an amicus; anyone but the taxpayer and its representative. These efforts eventually foundered when the KNTS refused even this limited access to its request.
There are good reasons why a foreign Revenue will want to keep its DTA request for information confidential. The most obvious is that disclosure of the request may “tip off” the targets of an overseas tax investigation as to the issues being looked into, progress in the investigation and how requested information might be used. This is why the commentary emphasises confidentiality of the request. However, confidentiality may come at a price when the foreign Revenue has to rely on the open procedures of our Courts to uphold a local request made to get the information it wants.
Without being able to show the Court what the KNTS asked for and the basis for its request, IR had to fall back on the generalities of affidavit evidence from its officers. The vagueness of this evidence had been criticised in the High Court. but it reflected the DTA position that the detail of the foreign information request should be kept confidential. The Court of Appeal preferred to deal with the matter on the basis that the evidence did not clearly show that, when considering the KNTS request, IR had applied the correct test: whether the requested information was necessary for the stated purposes of the DTA. The Court saw no reason why in future cases a suitably redacted version of the foreign request should not be made available to establish, at least at a threshold level, that IR had information enough to substantiate that the request covered the basic DTA requirements.
Although the Court of Appeal maintained the High Court position that the IR decision to issue requests for information was a justiciable and to be reviewed on a correctness standard, the Court had a pragmatic message for IR and for foreign Revenues asking for IR’s help to obtain information in New Zealand. It is that, if they wish successfully to uphold a local request for information, they will need in suitably redacted form to provide the Court and the party seeking review with insight into the factors considered by IR, compared with the requirements of the relevant DTA. In some cases it ought to be possible to do this without giving too much of the requesting Revenue’s game away so that the spirit behind keeping DTA information requests confidential is honoured still. However, there will no doubt be cases when even a redacted version of the DTA request may not be sufficient to establish clearly that IR has considered the DTA threshold for issuing a local information request.
© G D Clews, 2019