Notices issued under s 17 of the Tax Administration Act 1994 held to be invalid
2017 case note - guidance on Article 25 of the NZ/Korea double tax agreement – Chatfield, judicial review, justiciability, relevant considerations.
Chatfield & Co Ltd and Chatfield & Co (“collectively Chatfield”) applied to judicially review a decision of the Commissioner of Inland Revenue (“the Commissioner”) to issue 15 Notices to Furnish Information under s 17 of the Tax Administration Act 1994 (“the TAA”) to it (“the Notices”). A partially successful strike out application left one cause of action (being an alleged failure to take into account the terms of a double taxation agreement between the Republic of Korea (“Korea”) and New Zealand (“NZ”) (“the DTA”)) to proceed to a substantive hearing. The High Court found that cause of action was made out and granted the application for judicial review, quashing the Notices.
Any appeal of the judgment must be brought by 13 February 2018.
The judgment provides guidance on the interpretation of Article 25 of the NZ-Korea DTA.
The National Tax Service of the Republic of Korea (“the NTS”) asked the Commissioner, pursuant to the DTA, to obtain and provide certain information relating to a number of Companies (“the Companies”) associated with a Korean Taxpayer (“the Taxpayer”).
Information relating to five of the Companies was able to be obtained from the Commissioner’s existing records or publicly available sources. The remaining material was not available through these sources. The Commissioner accordingly proceeded to issue the Notices to Chatfield, the tax agent for the Companies, under s 17 of the TAA, in relation to that remaining material, referencing article 25 of the DTA. The Notices were signed by an Investigations Team Leader.
In May 2015 Chatfield commenced judicial review proceedings challenging the Commissioner’s decision to issue the Notices. They also sought orders for the disclosure of the NTS request and any and all exchanges between the Commissioner and the NTS relating to it.
That application for disclosure was declined. While Ellis J agreed that in principle it was possible to obtain such disclosure, and disclosure is governed by s 81 of the TAA, her Honour ultimately formed the view that the Commissioner was not required to disclose the requested documents pursuant to s 81. This was upheld by the Court of Appeal (on the basis the documents were not relevant to Chatfield’s amended claim) and leave to appeal to the Supreme Court was declined.
The Court granted the application for judicial review, declaring that the decision to issue the Notices was invalid and quashing the Notices.
Section 17 of the TAA, DTAs and Exchange of Information
The Court accepted s 17 powers may be used for the purposes of gathering information for exchange with a foreign state under the DTA as it forms part of the Revenue Acts.
The Court noted that in an increasingly globalised environment where not all information required to monitor compliance with a taxpayer’s obligations will be available in any one state tax treaties seek to facilitate exchange of information between states.
The Court noted the unique nature of DTAs which have direct effect in NZ’s domestic law once given effect by order in council, and that in the event of any inconsistency with the Revenue Acts s BH 1 of the Income Tax Act 2007 provides the DTA prevails.
The Court rejected the argument that the decision to issue the Notices was not justiciable, finding that:
- the case did not question the executive’s decision to enter into the DTA, raise comity issues, nor challenge any act of Korea as a foreign state;
- the DTA forms part of NZ domestic law and interpretation of both the TAA and DTA is within the Court’s constitutional competence;
- the case did not concern high policy or politically fraught issues;
- the Commissioner’s actions in issuing s 17 notices can be the subject of judicial review if the Commissioner exceeds or abuses her powers (and prior authority in the DTA context is to the same effect); and
- other checks and balances applicable to DTAs (in particular the OECD’s peer review regime) do not involve curial oversight, focus on individual cases or provide remedies to individual taxpayers.
Lawfulness of actions
The parties accepted that faced with the request for the exchange of information from the NTS Mr Nash must be satisfied:
- the information sought came within the terms of the DTA and NZ’s tax laws;
- the nature of the information sought was (or at the least appeared to be) consistent with the grounds for the request; and
- the type of information sought was broadly what would be expected to be necessary for or relevant to any inquiry of the nature indicated.
The Court determined that the word “necessary” in art 25 of the DTA required the competent authority to satisfy himself by clear and specific evidence that all of the information requested was needed or required in relation to an investigation into, or other action being taken by the NTS against a Korean taxpayer and the information was in relation to income tax, corporation tax, inhabitant tax or fiscal evasion. He also had to be satisfied any information exchanged would only be used in relation to those taxes and that the NTS had been unable to obtain the information in Korea.
The Court did not agree it could simply consider the Commissioner’s affidavits (and ask whether there are any errors of a material or substantive nature evident from them), nor rely on Mr Nash’s assurances and infer he had considered all that he was required to.
The Court noted the difficulty caused by the absence of the NTS request letter, any correspondence between Mr Nash and the NTS in relation to the request or file notes from Mr Nash in relation to the matter (the material), (noting Chatfield’s unsuccessful attempts to obtain the material through the Courts) and did not consider an offer to make relevant material available on a confidential basis to be acceptable on the basis that it would be contrary to the rules of natural justice.
The Court had asked the Commissioner to seek NTS views on the release of the material to an amicus curiae to enable the Court to hear opposing argument on the issue. The response was opposition to both the proposed release of the documents to an amicus and the provision of the letter outlining that opposition to anyone other than the Court.
The Court was not satisfied with the information supplied by the Commissioner and found it could not be satisfied that the nature of the information sought by NTS was consistent with the grounds for the request and that the information was of a sort which would broadly be expected to be necessary or relevant to any inquiry of the nature indicated in the request.
The Court noted that while a judicial review applicant bears the burden of proof on the balance of probabilities, the evidential burden will be relatively low where the facts are within the knowledge of the other party, particularly where the Court has to determine whether the relevant facts on which the exercise of the power in issue turns, did or did not exist.
The Court found this to be such a case. Based on the little raised by Chatfield and the limited evidence filed on behalf of the Commissioner, the Court was not satisfied Mr Nash had undertaken the appropriate inquiries.
The Court considered the argument the Investigations Team Leader who signed the Notices was not a competent authority and had no authority to make any decisions under article 25 of the DTA to be misconceived as nothing in the DTA or TAA requires Mr Nash to personally take the necessary administrative steps to procure information.
Intensity of Review
The Commissioner submitted the Court should only intervene if it found the nature of the information sought was such that it could not be potentially necessary to an investigation relating to one or more of the taxes set out in article 2 of the DTA. She also submitted neither the Court nor Mr Nash could be expected to inquire into factual assertions underlying the request nor what is required under Korean law as to do so would amount to a mini trial involving the determination of potentially difficult questions of foreign law.
The Court found there was no need for deference to the Commissioner when inquiring into TAA or DTA requirements and that review in this context can and should be hard-edged, applying a “correctness standard”. The question is whether or not the Court can be satisfied Mr Nash did what he was required to do by law and there was nothing in the facts to support a conclusion that a light touch, deferential or lesser standard of review was required or appropriate.
Tax Administration Act 1994: s 17, Judicature Amendment Act 1972, Double Taxation Relief (Republic of Korea) Order 1983 (SR 1983/5): Schedule 1