Win some, lose some…
Last May I commented on a High Court case involving CFC’s resident in China, whom had received tax sparing concessions, naturally reducing the level of taxes paid on their income. At the time, NZ had not introduced the active/passive attribution rules and consequently the income of the CFC’s had been attributed to a NZ resident shareholder.
In her NZ income tax return, the taxpayer had claimed a credit, not only for taxes actually paid by the CFC’s in China, but also in relation to the tax spared. The Commissioner disagreed with the assessments and reassessed the taxpayers 2005 to 2009 income tax returns.
The High Court agreed with the taxpayer, citing that Art 23 of the NZ/China DTA interpreted in the way the taxpayer had concluded, was the correct interpretation.
The Commissioner appealed to the Court of Appeal, who have just released their decision, this time finding in favour of the Commissioner and overturning the High Court judgement. The basis for the Court of Appeal decision again focused on Art 23, and what was its correct interpretation. In this regard:
- The focus of art 23(1) was on residence, not source, and it was not directed to economic taxation.
- In terms of art 23(2)(a), the “income” of the CFC was not “derived” by the taxpayer in China; and the tax paid or spared to the CFC was not payable, paid by or spared to the taxpayer. The tax imposed on two different persons was “in respect of” two different income streams.
- Article 23(2)(a) required the tax to have been paid by a New Zealand resident on income derived by him or her in China, and not by a third party CFC; that was the essential precondition to a credit in New Zealand.
As I said in my earlier update, the case may not be so relevant now, with the active/passive income test now in play, however it is certainly a useful decision nonetheless, providing some insight into the various Court’s views of how the international tax treaties should be read and interpreted.
Do I Have to Tell Them???…
The latest draft operational statement from IR, ED0202, discusses how the Commissioner will approach the subject of a taxpayer’s claim for a non-disclosure right for tax advice documents, when she is issuing notices to the taxpayer, their agent and/or a third party, requiring document disclosure.
A taxpayer’s right to claim non-disclosure, is governed by sections 20B to 20G of the Tax Administration Act 1994 (“TAA”). However what is essential to understand when providing advice to your clients, and a concept espoused by ED0202, is that the non-disclosure right for tax advice documents when compared to legal professional privilege, is like comparing the Japanese rugby team to the All Blacks (no offence to any Brave Blossom fans out there!).
The limited protection provided by the non-disclosure right for tax advice documents, is explained in some detail in ED0202, including examples of documents that are automatically considered not to be tax advice documents and therefore not covered by the non-disclosure right, such as transfer pricing reports, communications with third parties, client letter of engagements and structure diagrams.
The potential for a claim of a non-disclosure right for tax advice documents, will usually arise further to the issue of a formal information demand by the Commissioner, in accordance with sections 16 – 19 of the TAA. The taxpayer or their agent then files a form IR 519, claiming the non-disclosure right for certain documents. The flow-chart contained in ED0202 provides a good illustration of how you then work through the process of determining what is considered in a document to be subject to a non-disclosure right, with any tax contextual information clearly not covered by any privilege, at any time.
The definition of tax contextual information is a critical element to understand therefore, when your client has approached you for tax advice, and wants to know if what they disclose to you, will ever fall into the lap of IR. The term is defined in ED0202 as meaning the information that relates to a tax advice document, including but not limited to, facts or assumptions relating to the particular transaction, and a description of the steps involved in the transaction. Consequently, your client disclosing to you the real reason they undertook the transaction, which you then document in the background facts section of your tax advice document, is not protected by any non-disclosure right.
Finally, it is fundamental to ensuring a potential non-disclosure right may exist, that the document must have been intended to be and remain confidential between the tax advisor and the taxpayer, and not intended to be read by third parties or members of the public. While it would be useful therefore to commence your tax advice letter with such a statement, naturally the actions of the taxpayer post receiving the advice document will receive close scrutiny of the IR to ensure the intention was a two way street.
I would suggest you all have a good read of ED0202, to at the very least remind yourself of exactly what non-disclosure rights you do have in respect of the written advice you provide to your clients.
Submissions on ED0202 are requested no later than 11th May.
TWG – The Future of Tax…
The Tax Working Group, has as promised, released its Future of Tax: Submissions Background Paper. What I suspect will be of interest to most, are the four specific challenges the Government has asked the TWG to report back on:
- How would a capital gains tax (excluding the family home) or a land tax(excluding the land under the family home) affect housing affordability, and would these taxes improve the current system for capital income taxation? Relevant considerations will include: the impacts of these taxes on property-owners and renters; the ease of administering these taxes; the interaction of these taxes with the rest of the tax system; the extent to which the tax will incentivise productive investment as opposed to speculation; and the possibility of allowing for reductions in other taxes as a result of introducing them.
- Is there a case to introduce a progressive company tax (i.e. lower company tax rates for smaller businesses) in order to support small business?
- Is there a case to make greater use of environmental taxation to improve environmental outcomes and diversify the tax base?
- Could the Government assist low-income people by introducing GST exemptions for certain goods and services?
Now is your time to make submissions on any of the Challenges, with a due date of 30th April 2018.
Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected]
Ph: +64 9 365 5532
Fx: +64 9 309 5260
Mb: +64 21 823 464
