Chatfield Court of Appeal decision – a triumph for Inland Revenue masquerading as a win for the taxpayer?
Tax Alert - May 2019
By Virag Singh and Jeremy Beckham
On 28 March 2019, the Court of Appeal delivered its judgment in CIR v Chatfield & Co Ltd  NZCA 73. The case was an appeal by the Commissioner of Inland Revenue against a High Court decision where Chatfield successfully challenged the Commissioner’s decision to issue notices under section 17 of the Tax Administration Act 1994 (TAA) (section 17 notices). The section 17 notices were issued following an exchange of information request (EOI request) from the Korean National Tax Service (NTS). The Court of Appeal upheld the decision of the High Court to quash the section 17 notices.
While this was a rare win for the taxpayer in a judicial review context, a careful reading of the decision sets a low bar for our competent authority to lawfully discharge their obligations when considering an EOI request. Taxpayers will take little comfort from this decision and what it means for EOI requests going forward.
Chatfield is a firm of accountants and the registered tax agent for several NZ companies associated with Mr Huh, a Korean national with NZ residency. The NTS commenced a tax investigation in Korea into the affairs of Mr Huh and made an EOI request under Art 25 of the New Zealand-Korea Double Tax Agreement (the NZ-Korea DTA). The EOI request was received by Mr Nash who has held the position of competent authority in terms of NZ’s DTA network since March 1994 and is responsible for exchanges of information with NZ’s treaty partners. In response to the EOI request, Ms Forrest (an IRD investigations team leader) subsequently issued section 17 notices to Chatfield requesting the production of various documents and records.
Chatfield commenced review proceedings challenging the decision to issue the section 17 notices. It was accepted by the parties that the Commissioner’s sole purpose in issuing the section 17 notices was to obtain information requested by the NTS for possible exchange under Art 25 of the NZ-Korea DTA. No NZ tax revenue was at issue.
In the High Court, Wylie J was not satisfied that appropriate inquiries were made by Mr Nash to ensure compliance with the requirements under the NZ-Korea DTA for an exchange of information. Our previous Deloitte Tax Alert Article on the High Court decision can be found here.
The Court of Appeal decision
The Court of Appeal determined that there were six issues that it needed to resolve. Of these six issues, probably the most important concerned what is lawfully required by Inland Revenue when responding to EOI requests. In relation to the other issues, the Court of Appeal agreed with Wylie J’s conclusions in a number of important areas. These include that the decision to issue the section 17 notices was in fact justiciable (i.e. suitable for a court to resolve) and that a correctness standard should apply to the intensity of review (i.e. what does the DTA actually require of the decision-maker).
The core issue was whether Mr Nash lawfully discharged his obligations as competent authority when considering the EOI request under the NZ-Korea DTA. Art 25 of the DTA requires that the information requested is “necessary” for carrying out the provisions of the DTA. The OECD model convention in 2005 replaced the word “necessary” with the words “foreseeably relevant”, although this change was not carried through in the NZ-Korea DTA.
In the High Court, Wylie J accepted the submission that it was incumbent on Mr Nash to be satisfied “by clear and specific evidence” that all of the information requested by the NTS was needed or required in relation to an investigation, or other action, being taken by the NTS against a Korean taxpayer. In this regard, Wylie J noted that the evidence provided by Mr Nash in an affidavit was all “relatively vague” and it “suggests there has been no hard inquiry into the necessity for any exchange”.
The Court of Appeal on the other hand considered that the hard inquiry approach contemplated by Wylie J overstated the obligation on the competent authority on receipt of an EOI request. The Court generally agreed with submissions made by the Commissioner that the competent authority could not be expected to inquire into the factual assertions underlying the request, nor as to the law in the other jurisdiction. Moreover, provided that the competent authority was not put on inquiry as to some irregularity, then Mr Nash was entitled to take the statements in the request letter at face value.
Despite this difference of views, the Court of Appeal nevertheless considered that Mr Nash’s assessment of the EOI request was not lawful by reference to the requirements of Art 25 of the DTA. This was because Mr Nash in his evidence referred variously to both the “necessary” threshold and to the “relevance” threshold as having apparent application to his decision. As such, the Court was forced to conclude that “Mr Nash asked the wrong question in his application of the ‘necessary or relevant’ test”.
The Court of Appeal decision represents a significant watering down of the high benchmark test for the consideration of EOI requests that was outlined by Wylie J in the High Court. Following the High Court decision, it was hoped that Inland Revenue would re-examine its decision-making processes and put in place suitable checks and balances for responding to EOI requests. It is difficult to imagine that Inland Revenue will now feel the need to apply the same rigour to its consideration of EOI requests following the Court of Appeal decision. The hard inquiry approach contended for by Wylie J was not accepted by the Court of Appeal, which was prepared to accept that the competent authority is entitled (absent some irregularity) to take an EOI request at face value.
The Court of Appeal judgment leaves the impression that the Commissioner’s case failed on a technicality in not applying the correct standard when considering the EOI request. Had the correct standard been applied, there was no suggestion in the judgment that the consideration of the EOI request against Art 25 of the NZ-Korea DTA was any less rigorous than it needed to be. This implies that the competent authority really does not have to do much on receipt of an EOI request, provided that the request itself states that it is necessary or relevant (as the case may be).
The decision therefore sets a concerning precedent in lowering the bar for Inland Revenue’s consideration of EOI requests moving forward. In particular:
- Given that the competent authority is more or less entitled to accept an EOI request at face value, could this lead to inappropriate scrutiny of a taxpayer’s operations in other countries if, for example, a less scrupulous revenue authority demands information that it arguably should not be entitled to in the relevant other jurisdiction?
- Will a taxpayer still be able to put Inland Revenue on notice as to some irregularity when responding to a section 17 notice and must this irregularity be considered by Inland Revenue when responding to an EOI request? Can a taxpayer have confidence in Inland Revenue to give due regard to the issues raised?
In a post-BEPS reforms world, the Commissioner has new powers to request information from multinational groups. There is also an increased expectation of EOI requests between revenue authorities to counteract BEPS activity. Without the hard inquiry approach for considering EOI requests contended for by the High Court, taxpayers will be left with little more than hope that the competent authority will exercise due judgement and perform robust checks when responding to an EOI request. This can be balanced with the Court of Appeal confirming that Inland Revenue must show it has satisfied itself that a foreign government’s request complies with the express criteria in the relevant EOI article – and that the competent authority’s decision is reviewable notwithstanding the request has originated from a foreign government.
For more information contact your usual Deloitte tax advisor.