In a recent decision, the New Zealand High Court considered a challenge to the validity of requests for information made by New Zealand Inland Revenue at the request of the Korean National Tax Service (Korea). The court held that the requests for information were invalid and should be quashed.
The background to the decision was that Korea had sought certain information from New Zealand pursuant to Article 25 of the New Zealand-Korea double tax agreement (DTA). The information sought related to some 21 New Zealand taxpayers. Inland Revenue issued notices to Chatfield & Co, a tax agent for 15 of the taxpayers, requiring that Chatfield provide information to Inland Revenue, so that it may be passed on to Korea.
The most recent decision follows earlier proceedings related to Chatfield's challenge to the validity of Inland Revenue's requests. (See 'New Zealand: Courts consider challenge to information requests issued at request of foreign tax authority' in the June 2017 edition of International Tax Review for our summary of the earlier proceedings.) Subsequent to those earlier proceedings, Chatfield filed an amended statement of claim, applying for judicial review on the basis that Inland Revenue had acted unlawfully in issuing the requests. It is this amended claim that is the subject of the most recent High Court decision.
According to the judgment, Inland Revenue argued that Chatfield's challenge to the legality of Inland Revenue's request for information had undermined New Zealand's reputation internationally by delaying the provision of the information requested by Korea. It was said that the issues arising from Korea's request involved "relations between sovereign states, and occur through senior public servants designated as competent authorities", making them "unsuitable" for resolution by the courts.
The court rejected this argument and found that Inland Revenue's decision to issue the information requests was susceptible to judicial review. The court also rejected an alternative argument that the court should apply a less intensive standard in reviewing Inland Revenue's actions, stating: "Review in this context can and should be hard-edged, and a 'correctness standard' should apply…If the court is not satisfied that [the New Zealand competent authority] correctly interpreted or applied either Art. 2 or Art. 25 of the DTA, or that he properly scrutinised [Korea's] request as required by law, then it is appropriate to grant judicial review, and there is no warrant for a less intensive standard of review than would otherwise be the case."
Whether the decision to issue the information requests was lawful turned on whether New Zealand's competent authority could be satisfied that the information sought by Korea came within the terms of the DTA. Article 25 of the DTA requires that information requested be "necessary" for carrying out the provisions of the DTA or the domestic tax laws covered by the DTA, as well as to prevent fiscal evasion. The court held that this required the competent authority to satisfy himself with clear and specific evidence that all of the information requested by Korea was "needed or required in relation to an investigation into, or other action being taken by [Korea] against a Korean taxpayer…".
During the proceeding, Inland Revenue was not prepared to disclose the background documents related to Korea's request, "in particular the request from [Korea], file notes that [the competent authority] may have made, and any correspondence that may have passed between [the competent authority] and [Korea] regarding the request". The limited evidence before the court bore significantly on the outcome of the case. The court considered that Inland Revenue had "not been as candid in [its] conduct of this case as might have been expected". Based on the limited materials available, the court was not satisfied that Inland Revenue undertook the appropriate inquiries to satisfy itself that the information requested came within the terms of the DTA. The court, therefore, declared that Inland Revenue's decision to issue the information request was invalid and quashed the information request.
This decision represents a reversal of fortunes for Chatfield, who had previously been unsuccessful on most of the points it had raised. What seems to have made the difference for Chatfield is the re-framing of its argument, so as to focus on the legality of Inland Revenue's decision to issue the notices requesting information on Korea's behalf. The High Court has (correctly in our view) held that the courts will scrutinise such decisions as to legality and will require Inland Revenue to produce evidence demonstrating how it has reached the decision that a request is lawful.
This article first appeared in the International Tax Review here.