Chatfield & Co Ltd v Commissioner of Inland Revenue

[2016] NZHC 1234

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-1013 [2016] NZHC 1234

UNDER

the Judicature Amendment Act 1972

IN THE MATTER

of a decision under the Tax Administration
Act 1994

BETWEEN

CHATFIELD & CO LIMITED Applicant

AND

COMMISSIONER OF INLAND REVENUE

Respondent

Hearing:	On the papers
Counsel:	R A Rose for the Applicant P Courtney and M Bryant for the Respondent
Judgment:	9 June 2016

JUDGMENT OF ELLIS J

I direct that the delivery time of this judgment is

4 pm on the 9th day of June 2016

CHATFIELD & CO LIMITED v COMMISSIONER OF INLAND REVENUE [2016] NZHC 1234 [9 June

2016]

[1]      This judgment needs to  be read  in conjunction  with my judgment dated

1 September 2015.1    In that judgment I held that discovery of material exchanged pursuant to the Double Taxation Agreement (DTA) between New Zealand and the Republic of Korea (Korea) was, in general terms, governed by s 81 of the Tax Administration Act 1994 (the TAA).2    Accordingly, I said that discovery of such material could, in principle, be ordered in judicial review proceedings concerning the exercise of the Commissioner’s powers under the TAA to obtain documents for Korea pursuant to a DTA request.

[2]      As a consequence of that conclusion I said it would be necessary for the Commissioner to ascertain Korea’s position in relation to the specific documents sought by the applicant (Chatfield) and, as a matter of prudence, the reasons for any confidentiality claimed.  I also observed that if confidentiality was claimed by Korea over some or all of the documents:

(a)       the door was left open for the Commissioner to apply for an order under either ss 69 or 70 of the Evidence Act 2006 (the EA); 3 and

(b)the issue of the relevance of the documents concerned might need to be interrogated more closely.4

[3]      On 14 October 2015 Mrs Courtney filed an open memorandum indicating that the Commissioner had made further inquiries and Korea maintained confidentiality in relation to all the documents sought.  Mrs Courtney filed a further

memorandum for the Court’s eyes only in which she recorded the specific responses

1      Chatfield & Co Ltd v Commissioner of Inland Revenue [2015] NZHC 2099, (2015) 27 NZTC

22-024.

2      Based principally on the Supreme Court’s decision in  Westpac Banking Corporation Ltd v Commissioner of Inland Revenue [2008] NZSC 24, [2008] NZLR 709. The issue is discussed between [43] – [45]; [49] and [75] of my earlier judgment.

3      Chatfield & Co Ltd v Commissioner of Inland Revenue, above n 1, at [77].

4      At [39] of my judgment I said:

… in light of the conclusions I have reached on the issue of confidentiality below, I am prepared to proceed in  this decision on the  rather simplistic basis that the documents  that  (indisputably)  caused  the  s  17  Notices  to  be  issued  will,  by definition, be relevant to a claim seeking judicial review of the decision to issue the Notices.  It may, however, be necessary to engage more forcefully with the issue of relevance at the next stage.

received from Korea outlining the reasons why, as a matter of Korean law, confidentiality continues to be claimed for each of the documents concerned.

[4]      In the second of these memoranda Mrs Courtney asked the Court to make a direction that the information not be disclosed to Chatfield pursuant to either ss 69 or

70 of the EA.

[5]      On 19 May 2015 I issued a minute expressing my regret at the delay in further  progressing  the  matter  which  had,  at  that  point,  only  just  come  to  my attention.  In my minute I set out my tentative view on the operation of ss 69 and 70 and sought further comment from the parties.  My thinking at that point was that, in light of the Korean objection, a balancing of interests under s 69 favoured protecting the claimed confidentiality of the documents.

[6]      Initially  Mrs  Courtney  indicated  she  did  not  wish  to  comment  further. However she did subsequently provide a brief reply to the comprehensive submissions received from Ms Rose on behalf of Chatfield.  Ms Rose’s submissions opposed the approach I had foreshadowed and, in particular, the application of either ss 69 or 70 in the present case.

[7]      This judgment is the result of my consideration of Chatfield’s submissions and the Commissioner’s response.  The view I provisionally expressed in my minute of 19 May (namely that s 69 applied) has changed.

[8]      I agree with Ms Rose that, notwithstanding the fact that Korea has now specifically confirmed that confidentiality is claimed for the documents sought, this is not a ss 69 or 70 matter.  As my earlier judgment holds, the terms of the DTA make it clear that disclosure of the documents is to be determined in accordance with relevant New Zealand law.  Here, the Supreme Court made it clear in Westpac that that law comprised s 81 of the TAA and the rules governing discovery.5     To the extent  issues  of  confidentiality  or  public  interest  immunity  arise,   they  are

encompassed by (and can be dealt with under) s 81.

5      Westpac Banking Corporation Ltd v Commissioner of Inland Revenue [2008] NZSC 24, [2008] NZLR 709.

[9]      The relevant part of s 81 is subsection (3), which provides:

(3)       Without  limiting  the  generality  of  subsections  (1)  and  (1B),  no officer of the Department shall be required to produce in any Court or tribunal any document or to divulge or communicate to any Court or tribunal any matter or thing coming under the officer's notice in the  performance  of  the  officer's  duties  as  an  officer  of  the Department, except when it is necessary to do so for the purpose of—

(a)      carrying into effect—

(i)        the Inland Revenue Acts, including all Acts, whether repealed or not, at any time administered by the Department; …

…

[10]     In the present case (as in Westpac itself) the Commissioner (and the Court) is faced  with  competing  s  81  considerations.    On  the  one  hand,  it  is  trite  that compliance  with  the  Commissioner’s  discovery  obligations  in  the  course  of defending court proceedings  against her involves carrying into effect the Inland Revenue Acts.   On the other, maintaining a properly founded duty of confidence (whether owed to a taxpayer or to a foreign state) also involves the pursuit of such a purpose.   The integrity of the tax system depends both upon taxpayers not being unfairly disadvantaged when litigating against the Commissioner and upon the Commissioner not disclosing information provided to her in confidence.

[11]     In cases where disclosure of confidential tax information is sought by way of discovery, therefore, it is necessary for the Commissioner (and possibly the Court) to weigh such competing interests and to determine which must yield to the other, and on what terms.   In my judgment, that is a different weighing exercise from that which is required by ss 69 and 70.

[12]     So.  In the present case, the Commissioner wishes to maintain confidentiality because that is the wish of the Koreans.   The Koreans have provided a cogent explanation of why confidentiality is claimed.   The Commissioner (through  her delegate Mr Nash) has made her own assessment that the prerequisites contained in

art 25 of the Korean DTA are met.6    Her position is that, given that international comity in double taxation matters is fundamental, disclosing them would not be consistent with carrying into effect the Inland Revenue Acts.7    On its face, s 81(3) means that  she  has  grounds  to  for contending that  she cannot  be compelled  to disclose the documents concerned.

[13]     In  terms  of  relevant  competing  matters  that  might  weigh  in  favour  of disclosure there is the point that the exercise of public power by the Commissioner is reviewable and her proper defence of review proceedings is a matter that is regarded as part and parcel of carrying into effect the Inland Revenue Acts.  To the extent that consideration is actively engaged, it would suggest (perhaps) disclosure on terms (such as on a counsel to counsel only basis).  But in my view that consideration is not, ultimately, engaged here, for the reasons that follow.

[14]     First, there is the point noted in my earlier judgment that discovery is not a matter of right in judicial review proceedings.  More importantly, however, general discovery  principles  require  that  documents  sought  in  discovery  must  (at  a minimum) be relevant to some justiciable issue.  In that regard my minute of 19 May

2016 recorded:

… the material sought is said to be relevant only to one aspect of the claim, namely that in exercising her power under s 17 of the Tax Administration Act 1994 against the applicant the Commissioner failed to have regard to art 25 of the DTA.  As noted in my principal judgment, that pleading is not particularised  but  Ms  Rose’s  submissions  last  year  were  that  Chatfield wished to test whether the request from the NTS was:

(a)       necessary for carrying out the provisions of the Convention or of the domestic laws of Korea (as required by art 25(1)); and

(b)      for information which is obtainable under the laws or in the normal course of the administration of Korea (as required by art 25(2)).

The prospect of this Court on review being willing to engage with those kinds of issues is far from high.  Indeed, the Court would almost certainly be unwilling to second guess the assessment of those matters that has already been made by both the Korean authorities and by New Zealand’s competent

6      Principally that the information is necessary for carrying out the provisions of the Convention or of the domestic laws of Korea (as required by art 25(1)) and is information which is obtainable under the laws or in the normal course of the administration of Korea (as required by art 25(2)).

7 In my earlier judgment I noted that Double Taxation Agreements are effectively part of those statutes by virtue of incorporation under the Income Tax Act 2007 and/or the lawful function conferred on the Commissioner, at [15].

authority, Mr Nash.   The act of state doctrine counts strongly against the notion of a New Zealand court opining that another sovereign state has misinterpreted or misapplied its own law.8

[15]     Ms Rose did not specifically respond to or comment on these issues in her subsequent submissions.  But she did helpfully provide the Court with a copy of the recent decision in Abu v Comptroller of Income Tax which I consider supports the views I expressed.9

[16]     In  that  case,  the  Singaporean  Court  of  Appeal  was  concerned  with  an exchange of information request made by the National Tax Agency of Japan (the JNTA)  to  the  Singaporean  Comptroller  of  Income Tax  (the  Comptroller).    The request was made pursuant to art 26(1) of the DTA between Singapore and Japan.

[17]     The  DTA  request  from  the  JNTA  had  sought,  among  other  things,  the production of bank statements for certain accounts held by Mr Abu, his son and related  entities  with  BLM  Bank.     The  Comptroller  concluded  that  the  bank statements were protected against unauthorised disclosure by s 47 of the Banking Act (Cap 19, 2008 Rev Ed), and therefore filed an Originating Summons (OS 331) against the Bank for an order directing the production of the bank statements under s 105J(2) of the Income Tax Act (Cap 134, 2008 Rev Ed) (the ITA).  Mr Abu applied for, and was granted, leave to intervene.

[18]     The Singaporean  High  Court made the order sought  by the Comptroller. Mr Abu then took steps to try and stop its enforcement and, eventually, appealed. One of the issues raised by the appeal was whether the High Court was entitled or permitted to go behind the JNTA request.   In particular, Mr Abu had said that the High  Court  could  (and  should)  substantively  review  the  Letter  of  Request  and

interrogate the statements made in it that:10

8      See, for example, the discussion in Air New Zealand Ltd v Director of Civil Aviation [2002]

3 NZLR 796.

9      Abu v Comptroller of Income Tax [2015] SGCA 4, [2015] 2 SLR 420 (CA).

10     These statements related to the legal prerequisites for such requests contained in the Eighth

Schedule to the ITA.

(a)      the  requested  information  could  not  have  been  obtained  under

Japanese law;11

(b)the  JNTA  had  pursued  all  available  means  to  obtain  the  bank statements in Japan before making the request; and

(c)      the request had ceased to be foreseeably relevant to the enforcement of Japan’s income tax laws (because the JNTA had concluded its tax examination of Mr Abu).

[19]     There are obvious similarities between those contentions and those which

Chatfield wishes to advance in these judicial review proceedings.12

[20]     The Singaporean Court of Appeal rejected Mr Abu’s position.    The Court said:13

38       There was no real dispute that, on its face, the JNTA’s request met the requirements of the Eighth Schedule. Each of Mr Sharma’s arguments would instead have required the court to go behind the JNTA’s statements in the Letter of Request as well as the subsequent confirmations it provided. The Judge below rejected Mr Sharma’s arguments in this regard. The Judge held that the justification for a request was to be determined on the face of the request and whether it evidently complied with the Eighth Schedule requirements. The Judge thought that in many respects, the High Court’s role under the relevant statutory regime was an “administrative one” and there was little room for the High Court to examine the substantive merits of the Letter of Request …

39       Before   this   Court,   Mr   Sharma   was   critical   of   the   Judge’s interpretation of the High Court’s role in this regard. Mr Sharma contended that Parliament’s intention in enacting s 105J of the ITA was to ensure that unjustified requests could be denied at two levels in the case of protected information; the Comptroller would be the first level of protection, while the High Court would be the second. Mr Sharma sought to persuade us that the High Court’s role under s 105J both permitted and required that it substantively review the Letter of Request and go behind the statements made in it to satisfy itself that those statements were in fact true. To make

11     Mr Abu contended that the JNTA was precluded from obtaining the bank statements under the DTA as it could not have obtained the information under Japanese law because: (a) Mr Abu was subject to a voluntary tax examination in Japan and not a criminal investigation. In a tax examination the disclosure of information was purely voluntary and the JNTA did not have the power to compulsorily obtain books and information; and (b) the JNTA was precluded from requesting information for 2009 and earlier years by the tax limitation period under Japanese law.

12 These are set out in the quotation from my minute at [14] above and again at [21] below.

13     Abu v Comptroller of Income Tax, above n 9.

good these contentions, Mr Sharma relied on the Second Reading Speech where the Minister said (at column 1621):

Fishing expeditions can therefore be stopped at two levels – first by [the Comptroller], then by the High Court if it relates to information protected under the Banking Act and Trust Companies Act. This arrangement offers robust safeguards without compromising on the efficiency and responsiveness of our information exchange regime. It is in essence similar to the processes in other major jurisdictions such as the US and the UK, and is not aimed at stifling the effective exchange of information.

[emphasis added]

40       While  we  agree  that  s  105J  requires  the  High  Court  to  be independently satisfied as to the justification of a request, we do not think it follows from the Minister’s statements that Parliament had intended for the High Court to substantively review a request to the extent of inquiring into the truth of the factual assertions contained in it. Taking a purposive as well as a contextual interpretation of the statutory scheme, it seems clear to us that Parliament had intended for the validity of a request to be determined on its face. There are four broad reasons for this.

41       First,  it  is  clear  from  the  relevant  parliamentary  material  that Parliament had intended for the justification of a request to be assessed in light of the documentary requirements prescribed by the Eighth Schedule. In this  vein  the Minister  explained in  the  Second  Reading Speech that  (at column 1607):

The new Eighth Schedule sets out the documentary requirements which a requesting jurisdiction must fulfil for all requests. These requirements ensure that requests are justified, that is, clear, specific, relevant, legitimate and consistent with the Standard. They will help screen out “fishing expeditions”.

[emphasis added]

42       In  written submissions, Mr  Sharma  appeared to suggest  that the Eighth Schedule requirements inherently contemplated that the court would examine the veracity of statements contained in a request. In our judgment, Mr Sharma’s contention is not borne out. It is manifestly clear from a plain reading of the Eighth Schedule that it only requires a request to include a statement to the effect of paragraphs 4, 7 and 8 of the Eight Schedule (see [30] above). In short, once a “statement” to the requisite effect has been made by the requesting authority, then it will have complied with those requirements of the Eighth Schedule. In keeping with the Minister’s explanation as to the rationale of the Eighth Schedule requirements (see [41] above), it seems to us that once the Eighth Schedule is complied with, the justification of a request in terms of its consistency with the EOI Standard will be determined without the court going behind the statements made in it.

43      Second, the interpretation advanced by the Appellant produces anomalous results from a practical perspective. If s 105J requires or permits the  court  to  go  behind  the  Letter  of  Request,  there  is  a  real  risk  of applications made under s 105J of the ITA resulting in full trials calling for the examination of witnesses and the determination of potentially difficult questions of foreign law. This is a pertinent point even if, in essence, a

practical one, because although the Minister alluded to the protection of taxpayer rights as being one of the aims of the statutory regime, he also emphasised that this had to be balanced against the need to ensure that the efficacy of the exchange of information machinery was not compromised (see [39] above).

44       Third, international comity would be compromised if the Singapore court was required to make pronouncements that could question the underlying bona fides of requests made by foreign tax authorities. Would the foreign tax authority have to appear in our court to prove the basis of its request? If not, how would its right to be heard be secured before potentially adverse findings are made?

45       Fourth, in assessing the justification of a request, the court must be cognisant of its function, which is to apply the relevant provisions of the ITA. It must not step into the shoes of the executive, which is the branch of government charged with the responsibility for entering into and enforcing international agreements, including tax treaties.

[21]     The  concerns  articulated  here  are  precisely  those  which  gave  rise  to  the reservations expressed in my minute of 19 May.  I am therefore fortified in my view that it would not be open to Chatfield to ask this Court to interrogate in review proceedings whether the information sought by Korea is:

(a)       necessary for carrying out the provisions of the Convention or of the domestic laws of Korea; and

(b)obtainable    under   the   laws    or   in    the   normal    course    of   the administration of Korea.14

[22]     In light of those matters, any weighing of the claim for confidentiality against the fair and proper conduct of the judicial review proceedings must come down firmly in favour of confidentiality.  Moreover there is no need to consider whether some form of limited disclosure should be directed.  The DTA documents are not

required to be disclosed.

14     Similarly it would not be open to Chatfield to interrogate the specific legal reasons now given by the Koreans for claiming confidentiality.

[23]     It will now be necessary to make some further directions for the urgent progression of the claim.  The matter should be called in the next judicial review list

in the Auckland registry so that that may occur.

Solicitors:           Bell Gully, Auckland

Crown Law, Wellington

“Rebecca Ellis J”