NZ Revenue Outlines Stance On Tax Avoidance
03 July 2013
Posted by: Author: Mary Swire
Author: Mary Swire
New Zealand's Inland Revenue Department (IRD) has issued an Interpretation Statement outlining its stance on what constitutes tax avoidance.
Interpretation Statements set out the Tax Commissioner's view of the taxation laws, in relation to a particular set of circumstances in cases where a binding public ruling cannot be issued or is considered to be inappropriate. In this instance, the Statement relates to sections BG 1 and GA 1 of the Income Tax Act, and is the result of a prolonged period of public consultation begun in December, 2011.
Section BG 1 voids a tax avoidance agreement. It states that the agreement includes "all steps and transactions by which it is carried into effect," and can comprise two or more documents or transactions together, if they are deemed to constitute a single "agreement, contract, plan or understanding." It can also encompass unilateral agreements, and steps or transactions carried out or brought into effect outside the country.
Determining whether a tax avoidance agreement exists involves a complex set of procedures: in this, the Commissioner will consider the manner in which the agreement is carried out, the role of all relevant parties and their relationships, the economic and commercial effect and duration of the agreement, and the nature and extent of its financial consequences.
A so-called "parliamentary contemplation test" is then applied, to judge whether an arrangement makes use of the Income Tax Act in a way that is consistent with parliament's intentions for the Act. This is done by identifying what parliament's purpose is regarding the Act's relevant provisions, along with the commercial and economic effects of the deal.
In such cases, the Commissioner has powers to counteract any tax advantage that an individual or an entity has sought to gain under an agreement. Section GA 1 is applicable in cases where the voiding of an agreement has not appropriately countered the practice of tax avoidance.
As Chief Tax Counsel Martin Smith explained, the Interpretation Statement clarifies that "an arrangement will be deemed to be a tax avoidance arrangement if the use of the Income Tax Act is not what Parliament contemplated, having regard to the commercial and economic reality of the arrangement."
"By issuing this document and setting out the approach the Commissioner will take in analyzing whether section BG 1 applies, Inland Revenue has identified the principles from what the courts have said about the section, and taken into account feedback from taxpayers and their advisers."
Smith added that tax planning, including the use of alternative business structures, does not necessarily constitute an avoidance arrangement. Instead, the IRD will focus "on cases where there are clear indicators and circumstances indicating that someone has entered into an avoidance arrangement."
The Statement will therefore "provide greater certainty on the principles the Commissioner will apply in reaching a view on whether an arrangement is 'tax avoidance'," Smith said.