New Zealand Advisers Warn Clients on Taxman’s Information Demands

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Peter Hill

New Zealand tax advisers have alerted companies to respond with great caution to any demand made by the country’s tax office for copies of tax advice.

And while taxpayers have the right to claim that confidential tax advice given to them is exempt from any formal demand by the tax authority, the Inland Revenue Department has now made clear this isn’t a blanket right.

Companies’ confidential tax advice may now have outright exposure to the scrutiny of the tax authority wherever it may be noted among tax documentation for such information as intra-group goods and services pricing, known as transfer pricing; board minutes; tax calculations and worksheets; tax indemnity agreements; confidentiality agreements; memoranda of understanding, and valuation reports.

The tax authority’s definition for documentation is wide and applies to both paper and electronic communications such as books, accounts, records, letters, faxes, reports, memos, file-notes, photographs, images, e-mails and other data, in whatever way it is stored.

The warning comes after New Zealand’s Inland Revenue Department said that in the course of examining taxpayers’ transactions, it will seek out copies of tax advice to fill in any information gaps about the transactions.

The IRD said its new approach would apply to demands for information issued on and after July 1, 2018.

Bevan Miles, tax partner at Chapman Tripp in Auckland, said in an email Aug. 7 that for the IRD to seek the actual content of tax advice provided by accountants “would run directly counter to that level playing field and the rules themselves.” Miles added that is probably the real reason the IRD says it will only focus on facts stated in tax advice because “that is all the legislation permits the IRD to see.”

Tax advisers are alerting clients to act with caution after noticing the tax authority’s new approach in guidance issued July 5. In its guidance— Operational Statement OS 18/02—the Inland Revenue Department sets out how it will treat claims for non-disclosure of information that is the subject of a formal demand from the tax office.

Taxpayers have the right to claim confidential tax advice given to them (section 20B of New Zealand’s Tax Administration Act 1994) as being exempt from any formal demand for information made by the tax authority under the same Act.

The right to not disclose tax advice is separate but equal to the right—also enshrined in legislation—to claim legal professional privilege for tax advice given by a lawyer. It is meant to cover similar advice given by non-lawyers, like chartered accountants. In this way it creates a level playing field of tax advice between lawyers and accountants.

An IRD spokesperson told Bloomberg Tax Aug. 6 that often, in making a demand for such information, the IRD is more interested to determine the purpose behind a particular arrangement and perhaps the reasons why it was entered into.

However, Mathew McKay, lead tax partner at Bell Gully in Auckland, told Bloomberg Tax Aug. 7 the IRD could seek to use any factual information in a tax advice document provided by a taxpayer who did not claim the right of non-disclosure “both for relevant purposes” such as a purpose of resale issue, “and irrelevant purposes,” such as a tax avoidance issue.

The judicially-mandated approach to identifying the purpose or effect of an arrangement in tax avoidance matters, according to McKay, is to identify the objective effect of the arrangement by reference to the transaction documents, and to then identify the purpose of the arrangement by reference to those effects. He said “this should not require a consideration of any subjective statements made by the taxpayer.”

So, What Is Tax Advice?

The IRD has listed in OS 18/02 many examples of documents it does not consider eligible for non-disclosure.

McKay said that in many cases the documents listed would not be likely to qualify for non-disclosure, but he cautioned nevertheless that “the test must be applied to each document on a fact-specific basis.”

His view is that it is possible that many of the documents identified might contain tax advice and be able to qualify for the non-disclosure right.

“By way of example,” says McKay, “it is possible that a draft mark-up of a tax indemnity agreement might contain tax advice to the client, for example by way of a drafting note, in explanation of the inclusion of a particular limitation to the tax indemnity.” He said the key point is that every document should be considered on its individual merits.

That view was noted in a submission on earlier consultation on the guidance by industry body, Chartered Accountants Australia and New Zealand (CAANZ), which said a transfer pricing report that includes tax advice was acceptable to exclude from being disclosed. However, the IRD’s response to that suggestion was merely to change the example of a “transfer pricing report” to “transfer pricing documentation” as being unable to be excluded.

What wasn’t changed by the IRD was its view that all documents it lists in OS 18/02 need to be disclosed “in full”, and that any tax advice “referred to or contained in them may not be deleted or blanked out”.

Other Risks For Taxpayers

McKay says there are a number of other risks for taxpayers faced with formal demands for information from the IRD.

“From my perspective,” McKay said, “a key risk that taxpayers and their advisers often face when dealing with an Inland Revenue notice for information is the potential for the waiver of privilege in respect of legally privileged documents.” He warned that care needs to be taken by taxpayers in reviewing the documents to be disclosed to Inland Revenue “in order to prevent a waiver of privilege.”

On the right of non-disclosure of tax advice, McKay identified a further risk - the proper exercise of that non-disclosure right by way of notification to the tax authority. He said it is imperative that taxpayers ensure that complete and effective non-disclosure forms are filed in a timely manner at all relevant points, for example, “both at the time of an initial information request, and again following a subsequent discovery order if relevant.”

The time involved in doing all that is another risk, Miles noted. He said the non-disclosure right is often difficult to apply in practice given the time limits on claiming the right. He added “with large disputes involving large volumes of documents for which material time is taken to review before providing to the IRD, that becomes even more difficult.”

To contact the reporter responsible on this story: Peter Hill in Sydney at

To contact the editor responsible for this story: Penny Sukhraj at

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