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Chapter 2 - Background

In addition to assessors and officers being sworn to secrecy, other precautions are taken to protect the taxable value of a man’s property becoming known.

Clutha Leader, Volume VI, Issue 343, 7 May 1880, Page 3

2.1 The effective administration of the New Zealand tax system relies on the voluntary compliance of taxpayers. Critical to this compliance is taxpayers having trust in Inland Revenue that taxpayers’ information will not be disclosed inappropriately. However, to operate the tax system efficiently, Inland Revenue sometimes needs to disclose information to taxpayers and third parties when it is reasonable to do so. An appropriate balance is needed in situations when these principles are inconsistent.

2.2 Provisions protecting taxpayer confidentiality have been in place for over 130 years, since the introduction of the Property Assessment Act 1879. The Court of Appeal has said that the tax system ...rests on the assurance provided by stringent official secrecy provisions that the tax affairs of taxpayers are solely the concern of the Revenue and the taxpayers and will not be used to embarrass or prejudice them.[2]

2.3 Today, the current secrecy rules in section 81 of the Tax Administration Act 1994, continue to provide a strict rule of taxpayer secrecy. They provide that, as a general starting point, Inland Revenue officers must maintain (and assist in maintaining) the secrecy of all matters relating to various tax Acts administered by the Commissioner of Inland Revenue. Further, section 6 of the Tax Administration Act states that taxpayer confidentiality forms a key part of the integrity of the tax system.

2.4 At the same time, the Tax Administration Act recognises that the duty to maintain secrecy cannot be absolute and so there is a list of targeted exceptions to the general secrecy rule. There is also a general exception which provides that disclosure is permitted if it is for the purpose of carrying into effect the Inland Revenue Acts and certain other tax-related legislation.

2.5 The first specific statutory exception to tax secrecy was introduced in 1946, in relation to international double taxation agreements.[3] The Inland Revenue Department Act 1974 contained further statutory exceptions, including permitting sharing with the then Department of Statistics.[4]

2.6 For most government agencies, the Privacy Act 1993 regulates information-sharing between agencies. The Privacy Act contains an express exception to principle 11 (which prevents disclosure) permitting disclosures made in order to “avoid prejudice to the maintenance of the law”. However Inland Revenue is subject to additional statutory secrecy requirements, and therefore the Privacy Act “maintenance of the law” exception does not apply.

Example scenario: GST refund audit resulting in identification of possible investor fraud

In an investigation of a GST refund it becomes apparent that a taxpayer is lending funds on aggressively structured terms to high-risk borrowers at artificially ramped-up prices. Investors therefore have a false view of the profitability of the company.

Under the current rules, Inland Revenue cannot share this information. Under the proposed rules, Inland Revenue would be able to provide information on the transaction, and associated parties to the transaction, to the Police and the Financial Markets Authority on the basis of there being reasonable grounds to suspect a fraud is being committed.

Current exchanges of Inland Revenue information

2.7 While the general rule regarding taxpayer information is one of strict secrecy, there are a number of targeted exceptions to this rule. In relation to these targeted exceptions, Inland Revenue currently has information-sharing agreements with more than 20 other government departments.

2.8 Under these agreements, Inland Revenue can provide information to agencies such as:

  • the Accident Compensation Corporation, to identify ACC levy payers, and to calculate and collect premiums and residual claims levies;
  • the Ministry of Social Development, to help the Ministry identify people who qualify for a community services card, identify benefit overpayments, and locate debtors and recover benefit overpayments;
  • the Department of Internal Affairs, to assist in its role of administering charities;
  • the Ministry of Business, Innovation and Employment (Labour), to verify entitlement to parental leave payments;
  • the New Zealand Customs Service, to ensure interest is applied correctly to the student loans of New Zealand and overseas-based borrowers, and to help locate and contact child support defaulters;
  • the Ministry of Justice, to enable it to locate people with outstanding fines and enforce payment; and
  • Statistics New Zealand, for statistical purposes.

2.9 Information can be matched for verification of various entitlements of private individuals or for statistical purposes.

2.10 There are currently no provisions in the Tax Administration Act, nor any agreements in place, that permit information to be shared or provided in relation to serious offences. There is no law presently allowing Inland Revenue to make agreements generally in relation to serious crimes. As noted, the “maintenance of the law” exception to principle 11 in the Privacy Act 1993, which allows other agencies to disclose information regarding criminal offending, is not available to Inland Revenue. There is provision for sharing with the New Zealand Police in relation to action taken by the New Zealand Police under section 98(1) of the Criminal Proceeds (Recovery) Act 2009. This is however, a highly specified and limited information-sharing provision, relating to actions to recover criminal assets.

2.11 In August 2011, the Ministry of Justice released a paper, Strengthening New Zealand’s resistance to organised crime, an all-of-government response, which identified the need for improved domestic and international information-sharing, legal assistance and coordination.

2.12 While Inland Revenue participates in cross-agency prevention and detection of organised crime, it is unable to share taxpayer-specific information with other participant agencies under the current legislation. Inland Revenue’s role as participant in these situations is limited to sharing general technical expertise on matters such as company structuring or legal issues.

Example scenario: Providing wage and salary information to support investigation of immigration crime

Labour and immigration investigators at the Ministry of Business, Innovation and Employment begin an investigation into individuals suspected of people trafficking. This involves foreign nationals being brought into New Zealand under false pretences to work illegally for New Zealand employers in conditions that fall well short of minimum labour standards.

Under the proposed rules, provided an applicable memorandum of understanding was in place, the Ministry of Business, Innovation and Employment could request relevant wage and salary information held by Inland Revenue. This could provide crucial evidence to disprove the validity of employment agreements signed and statements made by the employers to conceal the offending.

Australian position on sharing information to combat serious offences

2.13 In Australia, legislation passed in 2010 allows information held by the Australian Tax Office to be disclosed to specified law enforcement agencies to combat serious offences (defined as offences that carry a sentence of more than 12 months and can be tried by jury).[5] Information can also be disclosed to taskforces and Royal Commissions. Previously, the Australian position was to allow information to be disclosed to law enforcement agencies, but this information could not be used for the prosecution of offences. This restriction has now been removed.

2.14 According to Australian officials, the most common circumstance in which information is provided under the Australian provision is following a request by an enforcement agency (rather than proactive sharing by the Australian Taxation Office).

2.15 The Australian legislation also governs the use of information once it has been disclosed to a law enforcement agency and sets out penalties for misuse of the information. Disclosure is permitted to authorised law enforcement agency officers when the disclosure is for the purpose of:

  • investigating a serious offence;
  • enforcing a law, the contravention of which is a serious offence; or
  • making, proposed or possible making, of a “proceeds of crime” order.

2.16 Disclosures are also permitted to:

  • an authorised Australian Security Intelligence Organisation (ASIO) officer for the purpose of performing ASIO’s function under subsection 17(1) of the Australian Security Intelligence Organisation Act 1979;
  • a Project Wickenby officer, or a court or tribunal when the disclosure is for or in connection with a purpose of the Project Wickenby Taskforce[6];
  • a taskforce officer of a prescribed taskforce, or a court or tribunal where the disclosure is for, or in connection with a purpose of the prescribed taskforce;
  • a Royal Commission (if the Letters Patent declare that the Royal Commission is one to which disclosure is permitted) where disclosure is for the purpose of the Royal Commission conducting its inquiry;
  • a State or Territory Royal Commission, commission or board of inquiry (if the regulations declare that disclosure is permitted) where disclosure is for the purpose of:

    • investigating a serious offence;
    • enforcing a law, the contravention of which is a serious offence; or
    • the making, or proposed or possible making, of a “proceeds of crime” order.

2.17 The Australian Project Wickenby Taskforce provides an example of the effectiveness of tax authorities working with other law enforcement agencies. While largely tax fraud-focused, the Taskforce has also achieved significant results in dealing with money laundering and recovering proceeds of crime through inter-agency cooperation and information-sharing. The Taskforce’s activities include intelligence-sharing, tax audits, criminal investigations, prosecutions and education programmes.

International conventions regarding domestic information-sharing

2.18 In response to increasing concerns over money laundering, the Financial Action Taskforce on Money Laundering (FATF) was established by the G-7 Summit held in Paris in 1989. FATF, which includes New Zealand, was given the responsibility of examining money-laundering techniques and trends, reviewing actions which had already been taken at a national or international level, and setting out further measures to combat money laundering.

2.19 In April 1990, FATF issued 40 recommendations which were intended to provide a comprehensive plan of action to fight money laundering. In 2001, a further eight special recommendations in relation to terrorist financing were added. In October 2004 FATF published a ninth special recommendation further strengthening the agreed international standards for combating money laundering and terrorist financing.

2.20 A thorough review of the recommendations was completed in February 2012 with the publication of the revised FATF recommendations. The revised recommendations have been extensively amended for a variety of purposes including: to deal with threats such as financing the proliferation of weapons of mass destruction, to allow a risk-based approach to regulation and compliance; and to place greater emphasis on effectiveness of implementation of the standards.

2.21 The revised recommendations are intended to strengthen global safeguards and protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. Sharing Inland Revenue information on serious offences would be consistent with the goals of FATF as information sharing is a key aspect of the FATF recommendations.

2.22 New Zealand is also a party to the United Nations Convention against Transnational Organised Crime (UNTOC). This convention requires participant parties to operate within their domestic capability to combat organised crime, and co-operate internationally to protect the international system from exploitation by organised criminal groups and networks.

2.23 In addition, New Zealand is a party to other multi-lateral treaties and involved in international forums which set or monitor best practices relevant to combating organised crime – for example, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the Asia Pacific Group on Money Laundering, concerned with implementation of the FATF recommendations in the Asia-Pacific region.

2.24 The New Zealand model has been identified as out of step with current international practices, which involve a high degree of cooperation between revenue authorities and law enforcement agencies, and use tax information in the detection and prosecution of both tax and non-tax crimes.

2.25 The OECD has identified New Zealand as unique in that prosecutions are often carried out directly by agencies such as Inland Revenue, the New Zealand Police or the Serious Fraud Office. The Secretariat has invited comment from New Zealand about what is essentially the tension between inter-agency prosecution co-operation and tax secrecy legislation. This discussion document focuses on that tension.

 

2 Knight v Barnett (1991) 13 NZTC 8014 (CA) at 8,016.

3 Land and Income Tax Assessment Amendment Act 1946, section 5(5).

4 Inland Revenue Department Act 1974 section 13(4).

5 Tax Laws Amendment (Confidentiality of Taxpayer Information) Act 2010 (Cth).

6 The Project Wickenby Taskforce is a cross-agency taskforce comprising eight Australian federal agencies, including the Australian Taxation Office. The key aims of the Taskforce are to address international tax evasion in the Australian tax system and to deter, detect and disrupt internal tax evasion and money laundering.