This paper discusses how New Zealand’s general anti-avoidance rule should be improved in order to better regulate the fiscal system with respect to three aspects of tax policy, namely:
(1) General anti-avoidance and double tax treaties
(2) Private binding rulings on tax avoidance
(3) The interpretation of states by the Commissioner of Inland Revenue on avoidance questions and on the applicability of section BG1 and the Income Tax Act 2007
As most jurisdictions tax income on the basis of both source of income and residence, it results in the possibility that a person can bear tax in two jurisdictions if he or she is a resident in one country and derives an income that has its source in another country. To address this issue, countries will often enter into double tax treaties which provide that jurisdictions of residence will grant credit for tax suffered at a foreign source, or sometimes wholly exempt that foreign income from tax. Double tax treaties operate by overriding provisions of national taxing statutes. The paper highlights the uncertainty over whether the general anti-avoidance rule, found in section BG1 of the Income Tax Act, can override a double tax treaty. The author argues that New Zealand should legislate to make it clear that the anti-avoidance rule takes precedence over provisions of double tax agreements.
Private rulings are rulings made by the Commissioner of Inland Revenue in respect of an individual taxpayer who proposes a particular transaction or structure. Part VA of the Tax Administration Act provides that such rulings are secret. As the general anti-avoidance rule is extremely imprecise, it is difficult for officials to give correct rulings on questions of avoidance. It is therefore recommended that the rulings regime be amended to prevent private binding rulings being made on avoidance questions falling under section BG1 of the Income Tax Act.
Interpretation statements are statements published by the Commissioner of Inland Revenue in respect of a particular area of tax legislation. They are issued with the purpose of reducing uncertainty of the law in that area. Parliament has repeatedly declined to concretise the anti-avoidance rule, it would be outside of Parliament’s wishes and constitutionally inappropriate for the Commissioner provide the detail. Furthermore, the Commissioner’s statement has the potential to attract heavy reliance and could consequently mislead. The author therefore advocates refraining from issuing Commissioner’s interpretation statements on the operation of the general anti-avoidance rule.