The New Zealand GAAR: Some Reflections on the UK Proposals

1. The New Zealand GAAR: Some Reflections on the UK Proposals Professor Craig Elliffe, University of Auckland

2. Background on the New Zealand GAAR Comparatively long history of the GAAR (1878 extended to Income Tax 1891) Major reforms to it in 1974 Subsequent cases (including the Privy Council) debated the role of GAAR v other black letter provisions 1878 land tax -1891 Only significant change in 1974 Perspective-NZ oldest stone building 1832 1878 land tax -1891 Only significant change in 1974 Perspective-NZ oldest stone building 1832

3. Features of the NZ GAAR It is a blunt instrument (it does not define the criteria that distinguishes legitimate tax planning from impermissable tax avoidance) Applies to every �arrangement� that has tax avoidance as its purpose or effect or as a �not merely incidental� purpose or effect Tax avoidance �includes� directly or indirectly Altering the incidence of tax Relieving the liability to pay tax Avoiding, postponing or reducing any liability or any potential or prospective liability Abbreviated Immediately see that your committee has anticipated these issues-list of criteria Broader base of potential application-you are drafting a sole purpose or main purpose test (discuss later) Not merely incidental-natural concomitant �arisen naturally from the legal transactions entered intoAbbreviated Immediately see that your committee has anticipated these issues-list of criteria Broader base of potential application-you are drafting a sole purpose or main purpose test (discuss later) Not merely incidental-natural concomitant �arisen naturally from the legal transactions entered into

4. Features of the NZ GAAR Power of reconstruction (counteraction) Commissioner may adjust �in a way the Commissioner thinks appropriate� He believes he does not have to describe the factual alternative for his adjustment Onus is on the taxpayer to show his adjustment is wrong and by how much 30 per cent of reported judgments of the last decade have dealt with tax avoidance Very broad discretion Very broad discretion

5. So-how is it going? NZ Supreme Court resolved the role of the GAAR in Ben Nevis English authorities of limited assistance Role of the GAAR as a �longstop� does not give correct emphasis Purpose of the GAAR-principal vehicle to address tax avoidance View the impugned arrangement in a commercially and economically realistic way, to see whether the use of the provision is for a purpose that is Parliament contemplated Longstop-Auckland Harbour Board-per Lord Hoffmann Court has developed factors (manner arrangement carried out, role of the parties, economic and commercial effect and financial consequences, duration of arrangement, artificiality and contrivance) Longstop-Auckland Harbour Board-per Lord Hoffmann Court has developed factors (manner arrangement carried out, role of the parties, economic and commercial effect and financial consequences, duration of arrangement, artificiality and contrivance)

6. A Case Study- Alesco NZ Ltd (HC) 12/12/2011 Alesco NZ funded by its Australian parent through zero coupon optional convertible notes (OCNs) Used to acquire new NZ businesses Sought interest deductions in NZ, no non-resident withholding tax and no income in Australia Alesco used an IRD Determination (which it argued it was obliged to follow) which bifurcated the OCN- into constituent debt and equity components Result was it claimed an interest expense under the �interest� accrual rules $60 borrowed and $40 purchase price for the equity option$60 borrowed and $40 purchase price for the equity option

7. Alesco NZ Ltd Held to be tax avoidance Artificial device designed to secure a tax advantage in NZ Notional interest claimed did not represent a real economic costs All interest expense disallowed (100% penalty) (the taxpayer argued that the counterfactual would suggest a deduction for interest on the principal) Clear legislative and IRD Determination outcome 16 taxpayers and � billion in tax Sam Warburton On appeal to Court of Appeal-may well have the right outcome but emphasis should have been on the lack of commercial purpose for the OCN and not the tax mismatch Sam Warburton On appeal to Court of Appeal-may well have the right outcome but emphasis should have been on the lack of commercial purpose for the OCN and not the tax mismatch

8. Observations on your proposals Understand you have a financial centre to protect! NZ does not. Your focus on protecting business and seeking taxpayer certainty is commendable Defining abnormal arrangements (i.e criteria in the statute is excellent)�need flexibility but not uncertainty. May save litigation. Having an Advisory Panel with its functions of advising on litigation and publication of decisions is another excellent feature (NZ Report on tax avoidance reform recommends both these suggestions) (lack of certainty has advocates in NZ) (lack of certainty has advocates in NZ)

9. Observations on your proposals Reasonable tax planning is a key safeguard In NZ we have seen cases (Penny and Hooper NZSC) where reasonable choices of structure have been seen as tax avoidance through non-commercial implementation �conduct� is the right word in section 4) but it will be testedIn Alesco the OCN was a reasonable choice of funding structure but not when the parties were 100 per cent associated and the equity option was arguably non-commercial

10. Observations on your proposals Obvious that hard cases are the ones that are close to the line Concerned that the combination of the two safeguards of no tax intent, and burden of proof on HMRC could impair effectiveness and make it hard to administer Tax �intent� or motive is so easy to engineer/ disguiseOur courts have looked for objective measures (purpose or effect)

11. Observations on your proposals Burden of proof should be on the taxpayer Not invoked lightly (because of senior delegated powers in HMRC) Why re burden Have you had such terrible experiences with HMRC? Q of trust. Still can ask a taxpayer to prove that their behavour was a reasonable choice of conduct afforded by the provisions of the act are you really asking HMRC to show that the taxpayer�s conduct was not reasonable tax planning Burden of proof on tax intent on tp but back on HMRC to show an abusive tax resultWhy re burden Have you had such terrible experiences with HMRC? Q of trust. Still can ask a taxpayer to prove that their behavour was a reasonable choice of conduct afforded by the provisions of the act are you really asking HMRC to show that the taxpayer�s conduct was not reasonable tax planning Burden of proof on tax intent on tp but back on HMRC to show an abusive tax result

12. Lastly� Structure and broad tests excellent (wish we had some of them as additional guidance in NZ legislation ) Business wants certainty and equality not complication I wonder if you are being too conservative and have too many safeguardsI wonder if you are being too conservative and have too many safeguards