Tax avoidance not clear cut - IRD
Inland Revenue has clarified how it will distinguish between tax avoidance and legitimate "tax planning", following 18 months of consultation.
Chief tax counsel Martin Smith said Inland Revenue would apply the same principle used by the Supreme Court in the 2008 "Ben Nevis" case which concerned tax avoidance by a forestry venture.
"In short, 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," he said.
The advice concerns tax avoidance within New Zealand over which Inland Revenue and local courts have jurisdiction. It has nothing to do with schemes used by the likes of Google, Apple and Starbucks that exploit deficiencies in international law to funnel their profits to tax havens, usually through Ireland. These are due to be tackled at a meeting of the G20 in Moscow later this month.
The Income Tax Act includes a catch-all "general anti-avoidance" provision that lets Inland Revenue void otherwise-legal arrangements if they are deemed to amount to tax avoidance, and to claim the tax involved.
However, there is no international equivalent to tackle tax avoidance that stems from deficiencies in international law, in part because of the difficulties of any one country claiming the right to such lost tax.
Inland Revenue's new guidance effectively puts businesses and their tax advisers in the position of having to interpret what MPs' intentions were when they passed the Income Tax Act in 2007, when deciding whether particular tax arrangements might be allowable.
Inland Revenue said it was often argued taxpayers should be given advice that would let them know for sure in advance whether a scheme would be judged as tax avoidance.
But it said today in its 133-page "interpretation statement" that it was not clear-cut whether "such certainty is either possible or desirable"