Categories: Previous Articles
      Date: Jan 21, 2012
     Title: IRD Finally Issues Tax Avoidance Guidelines 

Some cynics suggest that the IRD moves glacially slow when they are happy with the status quo but at the speed of light when tax revenue is at risk.  Support for this theory can be found in the latest draft interpretation statement issued by the IRD on the anti-avoidance provisions - some 22 years after the previous guidelines.

IRD's Draft Interpretation Statement on Tax Avoidance

This 117 page document sets out the IRD's views on how to interpret and apply the tax avoidance laws.

Unless you are an insomniac looking for a cure, we assume you will not read this document so have summarised below what we believe are the key points:

• It is not enough to simply comply with the black letter of the tax laws, you must also use a particular law in a way that Parliament contemplated
• The commercial and economic reality of the transaction will be examined to decide whether the tax outcomes are outside what Parliament contemplated

Our Comment

While the IRD are to be commended for issuing this extensive document (albeit 22 years late), our main concern is that the Parliamentary contemplation test is, with respect, a test that:

• Is difficult to apply e.g. how do you determine what Parliament contemplated for a tax law passed 40 years ago?
• Is unclear whether it is ambulatory e.g. does the test look at what Parliament contemplated when the law was passed or what Parliament would contemplate today?
• Seems to delegate to the IRD a power to attack any arrangement that the IRD does not like.  A cynic might suggest that the test should properly be called "the Inland Revenue contemplation" test
• Is subjective and is being applied by IRD officers who have tax collection targets to meet and whose objectivity in applying the test may become compromised
• Seems to be used as a method of shoring up holes in the legislation where poor policy and/or poor drafting have left gaps
• Seems to eliminate a taxpayer's choice in structuring transactions in the most tax effective way
• Provides little certainty to taxpayers and advisers as to where the famous "line" is between legitimate tax planning and tax avoidance

We can only hope that the Courts will one day "improve" the avoidance tests and move away from the Parliamentary contemplation test to one that is more certain, and one which the IRD cannot raise whenever it encounters something it does not like.