Settlement is often the most sensible resolution of any dispute. It is, however, more difficult to reach a settlement of a dispute with the Commissioner (CIR) than it is to settle an ordinary commercial dispute. The first part of this two-part article, published in Taxation Today, Issue 4 (February 2008), explored why settlement is often an attractive way of resolving a dispute, and the reasons why settling tax disputes is not as easy as settling other disputes.
This concluding part considers the CIR’s practice in this area, suggests ways in which advisors can improve their chances of reaching a sensible and lasting settlement of their clients’ disputes at a reasonably early stage, and ways in which the CIR could open the door to more settlements of genuine disputes without compromising the integrity of the tax system.
The CIR’s Published Policy
When a new aspect of tax administration arises, either through legislative change or Court decision, the CIR is usually commendably quick to develop internal processes and publicise guidelines for taxpayers and tax practitioners. For example, in April 2005 the CIR published two comprehensive Standard Practice Statements (SPS 05/03 and 05/04) on the changes which had just been introduced to the dispute resolution process in Part IVA of the Tax Administration Act 1994 (TAA 1994).
As noted in last month’s article, it has been clear for many years that the CIR can and, where appropriate, should settle tax disputes. As also noted last month, there are a variety of factors which can affect whether a dispute should be settled, and if so, how and on what terms. Therefore processes for considering settlement and guidelines on how to approach the issue would be very helpful to the CIR’s officers and taxpayers.
Unfortunately, however, the CIR’s progress in this area has been leisurely; some would say glacial. The current position is:
- INV 350 Finalising agreements in tax investigations (published in August 1998) is the operative standard practice statement, applied subject to the points below. It is hopelessly out of date and reflects the law before the enactment of s 6A TAA 1994. It states that settlement can only take place “in accordance with the law” meaning that agreements cannot be finalised based on “splitting the difference” on a global basis, and all agreements must be on an issue by issue basis based on the law and the evidence available. This is the standard practice statement which was expressly disapproved of by the Court of Appeal in Auckland Gas Co Ltd v CIR [1999] 2 NZLR 409.
- ED 007 Settlement of disputed tax litigation is a draft Standard Practice Statement for litigation disputes. Comments closed in 1999. It says that the CIR can settle on a compromise basis, that settlements are more likely to be made when there is a clear factual dispute, and provides for a panel of interested Inland Revenue officials and counsel to consider settlement proposals so as to ensure consistency.
- ED 008 Finalising agreements in tax investigations is the draft Standard Practice Statement for other (pre-litigation) disputes. Comments also closed in 1999. It restates the policy in INV 350.
- INS 0072 Care and management of taxes is the CIR’s draft policy on the “care and management” provisions in s 6A TAA 1994. Comments closed in 2006. It accepts that the CIR can settle on a compromise basis, at least in litigation, and cautiously accepts that settlements may be able to be entered into in the course of a dispute which has not reached litigation. It queries whether such a settlement would be binding on the CIR, because there is a theoretical argument that, absent a sealed judgment recording a settlement, the CIR is as a matter of administrative law, entitled to resile from a settlement and reassess if he changes his mind – CIR v Lemmington Holdings Ltd [1982] 1 NZLR 517 (CA). However the High Court decision in Bage Investments Ltd v CIR (2003) 21 NZTC 18,294 shows that the Courts will enforce a settlement against the CIR.
- External guidelines for the settlement of tax litigation are on Litigation Management’s current work program.
The Practical Reality
Absent any published policy, an ad hoc approach to settlements exists whereby settlement overtures from taxpayers regarding pre-litigation cases are usually considered at field level and then referred to Technical Standards for decision if considered worthy of further consideration. Settlement of litigation cases is considered by Litigation Management in consultation with the field and counsel.
In a September 2006 address to Law Research Foundation Conference on The Modern Reality of Dealing with Commercial Regulators, Inland Revenue’s Director of Litigation, Karen Whitiskie, summarised the approach to settling litigation this way: · “The Commissioner will not settle litigation cases which do not involve a genuine dispute. Voluntary compliance is not promoted where a taxpayer can seek to obtain an advantage through a protracted dispute of an unmeritorious issue.· The Commissioner is also reluctant to settle litigation which involves tax evasion or similar conduct.· Expect to pay use of money interest. This reflects the purpose of use of money interest which is to compensate the Commissioner for the loss of use of money through taxpayers paying too little tax.· Payment of the agreed settlement amount must be made.· Those that settle early in litigation with the Commissioner are likely to achieve more favourable terms (from that taxpayer’s perspective) than those that settle on the Court steps or after an unsuccessful hearing.· In terms of multi-party litigation the Commissioner is conscious of the need for consistent treatment for taxpayers in like position. Therefore the Commissioner will be prepared to accept settlements on the same basis from other taxpayers in the same position and conversely will not entertain settlement offers inconsistent with the terms of settlement for taxpayers in materially the same position. Any settlement will reflect the circumstances of that litigation and therefore does not provide a precedent for how similar or identical issues will be treated by the Commissioner in future.”
In practice it is reasonably easy to raise the prospect of settlement with Inland Revenue once a case is at the litigation stage. It can be very difficult indeed to raise the prospect of settlement with investigators or management during an investigation, even when the Part IVA process is well advanced. Much (probably too much) depends on the particular investigator or team handling the dispute.
Implementation of a Settlement
Imagine a dispute about the correctness of the taxability of a receipt of $100, leading to disputed tax of $33. A 50% settlement could be implemented three ways:
· Assess tax on 50% of the receipt, so $50 x 33% = $16.50
· Assess tax on the whole of the receipt but at a reduced rate, so $100 x 16.5% = $16.50
· Leave tax assessed at the statutory rate on the whole sum, so $33 tax is owing, but write-off or remit the obligation to pay half.
Settlements in practice are raised on the first basis. As the passage from the Inland Revenue Director of Litigation quoted above says, settlements are contingent on payment. This means that a compromise assessment reflecting the settlement is only raised once the settlement sum is paid.
Critique of CIR’s Policy and Practice
As already noted, it is much easier to progress settlement sensibly with Inland Revenue once litigation has commenced. Unfortunately this stage is only reached once a taxpayer has expended months if not years and tens if not hundreds of thousands of dollars in fees on the Part IVA TAA 1994 process. The justification for Inland Revenue’s cautious and grudging approach to settling cases before litigation appears to revolve around a lack of certainty or precision as to the strength of the respective parties’ cases before litigation has commenced. However, every litigant considering settlement will consider whether he or she has sufficient certainty as to the strengths and weaknesses of each side’s case to enable a settlement offer to be made or considered., and the CIR is in no different position whatsoever in this regard. Sometimes that certainty will arise at an early stage in the dispute. Sometimes it will never arise, or at least not until witnesses are cross-examined. It all depends. Choosing the litigation stage as a cut-off is arbitrary and in many cases may mean that potential settlement opportunities are delayed for months or years.
While the forthcoming publication of guidelines for settlement of litigation is welcomed, there is probably more need for guidance on settlement at an earlier stage of disputes. It is also here that lack of consistency across the IRD is apparent: the availability or otherwise of an early settlement for an appropriate case should not depend on the personality of the investigator assigned to a taxpayer, but it often does. Published policy and guidelines would help remove the personal element from the equation.
A suggestion which has been raised for many years is the establishment of a settlement panel consisting of wise heads from within the IRD, and potentially including external advisers, to ensure that consistency is being applied and consider each case on its merits. Part of this consideration would necessarily involve considering whether there is enough certainty to justify the CIR considering settlement, and if not, what if anything might provide such certainty.
Maximising Settlement Chances
Finally, the following practical points can be made about settling with the CIR:
· Only a genuine dispute will be suitable for settlement. There is simply no point in prolonging a hopeless case in the hope that Inland Revenue will give up – it never does.
· A professional but courteous approach works best.
· Full preparation is essential in order to gauge the risk of success should the matter progress to Court and hence the likely range of possible settlements.
· Where the taxpayer cannot pay, seeking a settlement on this ground alone is most unlikely to succeed. There are hardship relief and remission provisions in Part XI of the TAA 1994 which can be applied instead.
· A meeting with the people concerned on Inland Revenue’s side is essential if a settlement is to succeed. Settlement discussions conducted through correspondence seem to continue inconclusively and indefinitely before eventually falling through.
· Candour is also essential – any suspicion that the taxpayer is holding back, or misrepresenting the strength of the case, will probably be fatal. Discussions on a “without prejudice” basis will help both sides be as open as possible.
· The CIR will be much more likely to settle a dispute if he can be satisfied that the issues in dispute are historical rather than ongoing.