Editorial: Tax collectors have enough power now

What is the more important? The protection of the country's tax base or the preservation of the privilege which protects the privacy of lawyer-client relationships? That question lies at the core of a Law Commission report tabled in Parliament last week. The commission comes down on the side of the tax collectors. The Inland Revenue Department, it says, should have access to some private discussions between taxpayers and their lawyers. This would involve changing the law so that privacy protection covers only post-return communication. Inland Revenue would have access to all other communication as part of its normal information-gathering powers.

The proposal is a diluted version of that included in Sir Ronald Davison's 1997 Winebox Inquiry findings. Sir Ronald recommended that legal professional privilege for all tax matters be abolished. He, of course, had just overseen a lengthy inquiry in which the accused companies adopted a far from candid approach, all the while claiming they had merely been exploiting a loophole in the law. Having endured such obstruction, Sir Ronald was perhaps bound to sympathise with Inland Revenue over the frequency of recourse to the sanctuary of professional privilege.

Both the Law Commission and Sir Ronald say, in effect, that lawyer-client privilege is not so sacrosanct that it cannot, where necessary, be set aside in the public interest. Protection of the tax base, especially when so much industry is foreign-owned and money can be readily moved around the world, is such a case. If tax is avoided, it increases the burden on other taxpayers or prompts a scaling-back of Government spending.

The curbing of this privilege may, indeed, have a degree of logic in a fair and free society. The danger, however, is that such power could be open to abuse by the state should it wish to dispense with niceties. The loser in such an equation is individual rights. Therein lies the Achilles' heel of the Law Commission's proposal. Inland Revenue has, in fact, heightened fears of such abuse in recent years. A suicide on the Kapiti Coast, which the victim's widow attributed partly to an escalating tax bill, prompted many accusations that the department was callous. The upshot of these complaints, a parliamentary inquiry last year, heard harrowing tales of bullying tax collectors bent on recovering tax debt at virtually any cost. Unsurprisingly, the inquiry found that Inland Revenue was sometimes heavy-handed and dictatorial in its dealings with small taxpayers. It concluded that the department's powers were generally appropriate, and recommended a culture change and more compassionate approach.

The Law Commission and Sir Ronald were obviously more concerned with corporate practice than the small taxpayer. It is worth noting, however, that the loopholes in the law used by companies involved in the Winebox Inquiry have long since been closed. And, when it comes to basic privacy rights, different principles can hardly govern Inland Revenue's dealings with business and individuals. It might be more assiduous in its approach to companies, recognising the potential for slippage, but no less principled.

It is also worth noting that the law commissioners were not unanimous. Paul Heath, QC, a dissenting voice, said there was no compelling need to abolish non-litigation privilege in tax matters. And, given criticism of Inland Revenue, a law change would be inappropriate at this stage, he said. Indeed, the department's blotting of its copybook means the commission report will probably join others whose destiny is to gather dust. In the longer term, it could be that other approaches to the task of protecting the tax base will be more fruitful.

It would, for example, be more useful to make the law less open to interpretation and argument. That would remove legal debate over intent and the bounds of acceptable tax planning from the equation. Tax evasion should not be a matter of opinion. And where business ingenuity raises a doubt, the Taxation Review Authority is always available to act as an independent arbiter. Certainly, the rules would be upfront and transparent - and less likely to have unfortunate consequences for individual rights.