The Inland Revenue Department should have access to some private discussions between taxpayers and their lawyers, the Law Commission says in a report tabled in Parliament yesterday.
The law should be changed so that privilege, which protects the privacy of lawyer-client relationships, covered post-return communication only, the commission said in its report Tax and Privilege.
Other communication should be part of information that the Inland Revenue Commissioner had access to as part of his normal information-gathering powers.
"The commissioner in judging the legitimacy of tax-induced arrangements is in our view entitled to all relevant information including communications between taxpayers and their legal advisers," the commission said.
The report targeted overseas companies, saying it was "all too easy for a foreign-owned corporation to manipulate its accounts to diminish tax liability to a particular state in which it operates.
"We need to keep clearly in mind the extent of foreign ownership in New Zealand industry and the ease and speed with which funds can be moved around the globe."
It was a majority stance, with law commissioner Paul Heath, QC, expressing a minority view.
The commission proposal was a modified form of that floated by the 1997 Winebox Inquiry.
In his report into the commission of inquiry on Cook Islands tax deals, Sir Ronald Davison recommended legal professional privilege for all tax matters be abolished.
Claims by taxpayers to professional privilege in respect of alleged confidential communications between them and their legal advisers were a constant source of delay and frustrations for the IRD, Sir Ronald said.
The commission said taxpayers held "all the cards" as they knew their financial position, and the IRD did not.
"What this report discusses is which cards the taxpayer should be required to lay face up on the table," it said.
"Solicitor-client privilege in a non-litigious context is not to be regarded as so sacrosanct that it cannot in appropriate cases be set aside in the public interest."
A solid tax base was essential to the efficient functioning of a developed nation.
Mr Heath said he was not persuaded that there was a "compelling need" to abolish non-litigation privilege in tax matters.
Having regard to recent criticisms of the way the department had exercised its powers, it would be inappropriate to change the law "at this stage."
IRD has been widely criticised over the past two years for its heavy-handed approach to tax gathering.
A parliamentary inquiry was critical of aspects of its work.
- NZPA
Tax report calls for access to client data
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