PATTY TZU CHOU LIN v COMMISSIONER OF INLAND REVENUE [2018] NZSC 54

PATTY TZU CHOU LIN v COMMISSIONER OF INLAND REVENUE [2018] NZSC 54 [20 June 2018]IN THE SUPREME COURT OF NEW ZEALANDI TE KŌTI MANA NUISC 23/2018[2018] NZSC 54BETWEEN PATTY TZU CHOU LINApplicantAND COMMISSIONER OF INLANDREVENUERespondentCourt: Elias CJ, O'Regan and Ellen France JJCounsel: G D Clews and S J Davies for ApplicantD J Goddard QC and J B Y Cheng for RespondentJudgment: 20 June 2018JUDGMENT OF THE COURTA The application for leave to appeal is dismissed.B The applicant must pay the respondent costs of $2,500.____________________________________________________________________REASONS[1] The applicant seeks leave to appeal against a decision of the Court of Appeal1dealing with an issue of interpretation of the double tax agreement betweenNew Zealand and the People's Republic of China (the NZ/China DTA).2[2] The applicant had a 30 per cent interest in five companies that were resident inChina for tax purposes and trading in that country. They were Controlled ForeignCompanies (CFCs) for the purposes of New Zealand tax law, which meant that the1 Commissioner of Inland Revenue v Lin [2018] NZCA 38 (Harrison, Cooper and Asher JJ)[Lin (CA)].2 Double Taxation Relief (China) Order 1986.income of the companies in China was attributed to the applicant for New Zealand taxpurposes under the CFC regime.[3] China provided tax concessions to the companies, which meant that they wereexempt from paying tax that would otherwise have been payable in China. Theprovision of such a concession was referred to in the lower Courts as "tax sparing",and we will adopt the same terminology.[4] Article 23(2)(a) of the NZ/China DTA provides that, in general terms, Chinesetax paid in respect of income derived by a resident in New Zealand from sources inChina (with some exceptions) is allowed as a credit against New Zealand tax payablein respect of that income by the New Zealand tax resident.[5] Article 23(3) deals with the situation of tax sparing. In essence, it providesthat tax payable in China by a resident of New Zealand is deemed to include anyamount that would have been payable as Chinese tax but for an exemption or reductionof tax granted under Chinese law. Thus, tax spared by the Chinese authorities is alsoallowed as a credit against New Zealand tax payable by the New Zealand resident.[6] The five Chinese companies in which the applicant had a 30 per cent interestbenefited from tax sparing arrangements in China. The applicant's New Zealand taxliability for income earned by the companies in China under the CFC regime wascalculated by the Commissioner on the basis that a credit was provided for tax actuallypaid in China, but no credit was given for tax spared in China.[7] The applicant's challenge to this assessment was upheld in the High Court.3The High Court Judge considered that the applicant was entitled to a credit inNew Zealand for tax spared in China to the CFC, interpreting art 23(3) on the basisthat it had to be read in the light of the wording of art 23(2)(a) so that the twoprovisions could be read consistently.4 She said that this interpretation wasunderscored by evidence about the way in which double tax agreements are negotiated,the research done by each country into the other's tax systems and policy and the3 Lin v Commissioner of Inland Revenue [2017] NZHC 969 (Thomas J).4 At [97].irresistible inference that both parties would have known at the time of entering intothe NZ/China DTA that New Zealand intended to implement a CFC regime. Sheconsidered that the interpretation of art 23(3) respected the purpose of the tax sparingprovision in the NZ/China DTA to encourage investment in China by ensuring that thebenefit of the Chinese tax concessions remained with investors, rather than accruingto the benefit of the New Zealand tax system.5[8] The Court of Appeal differed from the High Court, focusing closely on thewording of art 23 itself. It considered that art 23's meaning was clear, and thus therewas no necessity to resort to extrinsic materials for assistance in its interpretation.6 Itconsidered that art 23(3) dealt with tax that would have been payable in China by aresident in New Zealand. It did not deal with tax that would have been payable inChina by a CFC, in which a New Zealand resident has an interest, thus causing theincome of the CFC to be attributed to the New Zealand resident under the CFC regime.[9] The applicant wishes to challenge the Court of Appeal on the basis that theCourt of Appeal did not apply the principles of interpretation of treaties and was toostrongly influenced by the plain meaning interpretation of art 23(3). She argues thatinterpretation of treaties, particularly double tax agreements, is a matter of publicimportance, noting that New Zealand has 40 double tax agreements with its maintrading and investment partners. She also argues that the interpretation of theNZ/China DTA itself is a matter of public importance and a matter of commercialsignificance, given the fact that double tax agreements are effectively part ofNew Zealand tax law through the operation of s BH 1(1)(c) of the Income Tax Act2007.[10] As the applicant acknowledges, however, the significance of the present caseis substantially affected by two important developments.[11] The first of these is the change made by Parliament to the CFC regime in 2009.The effect of this was that, from that time, the CFC regime required the attribution toa New Zealand shareholder of a CFC of the passive income of the CFC, but not the5 At [101]–[102].6 Lin (CA), above n 1, at [23].active income. (The applicant's tax liability in the present case predates 2009.) Astax sparing incentives are designed to promote active business, this means that it isunlikely that a CFC will ever benefit from a tax sparing provision in relation to incomeattributed to it in New Zealand.[12] The second is that a new double tax agreement is currently being negotiatedbetween New Zealand and China. The respondent referred to New Zealand'slong-standing policy of not agreeing to tax sparing provisions and to recent double taxagreements signed by China, the majority of which have not included tax sparingprovisions. It is anticipated that even if the new double tax agreement allows for taxsparing provisions, it will make clear one way or the other what credit should beavailable to a New Zealand tax resident.[13] We see these two developments as strong indications that the arguments thatthe applicant wishes to pursue if leave is granted are not points of sufficient importanceto justify the grant of leave for a further appeal to this Court. Also, we do not see anyappearance of a miscarriage of justice if leave is not granted in this case.[14] In those circumstances we decline leave to appeal.[15] We award costs of $2,500 to the respondent.Solicitors:Simpson Western, Auckland for ApplicantCrown Law Office, Wellington for Respondent