European Pacific Group Ltd v KPMG Peat Marwick; KMPG v Davison ('Winebox Case')

• Jurisdiction: New Zealand
• Judgment Date: 16 February 1996
• Date: 16 February 1996
• Court: Court of Appeal

New Zealand, Court of Appeal.

(Cooke P, Richardson, McKay, Henry and Thomas JJ)

KPMG Peat Marwick and Others

and

Davison

Controller and Auditor-General

and

Davison

Brannigan and Others

and

Davison

Jurisdiction Territorial Investigation into alleged tax evasion Company using foreign tax haven Alleged participation in tax evasion transactions by foreign State Disclosure of financial information an offence under laws of the tax haven State Whether individuals residing in forum State can be compelled to give evidence to commission of inquiry where to do so would breach laws of tax haven State Whether legislation having extraterritorial effect Whether privilege against self-incrimination applicable in respect of offence under foreign law

State immunity Jurisdictional immunity Public policy as ground for refusing claim of immunity Investigation into alleged tax evasion by use of foreign tax haven Alleged participation by foreign State in transactions Alleged use of Cook Islands tax haven by New Zealand companies to evade New Zealand tax liabilities Transactions involving sale and purchase of promissory notes and issue of tax payment certificates by Cook Islands to be used against New Zealand tax liabilities Commercial activity exception Whether activities classed as operation of tax regime or as sale of tax credits Whether public policy considerations outweigh other criteria in determining whether State immunity applicable Inquity factor Whether Cook Islands Government Auditor can be compelled to produce documents in his possession in New Zealand to commission of inquiry The law of New Zealand

Summary: The facts:1A Commission of Inquiry (the Commission)2 was established to investigate alleged tax evasion by certain New Zealand companies. In question were a series of transactions involving the sale and purchase of promissory notes to and from the Cook Islands Property Corporation, an instrument of the Executive Government of the Cook Islands. These transactions had the effect, it was claimed, of repaying to the companies all monies purportedly paid over to meet tax liabilities. It was

alleged that the Government of the Cook Islands had, as part of the transactions, been paid to issue tax credit certificates which were later set off against New Zealand income tax

The Commission was charged with investigating whether the Inland Revenue Department and the Serious Fraud Office had acted properly in respect of these alleged abuses and to recommend legislative changes to prevent future tax fraud or evasion. The Rt Hon. Sir Ronald Davison, the defendant in the instant proceedings, was appointed the sole Commissioner of Inquiry. The Commission was constituted under the Commission of Inquiry Act 1908 (the Act) and, in 1995, the New Zealand Parliament enacted the Commissions of Inquiry Amendment Act, increasing the penalties available to the Commission in the event of non-compliance with its orders. Under Section 6 of the Act, witnesses before a commission had the same privileges and immunities as those appearing in courts of law, including the common law privilege against self-incrimination. By Section 9 it was an offence for a person, having been summoned to give evidence before a commission of inquiry, to fail to do so without showing sufficient cause. By Section 13A, introduced by the Amendment Act, a person who refused to give evidence without offering any just excuse faced serious penalties. The Commission's work was, however, impeded by the strict secrecy provided for under Cook Islands legislation. By Section 227 of the Cook Islands International Companies Act 19812,3 disclosure of information relating to the affairs of a company registered in the Cook Islands constituted an offence. Pursuant to that legislation, the High Court of the Cook Islands had issued injunctions against the production of documents to the Commission and had warned the plaintiffs in the present proceedings that they faced prosecution if they disclosed information to the Commission in breach of Cook Islands law.4

The plaintiffs challenged the notices issued by the Commission requiring them to give evidence and produce documents. In a ruling, the Commissioner rejected the plaintiffs' claims that they should not be compelled to disclose information and held, inter alia, that the New Zealand public interest was the overriding factor when considering whether to permit a witness to refuse to give evidence. The Commissioner also ruled that he had to apply the principles of New Zealand law as contained in the amended 1908 Act and that in doing so to regard the provisions of the Cook Islands legislation relating to secrecy as completely irrelevant. The Commissioner found that Section 227 of the Cook Islands International Companies Act did not have extraterritorial effect and, accordingly, did not apply to residents of New Zealand giving evidence in the courts of New Zealand.

The plaintiffs applied for judicial review. The plaintiffs in the first application were kpmg Peat Marwick, an accountancy firm (kpmg), and its partners who resided and practised in New Zealand and, from time to time, worked in the Cook Islands. They claimed that there was sufficient cause for the purposes of Section 9 of the 1908 Act or just excuse in the context of Section 13A of the Amendment Act to refuse to give evidence or produce documents. They argued that they should not be compelled to give evidence where to do so would place them in breach of Cook Islands law, having

regard to the fact that they continued to undertake work in the Cook Islands. The plaintiff in the second application was the Controller and Auditor-General of New Zealand (the Auditor-General) who was also, by the Constitution of the Cook Islands, the Government Auditor of the Cook Islands. The Auditor-General questioned the Commission's authority to order production of documents which had come into his possession by reason of his position as Government Auditor of the Cook Islands. The Auditor-General argued that the activities of the Cook Islands Government in the transactions were not of a commercial character and, therefore, State immunity applied. The third application was brought by four former employees of the companies whose alleged tax evasion had given rise to the inquiry. These plaintiffs, all of whom were citizens and residents of New Zealand, objected to disclosure to the Commission because this would cause them to breach the laws of the Cook Islands and would expose them to criminal proceedings in the Cook Islands. They sought to rely on the common law privilege against self-incrimination

Held:The New Zealand public interest prevailed over other considerations. The applications were dismissed.

(l)(a) The Cook Islands were fully sovereign and independent and entitled to claim immunity in respect of sovereign acts. Difficulties arose in the present matter, however, because commercial and sovereign elements were intermingled. Seen in isolation, the issue of a tax credit was a sovereign act and attracted immunity. By contrast, dealing in promissory notes was an act which any private citizen could perform. The commercial aspects of the transactions under consideration were so significant that sovereign immunity had to be excluded. A State which had been so involved in commercial activities could not expect total immunity and, accordingly, its auditors and financial advisers could not benefit from State immunity (pp. 5369, 6057 and 61516).

(b) Notwithstanding the fact that compelling the plaintiffs to give evidence might tend to undermine the legislation of a foreign friendly country, the Commissioner did not have to permit the plaintiffs to refuse to give evidence on this ground, because to do so would hinder his investigation into the undermining of the New Zealand tax base (pp. 539, 607 and 61011).

(2) The Cook Islands International Companies Act operated extraterritorially and rendered a person guilty of an offence wherever he divulged information in breach of the statute. The injunctions issued in the High Court of the Cook Islands were also intended to have extraterritorial effect in so far as this was in the competence of that Court. It was pertinent, however, that, if the plaintiffs were prosecuted in the Cook Islands for giving evidence to the Commission, the defence of foreign State compulsion would probably be available and also, if the plaintiffs' extradition was requested by the Cook Islands for the purposes of such prosecution, it was unlikely that a New Zealand court would grant such a request. Nonetheless, there still remained for the plaintiffs a practical risk of prosecution. The question was whether that risk was such as to require the Commission to permit the plaintiffs to refuse to give evidence on the grounds provided under the 1908 Act. The New Zealand public interest required that this question be answered in the negative. There was no settled rule that a witness's privilege against self-incrimination extended to conduct made criminal by foreign law and, thus, the privileges under Section 6 of the Act did not apply. With regard to Sections 9 and 13A of the Act, which gave the Commission a discretion to be exercised in the light of all the circumstances, these matters were best left to the Commissioner who was in the best position to make the assessment. The Commissioner had not erred in finding that the New Zealand public interest outweighed other considerations and that the plaintiffs could not be permitted to refuse to give evidence (pp. 55462, 5847, 597604, 60810 and 6259).

Per Cooke P: International law might develop in the future to permit an exception to sovereign immunity on the ground of iniquity, excluding immunity in respect of, for example, atrocities, the use of weapons of mass destruction or acts of war regarded as unlawful by the United Nations. Such development, however, lay in the future and a court could not, under the prevailing rules of international...