"The Crocombe Judgment" IN THE COURT OF APPEAL OF THE COOK ISLANDSHELD AT RAROTONGA CA NO. 1/13
BETWEEN TATUROANUI GRAHAM CROCOMBE Appellant AND COLLECTOR OF INLAND REVENUE Respondent
Coram: David Williams P, Barker JA & Paterson JA
Hearing: 20 November 2013 Judgment: 22 November 2013 Counsel: Mr P David for Appellant Mr M Ruffin & Ms M Henry for Respondent
JUDGMENT (NO. 3) OF THE COURT
Introduction
[1] In a judgment given on 3 August 2012 Hugh Williams J determined that the Respondent, the Collector, was correct in assessing the Appellant, Mr Crocombe, with amounts credited to Mr Crocombe's current account by The Rarotongan Beach Resort and Spa Limited ("The Rarotongan"). The Appellant appealed on various grounds, all but one of which were determined by this Court in a judgment given on the 11 March 2013.
[2] The remaining point of appeal which is being determined in this judgment is that in issuing the assessment, there was improper conduct by the Collector amounting to an abuse of process that vitiates the validity of the assessments.
[3] The basis of the allegation of improper conduct is that the Collector referred Mr Crocombe's tax situation to Mr Trevor Clarke for advice. Mr Clarke is a qualified lawyer who practised law in the Cook Islands for some years before retiring from his practice and undertaking a successful business career in the Cook Islands. He was known to be a business competitor of Mr Crocombe's and Mr Crocombe submits that it was an abuse of power for the Collector to engage a business competitor to provide him with legal advice about how Mr Crocombe's tax affairs should be treated.
Factual Background
[4] It is not necessary to set out the detailed history of dealings between Mr Crocombe and his advisors on the one hand and the Collector prior to the assessments being issued. Much of this appears in this Court's earlier judgment. It is sufficient to say neither Mr Crocombe nor The Rarotongan filed tax returns within the statutory time limits. A letter written by the Collector to Mr Crocombe on 19 December 2003 referred to previous correspondent and advised that unless the returns were filed by 23 January 2004 he would prosecute.
[5] In June 2004 Mr Crocombe and his advisors had advised Mr Haigh, an officer of the Collector, that it was their wish to reopen the accounts of The Rarotongan and reclassify some of Mr Crocombe's director fees which had been credited to his current account. There were further negotiations between the parties and a formal request to reopen the accounts was made in a letter from The Rarotongan's accountants to the Collector on 7 May 2004. Despite further meetings and representations the Collector declined to allow the accounts to be reopened.
[6] The dates that the relevant tax returns were filed with the Collector were:
26/ 4/2002 - The Rarotongan's tax returns for the 1999 to 2001 years. 4/ 5/2004 - Mr Crocombe's individual tax return for the 1998 year. 10/11/2005 - Mr Crocombe's individual tax returns for the 1999 to 2003 years. 17/11/2005 - a further tax return by The Rarotongan for the 2001 year.
[7] Mr Crocombe became concerned when he discovered preparing for the hearing before Hugh Williams J that Mr Trevor Clarke had given advice to the Collector in respect of the tax returns.
[8] Mr Stoddart as the Collector at the time, advised Mr Crocombe's accountant on the 21 st July 2004 that he would not allow The Rarotongan's accounts to be restated. Mr Haigh, who later became the Collector himself, confirmed the position in a letter to The Rarotongan's accountant on 18 August 2004.
[9] The tax assessments were issued on 31 March 2006 after all returns had been filed. These assessments confirmed the advice that the Collector had given on 21 July 2004. One of the returns filed before the assessments were issued was The Rarotongan return for the 2001 year which was filed on 17 November 2005. That return raised the issue of fundamental error. This Court's earlier judgment dealt with this issue.
[10] Mr David for the Appellant relies mainly upon documentary evidence. It is only necessary to briefly refer to it at this stage although there will be a more detailed evaluation later. The documentary evidence relied upon is:
(a) a file note prepared by the Collector dated 21 July 2004 which included words "my legal advice is that you cannot change history." (b) a further file note of the Collector dated 29 July 2006 which indicated that Mr Crocombe's and The Rarotongan files were with Mr Clarke. (c) a record of a meeting between the Collector, Mr Crocombe and Mr Crocombe's counsel on 15 December 2006 which concluded with the words "Trevor Clarke – answer please?" (d) the Collector's letter to Mr Crocombe's counsel of 19 December 2006 raising issues from the meeting held a few days earlier. A handwritten note on that letter said "Don't sent this, per TC". It is accepted by the Collector that the reference to TC was to Mr Clarke. (e) a letter from one of the Collector's officials to Mr Clarke dated 29 February 2008 forwarding the Collector's file for Mr Clarke's perusal and comment. (f) a letter of 4 April 2008 from one of Mr Stoddart's officers to Mr Clarke requesting that he arrange for representation in Auckland to advise the Collector. (g) a letter of 13 June 2012 from the Crown Law Office to Mr Crocombe's New Zealand solicitors advising that Mr Clarke had given privileged legal advice.
[11] Mr Haigh was cross-examined on the Collector's legal representation and did state that to his knowledge Mr Clarke had not been involved in giving advice on the assessments dated 31 March 2006. However, it was also Mr Haigh's evidence that Mr Clarke was the closest thing on the island to a tax lawyer and that during the relevant period he was the person from whom the Collector would get advice from on draft bills etcetera. He confirmed that Mr Clarke was the Collector's legal advisor over the whole period and could see no reason why he would be replicated.
Issues
[12] There are two issues for this Court to determine:
(a) the factual issue of whether Mr Clarke did give advice to the Collector on Mr Crocombe's and The Rarotongan's tax matters and if so when he gave that advice; and (b) if advice was given relating to Mr Crocombe's and The Rarotongan's tax affairs was this an abuse by the Controller of his power as Collector.
Factual Issue
[13] Mr Ruffin for the Controller submitted that there was no evidence that Mr Clarke gave advice before the battle lines were drawn in this case. He was referring to 31 March 2006, the date on which the assessments were issued. Referring to the file note of 21 July 2004, it was Mr Ruffin's submission that the document has no context and may have merely been a question asked of another lawyer. Even if it was asked by the Collector of Mr Clarke it may have merely been a telephone query without formal provision of the accounts and simply asking whether it was possible to rewrite accounts particularly those that had been audited.
[14] It was also submitted on behalf of the Collector that this Court should not draw any inferences from the Collector opposing the late application made by Mr Crocombe that the Collector and Mr Clarke be called to give evidence in this Court and from the Collector's failure to call Mr Stoddart. In this respect Mr Ruffin relied upon the New Zealand Court of Appeal case ofRussell v Taxation Review Authority [2003] 21 NZTC18,225.
[15] The particular references relied upon fromRussell were:[31] ... We record, however, that we agree with the view taken byO'Regan J that there can be no obligation based on the rules of naturaljustice requiring a litigant in a civil proceeding, whether or not a publicauthority, to identify and make available witnesses considered by theopposing litigant to be the "correct ones". We agree also that there is nobreach of natural justice by a litigant opposing successfully an applicationfor an order for discovery of documents.
[16] In this Court's view the facts of this case do not fall neatly within the commentsmade inRussell. Here, the witnesses required namely the Collector and Mr Clarke hadbeen identified, albeit the realisation of their possible importance came on the eve of theHigh Court hearing. The Collector was within his legal rights in opposing theapplication to have Messrs Stoddart and Clarke called as witnesses and in deciding notto give evidence. However, in this case there was an allegation of improper behaviouragainst the Collector, who had an obligation to act in a high-principled way. There wassome evidence to support that allegation. In the circumstances this Court does notaccept that the Collector's failure to give evidence which would explain or clarify thedocumentary and other evidence, cannot be a factor from which an inference can bedrawn. It is noted that the New Zealand Court of Appeal was not referred to the Englishauthorities which are referred to later in this judgment.
[17] However, this Court is satisfied, without having to make any inferences relatingto the Collector's reluctance to give the information on when he sought legal advice andfrom whom, that it can form a view on the factual issue. On the balance of probabilitiesit concludes that Mr Clarke did advise the Collector on Mr Crocombe's and TheRarotongan's tax affairs before the assessments were issued and before Mr Crocombe'saccountant was advised that the Collector would not permit the rewriting of TheRarotongan's accounts for tax purposes.
[18] The evidence given by Mr Haigh, the Collector's own tax auditor, was that MrClarke was the Collector's legal tax advisor throughout the relevant period. There wasno other tax advisor on Rarotonga. The issue was an unusual matter of somecomplexity. It was being argued by a branch of a recognised international accountingfirm that The Rarotongan was entitled to rewrite its accounts. The submission was thatthis could be done because the original accounts contained a fundamental error and thatin accordance with international recognised accounting standards the accounts couldthen be rewritten. The issue is one in which the Collector would be expected to takelegal advice before coming to a decision.
[19] The Collector's memorandum of 21 July 2004 analysed in a reasonably detailedmanner the issues involved in this case. On one vital point he noted that "his legaladvice was that you cannot change history". It is difficult to give any otherinterpretation to this comment other than that Mr Stoddart took legal advice on theissues being raised by Mr Crocombe and his advisors.
[20] There is clear evidence that Mr Clarke advised the Collector after theassessments were issued. The Collector's memo of 29 July 2006 raised issues andconcluded that its intended focus was so that the Collector could see the importantaspect. That file noted that the files at that time were with Mr Clarke. They were notwith some other lawyer.
[21] The record of the meeting on 15 December 2006 detailed the matters discussedwith Mr Crocombe and his counsel and concluded with "Trevor Clarke – answerplease?" Clearly this was seeking legal advice.
[22] After the meeting of 15 December 2006 the Collector wrote to Mr Crocombe'scounsel to record two aspects of the meeting. The handwritten note on that letterindicated that it was not to be sent through Mr Clarke. No explanation has been given asto the meaning of this comment although a possibility is that the Collector did not wantMr Crocombe to know of Mr Clarke's involvement.
[23] A timetable prepared by the Collector shows that on 29 February 2008 a letterwas written by one of the Collector's officers to Mr Clarke asking for a draft submissionand enquiring as to his availability to represent the Collector.
[24] On 4 April 2008 the Collector wrote to Mr Clarke asking him to arrange forAuckland counsel to represent the Collector.
[25] On 13 June 2012 Crown Law replied to a letter from Mr Crocombe's solicitorsin which Crown counsel advised "Mr Clarke was instructed as counsel to provide legaladvice to the Collector and as such his advice is privileged". The solicitors had soughtinformation including details of Mr Clarke's involvement and the information disclosedto him. While advice given was privileged, the inquiries made were legitimate and theresponse inappropriate.
[26] Clearly Mr Clarke gave advice to the Collector from at least 29 July 2006,shortly after the assessments had been issued and the objections filed. By his ownadmission on the file note of 21 July 2004 the Collector had taken legal advice beforeadvising Mr Crocombe that the accounts could not be rewritten. The only evidence ofan involvement of a lawyer was that of Mr Clarke. Mr Haigh's evidence confirms thatMr Clarke was the regular legal advisor as there was no one else on the island that theCollector could turn. On the basis of this evidence, this Court is of the view that theCollector did, prior to the issue of the assessment, seek legal advice from Mr Clarke onthe tax position of both Mr Crocombe and The Rarotongan. It is unnecessary in thecircumstances to know the topics in which the advice were given. The clear inferencefrom the facts is that the Collector, prior to the issue of assessments, sought advice fromMr Clarke on the tax position of both Mr Crocombe and The Rarotongan. To give thisadvice it is more likely than not that Mr Clarke would have received the tax files and theaccounts for The Rarotongan.
The Legal Issue
[27] The legal issue, based on the factual finding that Mr Clarke did give legal adviceto the Collector on The Rarotongan's tax matters before the assessments were issued, iswhether the request for and the giving of that advice is an abuse of power which leads tothe conclusion that this Court should set aside the assessments.
[28] Mr David relied on several cases, some from the House of Lords, to support thesubmission that there was an abuse of power in this case. It is not necessary to citeextensively from these cases but reference will be made to some of the principles whichthe cases establish.
[29] The House of Lords considered the abuse of power inIn re Preston [1985] 1 AC835. In that case Lord Templeman said at page 864:(G) The court can only intervene by judicial review to direct thecommissioners to abstain from performing their statutory duties or fromexercising their statutory powers if the court is satisfied that “the unfairness”of which the applicant complains renders the insistence by thecommissioners on performing their duties or exercising their powers anabuse of power by the commissioners.
[30] Lord Bingham inThe Queen v Commissioners of Inland Revenue ex parteUnilever plc[1996] 68 Tax Cases 205, said at page 228:I would in general terms accept almost all these points, which reflect highauthority and rest on sound legal principle. But I am very uneasy at theconclusion which the argument is said to compel in this case. Unilever is, Ithink, entitled to make a number of points on the facts of the present case:(1) The courts have not previously had occasion to consider facts analogousto those here. The categories of unfairness are not closed, and precedentshould act as a guide not a cage. Each case must be judged on its own facts,bearing in mind the Revenue's unqualified acceptance of a duty to act fairlyand in accordance with the highest public standards.
[31] Simon-Brown LJ, also in theUnilever case observed at pages 233 and 234:“Unfairness amounting to an abuse of power” as envisaged inPreston and theother Revenue cases is unlawful not because it involves conduct such aswould offend some equivalent private law principle, not principally indeedbecause it breaches a legitimate expectation that some different substantivedecision will be taken, but rather because either it is illogical or immoral orboth for a public authority to act with conspicuous unfairness and in that senseabuse its power.
...
And there is this too to be said. Public authorities in general and taxingauthorities in particular are required to act in a high-principled way, onoccasions being subject to a stricter duty of fairness that would apply asbetween private citizens. This approach is exemplified in cases such asRegina v Tower Hamlets London Borough Counsel ex parte ChetnikDevelopments Ltd[1988] AC 858 and Woolwich Equitable Building Society vInland Revenue Commissioners[1993] AC 70, and reflected in Lord Mustill'sreference inMatrix-Securities to “the spirit of fair dealing which shouldinspire the whole of public life”.
[32] The Court is satisfied that the following principles apply:(a) a taxing authority has a duty to act fairly and in accordance with thehighest public standards. It is required to act in a high-principled way.
(b) if it acts with conspicuous unfairness it may be abusing a power.
(c) the categories of what may amount to an abuse of power are not closed.
Each case turns on its own facts.
(d) to establish an abuse of power it is not necessary to establish actual biasor improper motive or that either the Collector or Mr Clarke wished todisadvantage either Mr Crocombe or The Rarotongan. None of theseelements are alleged by the Apellant to be present.
(e) if there has been an abuse of power a Court may set aside an assessmenteven if it believes it to be correct.
[33] The essence of the submission on behalf of Mr Crocombe is that by takingadvice from a business competitor of Mr Crocombe, the Collector allowed the potentialfor bias and favour to become part of the taxation process. It was submitted that even ifMr Clarke did not actually act with any bias or favour, the reasonable person would seethat having someone in Mr Clarke's position vis-a-vis Mr Crocombe advise on decisionsdetermining Mr Crocombe's taxation liability, as demonstrating that there would be areal and apparent risk of bias. This is quite apart from the fact that because of the clearconflict, Mr Clarke should not have accepted the instruction in the first place orcontinued with the instruction.
[34] The Court accepts this submission. It does not suggest that Mr Clarke wasbiased but accepts he was in an obvious position of conflict. It is not suggested that MrClarke gave legal advice other than what he believed to be completely impartial legaladvice.
[35] However this Court has come to the conclusion that to ask a business competitorto advise on a rival's disputed tax position is unacceptable and improper and amounts toconspicuous unfairness. A taxpayer is entitled to expect that his financial position willnot be disclosed by the tax authorities to a competitor and that legal advice will not besought from a lawyer who is also a business competitor of the taxpayer. These pointsare sufficient to allow the appeal. The position is exacerbated in this case because of therelevant status of Mr Clarke and Mr Crocombe as prominent and leading businessmenwho are competitors in the same small business environment. Thus this Court is of theview that asking Mr Clarke to give the legal advice and Mr Clarke giving it wasimproper...........................................................................................
"Tax Haven or Asset Protection" "Secrecy or Privacy"
On Nicky Hager’s recent visit to the Cook Islands he told Matariki FM Trevor Clarke featured in a tax haven client database.
Hager showed Matariki FM details of over 100,000 tax haven clients around the world were made public over the weekend, including many clients of the Cook Islands offshore industry. The client lists, which were leaked and publicised earlier this year, also include Cook Islanders who use other countries as tax havens for their personal business.
A public website called the Offshore Leaks Database was launched that allows the public and journalists to search for names of people using secret trusts and companies. It can be found at http://offshoreleaks.icij.org. The website was created by the Washington DC-based International Consortium of Investigative journalists, which earlier this year began releasing stories based on the leaked tax haven information.
Hager reported the most prominent Cook Islander revealed in the Offshore Leaks Database is businessman Trevor Clarke. He is listed with 30 companies and trusts. Most of these date from when Clarke worked in the offshore industry, acting as director or trustee for foreign people’s companies and trusts. But the list also revealed some of Clarke’s personal offshore activities.
Furthermore Hager told Matariki FM Trevor Clarke’s offshore business is stretched across several countries. This started with a company called Dalvivian Limited he registered in Samoa in 1991. There was no sign of this company ever being disclosed publicly. Dalvivian Limited is then owned by a trust that is located far away in the British Virgin Islands, the Caribbean tax haven. This is the Beaumaris Trust, set up by Clarke in 2004 with himself and his family as beneficiaries said Hager. He added there was no sign of this trust being disclosed publicly either. Prior to 2004, Dalvivian Limited was owned via a different Clarke trust called Classowa Trust.
His Samoan company’s money is then held in another tax haven, Singapore. Dalvivian Limited has its bank account at the Bank of New Zealand Singapore branch said Hager. All this has been set up and administered for him by the offshore company Portcullis TrustNet, a company first established in the Cook Islands in the 1980s that still has an office in Avarua.
Why does a prominent business person spread his business overseas in these ways? The usual reason is to reduce the tax they have to pay to their own government. This does not mean the activities are illegal, but it means at least that they are finding ways to pay less tax. This is a controversial issue around the world, where people are questioning why wealthy people and big corporations pay so little tax compared to ordinary people. Usually offshore companies and trusts are part of the story there as well.
According to Hager Clarke’s use of his offshore company and trust are revealed in detail in leaked TrustNet files. They reveal a money-go-round, with money moving to and from Clarke’s business activities in the Cook Islands through the overseas tax havens.
In 2006, for example, Clarke’s Samoan company Dalvivian had NZ$4 million on loan to a Cook Islands company called Mainbrace Limited. The owner and director of Mainbrace is also Clarke. Hager says according to the leaked documents, Mainbrace in turn loaned this money to the Cook Islands Trading Company (CITC), Clarke’s main company. The document about the loan explained that “CITC is presently engaged in a new project, the construction of a new Building Centre (cost approx $3m).”
Thus the money loaned for the building project in effect went from Clarke’s British Virgin Islands trust, which loaned $4m to Clarke’s Samoan company, which loaned $4m to Clarke’s Cook Islands Company Mainbrace and it went from there to CITC.
Money moved in the other direction too. The documents shown to Matariki FM show that in 2006 Mainbrace paid nearly $500,000 of interest on the loan back to Dalvivian (minus 15% withholding tax). This money added to Dalvivian’s funds which in most years were loaned straight back to Mainbrace again. In fact, in practice, most of the money didn’t move at all, as the Mainbrace interest was retained and became an even larger loan from Dalvivian. Again, in effect, Clarke was lending himself money which was cycled around through the offshore company.
The leaked documents include three sets of annual accounts for Dalvivian. There is no record of the company paying tax on its considerable annual profits. All the business activity and all the money actually remains in the Cook Islands, but the offshore structures mean that the Dalvivian company profits are made in a country where no tax needs to be paid.
The documents show other activities as well. Dalvivian Limited also made an NZ$800,000 loan to a Cook Islands company called Oronga Securities Limited. Clarke was owner and director of Oronga Securities as well. Oronga Securities is part owner of a New Zealand company called Samex Limited which is believed to be the New Zealand supplier for Clarke’s Cook Islands Trading Company in the Cook Islands. Oronga Securities also owns part of the building at 155 Nelson Street, Auckland, where Samex is based. Income from this New Zealand Company was also ending up in tax-free offshore centres in Samoa and the British Virgin Islands according to Hager.
In 2005, Clarke arranged that some of the Beaumaris Trust money would be paid directly to him for another business project. Clarke wrote four pages of directions for the TrustNet staff on how to move that year’s Mainbrace and Oronga Securities interest payments to Dalvivian’s Singapore bank account, and for them to transfer NZ$450,000 from there to his personal ANZ account in the Cook Islands. He explained that “this will help me with a project I have on in Rarotonga for the benefit of my family”.
TrustNet staff was given special instructions about keeping Clarke’s offshore business secret. One document reads: "We are to contact Trevor by phone only unless otherwise instructed . . . No documents are to be kept here. All docs are to be held in our Hong Kong office."
Each of these transactions showed how wealthy individuals can use the companies and trusts located in faraway tax havens. Normally these companies and trusts remain secret year after year. But since this weekend’s launch of the Offshore Leaks Database, tens of thousands of clients will have their activities open for checking by other people, as happens routinely with the public company registers in non-tax haven countries.
There are suggestions that since the first publicity about the tax haven leaks in April, Clarke has been setting up new offshore entities to hold his millions, possibly replacing the ones described here. It is likely he already had other offshore structures as well. The Offshore Leaks Database only includes the business he happened to organise through TrustNet.
Clarke was chair of the Cook Islands' Financial Supervisory Commission, which was set up to oversee the offshore industry, from 2003 until 2010. He was also reportedly a tax department advisor. During these years he was using the offshore trust and company. Clarke responded that he was not "a user of any Cook Islands [offshore] entities" and said his offshore companies and trusts were set up well before his role as FSC chair. However this is not correct in the case of the Beaumaris Trust, as it was formed well after he became FSC chair in 2005. Clarke said there were lots of reasons for people to want to have assets outside the country where they live. He said he had not requested the special secrecy and had disclosed the offshore entities to a number of authorities.