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Controller and Auditor-General v Sir Ronald Davison (CA
226/95) Court of Appeal, Wellington [1996] 2 NZLR 278 HEARING-DATES: 30, 31 October, 1 November 1995, 16 February 1996 16 February 1996 CATCHWORDS: International law — Sovereign immunity — Circumstances in
which foreign government may forfeit its right to sovereign immunity —
Relevance of desirability of comity of nations — Commission of inquiry —
Whether Commissioner of Inquiry could require production of documents and
giving of oral evidence in respect of matters outside the territorial
jurisdiction of New Zealand — Whether foreign government engaged in commercial
activities or governmental activities — Whether issues of public policy were
dominant element in the deliberations of a commission of inquiry —
Applicability of doctrine of iniquity — Crimes Act 1961, s 352(1) — Evidence
Amendment Act (No 2) 1980, s 35 — Public Revenues Act 1953, s 12 Commissions
of Inquiry Act 1908, ss 4C, 4D, 13A, 13B and 13C. Evidence — Commission of inquiry — Commissioner requiring
production of documents and giving of oral evidence in respect of matters
outside the territorial jurisdiction of New Zealand — Whether commissioner
could make such requirement — Whether issues of public policy were dominant
element in the deliberations of a commission of inquiry — Crimes Act 1961, s
352(1) — Evidence Amendment Act (No 2) 1980, s 35 — Public Revenues Act 1953,
s 12 — Commissions of Inquiry Act 1908, ss 4C, 4D, 13A, 13B and 13C. Application for review — Judicature Act 1908 — Commission
of in inquiry — Whether Commissioner of Inquiry could require production of
documents and giving of oral evidence in respect of matters outside the
territorial jurisdiction of New Zealand — Whether witnesses had defences of
sovereign immunity or protection from self incrimination — Whether issues of
public policy were the dominant element in the deliberations of a commission of
inquiry — Extent of limitation on commissioner's powers — Crimes Act 1961, s
352(1) — Evidence Amendment Act (No 2) 1980, s 35 — Public Revenues Act 1953,
s 12 — Commissions of Inquiry Act 1908, ss 4C, 4D, 13A, 13B and 13C. HEADNOTE: Certain documents belonging to the European Pacific group of
companies were allegedly stolen by an employee. They passed in due course to
the Honourable Winston Peters MP who, with the leave of the House of
Representatives, was eventually able to table them in the House. On the basis
of the papers Mr Peters and others alleged that various companies associated
with European Pacific were implicated in the evasion of New Zealand income tax
by the use of the Cook Islands tax haven. The documents given to Mr Peters were
contained within a winebox, and that gave rise to the popular image associated
with the allegations. These allegations included assertions by Mr Peters that
at the very least the New Zealand Inland Revenue Department and the Serious
Fraud Office had been derelict in their duty in failing to detect and/or take
action in respect of alleged abuses of the tax system. Ultimately, by Order in Council under the Commissions of
Inquiry Act 1908, a commission of inquiry was constituted. Its terms of
reference included a requirement to inquire into whether the Inland Revenue
Department and the Serious Fraud Office in dealing with the Winebox
transactions had acted in a lawful, proper and competent manner. The commission
was further charged with inquiring as to whether, having regard to these
transactions, changes were necessary to criminal or tax law to protect New
Zealand's tax base from fraud, evasion or avoidance. The Right Honourable Sir
Ronald Davison, a retired Chief Justice, was appointed sole Commissioner of
Inquiry. At certain relevant times the Auditor-General was auditor
for the Cook Islands and, at other times, his duties were delegated to KPMG
Peat Marwick. The other plaintiffs in the proceedings commenced by Peat Marwick
are employees of that company. Brannlgan and others are former employees of
European Pacific, a group at the centre of the inquiry. In the course of his conduct of the inquiry, Sir Ronald
required, pursuant to his powers under ss 4C and 4D of the 1908 Act, witnesses
to produce documents and give oral evidence. The commissioner's powers in this
regard had been strengthened by the passage in July 1995 of the Commissions of
Inquiry Amendment Act 1995. By inserting ss 13A and 13B into the principal Act,
the commissioner was empowered to impose sanctions, including detention, upon
witnesses who, "without offering any just excuse", refused to answer
questions or produce documents. The applicants in all three appeals sought
judicial review of the commissioner's attempted exercise of his powers to
require witnesses to produce documents and to answer questions. All proceedings
were removed from the High Court to the Court of Appeal by order of the High
Court. The "just excuse" offered by the applicants in each case was,
first, that-the doctrine of sovereign immunity precluded them from producing
documents or answering questions about matters arising in a sovereign
independent nation (the Cook Islands) that was the subject of inquiry in
another state (New Zealand). Secondly, because of the secrecy laws in the Cook
Islands, for the applicants to comply with the commissioner's demands they would
be exposed to the risk of prosecution in the Cooks. They therefore claimed
protection against self-incrimination. NOTES: Editorial note: Cooke P delivered a judgment in respect of
all three cases, while the remaining Judges each delivered separate judgments
in respect of each case. Held: (in all cases) (per totam curiam) The Courts would not
countenance any transaction, such as a fraudulent tax-evasion scheme, which was
knowingly designed to violate a revenue law of a foreign country and of a
foreign and friendly state. While local Courts did not enforce foreign revenue or penal laws, it
was contrary to comity and public policy to assist in their breach (see p 287
line 16, p 306 line 26, p 331 line 39, p 308 line 4, p 309 line 50). Re Emery's Investment Trusts [1959] Ch 410; [1959] 1 All ER
577, Pye Ltd v BG Transport Service Ltd [1966] 2 Lloyd's Rep 300 and Euro-Diam
Ltd v Bathhurst [1990] 1 QB 1; [1988] 2 All ER 23 (CA) applied. 2 The public interest required the claims of just excuse or
sufficient cause to be rejected. (a) (per Cooke P and Henry J) In considering "whether
state immunity should be granted or not, the Court must consider the whole
context in which the claim against the state is made, with a view to deciding
whether the relevant act(s) on which the claim is based should, in that
context, be considered as fairly within an area of activity, trading or
commercial or otherwise, of a private law character in which the state has
chosen to engage . . . is not just that the purpose or motive of the act is to
serve the purposes of the state, but that the act is of its own character a
governmental act, as opposed to an act which any private citizen can
perform." Seen in isolation, the issuing of a tax credit was an act which
could only be performed by a state, but the evidence before the commissioner
was prima facie that the Cook Islands Government Property Corporation, in the
buying and selling of promissory notes, was integrally involved in the tax
credit transactions (the Magnum transactions). A government which descended to
this extent into the market place could not fairly expect total immunity. Its
auditors and financial advisers could be in no better position. Although the
imposition and collection of a tax was undoubtedly a function of government and
not a commercial activity, as was the issuing of a tax credit certificate, to
allow those factors to he determinative was to ignore the reality of the
transactions being investigated. The promissory note dealing involving the
state corporation could not be divorced from the associated collection of
"revenue" and the element of tax collection became largely illusory.
When put in context the acts in question could properly be considered as
falling within a commercial area of activity of a private law character (see p
288 line 19, p 289 line 14, p 308 line 53, p 309 line 15, p 309 line 24). Playa Larga (Owners of cargo lately laden on board) v I
Congreso del Partido (Owners) I Congreso del Partido [1983] 1 AC 244; [1981] 2
All ER 1064 and Kuwait Airways Corp v Iraqi Airways Co [1995] 1 WLR 1147; [1995]
3 All ER 694 (HL) referred to. (b) (per Richardson and McKay JJ) The Magnum transactions
were not to be characterised as commercial transactions of the Cook Islands
Government because the crucial tax collecting was necessarily within the sphere
of governmental or sovereign immunity. (see p 303 line 24, p 331 line 39). (c) (per Richardson, McKay and Thomas JJ) The principle of
sovereign immunity was not founded on any technical rules of law: it was
founded on broad considerations of public policy, international law and comity.
It was the result of an interplay of two fundamental principles of
international law: the principle of territoriality and the principle of state
personality, both being two aspects of state sovereignty. Under the first
fundamental principle sovereign states had jurisdiction to prescribe rules of
law and processes applying within their territory. The state activity in
question was New Zealand based because the Magnum and like transactions
contemplated that the tax payment certificates issued by the Cook Islands
Government would be utilised to secure a tax credit for the full amount in New
Zealand and for New Zealand income tax purposes; all documents sought by the
commissioner for production for inspection were presently in New Zealand; the
documents were in the possession of the Audit Office of New Zealand; and
further there was the particular expression of the recognised international law
principle of good faith in the special relationship between the two states. The
documents were believed to contain evidence of a conspiracy to which the Cook
Islands Government was party to make an abusive claim to foreign tax credits in which reliance on tax
certificates issued by the Cook Islands Government was a key feature. To insist
on production of those documents for the purpose of copying them would be a
proportionate response by New Zealand and should be justified under
international law (see p 304 line 36 — p 305 line 18, p 307 line 29, p 331
line 39, p 313 line 5, p 313 line 24). (d) (per Thomas J) The restricted theory of sovereign
immunity could be applied without strain or injury so as to disentitle the Cook
Islands to immunity from the jurisdiction of this country (see p 310 line 20). 3 (per totam curiam) The due imposition and collection of
taxes was fundamental to the functioning of government The state had a prime
interest in tax enforcement and in the investigation of abuses of its tax system.
Defrauding the public revenue struck at the heart of government. It would be
indefensible for a friendly state to be a party to an attempt to evade or abuse
our tax laws (see p 287 line 16, p 290 line 1, p 301 line 18, p 331 line 39, p
309 line 24, p 317 line 49). 4 (per Cooke P, Richardson, Henry and Thomas JJ; McKay J
dissenting in respect of CA 231/95) (a) The justification for compelling the witnesses to give
evidence in New Zealand was so strong that no balancing of considerations under
the foreign state compulsion principle could possibly lead to the witnesses
being allowed to refuse to give evidence. The privilege of immunity against
conduct made criminal by foreign law did not extend so far (see p 292 line 12,
p 292 line 55, p 328 line 47, p 331 line 6, p 333 line 33, p 331 line 41, p 309
line 24, p 348 line 48, p 350 line 25). Spencer v The Queen [1985] 2 SCR 278; [1985] 2 CTC 310
followed. United States of America v McRae (1867) LR 3 Ch App 79 not
followed. (b) The privilege against self-incrimination was thee right
of a person questioned to decline to answer on the grounds that the answer
would have a tendency to expose that person to a criminal charge. The
protection was directed to the particular answer to the particular question.
The purpose of the privilege against self-incrimination was to protect the
witness from compulsory disclosure of an existing criminal liability. It was
not directed to the act of testifying or the attempt by foreign states, by
imposing criminal sanctions for breaches of their secrecy regime, to stop
anyone from giving evidence on a matter. The risk of prosecution for testifying
was to be taken into account in determining under the relevant witness
provisions of the Commissions of Inquiry Act 1908 whether the plaintiffs had a
sufficient cause or just excuse for refusing to give evidence. In principle
that risk did not come within the common law privilege against
self-incrimination (see p 292 line 12, p 339 line 47, p 340 line 7, p 338 line
1, p 349 line 26, p 350 line 25). Re Grand Jury Proceedings 819 F 2d 984 ([11th Cir.] 1987) and United
States v Field 532 F 2d 404 ([5th Cir.] 1976) applied. All proceedings dismissed. Observations: (per Cooke P) (i) It would subvert the
intention of the New Zealand Parliament if the New Zealand Courts were to hold
that, despite the apparently strengthening Amendment Act, the commissioner's
inquiry into these tax matters could be frustrated by invoking the doctrine of
sovereign immunity, or by resort to the "immunities" of witnesses
preserved by s 6 of the Commissions of Inquiry Act or to the provision for
"any just excuse" in the new s 13A(1)(b). Any such decision would be
contrary to the true intent, meaning and spirit of the legislation, which the
New Zealand Courts are enjoined to apply by s 5(j) of the Acts Interpretation Act
1924, and could only be justified for reasons of transparent clarity and
cogency (see p 286 line 14). (ii) Faced with a serious issue of illegality or iniquity, a
Court cannot fall back on a bland answer that this sort of thing is beyond its
scope. A large part of the very raison d'etre of a tax haven may be to enrich
the haven country at the expense of other countries. A warning seems
appropriate that older doctrines such as sovereign immunity, privilege against
self-incrimination and the like, will not necessarily be apt when dealing with
this sophisticated modern phenomenon. The public policy or interest of the
country of the forum may properly require a different approach (see p 287 line
8). (per Richardson J) (i) It is well settled that, where the
Crown recognises a foreign entity as sovereign, the Courts are bound to follow
and no other evidence is admissible or needed. The Cook Islands is entitled to
jurisdictional immunity in these matters in respect of any conduct on its part
which properly falls within the protection afforded the exercise of sovereign
authority (see p 299 line 19). Duff Development Co Ltd v Government of Kelantan [1924] AC
797 referred to. (ii) Sovereign immunity extends to property in the hands of
a bailee for a foreign sovereign (see p 299 line 53). United States of America and Republic of France v Dollfus
Mieg et Cie SA and Bank of England [1952] AC 582; [1952] 1 All ER 572 referred
to. (iii) Revenue laws and their administration are an extension
of the sovereign power which imposed the taxes. Any local inquiry which
involves an assessment of their operation encroaches on that sovereign power
(see p 302 line 16). Moore v Mitchell 30 F 2d 600, 604 ([2d Cir.] 1929) referred to. (iv) In determining as a matter of statutory construction
whether a statutory provision has extraterritorial effect, it is presumed in
the absence of clear and specific language, first, that an offence-creating
section is not intended by Parliament to cover conduct outside the territorial
jurisdiction of the Crown and, secondly, that it will not be construed as
applying to foreigners in respect of acts done by them abroad (see p 326 line
24). Air-India v Wiggins [1980] 1 WLR 815; [1980] 2 All ER 593
(HL) referred to. (v) Courts and commissions recognise the reality that
national interests differ. Every tax regime has commercial implications and has
some features attractive to international commerce. In circumstances where an
individual risks sanctions in either event because of the prospect of punishment
for refusing to disclose or for actually disclosing particular information, the
Court or tribunal must weigh those risks in a sensitive and realistic way
recognising the principle of international comity or mutual respect of state
sovereignty (see p 342 line 45). (vi) Transactions affecting foreign tax credits may constitute: (a) acceptable tax planning; or (b) tax avoidance which is not criminal but which is
countered within the tax legislation; or (c) tax evasion which involves criminal liability for
breaking of the law. Determining into which category transactions fall requires
careful analysis of their true nature. Instead of an appeal to overall
substance there is a need to focus on the contractual arrangements entered into
and carried out (see p 343 line 1). Commissioner of In land Revenue v Europa Oil (NZ) Ltd [1971]
NZLR 641 (PC) and Federal Commissioner of Taxation v Spotless Services Ltd
(1995) 95 ATC 4,775 referred to. (per Thomas J) (i) "In the domain of international law,
in particular, there is room for the extension of old doctrines or the
development of new principles, where there is, or is even likely to be, a
general acceptance of such by civilised nations. Precedents handed down from
earlier days should be treated as guides to lead, and not as shackles to
bind" (see p 314 line 22). The Odessa [1915] P 52 referred to. (ii) As to the concept of sovereign immunity, territorial
sovereignty is the starting point. Practice and reality demand no less. State
immunity is to be seen as a derogation from territorial sovereignty and the
exclusive jurisdiction which that sovereignty confers. The notion that a state
may not interfere with the territorial sovereignty of another state other than
by licence does not disappear simply because the act of the other state is
performed beyond its territorial boundaries (see p 314 line 54, p 315 line 25).
(iii) It may be questioned how realistic it is in this day
and age to suggest that it would be undignified for a foreign state to be
subjected to the legal processes of another state in respect of matters in
which it is directly involved (see p 318 line 24). (iv) The preferred approach [to the question of sovereign
immunity — Ed] recognises that, in this area of international law, the incremental
approach favoured in the development of the common law is unlikely to be wholly
useful. International law is too uncertain and cases on particular topics too
infrequent for such an approach to be productive. Precedent is necessarily of
more limited value. International law knows no rule of stare decisis (see p 314
line 3). CASES-REF-TO: Adsteam Building Industries Pty Ltd v Queensland Cement and
Lime Co Ltd (No 4) [1985] 1 Qd R 127; 2 ACLC 829 (Qd:SC). Arab Monetary Fund v Hashim [1989] 1 WLR 565; [1989] All ER
466. Atherton, Re [1912] 2 KB 251. Attorney-General v Equiticorp Industries Group Ltd (In
Statutory Management) [1996] 1 NZLR 528 (CA). Attorney-General for the United Kingdom v Wellington
Newspapers Ltd [1988] 1 NZLR 129 (CA). Blunt v Park Lane Hotel Ltd [1942] 2 KB 253. Busby v Thorn EMI Video Programmes Ltd [1984] 1 NZLR 461
(CA). Compania Naviera Vascongado v Steamship "Cristina"
The Cristina [1938] AC 485; [1938] 1 All ER 719. East India Co v Campbell (1749) 1 Ves Sen 246; 27 ER 1010. European Pacific Banking Corporation v Television New
Zealand Ltd [1994] NZLR 43 (CA). Fay, Richwhite & Co Ltd v Davison [1995] 1 NZLR 517
(CA). Ganin v New South Wales Crime Commission (1993) 32 NSWLR
423; 70 A Crim R 417(CA). George W Cook (US) v United Mexican States UN Rep Vol IV 593
(1930). Governor of Pitcairn and Associated Islands v Sutton [1995]
1 NZLR 426 (CA). H (A Prisoner), Re [1971] NZLR 982. Hale v Henkel 201 US 43 (1906). Hammond v Commonwealth of Australia (1982) 152 CLR 188; 42
ALR 327. India (Government of), Ministry of Finance (Revenue
Division) v Taylor [1955] AC 491; [1955] 1 All ER 292. Jackson v Gamble [1983] VR 552; 7 ACLR 652 (Vic:SC). King of the Two Sicilies v Willcox (1851) 1 Sim (NS) 301; 61
ER 116. Letelier v Republic of Chile 488 F Supp 665 ([D.D.C.] 1980). Murphy v Waterfront Commission of New York Harbor 378 US 52;
12 L Ed 2d 678 (1964). Olsen v Mexico 729 F 2d 641 ([9th Cir.] 1984). Playa Larga (Owners of cargo lately laden on board) v I
Congreso del Partido (Owners) I Congreso del Partido [1978] QB 500; [1978] 1
All ER 1169. Practical Concepts Inc v Republic of Bolivia 613 F Supp 863 [D.D.C. 1985],
615 F Supp 92 ([D.D.C.] 1985). Pyneboard Pty Ltd v Trade Practices Commission (1983) 152
CLR 328; 45 ALR 609. R v B (Ruling no 2) (High Court, Dunedin, T 16/91, 18
February 1992, Williamson J). R v B (Ruling no 3) (High Court, Dunedin, T 16/91, 19
February 1992, Williamson J). R v Burney [1958] NZLR 745 (CA). R v Garbett (1847) 1 Den 236; 169 ER 227. R v Howse [1983] NZLR 246 (CA). R v Moke and Lawrence [1996] 1 NZLR 263 (CA). Rahimtoola v Nizam of Hyderabad [1958] AC 379; [1957] 3 All
ER 441. Rank Film Distributors Ltd v video Information Centre [1982]
AC 380; [1981] 2 All ER 76. Redfern v Redfern [1891] P 139 (CA). Rees, Re [1986] AC 937; [1986] 2 All ER 321. Reference re Exemption of US Forces from Canadian Criminal
Law [[1943 S.C.R. 483,] [1943] 4 DLR 11. Regazzoni v KC Sethia (1944) Ltd [1958] AC 301; [1957] 3 All
ER 286. Rio Tinto Zinc Corporation v Westinghouse Electric
Corporation [1978] AC 547; [1978] 1 All ER 434. Schmidt, Re [1995] 1 AC 339; [1994] 3 All ER 65. Schooner Exchange v M'Faddon (1812) 7 Cranch 116. Seeley (FF) Nominees Pty Ltd v El Ar Initiations (UK) Ltd
(1990) 96 ALR 468 (SA:SC). Spencer v The Queen [[1985] 2 S.C.R. 278,] (1983) 145 DLR (3d) 344; 2 CCC (3d) 526
(Ont:CA). Tournier v National Provincial and Union Bank of England
[1924] 1 KB 461 (CA). Trendtex Trading Corporation v Central Bank of Nigeria
[1977] 2 WLR 356; [1977] 1 All ER 881 (CA). United States v Bank of Nova Scotia 691 F 2d 1384 ([11th Cir.] 1982), 740
F 2d 817 ([11th Cir.] 1984). United States v Field [532 F.2d 404 (5th Cir. 1976), cert. denied] 429 US 940; 50 L Ed 2d 309 (1976). United States v First National Bank of Chicago 699 F 2d 341
([7th Cir.] 1983). United States v Frank 494 F 2d 145 ([2d Cir.] 1974) [cert. denied 419 U.S. 828 (1974)]. United States v Murdock 284 US 141 (1931). United States v (Under Seal) 794 F 2d 920 [(4th Cir. 1986)], [cert. denied,] 479 US 924; 93 L
Ed 2d 303 (1986). Wiest v Director of Public Prosecutions (1988) 86 ALR 464;
38 A Crim R 358. INTRODUCTION: These were applications for judicial review by three
plaintiffs. COUNSEL: Counsel in all proceedings: George Barton QC and David
Collins for the Controller and Auditor-General; David Williams QC, Bret
Gustafson and Fiona Guy for KPMG Peat Marwick, JA Dawson, RJ Florence and KR
Rushbrook; Richard Craddock QC, and Cecily Brick for GD Barry and DR Lilly; Bruce
Stewart for PJ Brannigan and AJ McCullagh; Brian Henry and Rachael Downs-Honey
for the Honourable Winston Peters; Willie Young QC and Nicholas Davidson for
the Serious Fraud Office; Colin Carruthers QC, Robert Chambers QC and John
Eichelbaum for the Commissioner of Inquiry. JUDGMENT-READ: Cur adv vult PANEL: Cooke P, Richardson, McKay, Henry and Thomas JJ JUDGMENTBY-1: COOKE P JUDGMENT-1: COOKE P. These three cases relating to the Winebox Inquiry
were heard on various dates in October, November and December 1995, and on or
about December counsel for KPMG Peat Marwick (Peats) supplied the Court, as had
{285} been requested, with a compilation of materials concerning tax havens. We
are grateful for this help. There has now been sufficient opportunity to
consider and reflect upon those materials, together with the written
submissions of counsel, so the Court is in a position to give judgment. Although the oral arguments and the written matter placed
before the Court have been very extensive, no stone being left unturned by the
assiduity of counsel, I think that the cases can be disposed of on a broad and
relatively simple ground, namely the New Zealand public interest. In my opinion
it dictates the decisions in all three of the present cases. As there is this
common theme, I have found it convenient to deal with the three cases in one
judgment, to be delivered in each. This does not inhibit the other members of the Court from
delivering separate judgments in one or more of the cases, and I have had the
advantage of seeing individual drafts prepared by some of my brothers. This is the third occasion on which Winebox cases have come
before this Court. The general facts are prominently in the public domain and
have been described in previous judgments. There is no need to give here more
than a brief outline. Certain documents belonging to the European Pacific group
of companies were allegedly stolen by an employee. They came into the
possession of the Honourable Winston Peters MR who by leave tabled them in the
House of Representatives. They were in a winebox. He and others alleged that
they implicated various well-known New Zealand companies in the evasion of New
Zealand income tax by the use of the Cook Islands tax haven; and that the New
Zealand Commissioner of Inland Revenue and the director of the Serious Fraud
Office had been incompetent in failing to detect and take action against the
abuses. Mr Peters went as far as to assert criminal conspiracy on the part of
those officials. Ultimately, by Order in Council under the Commissions of
Inquiry Act 1908, a commission was constituted to inquire into whether the
Inland Revenue Department and the Serious Fraud Office in dealing with the
Winebox transactions had acted in a lawful, proper and competent manner; and
whether, having regard to those kinds of transactions, any change to criminal
or tax law should be made to protect New Zealand's tax base from the effects of
fraud, evasion and avoidance. The Right Honourable Sir Ronald Davison, retired
Chief Justice, was appointed sole Commissioner of Inquiry. There has been a history of attempts by some of the
companies allegedly implicated to minimise publicity about their
Winebox-related transactions and to prevent the Commissioner of Inquiry from
obtaining information from them. The first case to come before this Court was
European Pacific Banking Corporation v Television New Zealand Ltd [1994] 3 NZLR
43. The plaintiff company was seeking to prevent documents for which it claimed
confidentiality from being used for a television programme. The Court held that
the defendants had a seriously arguable defence of iniquity, on the principle
that the law will not protect confidential information if the publication
complained of is shown to be in the overriding public interest. On that ground
various High Court pretrial orders concerning interrogatories, discovery and
particulars were affirmed. The second case was Fay, Richwhite & Co Ltd v Davison
[1995] 1 NZLR 517. Certain companies sought unsuccessfully to prevent the
Commissioner of Inquiry from hearing evidence in public. The Court held that he
was entitled to conclude that public and personal interests (such as the public
perception of the integrity of the inquiry, the nature of the public offices
held by two of the parties, and the impracticality of a closed inquiry)
outweighed the interest of taxpayer confidentiality. I think that the approach taken by the Court in those two
cases should be maintained in the present series of cases. Each is a judicial
review proceeding removed into this Court by an order made in the High Court.
They arise because objections have been raised to the use by the Commissioner
of Inquiry of his powers {286} under the 1908 Act, ss 4C and 4D, to require the
production of documents and the giving of evidence. During the early stages of
the inquiry, when the only clear sanction was statutory provision for a fine
not exceeding $1000 on summary conviction, the commissioner lacked adequate
power to enforce his requirements. That was remedied by Parliament by the Commissions of Inquiry
Amendrnent Act 1995, which received the royal assent on 29 July 1995. The
Amendment Act introduced into the principal Act provisions, ss 13A and 13B,
empowering a commissioner who is a Judge or former Judge of the High Court to
impose sanctions, including detention in custody for periods of seven days, on
a witness who "without offering any just excuse" refuses to answer
questions or produce documents. Power is further conferred to impose imprisonment
for up to three months for contempt of the commission. By s 13C there is the
safeguard of rights of appeal to the Court of Appeal. Although the new provisions apply to future commissions as
well (see s 4 of the Amendment Act), their immediate purpose was undoubtedly to
give the Winebox commissioner the powers that he had found to be needed.
Introduced by the government, the Amendment Bill was accorded urgency,
supported on all sides of the House of Representatives, and can be taken as
representing the virtually unanimous wishes of Members of Parliament. It was
common knowledge that the inquiry centred on the Cook Islands tax haven — and
also that the difficulties encountered by Sir Ronald Davison stemmed partly
from claims that the secrecy with which Cook Islands legislation clothed the
tax haven required witnesses to refrain from helping him with information. In
my view it would subvert the intention of the New Zealand Parliament if the New
Zealand Courts were to hold that, despite the apparently strengthening Amendment
Act, the commissioner's inquiry into these tax matters could be frustrated by
invoking the doctrine of sovereign immunity, or by resort to the
"immunities" of witnesses preserved by s 6 of the Commissions of
Inquiry Act or to the provision for "any just excuse" in the new s
13A(1)(b). Any such decision would be contrary to the true intent, meaning and
spirit of the legislation, which the New Zealand Courts are enjoined to apply
by s 5(j) of the Acts Interpretation Act 1924, and could only be justified for
reasons of transparent clarity and cogency. But in truth no such reasons exist.
Tax havens are a relatively new international development.
They may serve legitimate purposes, such as attracting investment by offering
low or negligible rates of tax, opportunities to harbour profits, or freedom
from exchange and other controls. But materia1 provided for us by Mr Williams,
such as "International Tax Avoidance and Evasion: Four Related
Studies" published in 1987 by the Organisation for Economic Co-operation
and Development, shows disquiet in developed countries about the use of havens
for international tax avoidance and evasion (terms which cannot, it seems to
me, be sharply distinguished). The following passage from "The Taxation of
Controlled Foreign Corporations: An International Comparison" by Brian J
Arnold, published by the Canadian Tax Foundation (No 78) in the same year, pp
117-118, invites a rueful reflection: "Second, and undoubtedly most important, tax havens are
used to avoid, defer, or reduce tax. The ways in which tax havens can be used
to avoid tax are virtually limitless. Some of the more common uses of tax haven
corporations and trusts are discussed below. It must be emphasized that the use
of tax haven corporations and trusts in these circumstances is assumed to be
legal. In other words, the success of the tax haven operation is not dependent
on the inability of the tax authorities of the taxpayer's home country to
discover the true facts. Third, tax havens are often used to evade tax. Tax evasion
through the use of tax havens is clearly illegal and must be contrasted with
the use of tax havens for tax avoidance purposes, which is clearly legal.
Although the distinction between tax avoidance and tax evasion is a
controversial one, it is {287} sufficient for this purpose to note that tax
evasion usually involves fraud, deceit, and the concealment or nondisclosure of
the true facts. According to various US government studies, the illegal use of
tax havens by US taxpayers is increasing significantly. Most of the increase is
apparently attributable to organized crime and the illegal drug trade. As
indicated at the outset, the illegal use of tax havens is beyond the scope of
this book." Faced with a serious issue of illegality or iniquity, a
Court cannot fall back on a bland answer that this sort of thing is beyond its
scope. A large part of the very raison d'etre of a tax haven may be to enrich
the haven country at the expense of other countries. A warning seems
appropriate that older doctrines such as sovereign immunity, privilege against
self-incrimination and the like, will not necessarily be apt when dealing with
this sophisticated modern phenomenon. The public policy or interest of the
country of the forum may properly require a different approach and in my view
does so in this instance. Such a public policy-based approach is analogous to that
applied by this Court in the Spycatcher case Attorney-General for the United
Kingdom v Wellington Newspapers Ltd [1988] 1 NZLR 129, where it was held inter
alia that, although the New Zealand Courts would normally be ready to lend
their aid to enforcing duties of confidence owed to the British Government by
its employees, the public interest of New Zealand justified publication in that
particular instance. It is not a one-sided approach. As Cheshire and North 's
Private International Law (12th ed, 1992) p 117 states, "on the ground
that public policy demands the maintenance of harmonious relations with other
nations, the courts will not countenance any transaction, such as a fraudulent
tax-evasion scheme, which is knowingly designed to violate a revenue law of a
foreign and friendly State". The immediate supporting authorities cited
are Re Emery's Investment Trusts [1959] Ch 410; Pye Ltd v BG Transport Service
Ltd [1966] 2 Lloyd's Rep 300, 308-309; and Euro-Diam Ltd v Bathurst [1990] 1 QB
1, 39-40. As Kerr LJ pointed out in the passage just cited, one need not go
beyond the House of Lords case of Regazzoni v KC Sethia (1944) Ltd [1958] AC
301 for authority that, while local Courts do not enforce foreign revenue or penal laws, it
is contrary to comity and public policy to assist in their breach. There is no
reason why New Zealand law should not embrace the same principle. It is against that background and with that approach that I
turn more specifically to the particular objections raised in the instant
cases. The question of sovereign immunity At all material times until 12 August 1991 the Controller
and Auditor-General of New Zealand, in effect the Audit Office, was also,
pursuant to art 71 of the Constitution of the Cook Islands, the auditor of the
Cook Islands Government Account and the accounts of all departments and offices
of the Executive Government. For the financial years ending 31 March 1989 and
1990 and a 15-month period ending 30 June 1991, the Audit Office delegated its
Cook Islands functions to Peats. An Act of the Cook Islands Legislative
Assembly, the Cook Islands Government Property Corporation Act 1969,
constitutes that corporation, consisting of members of the Cook Islands
Cabinet, to hold Cook Islands Government property of all kinds, with the widest
powers of management, including by s 4(e) power to sell, exchange, convey,
transfer, assign, lease, dispose of, turn to account or otherwise deal with any
property vested in the corporation. By s 8 the corporation is declared to be an
instrument of the Executive Government of the Cook Islands. It is clear,
however, that the Act is abundantly wide enough to authorise the corporation to
enter into commercial dealings. The Controller and Auditor-General, supported by Peats and
by correspondence from the Prime Minister of the Cook Islands himself, seeks a
declaration that the Winebox Commission has no lawful authority to order the
{288} Audit Office or Peats to produce to the commission information or
documents that have come into their possession in the exercise of their
functions as government auditor of the Cook Islands under art 71 of the
constitution; and the quashing of certain notices and an order of the
commission. The ground relied on is that the New Zealand Courts are obliged to
ensure that there is no encroachment on the constitutional integrity of a
foreign sovereign state. It is recognised that commercial transactions of a private
law character are an exception to this principle, but the contention is that
this exception does not apply. To dispose of the two preliminary matters it should be
mentioned (i) that although the Queen in right of New Zealand is the Head of
State of the Cook Islands, the Court was invited to and does approach this
issue on the basis that the Cook Islands is a fully sovereign independent state
and that the special relationship between the Cook Islands and New Zealand does
not affect this issue; (ii) that the commissioner has come to accept that it is
impracticable to require the production of documents that are not held by the
Audit Office or Peats in New Zealand. I will assume that all the documents held
here are or may be the property of the Cook Islands Government, although in
fact some of the Peats documents may not be in that category. Sovereign immunity is of course accepted by the New Zealand
Courts. The doctrine was recently applied by this Court in Governor of Pitcairn
and Associated Islands v Sutton [1995] 1 NZLR 426. The two leading expositions
of the doctrine and the commercial exception to it evolved in recent times are
the speech of Lord Wilberforce in Playa Larga (Owners of cargo lately laden on
board) v I Congreso del Partido (Owners) I Congreso del Partido [1983] 1 AC 244
and the speech of Lord Goff of Chieveley in Kuwait Airways Corp v Iraqi Airways
Co [1995] 3 All ER 694. In the latter case at pp 704-705 Lord Goff of Chieveley
refers to the distinction between acta jure imperii and actajure gestionis and
adopts the following passages from Lord Wilberforce: "The conclusion which emerges is that in considering,
under the 'restrictive' theory, whether state immunity should be granted or
not, the court must consider the whole context in which the claim against the
state is made, with a view to deciding whether the relevant act(s) on which the
claim is based, should, in that context, be considered as fairly within an area
of activity, trading or commercial or otherwise of a private law character, in
which the state has chosen to engage or whether the relevant act(s) should be
considered as having been done outside that area and within the sphere of
governmental or sovereign activity. . . . is not just that the purpose or motive of the act is to
serve the purposes of the state, but that the act is of its own character a
governmental act, as opposed to an act which any private citizen can
perform." The facts of those two cases, however, were remote from the
present case. In particular, as noted by this Court in the European Pacific
Banking case at p 46, the Winebox documents evidence methods of business
involving dealings in promissory notes. In the Magnum transaction, for
instance, one member of the European Pacific group paid on behalf of another
member $881,582 for tax. Contemporaneously another member issued and sold to
the Cook Islands Property Corporation a promissory note (for $10,000,000 and
interest) for the consideration of $10,881,582. Contemporaneously a fourth
member of the group bought the same note from the latter corporation for
$10,050,000. The Cook Islands Government issued a tax credit for $881,582,
which was apparently utilised against New Zealand income tax. All this was
prearranged. In the result all the tax was in substance repaid but the
corporation made on behalf of the Cook Islands Government a profit of $50,000.
The arrangements were evidently not disclosed to the New Zealand Commissioner
of Inland Revenue. {289} In an affidavit sworn on 26 October 1995 Sir Ronald
Davison speaks of having evidence of a series of transactions apparently using
the same or a similar promissory note structure and called the Japanese
Investment Fund (or JIF) transactions, and of a payment to the Cook Islands
Government Public Account in Wellington in connection with one of those
transactions. He also refers to evidence that European Pacific, Euro-National
and the Cook Islands Government may have negotiated an agreement whereby the
two groups or members thereof may have obtained exclusive rights from the Cook
Islands Government to utilise tax credit arrangements. Such arrangements would
enable the companies to attract investments from clients. The affidavit
mentions figures of profits apparently obtained by New Zealand companies from
such transactions, and an attempt by European Pacific to dissuade the Cook
Islands Government from a bond issue on the perhaps cynical ground that it
would be seen as a fraud on the Australian tax revenue. Seen in isolation, the issuing of a tax credit is an act
which could only be performed by a state. At least on the surface, it would by
itself attract sovereign immunity. But the affidavit of the Commissioner of
Inquiry and the evidence already before him show prima facie that the Cook
Islands Government Property Corporation, in the buying and selling of
promissory notes, was integrally involved in the tax credit transactions.
Dealing in promissory notes is an activity which any private citizen can
perform. As a whole the transactions may be called the sale of tax credits,
but, if that description is too loose, it is at least clear that there is
apparently strong evidence of ostensibly commercial sale-and-purchase contracts
as a key component of the arrangements. I Congreso and Kuwait Airways and the
other authorities cited to us do not deal with mixed-up transactions of this
kind. I have no doubt that the Winebox papers and the other evidence already
received by the commissioner provide substantial evidence that the Cook Islands
Government and its instrumentalities were engaged to a major extent in such
mixed-up activities. Clearly they fall within the commission's terms of
reference. Their commercial aspect is so significant that one can have no doubt
that the doctrine of sovereign immunity must be excluded in relation to the
whole inquiry. A government which descends to this extent into the market place
cannot fairly expect total immunity. Its auditors and financial advisers can be
in no better position. It may be that in ordinary Court proceedings in New Zealand
there would be, apart from the doctrine of sovereign immunity, a judicial
discretion to allow a witness to refuse to answer a particular question because
of its tendency to undermine the legislation of a friendly foreign government.
On balance in all the circumstances of a particular case a Judge might be able
to find that the witness had sufficient cause for refusing. The refusal might
not be "without offering just excuse" within the meaning of s 352(1)
of the Crimes Act 1961: compare R v B (Rulings no 2 and no 3) (High Court,
Dunedin, T 16/91, 18 and 19 February 1992, Williamson J). That case related to
the very different subject of sexual abuse, but in the second of these
characteristically perceptive rulings Williamson J accepted that "just"
encompasses "what is right, what is fitting, what is fair, what is well
founded". There is also a statutory discretion under s 35 of the Evidence
Amendment Act (No 2) 1980 to excuse a witness from answering questions or
producing documents, on the ground of breach of confidence: see R v Howse
[1983] NZLR 246, 251. Moreover, in this country we tend to accord to trial
Judges a degree of control over the evidence that they will receive or require
wider than has been seen to be appropriate in some English cases. But it is
unnecessary to diverge into those areas. Certainly, I think, the Commissioner
of Inquiry could, in his discretion, accept a refusal as offered with
"just excuse", within the meaning of the new s 13A(1)(b). But it is
manifest that the commissioner is not minded in that direction, and in my
opinion rightly so. One of his main functions under the Order in Council is to
conduct a thorough investigation of a possible undermining of New Zealand's tax
base. He cannot be bound to exercise his discretion in a way which would tend
to frustrate the inquiry with which he is charged. {290} Having had the advantage of reading in draft the
judgment of Richardson J, with much of which (particularly the concluding part)
I am in sympathy, I add some brief comments on what my brother calls the
iniquity factor. In the present era of civilisation and international law I
should think that a Court would be going too far if it were to allow a general
exception of iniquity to the doctrine of sovereign immunity. The invasion of
Kuwait was treated as iniquitous by the United Nations and no doubt was so
regarded by many countries, yet in the Kuwait Airways case the House of Lords
held unanimously that the seizure of Kuwait civil aircraft was protected by
sovereign immunity. On the other hand, as noted in the American Law Institute's
Restatement of The Law The Foreign Relations Law of the United States (1987),
vol 1, s 461c, "In principle, a foreign state is responsible for
violations of domestic law by terrorist acts committed by its agents". The
assassination case of Letelier v Republic of Chile 488 F Supp 665 (DDC, 1980)
is one of the supporting authorities cited. One can speculate that the law may gradually but steadily
develop, perhaps first excepting from sovereign immunity atrocities or the use
of weapons of mass destruction, perhaps ultimately going on to except acts of
war not authorised by the United Nations. But this is peer optimistically into
the future far beyond the bounds of anything falling to be decided in the present
judicial review proceedings. The maxim festina lente is in point, and while
founding on public interest I prefer to confine the reasoning in this judgment
to issues of tax avoidance or evasion under investigation by a national
commission of inquiry. The question of incrimination of witnesses The plaintiffs in the second judicial review proceeding now
before the Court are the New Zealand chartered accountancy partnership Peats
and three members of the firm who practise in New Zealand but from time to time
work elsewhere, as in the Cook Islands. The plaintiffs in the third judicial
review proceeding are four former employees of the European Pacific group of
companies. The group was or is based in the Cook Islands. The plaintiff Barry
has continued to do contract work for the group, taking him to the Cook Islands
from time to time. The plaintiffs Brannigan and McCullagh practise as chartered
accountants in a New Zealand partnership. The practice of their partnership
includes considerable Cook Islands work, necessitating frequent visits there.
They have now become auditors to the Cook Islands Government. The plaintiff
Lilly is currently employed by another group of companies and does not have a
continuing business connection with the Cook Islands. All the plaintiffs are
citizens and residents of New Zealand. They object to answering questions or
supplying documents as required by the Commissioner of Inquiry, on the ground
that this would tend to expose them to criminal proceedings in the Cook
Islands. In one respect, while not at all doubting his ultimate
conclusion, I very much doubt an opinion expressed by the Commissioner of
Inquiry in the course of a comprehensive ruling by him on 27 September 1995.
Contrary to his view, the relevant Cook Islands legislation designed to ensure
the secrecy of the tax haven appears to me to be almost certainly intended to
have extraterritorial operation. Under s 227(3) of the International Companies
Act 1981-1982, any person or entity who, with respect to an international
company or a foreign company registered under the Act and whether in the Cook
Islands or elsewhere, divulges information etc is guilty of an offence. There
are enacted exceptions, including one relating to transactions in prohibited
narcotic substances, but, despite some inelegance in the wording of s 227(8),
the tenor and terminology of the section as a whole point to an intention to
exclude the presumption against extraterritoriality. I will assume that the
true interpretation of the section is that it does have extraterritorial
effect. Similarly, certain injunctions obtained by European Pacific
in the High Court of the Cook Islands may be assumed to have been intended to
have extraterritorial {291} effect so far as that is within the competence of
the Cook Islands Court. The injunctions, an interim one on 3 May 1995 and a
permanent one on 29 August 1995, were against KPMG Peat Marwick, sued as a
company registered in the Cook Islands, and three individual partners or
employees of the company, two of whom are also plaintiffs in the second
judicial review proceeding now before this Court. KPMG Peat Marwick had
performed accountancy and auditing functions for European Pacific as well as
for the government; it seems evident that this international firm, with local
branches or personifications, must have considerable knowledge relating to
Winebox transactions. The injunctions were based on s 227 of the International
Companies Act and are couched in wide terms enjoining disclosures contrary to
Cook Islands law. It should be accepted that Sir Peter Quilliam, Chief Justice
of the Cook Islands, intended them to have the widest reach consistent with the
law of that country. In his judgment of 29 August 1995 he emphasised that the
duty of his Court is "to interpret and apply the law of the Cook Islands
and not to consider whether that law is somehow to be regarded as subordinate
to the laws of New Zealand or of any other country". That approach by
Quilliam CJ, recognising his primary loyalty as Chief Justice to Cook Islands
law, is entirely understandable. It cannot of course determine the effect of
his injunction in New Zealand. It is to be noted, moreover, that Quilliam CJ himself in his
judgment hinted, without going any way towards deciding, that in the event of
prosecution in the Cook Islands of defendants resident in New Zealand, the
defence of foreign state compulsion is likely to be available. I, too, accept
that likelihood. So did Sir Ronald Davison in his ruling, applying the rules
set out in the American Restatement volume already cited, s 441. The same
defence of foreign state compulsion seems likely to be available to proceedings
in the Cook Islands to enforce the injunction. The spectre of extradition was raised before us, albeit
without detailed argument. If any attempt were made to extradite New Zealand
citizens and residents to the Cook Islands to face charges there, arising from
evidence given by them under compulsion in New Zealand to the Commission of
Inquiry, this Court would he most unlikely to countenance it. Assuming that all
the statutory conditions of extradition are satisfied, there may remain in
exceptional cases a residual jurisdiction to grant relief on the ground of
abuse of process: Re Rees [1986] AC 937, 962, per Lord Mackay of Clashfern;
Wiest v Director of Public Prosecutions (1988) 86 ALR 464, 469, per Burchett J
Re Schmidt [1995] [1] AC 339 is not necessarily to the contrary. The House of Lords
in that case were not called upon to consider any question of an overriding
United Kingdom public interest. The New Zealand public interest which I have
been stressing could justify the exercise of such jurisdiction. However that
may be, there is a shorter answer to this point. Sections 340 to 347 of the
Cook Islands Act 1915 of the New Zealand Parliament, as amended, provide a
simplified procedure for extradition from New Zealand to the Cook Islands.
Section 343 is important: 343. Refusal of order in case of hardship — A Magistrate
may refuse to make any such order if, having regard to the nature of the charge
made against such person or to the circumstances of the case, the Magistrate is
of opinion that the return of such person to the Cook Islands would be the
cause of undue hardship or would otherwise be unjustifiable or inexpedient. The statutory discretion conferred by the phrases "the
circumstances of the case", "undue hardship" and "otherwise
. . . unjustifiable or inexpedient" is very wide (compare Re H (A
Prisoner) [1971] NZLR 982 and the authorities there collected). In the
circumstances of evidence under New Zealand compulsion a District Court Judge
would act properly in refusing an order. But the foregoing considerations do not altogether eliminate
the concern expressed by the plaintiffs in the second and third judicial review
proceedings {292} now before us. For a practical risk of prosecution, even if
not necessarily conviction, may still remain. Possibly the course of events may
be governed for a time more by political attitudes than by the principles of
private international law. A point to be borne in mind is that the plaintiffs are not
claiming that the testimony or documents required from them by the Commissioner
of Inquiry will disclose past breaches by them of Cook Islands law. Rather,
their claim is that by answering questions or providing documents they will
place or tend to place themselves at risk under Cook Islands law. Therefore the
question becomes whether that risk provides ground under the Commissions of
Inquiry Act of the New Zealand Parliament by reason of which the commission is
bound to allow them to refuse disclosure. Again I think, as did Sir Ronald Davison, that New Zealand
public policy demands a negative answer to that question. Arguably it might be
otherwise if there were a settled rule that the ordinary privilege of a witness
in Court proceedings against self-incrimination extended to conduct made
criminal by foreign law. But there is no such settled rule, as noted by Lord
Diplock in Rio Tinto Zinc Corporation v Westinghouse Electric Corporation
[1978] AC 547, 636. The subject is discussed and authorities reviewed by
Zelling Al in FF Seeley Nominees Pty Ltd v El Ar Initiations (UK) Ltd (1990) 96
ALR 468, 471-473, where it is pointed out inter alia that the powerful opinion
of Wigmore (8 Wigmore, Evidence (McNaughton Revision, 1961), s 2258) is
categorically against such an extension of the privilege. There is no need to
rake over the ground again. The judgment of Lord Chelmsford LC, sitting alone,
in United States of America v McRae (1867) LR Ch App 79 is to the contrary, but
in the light of other English cases is uniformly treated in the textbooks as
not having settled the law of England. To treat it now as settling the law of
New Zealand would be a good deal less than obligatory, especially after Lord Diplock's
observations. The South Australian Judge in Seeley doubted very much whether
the privilege does exist in relation to incrimination under foreign law. I
respectfully share that doubt, and to such an extent that I think the time has
come to settle the point for New Zealand law by holding unequivocally that the
privilege or immunity does not extend so far. That would mean that the privileges and immunities imported
by s 6 of the Commissions of Inquiry Act 1908 may be put on one side. But the
provisions of s 9(1) as to "without sufficient cause" and of s
13A(1)(b) as to "without offering any just excuse", apply and give
the commission a discretion to be exercised in the light of all the
circumstances. I agree with Kirby P who in Ganin v New South Wales Crime
Commission (1993) 32 NSWLR 423, 439, speaking of the similar statutory
expression "without reasonable excuse" said that it was undesirable
that different formulae be substituted for that which Parliament has enacted. I
would also take the approach stated by the President in the same judgment at pp
439-440: ". . . the Commission, as a body constituted to perform
investigatory functions, is likely to have more knowledge of the reasonableness
or otherwise of the appellants' now submitted excuses than this Court could
muster from its own experience. Where parliament establishes a specialised
body, such as the Commission, it is appropriate for this Court to accord great
weight to the decision of the Commission, given the knowledge and experience
available to it". On that approach, questions such as the likely ambit of the
knowledge of witnesses, the degree of help likely to be obtained from their
evidence, and the possibility of reasonably obtaining the required information
from other sources, are best left to the assessment of the Commissioner of
Inquiry. He has made it plain that the evidence which he is seeking from the
plaintiffs may be important to him. He is in a much better position than the
Court to make that judgment. Perhaps the commissioner went a little too far at one point
in his ruling of {293} 27 September 1995 in describing the provisions of the
Cook Islands legislation relating to secrecy as "completely
irrelevant". But later in the ruling he expressed the belief that "the
justification for compelling the witnesses to give evidence in New Zealand is
so strong that no balancing of considerations under the foreign state
compulsion principle could possibly lead to the witnesses being allowed to
refuse to give evidence". As I see it, in all the circumstances of this
inquiry that conclusion is unassailable. It is a conclusion well supported by prior authority. A few
examples will be enough. Probably the closest of all the cases cited to us is
Spencer v The Queen [[1985 2 S.C.R. 278,] [1985] 2 CTC 310, where the Supreme Court of Canada
disposed briefly of a contention that the appellant, a resident and citizen of
Canada who had been the manager of a Canadian bank in the Bahamas, could not be
compelled to testify for the Crown in a prosecution under the Income Tax Act
RSC 1952 against a client of the bank. The appellant contended that to do so
would make him liable to prosecution under a Bahamian statute, but in the
course of delivering the principal judgment, concurred in by seven other
Judges, La Forest J said at p 311: "To allow Mr Spencer to refuse to give evidence in the
circumstances of this case would permit a foreign country to frustrate the
administration of justice in this country in respect of a Canadian citizen in
relation to what is essentially a domestic situation. Indeed such an approach
could have serious repercussions in the operation of Canadian law
generally." La Forest J treated it as immaterial to consider whether or
not the Bahamian statute had extraterritorial effect. The Canadian public
interest was seen as the overriding factor. In argument before us an attempt
was made to distinguish that case on the ground that the principal judgment
mentioned that only if the appellant decided to go to the Bahamas would he be
in jeopardy of prosecution. The point made to us by counsel was that a number
of the plaintiffs carry on professional or business activities in the Cook
Islands. The short answer must be, however, that if a New Zealand citizen and
resident elects to carry on practice or business partly abroad, he cannot
thereby emancipate himself from his obligations under New Zealand law. Any
dilemma stems ultimately from his own choice, and he must live with the
consequences. Of the American cases cited to us, I think the most
instructive are United States v Frank 494 F 2d 145 ([2d Cir.] 1974) and United States v
First National Bank of Chicago 699 F 2d 341 ([7th Cir.] 1983). The former, a decision of
the United States Court of Appeals, Second Circuit, includes the following
passage at pp 156-157: ". . . no principle of accommodation requires the
United States to seal the lips of American citizens testifying to facts within their
knowledge concerning activities of other Americans in a foreign country as part
of a scheme to violate American criminal law, simply because that country
chooses to throw a veil of secrecy around bank accounts except insofar as their
courts may see fit to lift it." The First National Bank of Chicago case, before the Seventh
Circuit, contains a useful exposition of the balancing-of-competing-interests
approach to claims that the production of evidence to a domestic Court should
not be ordered because it may expose the person to criminal sanctions in a
foreign country. It is said that where two states have jurisdiction each is
required by international law to consider, in good faith, moderating the
exercise of its enforcement jurisdiction, in the light of a list of factors derived
from the Restatement These are cited by the commissioner in his ruling, as are
most of the cases which I have cited. In the Chicago case it was held that a
District Court had committed an abuse of discretion in making an unqualified
order for production, particularly without indicating the rationale of the
decision. The case was remitted to the District Court for further consideration.
{294} But it is significant that in that case the critical act of initially
conveying the information would take place in Greece, and it was highly
probable that persons of Greek nationality would make the disclosure. Those
acting in Greece would be exposed to criminal liability there (see p 345 of the
report). That situation differs from the circumstances of the present
case. Whatever the initial intention, the Commissioner of Inquiry is not now
seeking to compel any action in the Cook Islands. And I repeat my view that, in
the circumstances of the New Zealand inquiry, the commissioner was entitled to
find that no balancing of considerations could possibly justify allowing the
witnesses to refuse to give the evidence that he is seeking. McKay J has drawn attention to Murphy v Waterfront
Commission of New York Harbor 378 US 52; 12 L Ed 2d 678 (1964), a case
concerning the United States federal system and for that reason of limited
relevance. I do not see it as of assistance on the main point before us. The
majority and the minority Justices differed in their opinions as to whether
McRae (cit sup) had settled the law of England. If not, as has been thought in
England itself, nothing said in the Supreme Court of the United States can
settle that law. But I do think that Murphy is helpful on a secondary point.
There appears to have been unanimity in the result that, while a state granting
local immunity may compel testimony incriminating a witness under federal law,
the federal government may not use such testimony or its fruits in a federal
criminal proceeding: the state cannot grant federal immunity, but the federal
Courts as a matter of public policy decline to allow the compelled evidence to
be used before them. This gives some further support to the view that testimony
compelled in New Zealand cannot be used in a Cook Islands prosecution. The plaintiffs complain of difficulty in identifying in
advance, amongst a mass of papers and information, that which the commissioner
wants. I understood Mr Carruthers to indicate that a list of topics would be
provided, but I am not disposed to favour any order by this Court which would
circumscribe the commissioner in his procedure, either as to advance notice of
questions or as to their limitation to information not otherwise obtainable.
The plaintiffs are experienced professional and business persons, surely well
able by now to appreciate the kinds of information likely to be of interest to
the commissioner. For these reasons I would simply dismiss all three
applications for review. As to each application the plaintiffs should be
ordered to pay the defendant commissioner costs in the sum of $10,000, with
disbursements, including the reasonable travelling and accommodation expenses
of two counsel, to be settled by the Registrar of this Court. Before parting with the cases I would add something. It is
inspired by nothing personal, as I shall no longer be a member of this Court if
and when unfortunately any further Winebox cases are brought and reach here.
But I hope that the Court has seen the last of these cases. As already
mentioned, there has been a sequence of them, the first before and the rest
after the constitution of the commission. The difficulties with which the
commissioner was presented came to be such that the unusual step of legislation
extending his powers during the course of his inquiry was found necessary by
Parliament. It can be said that the present judicial review proceedings,
although unsuccessful, were justified on the ground that clarification was
required. But, after all, Sir Ronald Davison is a former Chief Justice of New
Zealand and hardly likely to act in any unfair, unlawful or hasty way. May he
now be permitted to continue his inquiry with full cooperation. The Court being unanimous as to the result of the first two
proceedings (those brought by the Controller and Auditor-General and Peats and
three other persons), they are dismissed with costs as already mentioned. The
third proceeding (brought by Brannigan and others) is likewise dismissed with
the same costs, this being a majority decision by four of the five members of
the Court. {295} JUDGMENTBY-2: RICHARDSON J JUDGMENT-2: RICHARDSON J: The central question which I see in this case
is whether New Zealand law may deny sovereign immunity status to documents held
by the Audit Office in New Zealand as auditor of the Cook Islands accounts
under the Constitution of the Cook Islands on the ground that the Cook Islands
Government was arguably party to transactions designed to abuse the tax system
of New Zealand. Background to proceedings On 12 September 1994 Sir Ronald Davison was appointed
pursuant to the Commissions of Inquiry Act 1908 to be a commission to inquire
into and report on: (a) "Whether the Commissioner of Inland Revenue and his
staff and the Director of the Serious Fraud Office and his staff acted, in the
course of their official duties, in a lawful, proper and competent manner in
dealing with the transactions referred to in the papers presented, by leave, to
the House of Representatives by the Member for Tauranga, The Honourable Winston
Peters, on 16 March 1994 (A6, Volumes 1 to 3):" (Emphasis added.) (b) "Whether, having regard to the kinds of
transactions referred to in the papers so presented, any changes to the
criminal law or tax law should, in your opinion, be made for the purpose of
protecting New Zealand's income tax base from the effects of fraud, evasion,
and avoidance and if so, what: . . ." The papers were presented to the House of Representatives in
a winebox and the inquiry has come to be known as the Winebox Inquiry. Some 60
sets of transactions have been identified. They have been narrowed down into
various categories. What has been described as the Magnum transaction followed
a structure proposed to the Cook Islands Government by the European Pacific
group of companies. The commission is aware of at least five other transactions
which followed a similar structure. The Magnum transaction was summarised by
the commission in a letter to the Prime Minister of the Cook Islands on 30 May
1995 in this way: "This transaction involves a series of steps in a
number of jurisdictions. It is unnecessary to explain all those steps. The
important acts occurring in the Cook Islands concern two payments of interest,
one occurring on 27 July 1988, and the other on 28 July 1989. The relevant steps occurring in the Cook Islands on 27 July
1988 begin by the payment of interest by one European Pacific company to
another, in respect to which it is said that Cook Islands withholding tax was
payable at the rate of 35% — being a sum of $881,582. Deloittes confirm that
such an amount was paid into account number 70CIGPA at the European Pacific
Banking Corporation ('EPBC'), and a receipt issued. On the same day the Cook Islands Government Property
Corporation ('CIGPC') purchased a promissory note from a member of the European
Pacific group for $10,881,582, and sold it to another member of the group for
$10,080,000 — a loss of $831,582. $831,582 was then transferred from 70CIGPA
to 70CIGPC (the account of CIGPC) at EPBC. The nature of this payment is
unclear. One European Pacific document describes it as an {296} 'advance', but
the money was not repaid. The economic effect of these transactions is to pay
back all but $50,000 of the amount of withholding tax paid. On 28 July 1989, the same steps are followed for the second
payment of interest, except that the full amount of withholding tax is repaid
— being $1,169,609. Both the receipts or certificates evidencing the payment of
withholding tax were presented in New Zealand by a member of the European
Pacific group. This led to a reduction in the tax to be paid by that company in
New Zealand of $2,051, 191. Accordingly, at the end of these transactions,
European Pacific are better off by $2,001,191, the Cook Islands Government is
better off by $50,000 and the New Zealand Government is worse off by
$2,051,191." The prior knowledge by the Cook Islands Government of the
intended substance of the arrangements may be inferred from an earlier letter
from European Pacific to the Prime Minister of the Cook Islands of 14 October
1987. It began by noting that, as the Prime Minister was aware, European
Pacific Banking Corporation and Euro-National Corporation Ltd had developed
financial arrangements to utilise foreign tax credits from transactions to be
undertaken in the Cook Islands and proposed that the government not allow any
other operator to utilise a foreign tax credit arrangement without first obtaining their
approval. It described the financial arrangements in this way: "A financial arrangement involving foreign tax credits includes an understanding
or arrangement whereby a taxing authority derives a tax levied in the Cook
Islands and that authority, or the Government or an associated instrumentality,
entity or person remits that benefit or substantially a similar benefit for the
purpose of or in order to facilitate the giving effect to of, the financial
arrangement. . . . The exclusive nature of the agreement between Government and
EPBC and ENC would result in significant benefits in the orderly marketing of foreign
tax credit
arrangements associated with the Cook Islands in a proper manner, by skilled
financial operators." To put it bluntly, as discussed in the explanatory letter
and as implemented in transactions including the Magnum transaction, it appears
that the Cook Islands Government was, in effect, selling tax credit
certificates for a fee which was only a fraction of the amount shown as
withholding tax in the certificates issued. That was because of the associated
cash benefits derived by an associated company in the client group dealing with
the Cook Islands Government. Not surprisingly, the commission has been trying to gain a
comprehensive understanding of this and other transactions channelled through
or occurring in the Cook Islands affecting the tax revenues of other countries,
particularly New Zealand. The commission sought directly and through the
assistance of the New Zealand Government to obtain information and support from
the Cook Islands Government. That was rejected. The Cook Islands Government
asserted that the principles of sovereign immunity precluded any questioning of
Cook Islands Government actions in this regard by the commission. The commission also sought relevant information from the
Audit Office. When the Cook Islands became an independent state under the
constitutional arrangements contained in the Cook Islands Constitution Act 1964
(which although a New Zealand statute applies to the Cook Islands only and not
to New Zealand (s 2)), art 71 of the constitution, expressed to be the supreme
law of the Cook Islands, provided for the audit of Cook Islands accounts in the
following terms: 71. Audit — (1) The Audit Office of New Zealand shall he
the auditor of the Cook Islands Government Account and of all other public
funds or accounts, {297} and of the accounts of all Departments and offices of
executive government and of such other public, statutory, or local authorities
or bodies as may be provided by law. (2) The Audit Office shall, at least once annually, forward
to the Speaker of the Legislative Assembly for presentation to the Assembly a
report containing such information as is required to be submitted by any
enactment, together with such other information relating to the Cook Islands
Government Account or other funds or accounts which under this Constitution or
under any other enactment are required to be audited by the Audit Office as
that Office considers desirable. By constitutional amendment (Constitution Amendment (No 14)
Act 1991 of the Cook Islands, s 4(1)) the "Audit Office of the Cook
Islands" was substituted for the New Zealand Audit Office in art 71(1).
However, for most of the years with which the commission is concerned the New
Zealand Audit Office was the constitutional auditor of the Cook Islands
accounts. Section 12 of the Public Revenues Act 1953 (NZ) had
established the office of Controller and Auditor-General appointable by the
Governor-General in the name and on behalf of Her Majesty and removable only
upon an address to the Governor-General from the House of Representatives.
Under s 2 "Audit Office" meant the Controller and Auditor-General and
the statute provided appropriate powers and machinery for the exercise of the
audit functions. Section 14, on which the commission relied in the course of
the present argument, provided that the Controller and Auditor-General should
not be capable of being a member of the Executive Council or of Parliament or
of holding any office of trust or profit in the public or any other service
than his office created by the 1953 Act. The Deputy Controller and Auditor-General has deposed that
the Audit Office provides assurance to Parliament that statements of
accountability rendered by the executive are a valid representation of the
results of the activities of the executive. That assurance is provided by
auditing those statements of account and reporting the results of audits to
Parliament. His evidence was that the Audit Office's role as auditor of the
Government Accounts of the Cook Islands was undertaken pursuant to specific
provisions in the Constitution of the Cook Islands; the Audit Office reported
directly to the Parliament of the Cook Islands when auditing the Government
Accounts of the Cook Islands; and the Government of the Cook Islands was
invoiced directly for those audits by the Audit Office. His understanding was
that the functions the Audit Office was required to carry out with respect to
the Cook Islands Government were the same as those required of it in New
Zealand in respect of the operations of the New Zealand Government. The documents presently held by the Audit Office are (i)
documents (mainly letters, memoranda, etc) created by the Audit Office; (ii) documents
(letters, memoranda, minutes, etc) created by the Government of the Cook
Islands; and (iii) documents created by third parties. The pleading of the
Audit Office is that all such documents are the property of the Cook Islands or
are held by the Audit Office by or on behalf of the Cook Islands and subject to
the direction of the executive authority of the Cook Islands in accordance with
the constitution. The commission believes that the documents so held by the
Audit Office are likely to include documents in all three categories relating
to Winebox transactions. Purporting to act pursuant to s 4C of the Commissions
of Inquiry Act 1908, the commission issued notices to the Audit Office and its
delegate KPMG Peat Marwick on 10 May 1995 and 26 April 1995 respectively
seeking production of certain documents. By order dated 8 September 1995 it
directed the Audit Office to produce to the commission for its inspection all
documents in the possession or power of the Audit Office within the terms of
the notice of 10 May 1995 so that the commission might determine the validity
of the objection made by the Audit Office to the production of the specified
documents. {298} The proceedings Faced with a perceived conflict between his continuing
responsibilities to the Cook Islands in respect of the performance of his
constitutional function during the period when the Audit Office was the
constitutional auditor of the Cook Islands, and compliance with any lawful
orders of the commission, the Controller and Auditor-General instituted
proceedings for judicial review. They were subsequently removed into this
Court. The amended statement of claim seeks a declaration that the
commission has no lawful authority to require or to order the Audit Office or
KPMG Peat Marwick to produce to the commission information or documents that
have come into the possession or control of the Audit Office or of KPMG Peat
Marwick in the course of the exercise of their functions as Government Auditor
of the Cook Islands under art 71 of the constitution; and an order quashing or
setting aside the commission's notices of 26 April 1995 and 10 May 1995 and
order of 8 September 1995. The pleading avers that: "17.1 In accordance with the principles of
international law both the New Zealand Government including Commissions of
Inquiry appointed under the Commissions of Inquiry Act 1908 and the New Zealand
courts are obliged to ensure that there is no encroachment on the
constitutional integrity of a foreign sovereign state. 17.2 As an exception to that principle, a foreign sovereign
state is not entitled to immunity from the exercise of jurisdiction either by
the Executive Government of New Zealand or by the Courts of New Zealand in
respect of commercial transactions of a private law character. 17.3 That the documents and information sought by the
Commission from the Audit Office and of KPMG Peat Marwick in the exercise of
their said functions are the property of the Cook Islands and held by the Audit
Office and by KPMG Peat Marwick by or on behalf of the Cook Islands and subject
to the direction of the executive authority of the Cook Islands in accordance
with the Constitution and as such are immune, in accordance with the principles
of International Law, from interference by any other state or by the courts and
instrumentalities of any other state. 18 That the exercise by the Audit Office or by KPMG Peat
Marwick of the functions of Government Auditor under Article 71 of the
Constitution lay within the sphere of the governmental or sovereign activity of
the Cook Islands and, contrary to the view of the Commission, did not
constitute an act of commerce or a commercial transaction or a commercial
activity of a private law character." By its amended statement of defence the commission avers
that: "(a) in conducting the audit of the Cook Islands Public
Accounts, the Audit Office was acting pursuant to duties imposed on him by New
Zealand law and was not acting as part of or at the direction of the Executive
Government of the Cook Islands Government; (b) such documents are not held on behalf of or at the
direction of the Cook Islands Government; and (c) such documents include documents concerning the
commercial activities of the Cook Islands Government." The primary arguments presented to the Court The arguments for the Audit Office and the commission
proceeded largely down different paths. The primary focus of Mr Barton's
submission for the Audit Office was on the functions of the Government Auditor
under art 71 of the constitution: whether they were within the sphere of the
governmental or sovereign activity of the Cook Islands and thus not an act of
commerce or a commercial {299} activity of a private law character. Mr
Chambers' submissions for the commission were, in essence, first that the Audit
Office was not an organ of the Cook Islands Government; and, second, that it is
the character of the acts evidenced by the documents sought to be inspected
which is relevant and not the character of the act of auditing, and the
documents concern the commercial activities of the Cook Islands Government. It
is convenient to take up Mr Chambers' arguments first, then Mr Barton's, before
turning finally to consider the public policy or iniquity argument which was
canvassed but not fully explored before us. The status of the Audit Office Mr Chambers submitted that the Controller and
Auditor-General is an officer created by New Zealand law answerable to the New
Zealand Parliament only and that the continued role of the Audit Office after
the 1964 Act came into force was part of New Zealand's continuing involvement
in Cook Islands affairs reflecting the special relationship of associated
statehood and New Zealand's financial support of the Cook Islands. In that
regard he submitted that s 14 of the Public Revenues Act 1953 precluded the
Audit Office from holding any independent office. With respect, this is a
hopeless submission. It is not necessary to explore the elements of statehood in
international law and, in particular, the implications of New Zealand
representation of Cook Islands in foreign relations. This is because of the
clear stance taken by New Zealand in this regard. It is well settled that,
where the Crown recognises a foreign entity as sovereign, the Courts are bound
to follow and no other evidence is admissible or needed (Duff Development Co
Ltd v Government of Kelantan [1924] AC 797). Mr Chambers accepts, as has the
commission throughout, that New Zealand recognises the Cook Islands as a
sovereign state. That is reflected in the terms of the letters exchanged
between the Prime Minister of New Zealand of 4 May 1973 and the Premier of the
Cook Islands of 9 May 1973 tabled in both Houses of Parliament, which are part
of the record in the case. They record that there are no legal fetters of any
kind upon the freedom of the Cook Islands which make their own laws and control
their own constitution. And in his judgment of 29 August 1995 in European
Pacific Group Ltd v KPMG Peat Marwick the Chief Justice of the Cook Islands
recorded that the Cook Islands has international capacity, and the authority of
the common Head of State (Her Majesty the Queen in Right of New Zealand) in
external affairs and defence is, by convention, exercised on the advice of the
Cook Islands Ministers — as, indeed, was provided for in s 5 of the Cook
Islands Constitution Act 1964 (NZ). Accordingly, the Cook Islands is entitled
to jurisdictional immunity in these matters in respect of any conduct on its
part which properly falls within the protection afforded the exercise of
sovereign authority. Up to 1964, while the Cook Islands were part of New Zealand,
the Audit Office acted purely in its New Zealand capacity, reporting to the New
Zealand Parliament. From 1964 it exercised two separate responsibilities — one
as auditor of the New Zealand accounts responsible to the Parliament of New
Zealand; the other as auditor of the Cook Islands under art 71 of the
constitution responsible to the Parliament of the Cook Islands. That latter
responsibility was provided for in the Cook Islands Constitution Act 1964. It
was a New Zealand statute but the obligations of the Audit Office then arose
under art 71 of the constitution which was part of the supreme law of the Cook
Islands. Not surprisingly, the Audit Office recognised those separate functions
in undertaking its role as auditor pursuant to art 71, reporting directly to
the Parliament of the Cook Islands (and not in that regard to the New Zealand
Parliament or any member of the executive in New Zealand) and billing the
Government of the Cook Islands for its audit services. Further, and referring to the second point, the documents it
received or generated in its capacity as constitutional auditor of the Cook
Islands were held by it in that capacity. Sovereign immunity extends to property
in the hands of a bailee {300} for a foreign sovereign (United States of
America and Republic of France v Dollfus Mieg et Cie SA and Bank of England
[1952] AC 582) and the unchallenged evidence from the Audit Office is that all
documents which it holds in respect of its art 71 responsibilities were
acquired solely in that role. Selling tax certificates a commercial activity? Assuming for present purposes that there is an arguable case
that the Cook Islands Government engaged in selling tax certificates in the
manner earlier described, are the transactions involved within the exclusion
from sovereign immunity of commercial activities of states? Public policy justifications for allowing a degree of
immunity for foreign states and their agencies from the jurisdiction of
domestic Courts derive from general principles of territorial sovereignty, the
equality and independence of states, notions of comity and reciprocity and an
assessment of the risk to foreign relations of excessive claims to jurisdiction.
Although these considerations support the acceptance of restrictions on
absolute immunity, they do not yield an obvious test for distinguishing
categories of immunity and non-immunity. The common law and international law
generally have tended to distinguish between commercial and governmental
transactions but the well-known difficulties of determining employment cases
within that rubric (see Governor of Pitcairn and Associated Islands v Sutton
[1995] 1 NZLR 426) suggest that the matter is of considerable complexity and,
as noted in that case (p 433), international law has not yet developed a
universally accepted set of principles governing the whole spectrum of
governmental activity abroad. Many states, including the common law countries Australia,
Canada, United Kingdom, and the United States, but not New Zealand, have
provided a statutory framework for dealing with sovereign immunity claims. The
leading statement of the common law exclusion of commercial activities of
states from the protection of sovereign immunity is in the speech of Lord
Wilberforce in Playa Larga (Owners of cargo lately laden on board) v I Congreso
del Partido (Owners) I Congreso del Partido [1983] 1 AC 244, 262, endorsed by
the House of Lords in Kuwait Airways Corp v Iraqi Airways Co [1995] 1 WLR 1147:
"The relevant exception, or limitation, which has been
engrafted upon the principle of immunity of states, under the so called
'restrictive theory,' arises from the willingness of states to enter into
commercial, or other private law, transactions with individuals. It appears to
have two main foundations: (a) It is necessary in the interest of justice to
individuals having such transactions with states to allow them to bring such
transactions before the courts. (b) To require a state to answer a claim based
upon such transactions does not involve a challenge to or inquiry into any act
of sovereignty or governmental act of that state. It is, in accepted phrases,
neither a threat to a dignity of that state, nor any interference with its
sovereign functions. When therefore a claim is brought against a state (I include
in this expression, and shall not repeat, direct and indirect claims — cf
United States of America and Republic of France v Dollfus Mieg et Cie SA and
Bank of England [1952] AC 582) and state immunity is claimed, it is necessary
to consider what is the relevant act which forms the basis of the claim: is
this, under the old terminology, an act 'jure gestionis' or is it an act 'jure
imperii': is it (to adopt the translation of these catchwords used in the 'Tate
letter') a 'private act' or is it a 'sovereign or public act,' a private act
meaning in this context an act of a private law character such as a private
citizen might have entered into?" Lord Wilberforce went on to observe (p 264) that the
activities of states cannot always be compartmentalised into trading or
governmental activities and a state may have clearly displayed both a
commercial interest and a sovereign or {301} governmental interest. To which is
the critical action to be attributed? His conclusion (p 267) was that: ". . . the court must consider the whole context in
which the claim against the state is made, with a view to deciding whether the
relevant act(s) upon which the claim is based, should, in that context, be
considered as fairly within an area of activity, trading or commercial, or
otherwise of a private law character, in which the state has chosen to engage,
or whether the relevant act(s) should be considered as having been done outside
that area, and within the sphere of governmental or sovereign activity." However, as emphasised by Lord Goff of Chieveley in the
Kuwait Airways case at p 1157, Lord Wilberforce at p 269 and applying a passage
from the judgment at first instance, stressed that: ". . . it is not just that the purpose or motive of the
act is to serve the purposes of the state, but that the act is of its own
character a governmental act, as opposed to an act which any private citizen
can perform." The question for present determination is whether the
actions of the Cook Islands Government are to be characterised as governmental
or commercial. The imposition of taxes is an exercise of sovereign power. The
operation of a tax system is a quintessential example of governmental activity
that should ordinarily be immune from intrusive scrutiny by the agencies of
another state. In George W Cook (US) v United Mexican States UN Rep Vol IV 593
at p 595 (1930) cited in O'Connell, International Law (2nd ed, 1970) vol 2, p
715 the United States-Mexican Claims Commission held that "The right of
the State to levy taxes constitutes an inherent part of its sovereignty; it is
a function necessary to its very existence . . .". The exercise of a
taxing power is a governmental activity. That activity is not exercisable by
private persons. The exercise of the tax function may constitute an abuse of
power but that does not change the character of the power which is exercised. It is a matter of looking at what was done in order to
determine whether the questioned activity was a private act of the state or
whether it involved necessary participation in a public act of the state. The
transactions involved in Magnum included the derivation of interest income in
the Cook Islands by a European Pacific company on which Cook Islands income tax
was payable and was paid. The derivation of interest income in the Cook Islands
and the consequential incurring under Cook Islands law of a tax liability was
part of the wider arrangement from which European Pacific companies derived
other benefits and the Cook Islands authorities incurred losses with the result
that the overall advantage to the Cook Islands revenues was only a fraction of
the tax collected. But whatever the motivation and whatever the overall
economic result, it involved the application of the tax legislation of the Cook
Islands by the Cook Islands. The issue of a tax certificate for tax stated to
have been paid was an integral feature. It was a public act of the state. The
issue of the receipt or certificate of payment of Cook Islands tax must, in my
view, be characterised as an exercise of governmental power. As Professor Schreuer observes (State Immunity: Some Recent
Developments (Grotius, 1988) p 25) provisions uncharacteristic of commercial
contracts can render an agreement non-commercial. He cites Practical Concepts
Inc v Republic of Bolivia 613 F Supp 863 [(D.D.C. 1985)], 615 F Supp 92 ([D.D.C.] 1985), where the
United States District Court found that the agreement between an American firm
and Bolivia for the provision of consultancy services contained so many
provisions untypical of private contracts, such as tax exemptions, immigration
privileges and diplomatic immunities, that it could not be classified as
commercial. Professor Schreuer goes on to suggest (at p 42) as one of the
criteria for distinguishing commercial from sovereign transactions: ". . .
Did the State use sovereign prerogative in effecting the transaction, {302}
such as granting tax exemptions, promising future preferential treatment in
non-commercial contexts, or did it use purely commercial incentives?" And in Moore v Mitchell 30 F 2d 600, 604 ([2d Cir.] 1929) cited by
Lord Keith of Avonholm in Government of India, Ministry of Finance (Revenue
Division) v Taylor [1955] AC 491, 511 Judge Learned Hand said: "To pass upon the provisions for the public order of
another state is, or at any rate should be, beyond the powers of a court; it
involves the relations between the states themselves; with which courts are
incompetent to deal, and which are intrusted to other authorities. It may
commit the domestic state to a position which would seriously embarrass its
neighbor. Revenue laws fall within the same reasoning; they affect a state in
matters as vital to its existence as its criminal laws. No court ought to
undertake an inquiry which it cannot prosecute without determining whether
those laws [of the other State] are consonant with its own notions of what is
proper." Those last two sentences deserve emphasis. Revenue laws and
their administration are an extension of the sovereign power which imposed the
taxes. Any local inquiry which involves an assessment of their operation
encroaches on that sovereign power. The conclusion that the Magnum transactions must be
characterised as an exercise of governmental power is reinforced by
consideration of the provisions of our Income Tax Act 1976 concerning credits
for foreign tax.
Section 293(2) provided that subject to the section "where a person who is
resident in New Zealand derives income from a country or territory outside New
Zealand, income tax paid in that country or territory in respect of that income
shall be allowed as a credit against income tax payable in New Zealand in
respect of that income". These transactions occurred before the
introduction of the detailed and sophisticated international tax regime and, in
the absence of a double tax agreement between New Zealand and the Cook Islands,
the Commissioner of Inland Revenue necessarily relied on the domestic
anti-avoidance and other provisions of the legislation then in force to assess
claims to foreign tax credits. Any consideration of the.progressive development of the
international tax regime in this country and of the experience of other
countries brings home the difficulties faced by Courts, tax administrations and
legislatures in giving effect to the apparently simple statutory command to
allow a credit for foreign income taxes. Writing in 1984 Professor Isenbergh
summarised the American experience in this way ("The Foreign Tax Credit: Royalties, Subsidies, and
Creditable Taxes" (1984) 39 Tax LR 227, 285): "There are over 200 foreign countries with tax systems
of some kind. Even among those ostensibly predicated on income, the variations
are endless. Some tax gross income, some net, some a tax base in between. Some
ignore realization and treat changes in net worth as taxable income. Others tax
various notional or imputed gains. Rules of aggregation, averaging, and
survival of losses are as varied as climates and ethnicities. Furthermore, the
administration and enforcement of an income tax system have as much effect on its real
import as do its substantive terms, as we are now discovering in the United
States. And that is not the end: Nontax regulation, pricing policies, various
subsidies (direct or hidden), all enter into the ultimate determination whether
(and how) a foreign government is collecting a true income tax — a tax at the
risk of a taxpayer's profit. Add to this all the more oblique ways governments
can abet or hinder the operations of taxpayers, and the determination becomes
even more obscure. The present rules for creditable taxes require an elaborate
and often scholastic dissection of foreign tax systems to determine whether they
adhere closely enough to norms of taxation derived from our own. The undertaking
is immensely difficult, uncertain, and easily undermined." {303} Of more immediate significance for present purposes,
the tax credit legislation proceeded and still proceeds on the premise that the
imposition and receipt of tax is a governmental activity. Any questioning of
Cook Islands authorities in relation to the Magnum transaction involving
inquiring into the operation of the Cook Islands tax administration comes up
against that problem. If the seizure of Kuwait Airways Corporation aeroplanes in
Kuwait and their removal to Iraq following Iraq's invasion of Kuwait was a
governmental act, as the House of Lords held in that case, I do not see how the
Magnum transactions, dependent as they were on the exercise of the sovereign
taxing power, could be characterised differently. It follows that any demand
for documents which are held in New Zealand on behalf of the Cook Islands
Government is an intrusion on the public or sovereign activities of the Cook
Islands. Finally, it is no answer to say that the operation of tax
havens is commercially driven. Every tax regime has commercial implications.
Variations from state to state exist in the degree of comprehensiveness of the
tax base, tax treatment of companies and other entities, rates of tax, tax treatment
of particular activities, incentives and exemptions. Almost every tax regime,
including New Zealand's, will have some features attractive to international
commerce. Our foreign investor tax credit regime is one example. In my view
there is no plausible basis for differentiating between different tax regimes
when considering sovereign immunity. A tax is a tax is a tax. Its imposition
and operation is a public governmental activity. The Audit Office function I have concluded that the Magnum transactions are not to be
characterised as commercial transactions of the Cook Islands Government. The
reason is that the crucial tax collecting was necessarily within the sphere of
governmental or sovereign immunity. That finding cuts the ground from under any
argument that the exercise of the audit function could be regarded as
monitoring commercial activities and having that same character. In any event
the crucial question is whether the exercise by the Audit Office of the
functions of Government Auditor under art 71 of the constitution was within the
sphere of governmental or sovereign authority of the Cook Islands. In auditing the Cook Islands public accounts the Audit
Office was performing the duty imposed on it by art 71 of the constitution. In
enacting the Cook Islands Constitution Act 1964 the Parliament of New Zealand
must be taken to have approved the designation of the Audit Office as the
auditor of the Cook Islands until such time as the legislative assembly of the
Cook Islands by constitutional amendment should provide otherwise. Once the
1964 Act came into force the Audit Office, while acting under art 71, was
performing responsibilities imposed by Cook Islands law, not New Zealand law.
Further, it would be wrong to treat the discharge of those responsibilities as
similar to the audit of a company's accounts by a private auditor. The
relationship between the Audit Office and the Cook Islands Government was not
contractual. It was not one of auditor and client. The auditor under art 71 is
an integral part of the constitutional arrangements. It may perhaps be
described as an organ of state. In terms of art 71 the auditor audits the Cook Islands
Government Account and other designated accounts. In that regard the Cook
Islands Government Property Corporation, which was referred to in the letter
from the commission to the Prime Minister of the Cook Islands as a participant
in the Magnum transactions, is declared to be an instrument of the Executive
Government of the Cook Islands (Cook Islands Government Property Corporation
Act 1969, s 8). The auditor then reports annually to Parliament. Public sector financial management is at the heart of
executive accountability to Parliament. The audit function assesses and reports
on the legality, efficiency, effectiveness and economy of financial management.
Audit is a governmental {304} function in a modern state as is recognised
internationally in the "Lima Declaration on Guidelines on Auditing
Precepts" resolved on by the 9th Congress of the International Organisation
of Supreme Audit Instutitions meeting in Lima in 1977. The Deputy Controller
and Auditor-General saw the art 71 functions as being the same in the Cook
Islands as those required of the Audit Office in New Zealand in respect of the
operations of the New Zealand Government. The report of the Audit Office for
the year ended 30 June 1995 states the purpose of the office as being a
constitutional safeguard to maintain the financial integrity of the country's
parliamentary system of government; its role being to assist Parliament to
strengthen the effectiveness, efficiency and accountability of the instruments
of government; and the role being discharged by providing reports on whether
governmental activities are carried out, and accounted for, in a manner consistent
with Parliament's intentions. In that role of constitutional auditor of the Cook Islands
under art 71, the Audit Office came into possession of documents created by the
Government of the Cook Islands, by third parties and by the Audit Office itself.
Those documents were then held by the Audit Office on behalf of the Cook
Islands Government. Some of those documents will no doubt relate to the
spending of public money for the acquisition of goods and services for the
state. However, that cannot affect the legal answer which is that on the
material before the Court the Audit Office came into possession of the
documents and information and created documents for its own audit purposes in
the course of carrying out a sovereign governmental function. That being so,
the requisition by the commission for the production of these documents by the
Audit Office affects the property rights and interests of the Cook Islands so
as to implead the state. While s 4C of the Commissions of Inquiry Act 1908 and
RR 310 and 311 of the High Court Code, on which the commission relied in
issuing the notices and making the order for production, are broadly phrased,
they are not expressed to apply extraterritorially or to override sovereign
immunity. They cannot be construed as barring a claim to sovereign immunity
(Governor of Pitcairn and Associated Islands v Sutton at pp 430 and 438). It follows that, subject to consideration of the iniquity
factor, all the arguments raised by the commission in support of the notices
and the order for production fail. Iniquity and public policy In Rahimtoola v Nizam of Hyderabad [1958] AC 379, 404 Lord
Reid emphasised that the principle of sovereign immunity is not founded on any
technical rules of law: it is founded on broad considerations of public policy,
international law and comity. In assessing the weight which may legitimately be given at
common law to New Zealand public policy considerations in the present case it
is as well to have three other factors in mind. The first is that, as the
distinguished international law scholar Sompong Sucharitkul has emphasised
(Bedjaoui, International Law: Achievements and Prospects (1991) ch 16:
"Immunity of States", at p 328), the doctrine of state immunity is
the result of an interplay of two fundamental principles of international law:
the principle of territoriality and the principle of state personality, both
being two aspects of state sovereignty. Under that first fundamental principle
sovereign states have jurisdiction to prescribe rules of law and processes
applying within their territory. The second and related consideration is that the state
activity in question in this case is New Zealand based in three respects.
First, Magnum and like transactions contemplated that the tax payment certificates
issued by the Cook Islands Government would be utilised to secure a tax credit
for the full amount in New Zealand and for New Zealand income tax purposes.
Second, all the documents sought by the commission for production for
inspection are presently in New {305} Zealand. Third, they are in the
possession of the Audit Office of New Zealand. While the Audit Office carried
out the audit activity in question as constitutional auditor of the Cook
Islands and holds documents in that capacity, it remains a New Zealand agency
constituted under New Zealand law and amenable in the ordinary way to the
jurisdiction of New Zealand Courts and commissions of inquiry. Neither the Cook
Islands Constitution Act 1964 nor any other New Zealand enactment has taken the
further step of immunising the Audit Office in that capacity as such from the
jurisdiction of New Zealand Courts and tribunals. The Audit Office may
interplead in respect of the property interests of the Cook Islands in the
documents, as it has done. It is not immune ratione personae from the
jurisdiction of the commission. The third background factor is the particular expression of
the recognised international law principle of good faith in the special
relationship between the two states. Cook Islanders are New Zealand citizens
and in the 1973 exchange of letters the Prime Minister of New Zealand stated
and the Premier of the Cook Islands agreed that the bond of citizenship
"also creates an expectation that the Cook Islands will uphold, in their
laws and policies, a standard of values generally acceptable to New
Zealanders". Against that background the public policy argument for
requiring production by the Audit Office of the specified documents can be put
very shortly. It is not a matter of the forum state simply preferring public
policies underlying its domestic laws to those of the foreign state.
Fundamental values must be at stake. Where the conduct of the foreign state is
in question, refusal of a claim to sovereign immunity could be justified only where
the impugned activity, if established, breaches a fundamental principle of
justice or some deep-rooted tradition of the forum state. It is well established that the forum state may assert
jurisdiction over certain governmental torts committed within or having an
effect within the jurisdiction. The European Convention on State Immunity of
1972, the articles on jurisdictional immunities of states and their property
adopted by the International Law Commission in 1991 and many state immunity
statutes (including those of Australia, Canada, the United Kingdom and the
United States of America) withhold immunity. The basis for the assumption and
exercise of jurisdiction is territoriality. The current provisions are confined
to physical damage and do not extend to defamation or interference with
contractual rights. Thus s 1605(a)(5) of the United States Code as enacted by
the Foreign Sovereign Immunities Act of 1976 provides:" (a) A foreign state shall not be immune from the
jurisdiction of courts of the United States or of the States in any case: (5) . . . in which money damages are sought against a
foreign state for personal injury or death, or damage to or loss of property,
occurring in the United States and caused by the tortious act or omission of
that foreign state or of any official or employee of that foreign state while
acting within the scope of his office or employment; except this paragraph
shall not apply to: (A) any claim based upon the exercise or performance or the
failure to exercise or perform a discretionary function regardless of whether
the discretion be abused, or (B) any claim arising out of malicious prosecution, abuse of
process, libel, slander, misrepresentation, deceit, or interference with
contract rights. One extreme case is Letelier v Republic of Chile 488 F Supp
665 ([D.D.C.] 1980). That was a tort claim by the families of dissident Chilean leaders
assassinated in Washington, against the Republic of Chile alleging it had
directed the assassination. The United States District Court held that the
Foreign Sovereign Immunities Act {306} of 1976 would not protect a foreign
government from civil liability in those circumstances. While the decision
turned on the construction and application of the particular statutory
provision, there are two important points for present purposes. The first is
that the assertion of jurisdiction in civil claims against a foreign state does
not distinguish between governmental and non-governmental acts. Its basis is
the entitlement of the forum state to exercise local control over particular
forms of harm or danger. See also Olsen v Mexico 729 F 2d 641 ([9th Cir.] 1984), a claim
against Mexico arising from the crash within United States territory of an
aeroplane carrying prisoners on behalf of Mexico. As Professor Crawford explains ("International Law and
Foreign Sovereigns: Distinguishing Immune Transactions", 54 BYIL (1983)
75, 111): "Deliberately to cause such harm or damage on the
territory of another State by an act of 'public power' is, in the absence of
some special exception, a plain violation of international law, whether the
harm is caused by assassination or invasion. The exercise of local jurisdiction
in such cases is an assertion of the forum's right, acknowledged by
international law, to deal with the consequences of unlawful acts on its
territory." The second point is the observation of Green DJ (p 673):
"Whatever policy options may exist for a foreign country, it has no
'discretion' to perpetrate conduct designed to result in the assassination of
an individual or individuals, action that is clearly contrary to the precepts
of humanity as recognized in both national and international law." That
reference to international law simply emphasises that a gross violation of
international law on foreign territory is an additional ground for refusing
sovereign immunity (Schreuer, p 54). Letelier was an extreme case. There must be other cases
where the alleged conduct of the foreign state is directed in a real sense
against the forum state or so directly affects it and is so outrageous that the
protection international law would otherwise give to the foreign state in
matters properly within the jurisdiction of the forum state should not be
allowed. The due imposition and collection of taxes is fundamental to the functioning
of government. The state has a prime interest in tax enforcement and in the investigation of abuses
of its tax system. Defrauding the public revenue strikes at the heart of
government. It would be indefensible for a friendly state to be party to an
attempt to evade or abuse our tax laws. It would also undermine those values
generally acceptable to New Zealanders which the Cook Islands has committed
itself to uphold. The Council of Europe — OECD Convention on Mutual
Administrative Assistance in Tax Matters of 1988 which came into force on 1
April 1995 recognises that states have information obligations to each other in
international tax matters. The purpose in this regard of the convention is
reflected in the opening paragraphs of the preamble: "Considering that the development of international
movement of persons, capital, goods and services — although highly beneficial
in itself — has increased the possibilities of tax avoidance and evasion and
therefore requires increasing co-operation among tax authorities; Welcoming the various efforts made in recent years to combat
tax avoidance and tax evasion on an international level, whether bilaterally or
multilaterally; Considering that a co-ordinated effort between States is
necessary in order to foster all forms of administrative assistance in matters
concerning taxes of any kind whilst at the same time ensuring adequate
protection of the rights of taxpayers." Article 4(1) requires state parties to exchange any
information: {307} ". . . that is foreseeably relevant to: a the assessment and collection of tax, and the recovery and enforcement of
tax claims, . . ." Article 5 goes on to provide: "1. At the request of the applicant State, the
requested State shall provide the applicant state with any information referred
to in Article 4 which concerns particular persons or transactions. 2. If the information available in the tax files of the
requested State is not sufficient to enable it to comply with the request for
information, that State shall take all relevant measures to provide the
applicant State with the information requested." And art 7 requires a party, without prior request, to
forward to another party information of which it has knowledge in certain
circumstances including where: "a the first-mentioned Party has grounds
for supposing that there may be a loss of tax in the other Party; . . . d a Party has grounds for supposing that a saving of tax may
result from artificial transfers of profits within groups of enterprises."
The convention has not been incorporated by legislation into
New Zealand law. It has not yet been ratified by New Zealand. Nevertheless it
is a contemporary recognition by the Council of Europe and the OECD that states
have responsibilities to each other for the provision of information in their
possession relating to international tax transactions. It also reflects the
good faith obligation which states owe each other under international law. Conclusion The documents in question are held within New Zealand by an
agency of New Zealand. They are believed to contain evidence of a conspiracy to
which the Cook Islands Government was party to make an abusive claim to foreign
tax credits in
which reliance on tax certificates issued by the Cook Islands Government was a
key feature. In my view to insist on production of those documents for the
purpose of copying them would be a proportionate response by New Zealand and
should be justified under international law. The remaining question is whether the Court should take the
view that such issues are more appropriately dealt with through diplomatic
channels or at least by Executive decision rather than under the exercise of
the Court's judgment in assessing underlying policy considerations. That may
often be the proper course. But the constituting of the commission recognises
that the government made the policy decision to inform itself about the Winebox
transactions through a commission of inquiry. The Executive has ruled where New
Zealand interests lie in that regard and that the commission is the appropriate
mechanism for gathering relevant facts and recommending action within the terms
of reference. I would refuse the declaration and orders sought in the
amended statement of claim. JUDGMENTBY-3: MCKAY J JUDGMENT-3: MCKAY J: I have had the advantage of reading in draft the
judgment of Richardson J in respect of this appeal. I am in agreement with his
reasoning and conclusions and concur in the result proposed by the President. JUDGMENTBY-4: HENRY J JUDGMENT-4: HENRY J: This was the first of three closely related
proceedings for review argued in this Court, all having been removed to it by
orders of the High Court. All relate to decisions of the defendant acting in
his capacity as a commission of inquiry duly appointed by Order in Council. It
has become known as the Winebox Inquiry. {308} In each proceeding challenges
were made to the right of the commissioner to require the giving of evidence or
the production of documents. Judgments are being delivered contemporaneously in
all three proceedings. The issue in this case is whether the claim of sovereign
immunity made by the plaintiff as auditor of the accounts of the Cook Islands
Government and on behalf of that government, is to be upheld. The composite
judgment of the President and that of Richardson J in this proceeding set out
the relevant factual matrix which I need not repeat. I am prepared to approach
the issue on the basis that all documents in question are or may be the
property of the Cook Islands Government and that the information sought to be
disclosed relates to the exercise of the functions of the plaintiff as
constitutional auditor of the Cook Islands Government accounts. Whether the
auditor is an organ of state needs no separate determination, because in my
view the issue can be decided by the application of the recognised exception in
respect of commercial transactions. This doctrine, which it is common ground
forms part of the law of New Zealand and is referred to as the restrictive
theory. is discussed in Playa Larga (Owners of cargo lately laden on board) v I
Congreso del Partido (Owners) I Congreso del Partido [1983] 1 AC 244 and Kuwait
Airways Corp v Iraqi Airways Co [1995] 3 All ER 694. In the former Lord
Wilberforce said at p 267: "The conclusion which emerges is that in considering,
under the 'restrictive' theory whether state immunity should be granted or not,
the court must consider the whole context in which the claim against the state
is made, with a view to deciding whether the relevant act(s) upon which the
claim is based, should, in that context, be considered as fairly within an area
of activity, trading or commercial, or otherwise of a private law character, in
which the state has chosen to engage, or whether the relevant act(s) should be
considered as having been done outside that area, and within the sphere of
governmental or sovereign activity." and at p 269: ". . . it is not just that the purpose or motive of the
act is to serve the purposes of the state, but that the act is of its own
character a governmental act, as opposed to an act which any private citizen
can perform." Although the imposition and collection of a tax is
undoubtedly a function of government and not a commercial activity, as is the
issuing of a tax credit certificate, in my opinion to allow those factors to be
determinative is to ignore the reality of the transactions being investigated.
An example of those is what is known as the Magnum transaction, described in
some detail by Richardson J in his judgment. It would appear that withholding
tax paid to the Cook Islands Government and evidenced by a tax credit
certificate for $881,582 was in reality repaid (except for the sum of $50,000)
through the medium of a contemporaneous dealing in a promissory note carried
out by the Cook Islands Government Property Corporation. The corporation, a
statutory body, comprises all members of the Cabinet of Ministers of the Cook
Islands. As a result of the dealing the corporation, which has wide commercial powers,
retained the sum of $50,000 by way of profit. One day later a similar procedure was adopted, the amount of
tax involved being $1,169,909, the whole of which was effectively repaid. The
net result is said to be that the New Zealand taxpayer obtained a reduction of
tax otherwise payable in this country of $2,051,191 and the Cook Islands
Government received $50,000. As Richardson J observed, in those circumstances
put bluntly what occurred was a sale of tax certificates. The commissioner is inquiring into the propriety of the tax
credit consequently claimed under the New Zealand tax legislation. The context
in which the act of the Cook Islands Government in issuing the tax credit is to
be considered must include {309} the directly associated promissory note
dealing involving the state corporation. That dealing cannot be divorced from
the associated collection of "revenue", and in my opinion lends the
transaction as a whole a commercial character, with the element of tax
collection becoming largely illusory. To use the words of Lord Wilberforce,
when put in context the acts in question can properly be considered as falling
within a commercial area of activity of a private law character. The use of a revenue-gathering power, although necessary to
the implementation of the whole transaction, is but part of it. There is a
strong commercial flavour, with the government and its instrument the
corporation being directly and significantly involved. It is difficult to see
how it can be said that the acts of the corporation were other than commercial
and of a private law character. They cannot be the subject of immunity. The
issuing of the tax credit gave rise to and formed an integral part of that
commercial activity, and must also have the same character. In his submissions Mr Barton also argued that the functions
of the Audit Office are functions of government (performed by an organ of
government) and therefore immune. It is not however the acts of the auditor
which are in question. The commissioner is investigating transactions which
presumably have come under the audit inspection. If the doctrine of immunity is
unavailable to the sovereign state itself because its acts are outside the
sphere of governmental activity then I do not think the immunity can be claimed
on behalf of government in respect of the audit relating to those acts. The
documents held by the auditor are in its possession as a result of the
commercial activities of the state. In his judgment Richardson J gives his reasons for
concluding that public policy here requires rejection of the claim to sovereign
immunity by reason of the inequity factor. There is in my respectful view merit
in the line of reasoning adopted in that judgment. Whether or not this Court
should now accept a broad principle of iniquity as affecting and possibly
overriding the traditional concept of sovereign immunity — which would be a
development beyond that now accepted under the "restricted" theory —
is debatable. However in my opinion there are compelling reasons for excluding
the doctrine of sovereign immunity, even if the restrictive theory did not
apply, without offending current concepts of international law. This case is
concerned with the functions of a commission of inquiry whose terms of
reference require investigation into the Winebox transactions and the need for
change to criminal or tax law to protect New Zealand's tax base from fraud and
evasion. There is evidence presently before the commissioner to support a
contention that some of the transactions may have defrauded the New Zealand
revenue or provided a means for evading tax. The foreign state is said to have
been instrumental in a significant way in assisting New Zealand taxpayers to
that end. The persons sought to be examined, and the documents sought to be
inspected are all in New Zealand. In those circumstances, public policy
requires disclosure, not frustration of the objects of the Commission of
Inquiry. Principles of international comity do not in my opinion require
otherwise. I would dismiss the application. JUDGMENTBY-5: THOMAS J JUDGMENT-5: THOMAS J: I am spared, and will spare the reader, a review
of the background facts and circumstances leading up to this appeal. Those
matters have been fully traversed in the draft judgments of Cooke P, Richardson
J and Henry J, which I have had the advantage of reading. I am in agreement with the decision which is reached in each
of those judgments. The claim to sovereign immunity cannot be allowed. In the
circumstances of this case it would be a denial of the sovereign right of this
country to exert jurisdiction within its own territory to excuse the
Auditor-General from producing documents held by the Audit Office in New
Zealand which are directly relevant to a task of the Commission of Inquiry. The
commission was established {310} by the government to examine the competence of
two of its most senior public servants in dealing with certain transactions
and, having regard to those transactions, to report on what changes, if any,
are required to the criminal or tax law for the purpose of protecting New
Zealand's tax base from the effects of fraud, evasion and avoidance. To a
greater or lesser extent, the Cook Islands Government is involved in, at least,
certain of those transactions, but the inquiry is not directed at either that
government or its conduct. The documents are simply required to enable the
Commission of Inquiry to discharge its duly authorised function of reporting in
accordance with its terms of reference. Whatever argument may precede or accompany the issue,
ultimately no Court of law would be prepared to extend sovereign immunity to
the Cook Islands Government in respect of the documents held by the
Auditor-General. Different Courts, or different Judges, may adopt different
routes in arriving at that conclusion, as evidenced in the judgments of Cooke P
and Richardson J, but in the end the same conclusion is inevitable. The Court's
decision will be founded expressly or tacitly on perceptions of public policy
and expectations of international law which accord with that policy. Neither
the content nor application of the doctrine of sovereign immunity is so
inflexible as to exclude the influence of those perceptions or expectations. In this judgment, therefore, I first seek to affirm that the
restricted theory of sovereign immunity can be applied without strain or injury
so as to disentitle the Cook Islands to immunity from the jurisdiction of this
country. In the second place I suggest an alternative, and preferred, approach
which would enable the Court to have regard to all relevant factors and
criteria in determining whether the doctrine of sovereign immunity should apply
or not. In the course of advancing that proposal, I warmly endorse the opinion
of Richardson J under the heading of "Iniquity and public policy" to
the effect that, as a matter of public policy, the Cook Islands should be
refused sovereign immunity. For the purpose of this judgment, I accept that the Cook
Islands is a sovereign independent state, that the Commission of Inquiry is an
instrument of the Executive, having been appointed by the Governor-General by
Order in Council pursuant to s 2 of the Commissions of Inquiry Act 1908, and
that the Audit Office is, or was at the material time, an organ of the Cook
Islands Government. The restricted theory of sovereign immunity At times during argument counsel on both sides of the case
managed to convey the impression that they were addressing the topic in the
early part of this century. The doctrine of absolute sovereign immunity,
perhaps eroded only by an exception in respect of commercial activity, strictly
defined, of the foreign state, was confidently extolled. Such a view is, of
course, patently incorrect. Indeed, a number of commentators doubt that the
absolute theory of sovereign immunity has ever prevailed. Even English law,
which has in the past tended to the monolithic on the subject, is not absolute
(see DP O'Connell, International Law (2nd ed, 1970) vol 2 at p 843). Exceptions
abound, as is to be expected when it is recognised that the principles of state
immunity are grounded less in theories of sovereignty than in the needs of
international relations. (See Restatement of The Law The Foreign Relations Law
of the United States (1987) vol 1 as adopted and promulgated by the American
Law Institute, 14 May 1986, at p 438). The enumeration of non-immunity
situations is so long that it is beyond me to provide an exhaustive list, and I
shall not attempt to do so. Reference to any textbook on international law
readily reveals the wide-ranging exceptiQns required by most countries (see Ian
Brownlie, Principles of Public International Law (4th ed, 1990), at pp 334 to
338). As Professor Sucharitkul reports, absolute immunity, even in common law
jurisdictions, has been in decline since Compania Naviera Vascongado v
Steamship "Cristina" The Cristina [1938] AC 485 (Sompong Sucharitkul,
State Immunities and Trading Activities in International Law (1959) ch 16). {311} What may be noted in passing, however, is that the
present circumstances share some affinity with a number of exceptions. Thus,
the exception which provides that any question relating to the ownership,
possession and use of property, removable as well as movable, is to be resolved
by the forum rei sitae reflects the well-established principle that matters
occurring within the forum state are subject to the jurisdiction of that state.
Hence, documents in the possession of the Auditor-General in this country may
be viewed differently from documents in his possession in the Cook Islands.
Then, again, the denial of sovereign immunity for states in the case of
contracts or transactions involving industrial or intellectual property
indicates a readiness on the part of local Courts to assert jurisdiction in
respect of relationships having a private law character and involving questions
of public policy, such as the need to protect intellectual property rights from
infringement by those bent upon that iniquity. I am here concerned, however, with the principal restriction
to sovereign immunity; the exception of activity engaged in by the foreign
state otherwise than in the exercise of sovereign authority, as distinct from
acts performed pursuant to the state's sovereign authority, or activity which
is "private" in character or of a "kind carried on by a private
person", as distinct from conduct which is of a "public nature",
or to "commercial" transactions or activity as distinct from
"governmental" acts or, if refuge is to be taken in Latin maxims,
acts de jure gestionis as distinct from activities de jure imperii — or
however else the distinction might be framed. The problem, as many
international law commentators have pointed out, is that a precise distinction
between these concepts is difficult to discern and define. Professor
Lauterpacht has aptly described the distinction as "incoherent and
unworkable" (H Lauterpacht, "The Problem of Jurisdictional Immunities
of Foreign States" (1951) 28 BYIL 220, at p 228). It is all of that. It may, to some extent, appear artificial to apply the
"commercial" exception in the circumstances of this case. The
exception developed to cope with the enormous increase in the trading
activities of governments undertaken beyond their territorial boundaries in an
increasingly global economy. Local litigants were unfairly deprived of a just
remedy by the application of the doctrine of sovereign immunity and foreign
states obtained an unfair advantage in competition with private commercial
enterprise (Restatement, supra, at p 391). Both notions of fairness and public
policy demanded that foreign states acting like private persons, particularly
when engaging in commercial activities, should be amenable to suit in the
country in which they chose to so act. In the present case, however, the Cook
Islands Government is not engaged in any "commercial" activity within
the territorial jurisdiction of this country. Nor is it, or its organ, the
Auditor-General, a litigant in proceedings within the jurisdiction. The
circumstances do not fit precisely the historical basis of the exception. I do not consider, however, that the restricted doctrine of
sovereign immunity should be discarded. As Cooke P has demonstrated, policy
factors other than fairness to local litigants and to competitors exist in full
measure to justify the application of the restricted theory. Just as the
non-governmental or "commercial" activity of a foreign state which is
contrary to New Zealand's laws is unacceptable when undertaken within the
jurisdiction, so too it is unacceptable for this country to be subject to the
detrimental impact of such activity when it occurs beyond its borders. This
extraterritorial effect of a foreign state's actions is recognised in the
United States' Restatement (supra, ch 5, s 453, at p 401) prepared by the American
Law Institute. Having first declared that a foreign state is not immune from
the jurisdiction of local Courts with respect to claims arising out of
commercial activity, the concept is extended to acts performed in the United
States (whether commercial or not) in connection with commercial activity
carried on "outside" the United States where the act "causes a
direct effect in the United States" (emphasis added). To my mind, this qualification is a logical extension of
restrictive immunity. {312} What must count is the effect of the foreign
state's activity within the jurisdiction and not simply its presence,
particularly when, as is the case here, both the organ of the foreign
government and the information sought is within the local jurisdiction. It cannot
be gainsaid that the involvement of the Cook Islands Government in transactions
described by the commissioner have, or are likely to have, a direct effect on
the tax base of this country. The impact of the sale of tax credit certificates
on the tax base is no less than it would be if, by some device, the Cook
Islands Government were able to sell the tax credit certificates within New
Zealand. There are no universally accepted criteria for classifying
the acts of a foreign government. The basic difficulty lies in distinguishing
between sovereign and non-sovereign activity. In a sense, all or most activity
undertaken by a state is an exercise of sovereign authority. A government which
decides to exert a monopoly in operating a national airline is exercising its
sovereign authority but the activity is undoubtedly commercial in that it can
be undertaken by private entrepreneurs. In the same way, nobody other than the
Cook Islands Government could establish a tax haven or "financial services
centre" in the Cook Islands of the kind described by the commissioner, but
the transactions entered into as part of the services provided have an
undeniably commercial flavour. It is probably a fiction to suggest that the
state ever steps down from its sovereign pedestal or that, if it purports to do
so, it acts as a private person (see O'Connell, supra, at p 846). Various tests which are applied in an attempt to assist in
determining the proper classification of the activity invariably prove
inadequate. Thus, a test which directs the Court to have regard solely to the
"nature" of the transaction has been widely criticised. (See M
Sornarajah, "Problems in Applying the Restrictive Theory of Sovereign
Immunity", (1982) 31 Int & Comp LQ 661, at pp 668-669.) It is
difficult to exclude the purpose of a transaction in determining its
classification. The nature of a tax haven may point to it being a legitimate
governmental activity, but if the purpose of the responsible government is to
obtain a profit by selling tax credit certificates, or the like, it is
difficult to avoid perceiving the activity as commercial. While in the United
States s 1603(d) of the Foreign Sovereign Immunities Act 1976 directs that the
test to be adopted in determining whether an activity is commercial or governmental
is the nature of the act, no final decision has been reached in England. (See
Sornarajah, supra, at p 669.) It is probable that, because of the recognised
incoherence of the nature/purpose dichotomy, no single or exclusive test will
be adopted in this country. As Lord Wilberforce said, suggesting a broader
approach, in Playa Larga (Owners of cargo lately laden on board) v I Congreso
del Partido (Owners) I Congreso del Partido [1983] 1 AC 244, at p 267, the
Court must consider the whole context in which the claim against the state is
made, with a view to deciding whether the relevant act upon which the claim is
based, should, in that context, be considered to fall fairly within an area of
activity, trading or commercial or otherwise of a private law character in
which the state has chosen to engage, or whether the relevant act should be
considered as having been done outside that area, and within the sphere of
governmental or sovereign activity. (See also Goff J in the same case [1978] 1
All ER 1169, at p 1194, pointing out that regard must be had, not only to the
nature of the transaction (if any) between the parties, but also to the nature
of the act complained of.) For present purposes, however, the point to make is that the
classification of the activity in question as sovereign or non-sovereign, and
the determination of what test to apply in making that classification, will in
effect dictate the outcome of the determination. If the activity of the Cook
Islands Government is regarded as essentially one of implementing taxation
measures, then it is likely that it will be viewed as a proper governmental
activity or function; if the nature of the transaction (entering into the
arrangement involving the contemporaneous exchange of the promissory notes),
the nature of the act complained of (selling tax credit certificates), and the
purpose of the activity (to secure revenue for the Cook Islands other than
{313} tax on income earned) is examined, the activity is likely to be
classified as non-governmental. Underlying the latter decision will be an
appreciation of what is or is not acceptable as a function of the state in
accordance with concepts of public policy prevalent in the forum state. (See
Brownlie (supra), at p 332.) In this regard, I join with Cooke P and Henry J in
classifying the activities of the Cook Islands Government as being within the
exception contemplated by the restricted theory of sovereign immunity. Imposing
taxes, collecting taxes, and issuing tax credit certificates in respect of
taxes which are otherwise due, are certainly functions of a sovereign state.
The government may establish a taxation regime of, in all probability, immense
complexity to that end. But the Cook Islands Government did far more than
engage in a tax regime of this kind. By virtue of entering into contemporaneous
transactions with the "taxpayer" through the medium of the Cook
Islands Government Property Corporation it allowed the "taxpayer" to
utilise the tax credits against their income in New Zealand, in the knowledge
that the tax paid in the Cook Islands to which the tax credit certificate
related would be repaid. The commission or fee charged by the government cannot
be categorised as tax; it represents a profit on the deal which the Cook
Islands Government entered into with its "taxpayer". Whether too
loose or not, the blunt description of the deal as selling tax payment
certificates for a fee adopted by Richardson J in his judgment is not
inappropriate. What was involved was a financial arrangement in which the Cook
Islands Government was a participant and, as with its commercial associates, it
looked for and received what was a commercial profit. To my mind, it does not matter that this financial
arrangement utilised the Cook Islands tax regime. Many commercial arrangements
or transactions do that. Identifying the act complained of, having regard to
the nature and purpose of the transaction, and considering the whole context of
the claim, I am left in no doubt that the Cook Islands Government cannot properly
claim to be outside the scope of the "commercial" or non-governmental
exception to the doctrine of sovereign immunity. If any doubt did exist, it could be eliminated, I suggest,
by examining whether the decision to withhold sovereign immunity offends, or is
inconsistent with, any of the established theories which have been advanced to
rationalise the immunity; the equality and independence of states, the
avoidance of indignity for a state in subjecting it to municipal jurisdiction,
the conferment of immunity as a matter of comity and goodwill or because of
notions of reciprocity, the maintenance of international order, or the adoption
of an approach based largely on expediency exempting a foreign government from
the local jurisdiction where the interests of diplomacy so require. But
although I believe such an examination supports the classification of the Cook
Islands activity as being of a "commercial" or non-governmental
nature, I will, to avoid repetition, leave that examination to my exposition of
the alternative approach. An alternative approach While content to hold that the claim of the Auditor-General
for immunity cannot succeed on the basis of the restricted theory of sovereign
immunity, I propose to advance an alternative and, I consider, preferable
approach. It is, I believe, the logical outcome of the widespread acceptance of
the concepts of restrictive immunity and the growing appreciation that it is
unsatisfactory for such immunity to be grounded on autonomous propositions.
Under this approach, no single criteria or test for determining whether the
claim of a foreign state for sovereign immunity should be granted would be
adopted. Rather, regard would be had to all relevant factors in the light of
any criteria which are applicable in the circumstances. Where the criteria are
in conflict, it will be necessary to balance one against the other in reaching
a decision as to whether or not sovereign immunity is applicable. Similar
approaches are discussed in Professor Brownlie's leading textbook (supra), at p
333 {314} and by the Australian Law Reform Commission in its report, Foreign
State Immunity (no 24), (1984) at pp 26-28. The preferred approach recognises that, in this area of
international law, the incremental approach favoured in the development of the
common law is unlikely to be wholly useful. International law is too uncertain
and cases on particular topics too infrequent for such an approach to be
productive. Indeed, the task of converting international custom and practice
and the relations and expectations of states into international law at any
given time tends to preclude an approach involving the explication of a
universal rule, albeit with exceptions, simply because custom and practice and
the relations and expectations of nations do not progress in that fashion.
Precedent is necessarily of more limited value. Indeed, in Trendtex Trading
Corporation v Central Bank of Nigeria [1977] 2 WLR 356, Lord Denning MR and
Stephenson LJ affirmed that international law knows no rule of stare decisis.
The Supreme Court of Canada also said in Reference re Exemption of US Forces
from Canadian Criminal Law [[1943] S.C.R. 483,] [1943] 4 DLR 11 at p 49: "To insist upon
precise precedent in usage would sterilize judicial action toward changing
international relations . . .". In a similar vein, in discussing the
present need for a test which can be flexibly applied, and recognising that no
rules can be regarded as inflexible, but have, at best, only presumptive value,
Professor Sornarajah (supra) at pp 670-671 declares: "In the area of
sovereignty immunity, which lies at the interstices of law and politics,
inflexible rules are of little value". For my part, therefore, I wholeheartedly endorse the
observations of Sir Samuel Evans in The Odessa [1915] P 52, who, while observing
that guides must not be lightly deserted, states (at pp 61-62): "In the domain of international law, in particular,
there is room for the extension of old doctrines or the development of new
principles, where there is, or is even likely to be, a general acceptance of
such by civilized nations. Precedents handed down from earlier days should be
treated as guides to lead, and not as shackles to bind." Such an approach would make explicit the flexibility which
is now ostensibly covert in the law. The uncertainty of international law and
practice, the lack of uniformity between states, the breadth of the exceptions
to the doctrine of sovereign immunity, the significance of the classification
of the activity adopted by the Court, the test applied in determining the
outcome of a claim to sovereign immunity, and the other factors which I have
discussed above already confer a substantial measure of flexibility on the
Courts when faced with a claim to sovereign immunity. Once this flexibility is
openly accepted, however, it becomes possible to articulate more precisely the
factors and considerations which should result in a claim to sovereign immunity
being granted or refused. The more overtly flexible approach recommended finds its
footing in the fundamental nature of the doctrine of sovereign immunity and
gains support from an appreciation of its basic tenets. In the first place, the concept of jurisdiction is founded
on the notion of state sovereignty. The state is supreme within its own
territory. Territorial jurisdiction is the paramount principle, both in theory
and in practice. It is, indeed, essential to the existence and personality of
the state. State immunity therefore represents an immunity from that
jurisdiction. The competence of the Courts of the forum state is not in
question. In this respect, the doctrine of sovereign immunity differs from the
concept of act of state. The latter is beyond the competence of the domestic
Courts in that they do not have jurisdiction to adjudicate upon the foreign
act. In the case of state immunity, however, the Court relinquishes the
jurisdiction which it possesses pursuant to the basic concept of territorial
jurisdiction. Although there may be theories to the contrary, I regard
territorial sovereignty as the starting point. Practice and reality demand no
less. This being the case, state {315} immunity is to be seen as a derogation
from territorial sovereignty and the exclusive jurisdiction which that
sovereignty confers. It at once becomes acceptable to allow the Court of the
forum state to exercise a greater degree of flexibility in determining whether
or not it should relinquish its jurisdiction in deference to a foreign state.
Public policy issues may assume a higher profile. The principles and customs
and practices which make up international law will, of course, be relevant, but
the Courts of the forum state can approach the question whether or not a
foreign state should be granted immunity from its jurisdiction less rigidly
than if it is supposed that there is some definite rule of international law
waiting to be unearthed and duly applied. Much the same point can be made with reference to Professor
Brownlie's introductory comment on the subject of the privileges and immunities
of foreign states in his leading textbook on international law (supra), ch XV,
at pp 322-323. The agents of one state enter the territory of another and act
in their official capacity in that state by licence. The existence of immunity
from the jurisdiction of the local Courts is then seen as a concomitant of the
"privilege" to enter and remain within the territory. Indeed, it is
to be noted that in Schooner Exchange v M'Faddon (1812) 7 Cranch 116, at p
137, the principles of sovereign immunity enunciated by Marshall CJ are
advanced as implications of an "express licence" to enter foreign
territory. Thus, in granting sovereign immunity, the sovereign state is, in the
Chief Justice's words, to be "understood to waive the exercise of a part
of that complete exclusive territorial jurisdiction, which has been stated to
be the attribute of every nation". (Also referred to by the Chief Justice
as the state's "full and absolute territorial jurisdiction", at p
137.) It is not surprising, therefore, that in practice Courts may
refuse to recognise foreign acts considered to be contrary to international law
or the public policy of the forum state. (See Brownlie (supra), at p 322.)
Certainly, this perception proceeds on the basis that the foreign state is
within the jurisdiction but, as discussed above, the principle is the same when
the act of the foreign state directly affects another state. The notion that a
state may not interfere with the territorial sovereignty of another state other
than by licence does not disappear simply because the act of the other state is
performed beyond its territorial boundaries. Once the notion of licence is accepted, it again becomes
more acceptable for the Courts to determine whether the act of the foreign
state becomes an abuse of that licence, being contrary to public policy or a
perceived breach of international law as may be determined by the Courts in the
exercise of the forum state's "full and absolute territorial
jurisdiction". What, then, are the relevant factors and criteria which the
Court should have regard to in determining whether the Cook Islands should be
granted sovereign immunity and the Auditor-General permitted to withhold the
information sought by the commissioner? I believe that the first consideration would be the nature
of the Commission of Inquiry and the certain endorsement which, in this case,
the inquiry has received from Parliament. Cooke P has referred to the
Commission of Inquiry Amendment Act 1995, which vested the powers of a High
Court Judge in a commission in regard to a witness who, "without offering
any just excuse", refuses to answer questions or produce documents or who
commits a contempt. The urgent manner in which that amendment was passed to
allow the commissioner to proceed with the inquiry is fully traversed. I therefore
agree with Cooke P that it would seemingly subvert the intention of Parliament
if the Courts were to grant sovereign immunity to the Cook Islands in the
present circumstances. Apart from this compelling reason, I believe that it is
relevant to have regard to the perception of commissions of inquiry which
prevails in New Zealand. In 1980, the investigatory powers of a commission of
inquiry were enlarged following a report of the Public and Administrative Law
Reform Committee presented to the {316} Minister in May of that year
("Thirteenth Report of the Public and Administrative Law Reform
Committee", May 1980). While alert to ensure that appropriate safeguards
exist for the protection of the individual, the committee emphasised the
positive role commissions of inquiry play in the working of government in this
country and the diverse functions which a commission can perform. The committee
concluded that commissions of inquiry are to be regarded as a valuable
component in a parliamentary democracy. (See paras 12-23.) In order, therefore,
to extend a commission's investigatory powers, the committee recommended the
enactment of additional provisions, particularly in respect of the inspection
and production of documents and furnishing of information. (See ss 4B, 4C and
4D.) The commissioner in this case is therefore to be seen as
exercising a valuable investigatory function as an adjunct to the working of
government and an equally important component of this country's parliamentary
democracy. The importance of his task or role is not to be lightly undermined.
In my view, this would be the case if the Auditor-General, resident in New
Zealand and in possession of relevant documents held in this country, were to
be exempt from the processes of the inquiry by virtue of the doctrine of
sovereign immunity. The second consideration would obviously relate to the
activities of the Cook Islands Government. Its apparent involvement in the
transactions under inquiry has already been subject to adverse comment in this
judgment and need not be repeated. More general regard may be had, however, to
the Cook Islands Government's establishment of a tax haven in that country. I
have found the first report published by the Organisation for Economic
Co-operation and Development (Issues in International Taxation) entitled,
"International Tax Avoidance and Evasion: Four Related Studies"
(1987), of considerable assistance. While a tax haven may have a number of
uses, some of which are wholly legitimate, its overriding characteristic is
that the jurisdiction in which it is established is actively promoted as a
haven for the avoidance of tax which would otherwise be paid in another
country. Income which derives from activities carried on outside the territory
of the tax haven is attracted to that territory. Thus, taxpayers make use of a
base company (generally a subsidiary company) in tax havens to shelter income
derived from source countries (which may often be the country of residence
itself) and, in that way, to escape tax normally payable to the country of
residence. Although the real income-producing activity generally occurs
elsewhere, income is redirected to the tax haven with an obvious detrimental
effect on the revenue of the country of residence whose tax base is diminished.
Hence, it is recognised that the use of tax havens leads to decisions which are
at variance with what a neutral tax system would command and results in
undesirable economic distortions in international competition and the flow of
capital. The OECD members also express concern at the impact of tax avoidance
and evasion (and the line between the two may be fine), such practices being
contrary to fiscal equity and having serious budgetary effects. Both New Zealand and the Cook Islands, of course, have the
sovereign right to impose taxes within their territory on their own residents.
But the characteristics of a tax haven, briefly described above, cannot be
ignored. In a real sense, the erosion of a country's tax base undermines the
basic principle of the resident country's tax system and is an invasion of that
country's sovereign right to tax. The Cook Islands' interference with New
Zealand's sovereign right to tax, provides a sound reason for not granting it
sovereign immunity. Lewis Carroll, alone, I suspect, would countenance the
notion of another country operating a tax haven to the possible detriment of
this country's tax regime seeking to shelter behind the doctrine of sovereign
immunity when an attempt is made to ascertain the existence and extent of that detriment.
In the third place, it is relevant to note that the inquiry
being undertaken is not directed at the Cook Islands Government itself. It is
not directly "impleaded" in {317} the process. The terms of reference
are directed at the competence of the Commissioner of Inland Revenue and the
director of the Serious Fraud Office in dealing with the transactions referred
to and to whether, having regard to those kinds of transactions, what changes,
if any, should be made to the criminal or tax law for the purpose of protecting
this country's income base from the effects of fraud, evasion and avoidance.
Thus, while the extent that the Cook Islands was involved in the transactions
may well emerge during the commissioner's hearings, that country is not directly
impugned. The New Zealand Government seeks no report on the Cook Islands
Government's competence or culpability, other than may be incidental to
reporting on what, if any, changes should be made in the law. Nor is the Cook
Islands Government exposed to any enforcement procedures in respect of its
involvement in the transactions under inquiry. In all, the circumstances here
are far removed from the situation where a foreign state is impleaded before a
Court or tribunal and subjected to the possibility that the coercive machinery
of the forum state will be used to execute any judgment against it. A fourth factor has been foreshadowed already. The
Auditor-General and the documents in issue are within New Zealand. It is
analogous that jurisdiction may be exercised in rem by the Courts of a forum
state on the basis that property, such as a ship or trust fund, is within the
jurisdiction. The physical presence of the property reinforces the state's full
and absolute territorial jurisdiction. Similarly, if the person having control
of documents is within the jurisdiction, jurisdiction in personam may be
acquired (Brownlie (supra), at p 324). Indeed, it is now beyond doubt that the
Federal Courts in the United States have the power to require the production of
documents which are actually located in a foreign country if the Court has in
personam jurisdiction over the person in possession or control of the material.
(See James D Harman Jr, "United States Money Laundering Laws:
International Implications" 9 NYL Sch J Itn'l & Comp L (1988) 1, at p
32.) This consideration is, of course, a manifestation of the fundamental
principle of territorial jurisdiction. Fifthly, I believe that it is pertinent that the
commissioner's inquiries have revealed that the Cook Islands Government has
been involved in arrangements in which the taxpayers concerned have presented
tax credit certificates issued by the Cook Islands Government to the Inland
Revenue Department in this country in order to enable the taxpayers to obtain a
credit for that amount of tax in New Zealand. As Richardson J has pointed out,
Magnum and like transactions contemplated that the tax payment certificates
would be utilised to secure credit for the full amount in New Zealand for New
Zealand income tax purposes. Yet, the amount of the tax credit certificates is
repaid to the taxpayers by the Cook Islands Government's agency for a fee or
commission. Conduct of this kind cannot be ignored by the forum state. I
therefore welcome Richardson J's finding that to insist on the production of
the documents in issue for the purpose of copying them is a proportionate
response by New Zealand, and one which should be justified under international
law having regard to the fact that the documents are believed to contain
evidence of a conspiracy, to which the Cook Islands Government was a party, to
make an abusive claim to foreign tax credits in reliance upon tax credit certificates issued by
the Cook Islands Government. The judgment represents a realistic recognition of
the part public policy plays in determining the application of sovereign
immunity to the conduct of a foreign state. I endorse Richardson J's observation that the state has a
prime interest in tax enforcement and in the investigation of abuses of its tax system, and
that defrauding the public revenue strikes at the heart of government. I agree
that it would be indefensible for a friendly state to be party to an attempt to
evade or abuse our tax laws. I do not, therefore, need to elaborate the point
further. Suffice to say that, while content to include this consideration among
a number of others in determining whether or not sovereign immunity should
apply, I accept that the point can, in itself, provide a proper public policy
basis for withholding that immunity. {318} Sixthly, this is not a case where the dispute would be
best dealt with politically or through diplomatic channels. Thejudgments of the
House of Lords in I Congreso del Partido (supra) indicate an awareness that
there are classes of cases in this area which are better settled by the
executive than the judiciary. (See also Goff J, [1978] 1 All ER 1169, at p
1192.) I do not question the merit of this point of view. This is not, however,
such a case. The Auditor-General has objected to the summons issued by the
commissioner and pursued his objection in this Court. It properly falls to the
Court to resolve the issue, no doubt alert to the political impact which its
decision might generate. Correspondence produced to the Court between
representatives of the Cook Islands Government and the New Zealand Government
reveal that the latter has not been moved to indicate that state immunity is
thought appropriate in the circumstances, or that refusing it would cause
difficulties in its relationship with the Cook Islands Government which it is
not prepared to meet. Even if there were to be adverse consequences of a
political or diplomatic kind, the primary objective of having the commissioner
effectively complete his investigation in accordance with his terms of reference
must prevail. Finally, it is relevant to assess whether sovereign immunity
should be granted having regard to the principles underlying the doctrine. In
this respect, counsel for the Auditor-General submitted that the exercise of
jurisdiction by the commissioner would be incompatible with the dignity and
independence of the Cook Islands, that it could upset international relations,
that it would amount to interference with the sovereignty of the Cook Islands
and that, in effect, it would be an interference with the property rights of
that country. But is this claim correct? I think not. First, with reference to the theory that the assertion of
territorial jurisdiction is an affront to the dignity of a foreign state, it
may be questioned how realistic it is in this day and age to suggest that it
would be undignified for a foreign state to be subjected to the legal processes
of another state in respect of matters in which it is directly involved. As
Professor O'Connell observes, it is not beneath the sovereign's dignity in
civil law systems, and now by statute in England and America, to subject itself
in private matters to its own jurisdiction. He asks, why, then it should be
beneath the sovereign's dignity to submit itself to a foreign jurisdiction in the
interests of the administration of justice? (p 842). To my mind, it cannot be
validly claimed that, once the Cook Islands Government chose to enter into the
arrangements in issue with the ramifications which that had for the New Zealand
tax regime, it is an affront to the dignity of that nation to have its actions
examined in the course of an inquiry in New Zealand. Secondly, much the same observations can be made with
reference to the theory that the equality and independence of nations gives
rise to a duty on the part of states to refrain from intervening in the
internal or external affairs of other states. (See Brownlie (supra), at p 291.)
The point can at once forcibly be made that no such duty arises in the
circumstances of this case. By virtue of its involvement in arrangements
apparently designed to defraud the New Zealand tax revenue, the Cook Islands
forfeited any claim to have its sovereign equality and independence recognised
by the grant of sovereign immunity. In any event, it can hardly be said that
New Zealand is seeking to intervene in the internal or external affairs of the
Cook Islands by permitting the commissioner to have access to documents in New
Zealand relevant to its terms of reference, whatever consequences may eventuate
in respect of the secrecy attaching to the operations of its government. Nor is the theory of comity a sound basis for exempting the
Cook Islands from the jurisdiction of this country. This basis for sovereign
immunity presupposes, of course, comity and goodwill as between states in their
international relations. Thus, comity and goodwill is due to New Zealand from
the Cook Islands as well as from New Zealand to the Cook Islands. Good faith is
required on the part of both. Again, however, it cannot be properly suggested
that refusing to waive its jurisdiction in the present circumstances would
demonstrate a lack of comity or {319} goodwill on New Zealand's part. Indeed,
it could be suggested that the essential comity and goodwill, and the element
of good faith, is lacking in the actions of the Cook Islands Government in
participating in the arrangements in question. Finally, reference may be made to a number of bases put
forward justifying the doctrine of sovereign immunity which might be loosely
termed the preservation of international order. It is suggested that, in the
absence of a supranational authority, the subjection of one state to the
jurisdiction of another would upset that international order. But it would,
perhaps, be a rather inflated overstatement to suggest that New Zealand's
refusal to confer sovereign immunity on the Cook Islands relating to matters
arising in the course of an inquiry would result in the international order
being disrupted. Countries which operate tax havens having the characteristics
described above cannot fairly claim that they should be immune from the
scrutiny of other countries whose tax base is adversely affected. Nor, again,
can the maintenance of the international order be used to shelter behind when
conduct is undertaken by the foreign state which is itself damaging to that
international order. In the present case there is an added factor which can be
introduced under this head. Richardson J has referred to the particular
expression of the recognised international law principle of good faith in the
special relationship between New Zealand and the Cook Islands. Cook Islanders
are New Zealapd citizens, and in an exchange of letters in 1973, the Prime
Minister of New Zealand stated, and the Premier of the Cook Islands agreed, that
the bond of citizenship "also creates an expectation the Cook Islands will
uphold, in their laws and policies, a standard of values generally acceptable
to New Zealanders". Having regard to these considerations I am of the view that
the Court must decline to grant immunity from jurisdiction to the Cook Islands.
The balance between the interests of New Zealand in exercising its territorial
jurisdiction and the interest of the Cook Islands in obtaining sovereign
immunity falls heavily in favour of denying immunity. To my mind, to reach any
other decision in the circumstances of this case would be to pay undue homage
to some perceived legal formula which does not adequately reflect the reality
of international relations, the reasonable expectations of international law,
or the various factors which point to the grant of sovereign immunity being
contrary to the perceptions of public policy which prevail in this country. I would disallow the appeal and refuse the declarations
sought by the Auditor-General. DISPOSITION: All proceedings dismissed. SOLICITORS: For the Controller and Auditor-General: Rainey Collins
Wright & Co (Wellington); For KPMG Peat Marwick & Others: Kensington
Swan (Auckland); For PJ Brannigan & Others: Rudd Watts & Stone
(Auckland); For the Honourable Winston Peters: Dennis J Gates (Whangaparoa);
For the Serious Fraud Office: Office Solicitor, Serious Fraud Office
(Auckland); For the Commission of Inquiry: Luke, Cunningham & Clere
(Wellington). |