Banks deliver $2.2 billion Xmas bonus to NZ

Foreign banks deliver $2.2 billion Christmas bonus to taxpayers in tax avoidance settlement

By Pattrick Smellie

Dec. 23 (BusinessWire) – New Zealand’s four largest foreign-owned banks have thrown in the towel and settled tax avoidance disputes with the Inland Revenue Department for more than $2.2 billion in what is believed to be the largest commercial settlement in New Zealand’s legal history.

In a move that delivers the taxpayer a huge Christmas bonus, Westpac, Bank of New Zealand, ANZ National Bank and ASB – all of which are owned by Australian parent banks - have settled with the IRD for around 80% of the total tax, including accumulated interest, in dispute.

By settling, the banks have also avoided hefty penalty payments which the IRD could have applied, assuming challenges to two High Court judgements earlier this year against BNZ and Westpac had failed at the Court of Appeal and Supreme Court.

It also confirms a major element in the short term improvement in New Zealand’s balance of payments deficit on current account, which shrank to 3.1% of Gross Domestic Product in the year to September, its lowest level in six years, in large part thanks to Statistics New Zealand assuming that the banks would fail in appeals that had been expected to take anything up to another five years to complete.

The decision ends the prospect of millions of dollars in additional legal fees for the banks and the Crown, and represents a major victory for both the IRD and the Crown Law Office, while leaving the banks privately seething because IRD’s binding rulings on early versions of the transactions emboldened them to repeat similar deals without seeking further permission.

All the transactions differed, but essentially involved foreign banks attempting to leverage apparent loopholes that reduced the New Zealand tax take, effectively allowing the banks to choose what rate of tax to pay in this country.

In the Westpac case, the Crown produced memos from a senior tax adviser, now chairman of PricewaterhouseCoopers in New Zealand, John Shewan, advising Westpac it should declare tax at a rate that would meet public relations objectives: around 15%, similar to peers in the industry, despite a corporate tax rate in New Zealand of 33%.

When it came to actual tax paid, as opposed to the rate publicly declared, a rate as low as 6.5% was advised as feasible, since the complexity of the tax system in this area meant few would be able to deduce the difference.

When IRD ruled against such treatments, all four banks (five at the time, since the National Bank was still then owned by Lloyd’s) launched High Court challenges.

The BNZ’s challenge in the Wellington High Court before Justice John Wild failed, but legal advisers placed their faith in moving the Westpac trial to Auckland, were they were confident a more commercially savvy bench would rule in their favour.

Instead, Justice Rhys Harrison delivered, if anything, a harsher verdict than Wild’s.

The settlement is the tax department’s largest ever and follows years of investigations and court battles as the foreign-owned banks insisted that structured finance or “repo” transactions in the late 1990’s and early 2000’s were legitimate.

Westpac New Zealand Chief Executive George Frazis said, "We entered these transactions relying upon expert advice and a ruling issued by the IRD in relation to a similar transaction, but we accept the court has ruled and that, on balance, it is best that we accept this industry settlement and move on.”

The BNZ’s statement was similar: “This is a complex and technical issue, and it has been the subject of much debate. Simply put; we acted in good faith at the time, the High Court has delivered a judgment, and now it is time to settle so that we can move on and move forward,” BNZ’s chief executive Andrew Thorburn said.

The settlement sees the banks collectively paying around 80% of the full amount of tax and interest in dispute, and the IRD levying no penalties.

The Commissioner of Inland Revenue, Robert Russell, and the Solicitor-General, David Collins QC, said they were pleased the long-running tax disputes have been settled.

Russell said it had been Inland Revenue's long-held view that the transactions were tax avoidance.

”Our decision to pursue these cases has been shown to be absolutely right, and it has returned a very good result for the taxpayers of New Zealand.”

”We believe this sends a strong signal to companies operating in New Zealand - like all taxpayers they must meet their obligations,” he said.

So confident had IRD become of its position that, prior to the settlement, it was pressing to have both the BNZ and Westpac Court of Appeal challenges heard simultaneously, and they had been set down for the same four weeks in October next year.

All the affected banks have provisioned already for such a loss and say the judgements have no impact on their prudential liquidity requirements or capacity to trade.

(BusinessWire)

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