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Eric Watson's Cullen Group avoided $51m in tax: High Court

Eric Watson's Cullen Group avoided $51m in tax, High Court confirms

Kim Savage, Senior Business Journalist

The High Court has sided with Inland Revenue (IRD) in a multi-million dollar tax avoidance case involving high profile businessman Eric Watson's company Cullen Group.

The complex saga dates back to 2002, when Mr Watson moved to the UK and restructured his affairs using two Cayman Islands-based companies, Modena and Mayfair.

That allowed Mr Watson's Cullen Group to pay only a 2 percent levy on the interest on those loans, instead of 15 percent withholding tax.

Justice Matthew Palmer confirmed IRD's assessment that the Cullen Group's actions amounted to avoiding $51.5 million of tax, because Mr Watson still had control on both sides of the deal.

"It restructured shares in one New Zealand company (Cullen Investments Limited) into loans to another New Zealand company (Cullen Group), which were assigned to overseas entities (Modena and Mayfair) in form but not substance," Justice Palmer said.

The Cullen Group used a process called Approved Issuer Levy (AIL), which was designed to encourage investment in New Zealand, by making it cheaper for New Zealanders to borrow from overseas investors, but it required the two parties not to be linked.

Using the AIL system allowed Cullen Group to pay only $8 million in levies, but the court has backed IRD that it should have paid $59.5 million in non-resident withholding tax.

It now owes the difference, $51.5 million plus another $60.5 million in interest charged on the outstanding amount, bringing Cullen Group's total liability to $112 million, excluding any penalties.

A representative for Cullen Group told RNZ Business it is considering the judgement and will make any decision on an appeal in due course.

Who is Eric Watson?

The IRD did not target Mr Watson personally for the tax avoidance but his company Cullen Group.

His name has featured in headlines throughout his career, with Mr Watson known for his ownership of the Warriors rugby league team, a marriage to model Nicola Robinson, and a fight with movie star Russell Crowe in a London pub in 2002.

Last year, Mr Watson lost a bitter wrangle with his former business partner Sir Owen Glenn and was ordered to pay him close to $50 million.

The stoush was over $250 million of Sir Owen's investment funds which the UK's High Court found Watson's companies had obtained unlawfully.

What happened?

• 2002 - Eric Watson moves to London, restructures his business affairs so that his shares in Cullen Investments are replaced by loans owed by Cullen Group to conduits in the Cayman Islands, Cullen Group applies to become an Approved Issuer which means it is eligible to pay a two percent per annum levy instead of 15 percent withholding tax.

• March 2003 to November 2008 - Cullen Group pays two percent of the $397 million of interest it paid, or credited in account, to Modena and Mayfair, amounting to just over $8 million.

• 2010 - IRD assessed Cullen Group as liable for non-resident withholding tax on the interest, which at 15 per cent, amounted to around $59.5 million. Minus the $8 million, Cullen Group is deemed to owe IRD $51.5 million.

• August and September 2018 - Cullen Group challenges IRD's assessment in the High Court.

• March 2019 - Justice Matthew Palmer delivers his judgement and agrees Cullen Group is liable for $51.5 million in tax, plus $60.5 million in use of money interest.

Was it mistaken tax avoidance?

Cullen Group argued that the end result, a difference of $51.5 million in tax paid was incidental because the company qualified for the Approved Issuer Levy.

Justice Palmer said Cullen Group had failed to prove its point.

"It is not one of the rare cases where tax avoidance was merely incidental. The amount of tax avoided and the integral nature of payment of AIL as a term of the relevant loans indicate tax avoidance was an end pursued in its own right."

IRD's response

IRD's legal services leader Karen Whitsikie said the decision was the culmination of a lot of hard work by many people.

"This was a long running issue and shows the dedication of our people in unravelling what went on."

She said the court had supported the way IRD viewed the arrangement created by Mr Watson.

"Mr Watson retained a high degree of control over the relevant entities and was on both sides of the loans. The Court found it was a tax avoidance arrangement and void against the Commissioner."

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