Esmari van de Vyver
On 16 July 2009 the New Zealand High Court ruled against the Bank of New Zealand over six structured finance transactions. The tax liability amounts to about $NZ 654 million.
Justice John Wild found the transactions had no commercial purpose or rationale, other than to use the bank's tax capacity to generate exempt income. Without the tax benefits they were anticipated to generate, the transactions involved providing funds to the counterparties at a substantial loss. The only purpose of the transactions was to use the bank's tax capacity to generate exempt income. The transactions had no commercial purpose or rationale and tax avoidance was therefore not a merely an incidental purpose or effect of the transactions.
The bank borrowed money from the market and used it to make six "extraordinary low cost" loans of $500m each to special purpose vehicles owned by the bank in the Cayman Islands. It received shares in the special purpose vehicles in return. The special purpose vehicles then lent the funds to Rabobank, American CS First Boston, Lehman Brothers and insurance underwriter Gen Re.
The Bank of New Zealand claimed the cost of funding the scheme, a fee charged for securing a guarantee for the loans and hedging costs against the interest earned on the loans. The deductions resulted in a tax loss over the transaction period.
Bank of New Zealand chief executive Andrew Thorburn said the bank was disappointed and will decide within the next few weeks whether to appeal the decision, but that the ruling would have no impact on its ability to meet any of its debt or equity obligations.
The judgement is likely to affect Westpac, ANZ and the Commonwealth Bank, who are also in dispute with the New Zealand Inland Revenue over the tax treatment of similar transactions. The nation's four big banks are staring at a potential tax bill of almost $NZ 2.4 billion. Westpac, which has a $NZ 903m exposure, started a High Court case on June 30, while cases involving ANZ ($NZ 562m) and CBA ($NZ 280m) have yet to be allocated court dates.
Bank of New Zealand Tax Avoidance Case
20 March 2009Esmari van de Vyver
In the first important New Zealand tax avoidance case in ten years, Inland Revenue's case against the Bank of New Zealand started in the High Court this week.
It is the first of six New Zealand banks that are being assessed for about $2 billion in taxes and interest on structured financial transactions during the seven years to June 2005. Inland Revenue argues that the transactions were "unusually complex, highly contrived and commercially inexplicable", which serve as evidence that their real purpose was tax avoidance.
The other banks that received amended assessments are ANZ National, ASB Bank, Westpac, Rabobank and Deutschebank. Westpac recently lost a Court of Appeal case that partly dealt with the relevant transactions. Deutschebank has since settled with Inland Revenue.
The Bank of New Zealand undertook a series of nine transactions between 1998 and 2002, six of which are being challenged by Inland Revenue.
The bank borrowed money from the market and used it to make six "extraordinary low cost" loans of $500m each to special purpose vehicles owned by the bank in the Cayman Islands. It received shares in the special purpose vehicles in return. The special purpose vehicles then lent the funds to Rabobank, American CS First Boston, Lehman Brothers and insurance underwriter Gen Re.
The Bank of New Zealand claimed the cost of funding the scheme, a fee charged for securing a guarantee for the loans and hedging costs against the interest earned on the loans. The deductions resulted in a tax loss over the transaction period.
Inland Revenue argued that the Bank of New Zealand could not have provided funding at competitive rates to these highly rated institutions or their subsidiaries without the tax advantages. The tax deductions were the sole driver of the transactions as a whole and in part.
The Bank of New Zealand replied that the transactions were legitimate in terms of the tax legislation at the time and were genuine commercial deals with real risks and exposures to the bank. The costs were incurred to protect the bank and were claimable expenses and the motivation for the transactions was not to create tax losses, but to earn interest income that was tax exempt in New Zealand.
"Just because a transaction is dependent on tax exemptions does not mean it is a tax avoidance arrangement", said the bank's defence lawyer.
The court hearing is expected to last approximately ten weeks.
Copyright © 2009 Esmari van de Vyver