Every year the IRD gets a boost to its budget to track down corporate tax avoiders.
It’s tempting to think that the taxpayer always loses when it comes to multinational corporate taxpayers, but in the past few years the Inland Revenue Department (IRD) has had a string of significant wins. And year after year, the IRD gets big increases in its enforcement budget, a no-brainer since every dollar spent on nailing tax avoidance yields a return to taxpayers of about $7.
THE BANK "REPO" CASES
Settled on Christmas Eve, 2009, for $2.2 billion and involving the country’s four largest foreign-owned banks – Westpac, ANZ, BNZ and ASB – this is still believed to be the largest commercial settlement in New Zealand. By agreeing to pay the equivalent of about 80% of the unpaid tax and interest in dispute, the banks avoided potentially large penalties if they lost in court. The case was notable for advice from a PwC senior partner at the time, John Shewan, that his client, Westpac, should be seen to be paying enough tax to satisfy public expectations. He suggested that should be about 15% of annual profits, compared with the corporate tax rate at the time of 30%. Westpac chose to pay at an effective tax rate of 6.5%.
TRANSTASMAN HYBRID CASES
A string of Australian-owned companies, including former KiwiRail owner Toll Holdings, Telstra and former TV3 owner Ironbridge Capital, used a simple tax-minimising trick to invest in New Zealand companies in the first half of the 2000s. Using either mandatory or optional convertible notes (MCNs and OCNs), they stacked the New Zealand entities with debt. The interest paid on that debt was deductible from New Zealand earnings, reducing the tax take on this side of the Tasman, while increasing earnings booked in Australia. The courts found much of that debt was loaded on to the Kiwi companies for tax rather than justifiable commercial reasons. As much as $300 million in unpaid tax, interest and penalties was at stake.
The IRD’s former head of policy, Robin Oliver, now in private practice, says corporate customers wouldn’t dream of such schemes today.
“With our anti-avoidance rules and the way the Supreme Court interprets them, it makes it a no-go area,” he says. “If someone came to us today and this is what they wanted to do, we’d look at them cross-eyed.”
More on tax avoidance: The missing billions of multinational tax
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