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Watson's Cullen Group accepts IRD appeal ahead of $60M tax avoidance trial

Tuesday 29th May 2018

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Inland Revenue and Eric Watson's Cullen Group have settled one pre-trial dispute ahead of a tax avoidance trial in Auckland later this year.

IRD is pursuing Cullen Group for $59.5 million in non-resident withholding tax, as it says a 2002 restructuring was done to avoid tax. Eric Watson owned all the shares in Cullen Investments before November 2002, when he sold all of that company's shares into the newly formed Cullen Group. Watson then loaned $291 million to Cullen Group, assigning those loans to two Cayman Islands companies. 

Under New Zealand's tax law, interest paid to a non-resident, such as the Cayman Islands companies, attracts non-resident withholding tax of 15 percent, but that can be cut to a 2 percent levy (the approved issuer levy, or AIL) if certain conditions are met. One condition is that the payer and the recipient are not “associated persons” under the relevant Income Tax Act.

Cullen Group paid the 2 percent levy, and IRD argues that while Cullen Group and the Cayman Islands companies weren't associated parties under the specific terms of the relevant Income Tax Act, it was nonetheless a tax avoidance arrangement which allowed Cullen Group to benefit significantly from paying a lower levy. 

Cullen Group last year won a pre-trial motion to access documents which included advice from IRD or special purpose committees or working groups to Parliament about tax law, specifically the definition of “associated persons” to be employed in the legislation. The High Court, in that decision, said that the key issue at trial will be whether Cullen Group made use of the “associated persons” rule or the AIL regime in a manner contrary to Parliament’s intention at the time Parliament enacted the legislation which established the AIL regime. 

An appeal from the IRD on this was to be heard this morning in Wellington, but the dispute was settled on Friday, with Cullen Group accepting that the High Court judge who granted them access was wrong. 

Cullen Group accepted the ruling went far beyond the normal definition of extrinsic aids, and that it would likely be a fruitless fishing expedition which would cover material dating back to 1968. The trial judge would also likely refuse to admit any documents found. 

The three-week trial will begin on Aug. 27 in Auckland's High Court. 


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