Pretax profitability 'irrelevant' - Bank of NZ makes closing arguments in $2billion tax case

Thursday 11th June 2009

Just because Bank of New Zealand transactions lost money without tax breaks doesn’t make such arrangements evidence of tax avoidance, the bank’s legal counsel Alan Galbraith told the High Court in Wellington today.

Summing up for BNZ after 10 weeks of evidence in a case with potential bearing on more than $2 billion in unpaid back taxes and interest by seven New Zealand banks, Galbraith said it was "not meaningful" to talk about bank financing transactions as "tax-driven in any pejorative sense, because tax-driven transactions are an ordinary part of commercial life and finance practice".

"The fact that a transaction's economic viability is dependent on the availability of a tax benefit has never been seen as a hallmark of tax avoidance," he said.

BNZ, Australia & New Zealand Banking Group, National Bank, ASB Bank, Westpac Banking Corp, Rabobank and Deutsche Bank are all subject to challenges by the Commissioner of Inland Revenue over transactions which, in the BNZ's case, date back to 1998 and 2002 and allegedly allowed the lender, a unit of National Australia Bank, to decide how much tax it would pay in New Zealand. Deutsche Bank has already settled with the IRD, and the other banks are watching the BNZ closely for an indication of the likely outcome of their trials, which are yet to be heard.

The IRD case closed last week and BNZ’s closing arguments were heard yesterday, with Judge Richard Wild querying Galbraith's concentration on the benefits to the international counter-parties in the transactions rather than the position of the bank.

"I have no problem with the commerciality from the counter-parties' perspective," the judge said at one point. "They must have been delighted to get this money at those rates.

"If I have difficulty, it's with the BNZ's perspective. This was lending at below cost," he said.

BNZ made structured finance loans of $500 million each for up to five years to Netherlands-based Rabobank, American CS First Boston, Lehman Brothers and insurance underwriter Gen Re.

They were based on similar transactions which the IRD have previously given binding rulings on, but which exploited other countries' tax loopholes rather than the New Zealand tax base.

As much as $641 million in unpaid tax and interest is at stake in the BNZ case, and perhaps $2 billion in total across all the transactions at stake.

In the BNZ transactions, funds were lent at sub-Libor interest rates and were unprofitable for BNZ prior to tax, but this "comparatively small economic cost was far outweighed by the exceptional return derived by BNZ after tax," the IRD has argued.

The structured finance transactions were "unusually complex, highly contrived and commercially inexplicable, absent their tax objective," the department contends. "The financing provided by BNZ was subsidised by the New Zealand tax base.”

The bank’s counsel, Galbraith, however, argued that the transaction was one of the huge number of inter-bank financial transactions that occur constantly as financial institutions seek to manage their ever-changing portfolios.

"Whether or not the (BNZ) and the counter-parites would have transacted without the benefits in these cases, the counterparties would still have needed to raise funds, and the (BNZ) would have carried out financing transactions. That is their business," Galbraith said. "There is a wide range of transactions which would not take place in the form they do, or even at all, were it not for the tax effects."

Businesswire.co.nz

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