Air NZ calculations behind big tax bill

By CHRIS DANIELS aviation writer

Differences in the ways resident and non-resident aircraft owners calculate profits appear to be at the heart of Air NZ's shock Hong Kong tax bill.

The Hong Kong Inland Revenue Department says the Air NZ subsidiary NZ International Airlines owes $47 million in unpaid tax for the years from its formation in 1989 to 2002.

Air NZ says adding later years could add $60 million to the bill, giving a total of $107 million.

The airline will have to pay its $47 million tax bill within six weeks.

Its chief financial officer, Shane Warbrick, is in Hong Kong negotiating with tax authorities.

One tax lawyer spoken to by the Herald said some "very big" tax cases had come from Hong Kong. Appeals in such cases once went to the Privy Council in London, but now the top court was the Court of Final Appeal in Hong Kong.

This court sat with four Hong Kong judges and one from overseas, often from Britain or sometimes Australia or New Zealand.

The tax lawyer said Air NZ's subsidiary company might have been caught out by a formula applied to profits.

The method used to work out which profits were taxable in Hong Kong related to the number of times aircraft owned by the company landed at an airport in Hong Kong.

Companies were treated as "resident aircraft owners" or "non-resident aircraft owners", which affected the way their taxable profit was calculated.

Air NZ had cash reserves of $894 million at the end of last year, and management says there is enough money in the bank to pay the tax bill.

The Business Herald understands that airline management was confident about the scheme, particularly after having it endorsed by Hong Kong tax officials in the mid-1990s.

Air NZ is in the process of shutting its Hong Kong office and all aircraft purchases and lease arrangements will be handled from New Zealand.