Taxman challenges BNZ deals

The Bank of New Zealand shared the benefits of tax avoidance arrangements with global investment bank Credit Suisse and a subsidiary of Warren Buffett's firm Berkshire Hathaway, the Inland Revenue Department alleges.

The BNZ is fighting tax reassessments dating back to 1998 that left it with a potential liability of up to $518 million - including interest of $102 million - at March 31.

Documents filed in the High Court at Wellington by the IRD and the BNZ show some of the methods used in the alleged avoidance arrangements.

They also show the IRD believes some fees paid by BNZ to Credit Suisse - then Credit Suisse First Boston - and the General Re group of companies, were a mechanism to "share the benefits arising from the tax avoidance".

The General Re group is headed up by Berkshire Hathaway's reinsurance subsidiary General Re Corp. Berkshire Hathaway chief executive Buffett was ranked second last year on Forbes Magazine's list of the world's richest people with a net worth of US$44 billion ($65 billion).

The IRD is also disputing similar "structured finance" deals done by ANZ National Bank, Westpac and ASB. The four Australian-owned together face potential retrospective tax bills of more than $1.7 billion.

The dispute relates to deals where banks borrowed money overseas, channelled it through New Zealand, then invested it offshore.

The BNZ wants the IRD's reassessments overturned - and also wants the tax department to pay its court costs.

The IRD says it is entitled to adjust the taxable income of any party involved in tax avoidance.

Court papers show the BNZ case centres on a series of loans BNZ subsidiaries - BNZ Investments, BNZ International, BNZI Securities No.1 and BNZI Securities No.2 - took out with General Re and Credit Suisse subsidiaries.

The 1998 and 1999 deals saw BNZ buy beneficial interests in two General Re trusts and a CSFB trust each valued at $500 million.

BNZ then paid procurement fees of 2.95 per cent a year on the loans. General Re repurchased BNZ's interest in its trusts, both for $500 million, in 2000 and 2004 and the CSFB group bought back BNZ's interest in its trust for $500 million in 2002.

The IRD alleges BNZ wrongly booked the procurement fees on loans from the US-based institutions as allowable deductions in New Zealand tax returns.

The IRD also claims guarantee arrangement fees paid between BNZ subsidiaries relating to the loans were "part of a tax avoidance arrangement".

The IRD also objects to one of the BNZ subsidiaries claiming tax credit for more than $25 million of tax paid to the US Internal Revenue Service by a General Re trust.

BNZ says it was entitled to a foreign tax credit because this reflects foreign tax paid on its behalf.

The IRD, however, claims this is an "integral" part of the tax avoidance arrangement.

BNZ claims procurement and guarantee arrangement fees in the deals were paid in order to achieve a commercial advantage.

But the IRD maintains: "The fees were a mechanism to maximise tax deductions and share the benefits arising from the tax avoidance arrangement" with the General Re and CSFB groups of companies.

The IRD rejects the BNZ's claim that similarities between the disputed deals and previous approved deals meant it was entitled to expect the green light from the taxman.

This is a claim also made by Westpac in its argument with the IRD.

"A binding ruling is given on a particular transaction and is not a statement of policy on a particular type of transaction," says the IRD. Therefore, the BNZ was not entitled to expect the IRD to treat other transactions, similar or otherwise, in the same way as ones previously approved.

The next pre-trial hearing is set for August 16.