Tobacco giant in IRD tax probe

The Inland Revenue Department is investigating transactions by the New Zealand arm of global tobaco giant British and American Tobacco as it pushes home the advantage created by its win over tax avoidance by foreign-owned New Zealand banks.

BAT (New Zealand), whose brands include Dunhill, Rothmans and Benson & Hedges, has provisioned almost $40 million in back taxes because of the IRD review of "a financing transaction undertaken by the company", according to its report for the year to December 31, filed with the Companies Office.

"The IRD's review is not yet complete," BAT NZ said in notes to the accounts. "It has indicated to the company that is preparing an issues paper with respect to the transaction and will make that paper available to the company shortly for comment.

"In light of this and recent New Zealand court decisions which are widely regarded as indicating a conservative shift in tax jurisprudence in New Zealand, the directors decided to make a provision of the tax which may be imposed by the IRD in respect of the transaction."

The bank tax avoidance cases saw BNZ, ANZ New Zealand, Westpac and ASB - all owned by Australian banks - pay $2.2 billion to settle with IRD last Christmas Eve over cross-border structured finance transactions undertaken in the late 1990's and early 2000's.

The banks had challenged IRD's view that the transactions constituted avoidance, but settled after two separate High Court actions by BNZ and Westpac failed last year.

The transactions were only available to the local branches of foreign-owned companies because they exploited loopholes in New Zealand's international tax law.

The hit to BAT NZ's earnings comes as the government wallops smokers with three 10 per cent increases in tobacco excises over the next three years to discourage smoking.

The accounts show BAT NZ declared post-tax "comprehensive earnings"
of $53.2 million, compared with $106.1 million in the year to Dec. 31, 2008.

That was despite a small lift in total revenue to $293.2 million
($284.2 million the previous year), giving gross profit of $228.0 million ($222.8 million).

Income tax provisioning rose from $37.9 million the previous year to $81.1 million, of which $39.5 million was "under-provision for previous years".

Meanwhile, the New Zealand arm of Imperial Tobacco - owner of brands including Camel, More and Drum - reported after-tax net profit of $12.5 million for the year to Sept. 30 in its Companies Office annual report filings. That compared with $10.8 million in the year to Sept. 30, 2008.

The huge impact of excise duties on tobacco companies' operations is more clearly shown in Imperial Tobacco (New Zealand) Ltd's accounts than BAT (NZ)'s.

Imperial's total revenue for the last financial year was $266 million, of which $192.3 million was excise duties payable to the government. By comparison, "raw materials and consumables used" amounted to just $17.6 million for the year.