National says Transpower tax deal 'questionable'

National Party finance spokesman John Key is attacking the Government over the ethics of a $500 million Transpower scheme involving international tax haven the Cayman Islands.

The state-owned national grid owner and operator has granted a long-term lease over the South Island's high-voltage network to unnamed United States investors, who have then leased it back through an intermediary body in the Cayman Islands to help the investors manage their tax liabilities.

The scheme appears likely to reduce Transpower's tax bill.

Mr Key said the complicated tax deal would be Finance Minister Michael Cullen's winebox -- the name given to an investigation into another tax avoidance scheme.

"He is prepared to risk our long-term international reputation for a mere $34 million," Mr Key said.

In the United States these types of deals had cost hundreds of billions of dollars in lost tax revenue, he said.

"It would appear our Finance Minister has learned nothing from the collapse of Enron.

"Technically this may not be against the law but is it ethical behaviour from a state owned enterprise?"

Mr Key said he suspected the case was not isolated and said there were reports that the Airways (Corporation) may have similar arrangements.

"Dr Cullen is the ethical gatekeeper charged with guarding our international reputation. If the boot was on the other foot how would the New Zealand taxpayer feel about subsidising US investors?"

Green Party co-leader Jeanette Fitzsimons said Transpower's board should be fired if the scheme is "dodgy".

"If Transpower have engaged in dodgy dealings that have cost the taxpayer or put the grid at risk, its board and CEO must be fired immediately," she said.

"The Government must quickly investigate this deal and report back on its impact on electricity consumers and taxpayers."

Ms Fitzsimons said New Zealanders were entitled to be given the full facts.

Transpower says it has not sold the South Island's high-voltage network overseas, but experts believe it may be risking ownership of the grid for a one off $34.6 million payment if the deal collapses.

Canterbury University accountancy academics Sue Newberry and Alan Robb wrote a report about the scheme and revealed the involvement of what is called a special purpose entity in the Caymans.

While Transpower's December report showed its leased assets had risen by $551m, some believe the deal may be worth as much as $750m, although the money never made it to New Zealand but was re-routed back to the US via the Cayman Islands tax haven.

In the US, such deals have been slated as tax scams and have cost hundreds of billions of dollars in lost tax revenue.

Special purpose entities were closely linked with the fall of giant US energy trading company Enron.

Transpower spokesman Chris Roberts said such transactions had been entered into many times by utility companies around the world and were a "common way for asset-intensive companies to efficiently finance their assets".

"This allows Transpower to reduce our borrowing needs and ultimately charge lower prices to our customers."

Transpower had retained title of the South Island lines and believed there was no risk of losing control of the grid.

Transpower already had a leasing deal of a similar kind over the Cook Strait cables that was signed in 1996.

Mr Roberts said the transaction was the subject of a binding ruling by Inland Revenue (IR) and was "tax positive", a status that Dr Newberry said suggested it reduced Transpower's tax obligations.

Finance Minister Michael Cullen yesterday told The Press newspaper Transpower had been keen to pursue the lease and had "sought willing counter-parties" to enable that to happen.

The Government had agreed to the transaction on the proviso that the final decision rested with Transpower's board, subject to consultation requirements and checks that risks from the transactions were remote.

Dr Cullen said tax was still being paid to the Government on increased profits.

He said Mr Key's criticism was surprising as the National Party had approved a similar deal in 1996 for Transpower, he said.

"What's happened here is the United States deliberately has within its tax system the ability of these lease out lease back provisions which we certainly would think rather odd if they were in our tax system," he told National Radio.

The US embassy in Wellington had given an assurance the case was not an inappropriate use of its tax system and it would not affect the reputation of New Zealand companies.

US authorities have said they are looking at lease out lease back schemes.

"So Transpower retains ownership of the grid and the system. There's a lease out and lease back arrangement which generates additional profit for Transpower, that results in additional revenue for the Government in terms of taxation on those profits."

Dr Cullen said it was up to the United States government to make changes if they were unhappy with these kinds of arrangements.

He confirmed that Airways and a number of New Zealand private companies had similar arrangements.

- NZPA