Tax case sparked by 2004 audit of Watson

The IRD’s $112 million tax chase of rich-lister Eric Watson’s Cullen Group was sparked by a 2004 audit, the High Court has heard.

In the second day of hearings in the trial at the High Court at Auckland, Cullen executive William Gibson said the tax wrangle had history dating more than a dozen years.

“During 2004 Watson was audited by the Commissioners’ High Net Worth Individuals unit,” Gibson said, outlining how early concerns about the routing of loans through the Cayman Islands had seen the case progress through Inland Revenue disputes processes to the present court action.

The case centres on a complex network of shares transfers and $291m in related-party loans between Watson’s companies, trusts and two Cayman entities in 2002 as the controversial rich-lister sought to leave New Zealand, and his personal tax obligations here, in order to relocate to London.

The heart of the dispute is whether the transaction entitled Cullen to qualify for the Approved Issuer Levy, a 2 per cent charge on interest paid, or whether it should have, as Inland Revenue says, attracted the 15 per cent charge of a NonResident Withholding Tax. Counsel for Cullen Group said the difference amounted to $50m, but lawyers acting for Inland Revenue said given the passage of time and the need to charge interest it was seeking $112m.

Gibson said the 2002 transactions, while “highly structured and involving many steps” had a “genuine and proper purpose” in order to facilitate Watson’s relocation to London.

He said at the same time the share-transfers and loans were being put in place, Watson was selling property in New Zealand. Gibson said Watson had left New Zealand on May 14, 2002, and by April the following year qualified to be a nontax resident of New Zealand.

Gillian Coumbe QC, acting for Inland Revenue, asked Gibson why the Cayman Islands, popularly seen as a tax haven, were used in the transaction.

“For a high net worth individual on a UK non-dom basis, the word tax haven I have a negative connotation with and that’s the public perception, it’s perfectly acceptable to use jurisdictions which have minimal tax friction,” he said.

Under further questioning from Coumbe, Gibson confirmed Watson also maintained structures in other tax havens including Jersey and the British Virgin Islands.

Gibson is the sole witness presented by Cullen to give evidence on the facts of the transactions.

The hearing continues.