Tax man chases Wat­son’s firm for . . . $60 mil­lion

IRD tar­gets high pro­file busi­ness­man’s com­pany Cullen Group over Cay­man Is­lands ‘tax avoid­ance’

Weekend Herald - - Front Page - Matt Nip­pert

When tax­pay­ers dig in and ex­er­cise their rights, it can grind on.

Terry Baucher

Eric Wat­son’s hold­ing com­pany is fac­ing de­mands to pay $60 mil­lion in back taxes af­ter In­land Rev­enue de­cided its com­plex net­work of re­lated-party loans and Cay­man Is­land ve­hi­cles amounted to tax avoid­ance.

The high-pro­file ex­pa­tri­ate busi­ness­man — fa­mous for mar­ry­ing lin­gerie mod­els, get­ting into a fist­fight with Hol­ly­wood star Rus­sell Crowe, and past own­er­ships stakes in the New Zealand War­riors league team and col­lapsed Hanover Fi­nance — faces the prospect of the tax bill in­di­rectly tak­ing a chunk of his es­ti­mated $450m for­tune.

The tax claims, which have worked their way through the High Court at Auck­land over the past two years, are set down for a full air­ing at a three-week trial from Au­gust 27.

Wat­son is not be­ing per­son­ally chased, with IRD mak­ing its claims against his hold­ing ve­hi­cle Cullen Group. Jus­tice Mark Wool­ford noted in a pre-trial rul­ing that “be­fore the ar­range­ment at is­sue, Mr Eric Wat­son per­son­ally held all the or­di­nary shares”.

The tax claim is be­ing con­tested, with Wat­son’s Cullen Group ar­gu­ing its ac­tions were not only le­gal, but in­tended to be le­gal by Par­lia­ment when the rel­e­vant tax leg­is­la­tion was passed.

In pre-trial skir­mishes, Cullen Group won a bid to seek doc­u­ments of­fer­ing advice to Par­lia­ment — but In­land Rev­enue have dis­puted this rul­ing with an ap­peal to be heard in Welling­ton on May 29.

Both In­land Rev­enue and rep­re­sen­ta­tives for Wat­son and Cullen cited the le­gal ac­tion in de­clin­ing to com­ment about the dis­pute.

Wat­son’s re­struc­tur­ing of his Cullen em­pire in 2002 — when he re­lo­cated from New Zealand to Lon­don — is at the cen­tre of the case.

The re­struc­tur­ing saw a com­plex chain of loans and share trans­fers be­tween en­ti­ties — with Wat­son mak­ing $291m in loans to Cullen Group to en­able the sale of his Cullen In­vest­ments shares, then as­sign­ing these loans to two Cay­man Is­land com­pa­nies — that In­land Rev­enue al­leges served no pur­pose ex­cept to avoid pay­ing $59.5m in tax.

“The Com­mis­sioner al­leges that this was a tax avoid­ance ar­range­ment,” Jus­tice Wool­ford sum­marised in his rul­ing.

He said In­land Rev­enue claimed the ma­noeu­vre was “not a gen­uinely arm­slength trans­ac­tion” but was in­stead “con­trived” and “care­fully de­signed” to en­sure the in­ter­est pay­ments in­volved qual­i­fied to pay only a 2 per cent levy in­stead of 15 per cent non-resident with­hold­ing tax.

Tax con­sul­tant Terry Baucher, who re­viewed the pub­lished rul­ing on the case, said the dis­pute boiled down to the spirit of the law.

“This all comes back to the very ne­bu­lous con­cept of ‘Par­lia­ment con­tem­pla­tion’. At the time Cullen com­plied with the let­ter of the law. The is­sue is that In­land Rev­enue is ar­gu­ing that Par­lia­ment never con­tem­plated the law be­ing used this way, so ag­gres­sively,” he said.

He com­pared ag­gres­sive tax plan­ning to the over-the-ball play of for­mer All Black cap­tain Richie McCaw.

“Any good open­side will push it to the limit. They’ll se­cure you lots of turnovers, but some­times they’ll get whis­tled for it.”

Ac­cord­ing to public no­tices in the Cay­man Is­lands, the two en­ti­ties con­nected to the case — Mod­ena Hold­ings and May­fair Eq­ui­ties — were wound up, re­spec­tively, in 2009 and 2010.

Baucher noted the age of the dis­pute — with some trans­ac­tions dat­ing back 16 years — did raise ques­tions but there may have been is­sue ob­tain­ing in­for­ma­tion from en­ti­ties in “non-trans­par­ent” ju­ris­dic­tions like the Cay­man Is­lands.

“On the other hand, you might ar­gue jus­tice de­layed is jus­tice de­nied. It’s clearly been in dis­pute for some time but when tax­pay­ers dig in and ex­er­cise their rights, it can grind on,” he said.

The tax dis­pute in the High Court at Auck­land is only one le­gal front for the bat­tling Wat­son, with other sig­nif­i­cant pro­ceed­ings pit­ting him against fel­low rich-lis­ter Sir Owen Glenn also soon to come to a head.

That case, over a soured busi­ness re­la­tion­ship be­tween the two men and the fate of more than $200m stashed in a Jer­sey bank ac­count, has spanned four years and courts in Europe and the Bri­tish Vir­gin Is­lands.

A 12-week trial over the mat­ter at the Chancery Di­vi­sion of the Lon­don High Court con­cluded in July, with a rul­ing yet to be handed down. Reached for com­ment this week Glenn said the le­gal limbo meant he was un­able to com­ment.

The mul­ti­mil­lion-dol­lar le­gal bat­tles come as Wat­son has ap­par­ently ex­ited New Zealand, the coun­try of his birth but where he has not resided since 2002. In the past year he has cashed up his re­main­ing lo­cal hold­ings, in­clud­ing an es­tate in Karaka, a stake in Viaduct eatery Soul Bar & Bistro and the War­riors NRL team.

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