Specialists say court decision could scare off international investors.
International investors could be scared off by a Court of Appeal decision yesterday which saw Inland Revenue notch up another big win, say tax specialists.
Alesco New Zealand lost another leg of its stoush with the IRD yesterday over whether a funding structure used to buy two other companies was a tax avoidance arrangement.
The amount at issue in the Alesco case is $8.6 million, but yesterday's judgment could have implications for other tax avoidance disputes with the IRD where hundreds of millions of dollars are estimated to be at stake.
Decisions in these cases were awaiting the outcome of the Alesco litigation, the Court of Appeal said.
University of Auckland Business School senior tax law lecturer Mark Keating called yesterday's decision a "slam-dunk" for the IRD.
"If there's an imaginary line that you cross between tax planning and tax avoidance, then IRD have been taking cases that go closer and closer to that line," Keating said.
"The [corporate] taxpaying community are basically waiting for a case where the IRD overstretch and there were a number of people who hoped and believed that Alesco would be that case."
Ernst & Young senior tax partner Jo Doolan said yesterday's judgment was an "alarming result".
"It reinforces the feeling of many inbound investing corporates that the NZ tax environment is too uncertain. It may discourage them from continuing to do business here," she said.
"Given New Zealand is a capital importer and relies on overseas investment, one can only hope some form of sanity is restored by the appropriate political invervention."
Keating said he could understand Doolan's argument.
"The concern is big businesses, investors in New Zealand, will say, 'We're just not going to invest in New Zealand because the risk is too great', or, 'Well if we're going to invest we're going to want a premium for the uncertainty because, in effect, we're taking a risk,"' he said.
Deloitte New Zealand chief executive Thomas Pippos said the decision reinforced that the IRD had a lot of scope to challenge transactions it disliked through the avoidance provision, which it used in this case.
The Alesco case
The tax dispute involved a New Zealand subsidiary of Australian building products supplier Alesco Corporation, which bought two local businesses in 2003.
Alesco used a structure known as "optional convertible notes" (OCNs) to advance $78 million to Alesco NZ for the buy. This was effectively an interest-free loan, the Court of Appeal said yesterday.
Between 2003 and 2008 Alesco NZ claimed deductions for sums treated as interest liabilities on the notes, but the tax commissioner saw it as tax avoidance.
The IRD's position on the issue, which involved about $8.6 million of tax, penalties and interest, was upheld in the High Court in 2011. Alesco took the case to the Appeal Court, which ruled against it.