KEY POINTS:
Our main banks have been accused of a tax rort so massive the sums involved will have an impact on the average taxpayer.
Inland Revenue claims the alleged rort involved the banks deciding how much tax they wanted to pay and creating a scheme to avoid the rest
- profiting by $1.7 billion.
A potential Inland Revenue win in the case would make a large amount of money available for public spending. It would be enough to fund tax cuts for working New Zealand.
The accusations are laid out in court judgments being fought by the banks, which include the BNZ, ANZ, National Bank and Westpac.
ASB Bank, Rabobank and Deutsche Bank were also involved, although the Herald on Sunday has learned that the latter bank and Inland Revenue settled out of court last week.
Court judgments have so far backed the approach taken by Commissioner of Inland Revenue Bob Russell, who is insisting the banks pay $1.7b plus interest into the public purse, raising the cash at stake to more than $2b.
Collectively, it is the biggest tax case the country has seen, taking in more than 60 separate court cases and a handful of judicial reviews.
The final court cases will not take place until the middle of next year, and may stretch into 2009.
There are also fears that, even as Kiwis would enjoy the benefit of a successful outcome for the IRD in the case, the banks would recoup their cash by hiking bank charges and interest rate fees.
Dr David Tripe, director of Massey University's centre of banking studies, said that if the banks were to lose, then it was likely a taxpayer windfall would be matched by increased bank charges. "If the banks didn't win they would like to recoup the money [through] interest margins, fees and charge," he said. "If the banks lose, we will pay."
Details of the case are emerging after two years of court battles by the banks with the Commissioner of Inland Revenue. Recent cases have seen resistance to Inland Revenue efforts to use internal banking documents in the case - and to use documents from one bank against another.
The courts have ruled in favour of Inland Revenue right through the Court of Appeal. The next hearing is scheduled in the Supreme Court for December 11.
In a recent decision, Court of Appeal judges William Young, Robert Chambers and Mark O'Regan dismissed an appeal by the BNZ to restrict the information available to Inland Revenue.
"There is a fair amount of money at stake - $1.7b core tax in total of which $415m is tied up in the BNZ litigation."
The total figure at stake, including interest, is $2.092m, based on disclosure statements published by six of the seven banks. This includes tax reviews already carried out by Inland Revenue, and others which are still being done.
The appeal court justices reviewed the Inland Revenue case, which is that "repo deals" carried out by the banks "were devoid of commercial purpose other than exploitation" of a tax loophole.
Most banks involved refused to comment except Westpac and BNZ, which said fees had not gone up.
Tripe said the fact the main banks were all carrying out the schemes did not suggest complicity.
Tripe, who will be an expert witness for one of the banks when the case goes ahead, said the highly competitive banking market in New Zealand meant the banks would scour competitors' financial results. If those results suggested one bank was obtaining an advantage over the others, then work would be done to discover how - and to match it.
There is also speculation that finance minister Dr Michael Cullen has spent the cash the Government may recoup, before the case has even been heard. Cullen refused to answer any questions about whether the banks' money had been earmarked for projects - or even spent already.
Loophole closed in 2005
The loophole which Inland Revenue claims was exploited by the main trading banks was closed by legislation passed in Parliament in 2005.
It came shortly after Inland Revenue issued notices to the banks that it was reviewing the level of tax for which they were liable.
The loophole allowed the banks to send money through an offshore company, and then through their Australian-based parent company before being repaid in New Zealand.
The return on the investment would be treated by the banks as exempt from tax because the profits on the deal were paid from the offshore company to its parent company, which is also offshore. Alternatively, they claimed they were relieved from tax because of foreign tax credit rules.
The use of the deals was estimated to have substantially lowered the banks' tax take. Last year, the BNZ and Westpac won the Roger Award for worst company, decided by the Campaign Against Foreign Control of the Aotearoa and the Gatt Watchdog.
Judges John Minto, Laila Harre, Maire Leadbeater and Mary Ellen O'Connor estimated that the banks were paying as little as 6.7 per cent tax, rather than the actual rate of 33 per cent.
The judges said that the activities of the ASB Bank and ANZ were similar, and had they been nominated then all four banks would have been awarded the Roger Award.
Some of the banks, in their disclosure statements, state that they went to Inland Revenue in 1999 with a sample of the deal and had it signed off by tax inspectors.
Some, including BNZ, have also stated that the deal and its benefits were standard market practice.
It is believed that Inland Revenue, in approving the original structure of the tax deal, did not expect the banks to seize it with such vigour.
The commissioner told the Court of Appeal justices that "the repo deals were executed on a template".
