Westpac warns of $647m back-tax bill

By PAULA OLIVER

Westpac yesterday said it could have to pay the Government as much as $647 million in backdated tax.

But it is promising to fight the Inland Revenue Department's review of its past deals, claiming that the IRD itself gave the transactions the all-clear in 2001.

The IRD has been working for months on an audit of a particular type of transaction made by major banks dating back to 1998.

The spotlight went on the audit in March, when Revenue Minister Michael Cullen told Parliament that banks were under scrutiny for the amount of tax they paid.

He hinted the payments did not align with the profits the banks were making and legislation to change the rules appears likely this year.

Yesterday, Westpac chiefs pored over 12 IRD notices that landed in their hands on Thursday evening.

In a statement to the stock exchange, the bank said the notices, which propose to reassess past tax liability, related to three transactions between 1999 and 2002.

The notices are proposals rather than final bills.

The potential cost for Westpac of the reassessments is $85 million or $113 million including interest. But the final cost could be far higher.

Westpac opted to go on the front foot publicly and disclose that other transactions were also under review.

If the IRD's treatment of those was the same as it had indicated in the new notices, Westpac calculated that the potential cost would be about $647 million including interest. The payments are very much in dispute.

Like BNZ, which in April was handed a $57 million tax bill and the prospect of demands for another $212 million, plus interest and penalties, Westpac plans to fight the IRD in court if necessary.

In a strongly worded statement, it said it had sought IRD approval for an initial transaction in 1999. That was given after an extensive review.

That binding ruling, as Westpac claims it to be, has since been backed by independent tax and legal opinions.

The IRD has also been working on a separate policy review to see if the tax rules for banks need to be changed.

Papers related to that project and released to the Business Herald under the Official Information Act show a high level of concern within the Beehive and the IRD over the amount of tax being paid.

An IRD report to Cullen late last year stated that taxes paid by banks had remained flat since 2000 - while their accounting profits in that time had increased 50 per cent.

Of most concern was the banks' use of what are known as conduit rules.

They can involve a foreign company using a New Zealand subsidiary to invest in a third country, thus paying a low 15 per cent tax rate.

The IRD report stated that there had been a substantial increase in the banks' use of these rules "in a manner which appears contrary to the original policy intent".

Banks are not the only companies that use the conduit rules, which were introduced in 1999 partly to encourage overseas investment.

But the IRD report indicates that banks are by far the biggest users. In the 12 months to October last year, banks obtained about 90 per cent of the total conduit relief claimed by all New Zealand taxpayers.

Some have claimed that their use of that scheme has been scaled down.

Other areas of tax policy that have been looked at by IRD in relation to banks include the thin capitalisation rules, foreign tax credits and the trading of certain tax advantages.

A paper presented to the Cabinet economic development committee in May indicates the most likely law change to be made this year is in the area of thin capitalisation rules.

They act to ensure that excessive debt cannot be allocated to the New Zealand operations of a multinational bank.

Broader reform of the conduit rules could come later.

BANKS AND TAX - WHAT'S GOING ON?

Since 2000, the average tax rate of the major banks has fallen by about one third.

The major reason for this is the use by banks of what are known as 'conduit rules'.

They can involve a foreign company using a New Zealand subsidiary to invest in a third country, thus paying a low 15 per cent tax rate.

In 1998, about $1.5 billion was invested in such foreign-structured finance arrangements. By last year, it had grown to more than $8 billion.

Banks claimed about 90 per cent of the total conduit relief claimed by all New Zealand taxpayers in the 12 months to October last year.