Fonterra to settle UK customs row for $30 million back duties

11.45am

Fonterra says it will pay the British Government £11 million ($30 million) in back duties on butter shipments at the centre of a bitter row which began in 1996.

UK Customs and Excise had been seeking payment since 1997 of £323 million -- $880 million at 2003 exchange rates.

"The settlement in the UK brings welcome closure to this whole affair," Alexander Toldte, chief development officer of Fonterra, into which the Dairy Board was folded three years ago, said today.

The board was the marketing arm of New Zealand's dairy cooperatives manufacturing for export.

The row centred on the interpretation of EU quota requirements relating to the composition, method of manufacture, and weight of butter and cheese and customs procedures for their import.

The dispute was triggered by an audit by the EU Court of Auditors in 1996, which criticised various import procedures that had been in place for several decades.

This triggered a series of legal actions by Customs and Excise which courts were told in 1999 turned New Zealand's dairy giant Anchor Foods from a profitable company into a loss-maker.

In an unwelcome move for the dairy industry the series of court cases also turned a spotlight on trading structures which appeared to involve transfer pricing.

At one point a lawyer for the customs commissioners complained Anchor was transferring its British assets to an associated company, New Zealand Milk, for £9 million -- a "gross undervaluation" designed to leave behind the import duties debt.

The lawyer for UK Customs told a judge: "The company only seems to make a profit of less than half a per cent before tax. How does it not make a profit when it is known to have 30 per cent, by far the largest share, of the UK dairy produce market?"

He complained of a "real risk" that Anchor's assets might be dissipated before Customs could recover its money.

Mr Toldte said that after various reviews by British and EU authorities, and numerous court hearings, it had now been agreed that duties totalling £11 million were due, which would be met from funds already held by UK Customs

"The claims were complex and highly technical," Mr Toldte said.

The dispute became extremely bitter. At one stage, the Dairy Board had to send in a trouble-shooter from New Zealand, Graeme Milne, to run European operations when customs officials laid criminal charges of fraud against the chief executive of the board's Milk Products Holdings (Europe) Ltd, Monny Verschueren and six other executives. The charges were all denied.

The campaign was widely seen in New Zealand as a concerted effort by dairy industry interests in Europe to derail the New Zealand marketing machine which was starting to beat European manufacturers on their own ground.

A flashpoint was New Zealand's development of technology for producing a spreadable butter with filtering out of "hard" fats. The Dairy Board was creaming big profits when low-tariff access under a quota was taken away by British Customs in 1996.

Because the butter could be spread straight after being taken from the refrigerator, it quickly gained popularity among Britain's young and affluent consumers. The Customs action that gutted New Zealand's spreadable butter sales was based on a European claim that the method used to produce spread-easy butter to be "indirect or recombining butter".

Under the old terminology in the then 76,000 tonne annual butter quota agreement the product had to be made "directly" from milk or cream.

At the time New Zealand was earning about $50 million, retail, on 5000 tonnes of spreadable butter shipped each year from Bay Milk Products' factory at Edgecumbe. The European crackdown hit just as the dairy industry was commissioning a Northland Dairy plant to make 10,000 tonnes a year, which would have been worth $100 million annually at the same sort of price premiums.

The 1996 decision applied the same reasoning to the ordinary butter made in a manufacturing system known as ammix, which did not exist when the original quota agreement was made.

This meant these butters could not benefit from concessionary rates of duty, and some exports -- particularly spreadable butter -- to the EU virtually stopped overnight.

The subsequent political and legal argument cost New Zealand the competitive lead on which it had been depending to extract the maximum value from some of its products.

"We always knew our rivals in Europe would eventually work out the same or similar technology for producing a soft butter, but the customs intervention cost us a lead which would have secured significant premiums and a dominant market share," Dairy Board spokesman Neville Martin said at the time.

An about-face in 1999 in which the European Commission allowed spreadable butter to be imported under the same preferential tariff treatment given to traditional butter was only just in time.

To reduce costs, after the 1997 decision, New Zealand manufactured spreadable butter and aerosol cream in Belgium. The European Commission backdown came just as news broke that other food manufacturers in Belgium had been using produce from livestock fed dioxin-contaminated feed.

Immediately the news broke, the board pulled its Belgian-made product and rushed new supplies from New Zealand.

Since then, New Zealand's dairy industry has restructured its British operations, cutting a deal with one of its biggest competitors in Europe, Arla Foods AmbA, for a joint venture in the European butter and margarine markets.

The packing of New Zealand butter and other spreads was switched from the old Dairy Board base at Swindon to Arla's base in Leeds, packaging of cheese and aerosol cream contracted out, and European sales of dairy ingredients transferred to Germany.

Today, Fonterra said the previous quota regime has been replaced by a new and exacting compliance and testing regime, and it had worked closely with authorities to ensure that problems of the 1990s could not recur.

"Fonterra is committed to absolute integrity and full compliance in all its businesses around the world," Mr Toldte said.

- NZPA