Inland Revenue have described a complex series of transactions Eric Watson undertook through the Cayman Islands as "circular", and say the flamboyant expatriate's holding company should pay $112m in back-taxes and interest.
The High Court at Auckland today heard the opening exchanges of a long-brewing dispute between the Commissioner of Inland Revenue and Watson's Cullen Group over manoeuvres the businessman made when he left New Zealand in 2002 to enjoy the life tax advantage as a non-domiciled resident of the United Kingdom.
Gillian Coumbe QC, in her opening, walked the judge through a flow-chart of the transaction in question. "You start out with Mr Watson on the right, and end up again with Mr Watson on the left. You see immediately the circularity of the transactions," she said,
Coumbe said the Cayman appearance was significant. "The Cayman Island is the place for this – the lower level of scrutiny, or of regulatory policing if you like, of entities incorporated there. We will also say that it keeps things opaque, and that was a motivation as well."
The hearing, before Justice Matthew Palmer, is expected to last for three weeks and hear from seven witnesses – mostly tax experts, including several from overseas - although Watson himself is not expected to give evidence.
Watson's Cullen executive William Gibson, the sole non-expert witness, is expected to give evidence tomorrow.
Watson's Cullen Group is challenging a determination by Inland Revenue that complex offshoring arrangements conducted from 2002 - where Watson sold shares in his Cullen Investments holding vehicle to another entity he controlled using two Cayman Island companies to managed the related-party vendor finance - amounted to avoidance.
Barrister David Cooper, acting for Cullen, said the complex transactions had a legitimate purpose to restructure Watson's affairs when he left New Zealand that year to relocate to the United Kingdom.
"He became a tax resident of the UK. He sold his shares in Cullen Investments Limited, the main investment which he did hold personally, to a new trust structure," Cooper said.
Cooper said Watson ceased being a New Zealand resident for tax purposes later in 2002, and then went on to become a non-domiciled resident of the United Kingdom.
Cooper said the UK rules around non-dom status, particularly income from outside the United Kingdom, were "somewhat complicated" and also formed part of the reasoning behind the transaction in question.
The court has heard the dispute has been ongoing for some years, with Inland Revenue scrutiny from 2013 and saying the use of tax havens – in this case the Cayman Islands – adding to their concerns.
Pre-trial hearings heard Inland Revenue concluded the transactions in questions, involving $291m in related-party loans and share transfers funnelled through two Cayman Island companies, were "contrived" and "carefully designed" to ensure they attracted only a 2 per cent approved issuer levy instead of 15 per cent withholding tax.
"The Commissioner alleges that this was a tax-avoidance arrangement," a December pre-trial ruling from Justice Mark Woolford said, noting $59.5m in back taxes were sought.
Coumbe expanded on this amount, noting that with a cost of borrowing the amount sought as $112m. This did not include any late payment penalties, she said.
Watson is not being personally chased, with IRD making its claims against his holding vehicle Cullen Group. Justice Woolford noted in a pre-trial ruling that "before the arrangement at issue, Mr Eric Watson personally held all the ordinary shares".
Despite his absence, Watson has been ever present in court, with the lawyer for Cullen noting his control over all entities in question and his desire to abandon New Zealand as a tax-paying resident in preference for non-dom status in London was the underlying driver of the transactions.
Cullen Group is challenging Inland Revenue's determination, arguing its actions were not only legal, but intended to be legal by Parliament when the relevant tax legislation was passed.
The tax case, having bubbled through the courts for three years, is coming to a head just weeks after Watson's similarly-protected dispute with former business partner Sir Owen Glenn was resolved firmly in the latter's favour.
That case, over the proceeds of a joint-venture between the pair of now fallen-out rich listers, saw Glenn successfully argue the joint-venture should be wound up as Watson had engaged in "deliberate deception". A future hearing will determine damages, with Glenn seeking £52.8m in interest costs.
Watson signalled he would appeal, but part-way through the trial had agreed to repay Glenn £130m in capital contributions.
Having left New Zealand in 2002, Watson appears to have recently liquidated his remaining local business presence, selling his 33ha rural estate in Karaka, stake in viaduct restaurant and nightclub Soul Bar, and offloading the Auckland-based Warriors NRL club to a consortium including Autex Industries and Auckland Rugby League.
The National Business Review rich list last week assessed Watson's net worth as having tumbled over the past year - from $420m to $250m - largely off the back of bitter legal disputes.