Government to change banks tax law

1.20pm

The Government will announce within a few weeks law changes that will possibly see banks paying hundreds of millions more in tax than they have in the past.

Reserve Bank papers released under the Official Information Act disclose deep concern about wide differences between what banks report as having paid in tax and how much the Government actually receives.

Finance Minister Michael Cullen's spokeswoman said Inland Revenue had been working with the banks on their use of tax laws.

"They have been using legitimate vehicles," the spokeswoman said.

Cabinet has already approved changes to tax law and more details will be revealed in a few weeks.

Dr Cullen said in March that the IRD was looking at tax laws because banks were paying a lot less tax than their profits would indicate.

The Reserve Bank papers showed that while the banks were reporting tax rates of between 33.4 per cent and 27.1 per cent, in actual fact their effective tax rates ranged between 15.9 per cent and minus 9.8 per cent.

Figures from the Australian-owned banks show significant differences:

*In 2003 National Bank's pre-tax profit was $439m with reported tax $143m, whereas the tax paid was $70m;

*ASB's profit was $419m with reported tax of $141m but it actually received $9.8m back;

*Westpac's profit was $667m with reported tax of $203m and paid tax of $48m;

*BNZ's profit was $752m with reported tax of $204m and paid tax of $56m;

*ANZ's profit was $593m with reported tax of $176m and paid tax of $56m.

The papers are full of riders saying it was difficult to know how much tax the banks should have paid. The differences between what was paid and what was reported as paid provided "crude estimates" that could be legitimately explained for a number of reasons which only the banks could know.

The Reserve Bank said it appeared the Government could not do much about the differences.

"While it is likely that for some banks the reporting of some aspects of their tax affairs do not meet a common sense standard of true and fair, there is not much we can do about it," one paper said.

"We can't identify the 'offending' transaction types and even if we could banks will have a professional defence of their interpretation of the relevant standards."

The Reserve Bank was only interested in whether the taxation issue affected the financial soundness of the reports.

They were not a problem for the Reserve Bank as the "effect of their treatment is to make the banks look less profitable than they really are.

"We would be more concerned if the effect was to boost profits. On the other hand the apparent ease with which banks can manufacture a desired reporting outcome leaves one with a sense of unease about what they could do in areas that are of more direct prudential concern," the papers said.

IRD has issued a number of reassessments to banks in recent months and officials told NZPA they were in some part due to the ongoing review of the banks' tax as well as individual transactions.

Once all the banks are reassessed it has the potential to swell the Government's coffers by around $1 billion.

Westpac recently reported it was facing a potential tax bill of $774 million.

In April, BNZ said it had been issued with a tax bill for $57m, which - by BNZ's reckoning - could swell to some $212m.

BNZ's parent - National Australia Bank - has said it will contest the IRD's assessment.

- NZPA