Judges' findings point to fraud in Magnum deal

By Audrey Young

The High Court decision on Sir Ronald Davison's Winebox report leaves part of the commission of inquiry's findings "incomplete," as the judgment says.

But other parts of the judgment suggest it has not left open the question of legality of the Magnum deal.

While Justices Anderson and Robertson have not ruled that the Magnum tax deal was fraudulent - which was beyond their brief - they say its circumstances "could support a finding that there was evidence of fraud."

And they say if certain features were present, "there would be fraud."

In a devastating decision, the judges overturned the key findings of the commission of inquiry, run by former Chief Justice Sir Ronald, saying he got the law wrong.

Sir Ronald found no evidence of fraud in the Magnum transaction, and therefore cleared the Inland Revenue Department and Serious Fraud Office of incompetence in assessing the deal.

He believed that European Pacific had legally exploited a loophole in the Income Tax Act 1976 relating to tax credits.

The court has overturned findings that go to the heart of Sir Ronald's terms of reference: whether the department and office acted competently.

"The commission's errors of law were very material," it says. "They went to the substance of a significant part of the report."

The judges could not have ruled the Magnum deal fraudulent without a fair trial. But they have said Sir Ronald was wrong to conclude there was no evidence of fraud.

They also say the correction of Sir Ronald's error in law will revive suspicions about whether the Cook Islands Government and European Pacific together created false tax certificates.

The Winebox inquiry began in 1994 after New Zealand First leader Winston Peters tabled in Parliament a winebox of documents detailing about 60 transactions.

The inquiry was drawn out to three years because aspects of the proceeding were challenged 20 times in various courts, including the Court of Appeal and the Privy Council.

Mr Peters challenged the findings, saying Sir Ronald got the law wrong on the Magnum deal, and the High Court agrees.

The two judges say that while the winebox contained 60 transactions, in many ways the Magnum deal was "the exemplar of the impugned transactions, being examined as such in the Court of Appeal and Privy Council cases arising in the court of the commission's hearings."

"Furthermore, it involved the loss to the New Zealand taxpayer of $2 million. Its significance therefore lies not in its unity but in its relevant singularity."

European Pacific Funds Management Ltd (EPFML) received a tax reduction of $2 million after it presented $2 million worth of tax certificates to Inland Revenue showing tax paid in the Cook Islands.

It had not disclosed to the department that all but $50,000 of it had been refunded by the Cooks to another European Pacific company, Harcourt Acceptance Ltd.

As the Privy Council put it: "All these dealings were part of a single, prearranged scheme. Their economic effect was to pay back almost all the tax paid ... Thus European Pacific was better off by $1.95 million, the Cook Islands Government was better off by $50,000 and the New Zealand Government was worse off by $2 million."

The disclosure obligations of the Income Tax Act 1976 required a company to "furnish to the Commissioner [of Inland Revenue] all information (including information in relation to any amount to which the taxpayer is entitled in respect of any relief or repayment of the foreign tax) necessary for determining the amount of credit."

Sir Ronald concluded that European Pacific was not obliged to disclose the repayment of tax to Harcourt and that the tax credit was valid.

But the High Court has found otherwise: "Whilst section 301 (1) does not expressly impose an obligation of disclosure, it implies it by stipulating a condition of entitlement which makes it unlawful to receive and retain a tax credit when the condition is not met.

"In relation to the Magnum transaction, that condition was not met. A tax credit was accordingly not due and was unlawfully received and retained.

"If, in EPFML's claiming and retaining the benefit of the credit when disclosure had not been made, certain other features were present, there would be fraud."

The judgment does not specify what "other features" might mean, but for fraud to be found, intent to commit fraud must be proved.