IRD vs the banks

The Dom Post reports:

The Inland Revenue Department is asking the High Court to rewrite tax law in a $641 million tax avoidance case between it and the BNZ, the bank says. …


BNZ is the first of the four main trading to challenge Inland Revenue’s claims of tax avoidance by using so-called structured financial transactions, involving foreign financial institutions between 1998 and 2002. The banks have been assessed to owe about $2 billion in unpaid taxes and interest. Inland Revenue claims the transactions generated tax losses through fees and hedging costs which the bank then used to offset other taxable income.

But BNZ’s lawyer Alan Galbraith, QC, said in his closing submissions to the High Court at Wellington that Inland Revenue’s case was “fundamentally misconceived” in the legal interpretation and tests, and the commercial and economic reality of the deals. Inland Revenue had also incorrectly inferred that, if Parliament had mistakenly failed to bar the use of structured financial transactions in tax legislation, the court could remedy the situation.

There is a lot at risk with these cases. I understand from informed sources close to one of the banks, that they have offered to settle the case for around $500 million. Informally it seems this was acceptable to Ministers, but that Crown Law was strongly against any settlement.

I understand that until the cases are resolved, there is considerable uncertainity over funding arrangements for the banks, and this is partly why interest rates are not dropping more.

I don’t know the strength of the Government’s case, but I imagine questions will be asked if they lose the case, after declining half a billion dollar settlement. And if the banks do lose, I suspect it will end up in the Supreme Court in a few years. And the problem is that until we get a final Supreme Court ruling, uncertainity may remain.

UPDATE: An informed source tells me that the Government is not facing much risk due to the Supreme Court decision in Trinity. They agree it will go to the Supreme Court but are very confident that the cost of doing so will be a small fraction of the eventual judgement.  Also that generally can not agree to part settlements – only to reduce or waive penalties.

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