Anti-tax Avoidance Case Study

Tax-related financial crimes is not well-understood amongst bank practitioners.

Below is an interesting Court case on Anti-Tax Avoidance.  Given that, the case facts were specific to New Zealand, for the purpose of making it easy, I have removed the country-specific elements and made it a generic illustration.

Case Facts

The Defendant (“D”) in-question re-located from New Zealand (NZ) to the United Kingdom (UK) in Year 2002. D attempted to divest himself of all NZ ties (i.e. non-NZ tax resident) and undertook the following: -

(a) Sold his property and a number of other assets, as well as disassociated himself from clubs and associations in NZ; and

(b) Restructured his business ownership such that: -

• The shares he owned in Cullen Investments Ltd (“CIL”) were replaced by loans owed by Cullen Group Ltd (“Cullen Group”) to conduit companies in the Cayman Islands, Modena Holdings Ltd (“Modena”) and Mayfair Equity Ltd (“Mayfair”); &

• Modena and Mayfair are not associated persons of the Cullen Group

[Comment: In short, this is to give the appearance of Independent Ownership and arms-length]

Refer to attached schema: -

In essence, D exchanged his equity in CIL for a debt of the same value from CIL’s “new owner” i.e. Cullen Group. However, the Cullen Group is ultimately owned by D through a series of holding companies and trusts. This restructuring was contemplated such that the withholding tax on interest paid to Modena and Mayfair would qualify for a concessionary tax of 2%, note, as opposed to the standard rate of 15%.  This, was then, challenged by the Commissioner of Inland Revenue (Commissioner).

Note: The concessionary tax rate is meant to encourage investment in New Zealand by reducing the cost of borrowing from non-residents.

The Commissioner explained that the above arrangement constituted an act of anti-avoidance, as follows: -

(a) No genuine overseas investment from a genuine non-resident lender.

(b) The parties were subject to a high degree of common control (i.e. via D).  Neither the lender nor the borrower were independent, on the basis that Mr Watson maintained a high level of control over both sides of the transaction. Many features of the loans and transactions were commercially unorthodox.

In essence: -

• The ownership and debt relationships were structured in order to allow D, through Cullen Group in New Zealand, to pay tax at 2% rather than 15%.

• Relocating to a new jurisdiction does not amount to tax incidence alteration being merely incidental. The argument here is technical. In simple terms, the Court looked at the intent of D’s relocation to the UK and considered 2 facets; (i) D’s migration being positively correlated to the restructuring of CIL’s ownership; (ii) The application of a 2% concessionary rate was a key element of the loans between Cullen Group and Modena and Mayfair. However, the Cullen Group was unable to show that the altering of the tax incidence was merely incidental.

(c) Technically, while the arrangement (i.e. Form) qualify for the concessionary tax: -

• The restructuring was Form, not Substance, as D retained a high degree of control over the entities; &

• The application of the tax concession was outside the Parliament’s contemplation. 

[Comment: this concept is very important, as it is universally applied in most

Courts. In other words, the legislation is not meant for legitimate use rather than artificial means to qualify (as such) ]

I found this case interesting and I hope you did as well.  >-<