August 18, 2022

Rich-lister Eric Watson’s Cullen Group defends $60m tax avoidance allegations in High Court [Cayman Islands named]

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The IRD alleges Eric Watson’s company Cullen Group avoided paying nearly $60m in taxes.

A company belonging to rich-lister, Eric Watson owes the government nearly $60 million in unpaid tax, the commissioner for the Inland Revenue alleges.

The complex tax trial for Watson’s Cullen Group opened at the High Court in Auckland on Monday, before Justice Matthew Palmer.

Cullen Group is challenging Inland Revenue’s (IRD) allegations that it was involved in tax avoidance totalling $59.5m.

In a pre-trial judgment released in December Justice Mark Woolford noted that in November 2002, Watson sold all the ordinary shares in Cullen Investments to a newly incorporated company, Cullen Group.

IRD alleged Watson retained control over both Cullen Investments and Cullen Group through various trusts and directorships, the judgment said.

Watson made two loans totalling $291m to Cullen Group, the judge said.

Watson assigned the first loan of $193m to Modena Holdings and the second loan of $98m to Mayfair Equities. Both companies were non-resident companies incorporated in the Cayman Islands, he said.

The Cayman Islands, in the Caribbean Sea are a well known tax haven.

Cullen Group paid or accrued interest on the loans, he said.

Under New Zealand tax law interest paid to a non-resident such as Modena or Mayfair was ordinarily subject to non-resident withholding tax at 15 per cent, he said.

However, if certain conditions were met a 2 per cent levy could be paid instead, he said.

One condition was that the payer and the recipient were not “associated persons” under the relevant Income Tax Act, he said.

In her opening IRD lawyer Gillian Coumbe QC said that the “circular nature” of the loans started with Watson and, following a series of transactions, came back to Watson.

“Mr Watson was essentially loaning money to himself,” Coumbe said.

Woolford said in his December judgment Cullen Group paid a 2 per cent levy rather than 15 per cent non-resident withholding tax on interest paid to Modena and Mayfair.

The IRD alleges that the arrangement was not a genuine arms-length transaction and Cullen Group gained the benefit of the levy regime in a contrived way.

The loan arrangements between the parties was designed to be “opaque”, Coumbe said.

“This was a contrived and artificial arrangement.”

For example, when Cullen Investments was set up it had four name changes in one year, she said.

Once use-of-money interest was taken into account Watson’s firm owed $112m, excluding late payment penalties, Coumbe said.

In his opening address Cullen Group lawyer David Cooper said Watson moved funds to the Cayman Islands around the same time he was moving to the United Kingdom.

Moving funds from New Zealand to the Cayman Islands was a legitimate choice available to Watson, he said.

The reasons were for tax purposes and were legal, he said.

When Justice Matthew Palmer asked why the Cayman Islands was chosen over other jurisdictions, Cooper was not able to provide an explanation.

He said the same debate would be had if Watson had chosen the United States or Singapore.

He did not see why there was any evidence needed to justify the choice of the Cayman Islands over any other jurisdiction, Cooper said.

In the recently published National Business Review Rich List Watson’s wealth dropped 40 per cent to an estimated $250m.

The former Warriors rugby league team owner has recently come out the other side of a lengthy leal stoush with former business partner Sir Owen Glenn.

The 12-week long High Court case in London related to hundreds of millions of dollars Watson and Glenn pumped into a joint European property venture called Spartan Capital.

Watson said he was appealing the judge’s ruling in that case.

The IRD versus Cullen Group case continues.

– Stuff

IMAGE: The IRD alleges Eric Watson’s company Cullen Group avoided paying nearly $60m in taxes. CHRIS SKELTON/STUFF

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