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Westpac bank - Source: ONE News
Westpac is facing up to $918 million in taxes and interest following a High Court decision in favour of the Inland Revenue Department.
The court on Thursday found against the Australian-owned bank on four of the nine contested transactions that took place between 1998 and 2002.
The judgement relates to funding facilities or re-purchase agreements following a law change in 1996. The change allowed New Zealand based companies that were foreign owned to invest outside New Zealand and receive the return on that investment tax-free.
In a similar case in July, the High Court ruled that BNZ used offshore transactions to avoid paying the IRD and in August ordered the bank to pay $654 million.
In that case it was argued that under the law BNZ made loans to overseas financial institutions at low interest rates with the transactions generating tax losses through fees and hedging costs.
The Crown argued the transactions were tax-driven and designed to avoid tax.
Westpac New Zealand CEO George Frazis says the bank is "very disappointed" with the court's decision.
He says the bank has always maintained that the transactions were commercially justified and legal, and in 2001 obtained a ruling from the Commissioner of the Inland Revenue regarding a similar transaction.
"(This) confirmed Westpac's view that a transaction of this type satisfied all tax laws, and in particular, was not a tax avoidance," says Frazis.
Frazis says the Westpac would now comb through the judgement and will consider appealing the decision.
The Westpac Group will also consider provisions as part of its 2009 full-year results due on November 4.
If it does increase existing tax provisions to $918 million its tier 1 capital ratio will be impacted by 25 basis points, though Frazis says the bank's day to day operations will function as normal.
All the four main trading banks in New Zealand - Westpac, BNZ, ANZ-National and ASB - are under IRD's microscope and it has been estimated they collectively owe about $2 billion in unpaid taxes and interest.
BNZ said in August that it would appeal its ruling.
