IRD Wins Another OCN Ruling

March 6, 2013 New Zealand Taxation

OCNThe IRD has won another case against companies using financial instruments to artificially lower their tax obligations in New Zealand.

In a ruling by the Court of Appeals on March 5th the Inland Revenue Department won its case against Alesco New Zealand regarding claims that the businesses’ use of optional convertible notes was tantamount to excessive tax avoidance.

Explaining the position of the IRD, the director of litigation management at the Department said “…when Alesco New Zealand issued OCNs with zero percent interest coupons attached, to its parent company to fund the purchase of Biolab Limited and Robinson Industries Limited in 2003 and claimed a deduction for ‘interest’ expenditure, it acted outside the intended scope of financial arrangement rules and the relevant Inland Revenue Determination”.

The total amount of taxes owed and penalties payable from the dispute is equivalent to approximately NZD 8.6 billion.

The optional convertible notes under dispute are a form of financial instruments which have debt and equity components, allowing the holder to convert the debt they are owed into shares of the issuing company.

The decision of the Court of Appeals has already sparked heated debate amongst tax professionals, with some claiming that the ruling will reduce the number of foreign businesses coming to New Zealand, while supporters of the IRD claim that the decision further clarifies the line between legitimate and illegitimate tax structures.

Photo by Youssef Abdelaal