Paper not reassuring: Real risks over cross-border leases
by Sue Newberry and Alan Robb. Dr Sue Newberry and Alan Robb are senior lecturers in financial accounting at the University of Canterbury, Christchurch, New Zealand.
(Published in The Press, Christchurch, Saturday April 23 2005, C2)

The Cabinet paper on cross-border leases made public does little to reassure taxpayers that Transpower’s dealings are other than tax-driven devices.

The Cabinet paper says state-owned enterprises (SOEs) should not be “overly aggressive” with their tax planning. SOEs should not be “on the ‘leading edge’ of developing techniques to minimise tax.”

Evidently, if others have used an aggressive tax reducing technique, then SOEs should be free to do so too, even if the scheme is “aggressive”.  But not if it is “overly aggressive”.

Aggressive tax planning has been described by the Australian Tax Office as “schemes or arrangements which undermine the integrity of the tax system and community confidence in the fairness and equity of that system.”

Both Transpower and the Airways Corporation have paid large sums to PricewaterhouseCoopers for tax advice. They would not need to pay so much merely to learn that the approximately 5 per cent fee they reported as income from the cross-border lease is taxable.

Both should be required to explain the nature of any tax advantage to them in New Zealand associated with their cross-border leases. Further, the Inland Revenue Department might be asked to review any binding rulings it issued in light of the revelation in the Cabinet paper that these deals are tax-driven.

Finance Minister Dr Michael Cullen has also stated that cross-border leases “are legitimate tax instruments under United States law”.

Cullen says he asked the US Ambassador about that. The Cabinet paper confirms the US Embassy’s awareness of cross-border leases which, if “fully compliant with the relevant laws and regulations” pose no problems. The Cabinet paper also notes the US Embassy’s understanding that the US Inland Revenue Service (IRS) “has regulations covering cross-border leasing transactions.” Surprisingly, it was deemed “not necessary to ask any specific questions of the IRS.”

The Cabinet paper reassures ministers they needn’t bother their minds with these “complex” transactions because that would require “expert advice”, yet those preparing the Cabinet paper relied on general advice from the Embassy when they could, and should, have approached the IRS for expert advice.

Cullen states ownership of the national grid is not at risk:

“Transpower retains legal title to the asset and has protections in place to ensure that it will retain title should the US investors become financially distressed or the arrangement be terminated”.

The Cabinet paper, while full of convoluted language, recognises the risks are real. It says the SOEs’ input into the lease design can address “situations where ownership could be affected, and can minimise risks to ownership.” This does not sound like no risk.

The Cabinet paper says that in cases of financial distress, or no-fault termination of the lease, sufficient protection should exist for an SOE to retain ownership of the assets. As anyone with a large mortgage knows, legal title doesn’t count for much when debts are pressing. Under some circumstances there would be little choice but to relinquish title. Where crucial infrastructure assets are concerned, we cannot afford to lose them. A taxpayer bailout seems likely should trouble occur.

Exactly how have Transpower and Airways addressed the risks to ownership? The key issues here are the amounts of the guarantees and any other assurances given, the circumstances under which they could be activated.

The Cabinet paper says the shareholding Ministers did not intend to make any public announcement of the cross-border leases. It says cross-border leases are “generally disclosed in annual reports”. As has become apparent in the last week, the disclosure in the SOEs’ annual and half-yearly reports is inadequate. Whatever happened to accountability and transparency?