By Matt Nippert, NZ Herald

Inland Revenue have described a complex series of transactions Eric Watson undertook through the Cayman Islands as “circular”, and say the flamboyant expatriate’s holding company should pay $112m in back-taxes and interest.

The High Court at Auckland today heard the opening exchanges of a long-brewing dispute between the Commissioner of Inland Revenue and Watson’s Cullen Group over manoeuvres the businessman made when he left New Zealand in 2002 to enjoy the life tax advantage as a non-domiciled resident of the United Kingdom.

Gillian Coumbe QC, in her opening, walked the judge through a flow-chart of the transaction in question. “You start out with Mr Watson on the right, and end up again with Mr Watson on the left. You see immediately the circularity of the transactions,” she said,

Coumbe said the Cayman appearance was significant. “The Cayman Island is the place for this – the lower level of scrutiny, or of regulatory policing if you like, of entities incorporated there. We will also say that it keeps things opaque, and that was a motivation as well.”

The hearing, before Justice Matthew Palmer, is expected to last for three weeks and hear from seven witnesses – mostly tax experts, including several from overseas – although Watson himself is not expected to give evidence.

Watson’s Cullen executive William Gibson, the sole non-expert witness, is expected to give evidence tomorrow.

Watson’s Cullen Group is challenging a determination by Inland Revenue that complex offshoring arrangements conducted from 2002 – where Watson sold shares in his Cullen Investments holding vehicle to another entity he controlled using two Cayman Island companies to managed the related-party vendor finance – amounted to avoidance.

Barrister David Cooper, acting for Cullen, said the complex transactions had a legitimate purpose to restructure Watson’s affairs when he left New Zealand that year to relocate to the United Kingdom.

“He became a tax resident of the UK. He sold his shares in Cullen Investments Limited, the main investment which he did hold personally, to a new trust structure,” Cooper said.

Cooper said Watson ceased being a New Zealand resident for tax purposes later in 2002, and then went on to become a non-domiciled resident of the United Kingdom.

IMAGE: Eric Watson is the founder of international private investment company Cullen Group. Photo / NZ HeraldEric Watson is the founder of international private investment company Cullen Group. Photo / NZ Herald Matt Nippert.

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