Frucor loses appeal in $13m tax battle with Inland Revenue

Soft drinks company Frucor Suntory has lost its appeal in a tax avoidance case brought by Inland Revenue, and must pay the tax department $45,000 in costs, the Supreme Court ruled yesterday.

The court agreed that a $204 million funding deal Frucor entered into with Deutsche Bank in 2003 amounted to tax avoidance.

In its 2021 financial accounts, Frucor said the total income tax in dispute was $7.4m plus interest of about $2m, and shortfall penalties of $3.7m. Now owned by Japanese food and beverage company Suntory, its New Zealand brands include Pepsi, energy drink V, Just Juice, Fresh Up, 7-Up and Up & Go.

In 2020, the Court of Appeal ruled that Frucor should not have claimed the tax deductions that it did on interest it paid to Deutsche Bank. The Court of Appeal said in its decision that it seemed plain the funding arrangement ‘‘had New Zealand tax avoidance as one of its purposes or effects’’.

The particular sum of $204,421,565 was calculated to reach the tax beneficial outcome, it said.

Yesterday the Supreme Court dismissed Frucor’s appeal and ordered the company to pay costs of $45,000 plus expenses to Inland Revenue. The court also allowed Inland Revenue to cross-appeal on shortfall penalties, estimated in Frucor’s 2021 financial accounts as $3.7m.

Aside from dissenting justice Susan Glazebrook, Danone was determined to have acted with the main purpose of obtaining tax advantages. The Inland Revenue penalty for an abusive tax position is 100% of the resulting tax shortfall.

The Court of Appeal had ruled that shortfall penalties did not apply.

The case had hinged on whether Frucor was entitled to seek a tax deduction on all of $66m that it paid to Deutsche Bank as part of a partlycircular group funding scheme.

Inland Revenue argued that only $11m of the sum that Frucor later paid Deutsche Bank should have been treated as interest for tax purposes, given that the true value of the loan advanced by Deutsche Bank was $55m, not $204m.

The funding scheme allowed Danone NZ to finance the purchase of Frucor in a way that would entitle it to tax credits for the life of the fiveyear scheme.

For the year ended December 2021, Frucor’s annual net profit jumped to $31.6m from $16.3m a year earlier. Revenue rose to $528m from $464m in 2020.