With almost two-thirds of Australia’s top 100 companies listed on the stock exchange have subsidiaries in tax havens or low-tax jurisdictions, there are fears the structures are being used to minimise tax

Island allure: The tax secrets of big business

May 25, 2013

Georgia Wilkins and Ben Butler

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With many of Australia’s largest companies owning offshore subsidiaries in exotic locations, there are fears the structures are being used to minimise tax. ‘The rules… were developed for the industrial age’ said Assistant Treasurer David Bradbury. Very few Australians will have heard of Burdekin Investments, one of the thousands of low-profile post-box companies that makes its home at Ugland House, a resort-style office building in George Town, the capital of Caribbean tax haven the Cayman Islands. It keeps a much lower profile than its parent, Australia’s biggest company, Commonwealth Bank, whose logo is proudly borne by the group’s branches on shopping strips across the country. But thanks to tax authorities and governments desperate to plug budget gaps, tax-haven companies such as Burdekin are getting more attention. There have already been investigations into the tax paid by technology multinationals in Britain and Australia, and this week the US followed suit, with the powerful Senate permanent subcommittee on investigations inquiring into the tax affairs of Apple.

As the details of Apple’s complex tax minimisation strategies emerge, questions are being raised about the legitimacy of Australia’s own company ownership structures and their heavy use of tax havens.

BusinessDay can reveal that all but one of Australia’s top 20 companies listed on the stock exchange have subsidiaries in low-tax or tax-free jurisdictions, including Hong Kong and Singapore.

At least half have subsidiaries in tax havens such as Bermuda, Switzerland, Jersey and the British Virgin Islands. This includes Commonwealth Bank’s Cayman Islands subsidiary. Telstra, which says it paid $1.8 billion in federal, state and local taxes last year, controls 20 subsidiaries across five remote island nations, including Jersey and Mauritius.

The Uniting Church’s justice and international mission unit is preparing to release a report into the ownership structures of top 100 companies on the ASX.

The report, titled Secrecy Jurisdictions, the ASX 100 and Public Transparency, reveals that as of April 2011, 61 of the top 100 companies held subsidiaries in ”secrecy jurisdictions” that have been targeted by tax authorities for their lax standards.

While many of Australia’s large companies do legitimate business in low-tax jurisdictions such as Hong Kong and Singapore, which often act as an entry point into China, financial documents show many subsidiaries exist with little evidence of commercial activity.

Dr Mark Zirnsak, director of the justice unit and author of the report, says he is concerned about the role secrecy jurisdictions play in the global economy and how connected they are to Australian business. ”These are places that fail to meet international standards on transparency, on anti-money laundering laws, and on tax law co-operation,” he says.

The report comes at a crucial time for the federal government, which is struggling to fund essential services without making cuts.

”If the government has less revenue, as we’ve seen at the latest budget, then tough decisions need to be made about what money is spent where,” Zirnsak says.

”Does money go into health? Does it go to people with disabilities? Is there enough money to help people with mental health problems? We end up trimming money that goes to helping people in developing nations overseas to fund disability services.”

CBA says it is looking to close Burdekin Investments, which is incorporated in the Cayman Islands but deemed a British company for tax purposes. Westpac has confirmed it held subsidiaries in Luxembourg and Jersey, in the Channel Islands.

A Westpac representative says the Jersey entity, Mayfair Australia Investments, was closed last year and it is preparing to wind down the Luxembourg subsidiary, Codrington Sarl, believed to be used to finance the bank’s British operations.

According to recent annual reports, Telstra alone controls 20 subsidiaries registered in tax havens – 10 in the British Virgin Islands, four in Bermuda, four in Jersey, one in Mauritius and one in the Cayman Islands.

But the company defends the long list, with a spokesman saying: ”Some of the subsidiaries are operating entities, others are companies holding investments in other companies, some are dormant and some are being liquidated.

”We pride ourselves on operating to the highest standards of corporate governance and on creating significant social value, through employment, investment and business activities.”

The heavy use of offshore units by banks, particularly Macquarie Bank, to minimise tax, has led the federal government to clamp down in the budget on the practice.

This month, as it sought to minimise its deficit, it announced measures to save $4 billion by closing down ”loopholes and abuses” in tax laws that Assistant Treasurer David Bradbury says are being abused.

The measures include tighter thin-capitalisation laws, which govern how much debt an offshore parent company can load into an Australian subsidiary; a crackdown on ”dividend washing”, which allows investors to earn two sets of franking credits on the same shares; and an increase in Tax Office compliance checks on offshore marketing hubs.

The measures follow the government’s earlier moves to amend transfer pricing and tax avoidance laws in legislation now before Parliament.

Bradbury warns that Australia’s corporate tax base is under threat from aggressive tax planning by multinational companies.

”If we see gaping holes in our laws, then we need to do our best to legislate to close them,” he says. ”Some of the measures that we proposed do crack down on loopholes. Some of the practices that we’re targeting with measures introduced in the budget – they are straight out rorts.”

The elaborate tax-minimising strategies of Apple and Google, which have come under focus because of their sheer scale, have confounded Western governments grappling with the fallout of the European debt crisis and soaring unemployment.

They have also drawn attention to the ”double Irish-Dutch sandwich”, a strategy that Apple, Google and many other big multinationals use aggressively to bolster profits.

A Treasury paper said last month there was ”serious concern” that Australia’s tax system was failing in the digital age, as companies, particularly those dealing with intangible products such as online advertising, took advantage of low-tax jurisdictions.

This week’s US Senate inquiry into Apple’s use of tax havens revealed products sold in Australia were handled by several offshore subsidiaries to prop up Apple’s offshore profits.

The revelation was one of many contained in congressional documents that outlined how Apple used a global network of subsidiaries, including in Ireland and Singapore, to avoid paying higher taxes elsewhere.

Documents filed by US congressional investigators show Apple products manufactured in China are resold to Apple retailers in Australia after an Irish subsidiary, Apple Sales International, takes ”paper” ownership of the products mid-transit.

The process, which allows Apple to dodge foreign sales tax rules and to concentrate profits from the sales revenue in the tax havens, has come in for scathing attacks from the British, European and US governments.

Jason Sharman, a professor in international political economy at Griffith University, warns it is not just technology companies that implement these strategies.

”If you are a big Australian mining firm, based in 15 countries, you may want to book all the loans and leasing agreements out of a low-tax jurisdiction,” he says.

”Even if you are BHP, it’s not as if most people employed at the firm are swinging a pick or driving a truck. Most of them are doing intellectual, white-collar work.”

Many holding companies used by the ASX top 100 are likely to be used for holding intangible things such as patents, intellectual property, treasury operations or financing loans, Sharman says.

”Any physical firm is still going to involve a lot of intangibles.”

This week’s grilling of Apple by US legislators followed an EU summit in Brussels that called for effective measures against tax avoidance and fraud, listing 10 steps to be in place by December. The EU estimates tax evasion and avoidance costs it €1 trillion ($1.33 trillion) a year.

And the OECD will present a draft action plan on tax-base erosion and profit shifting to the G20 finance ministers meeting in July.

Bradbury says the issue needs to be tackled at a domestic, multilateral and global level. ”I think as governments come under pressure to consolidate their finances, to reduce spending and to shore up their tax basis, this is an obvious area of focus because it is clearly an area where some multinationals are not paying their fair share of tax.”

It’s not just a question of the law, Bradbury says. ”There’s a broader question about the morality of these practices. Many companies have said ‘if you think this is wrong, change the laws and deal with it’.”

Corporate Tax Association executive director Frank Drenth says large companies will always pursue ways in which to boost their profits through favourable tax treaties.

”It is true that different multinational groups will go harder than others in exploiting tax planning opportunities, because there are differences between the tax systems in different countries.”

He warns that compulsory disclosure of company taxes would result in a witch-hunt, and says tax subsidiaries in low-tax jurisdictions are often legitimate.

”Australian companies will use these locations but they’re generally for sound business reasons,” he says. ”Some companies may decide to clean up their act sooner rather than later, but mainly because it’s not a good look.”

Bradbury admits that global tax laws have not kept up with the digital age, and are in dire need of reform. ”The basic problem here is that the rules of international taxation were developed for the industrial age,” he says. ”They are failing abysmally in keeping up with the changes of the information or knowledge economy.

”If we let these practices go on unchecked, we are allowing some businesses to gain an unfair edge over their competitors. Because if you’re a small business that’s only located in one jurisdiction, you don’t have the capacity to transfer profits and shift profits offshore, and you certainly don’t have the capacity to engage the best legal and taxation minds in the country to minimise your tax.

”There’s also the question that if some of the most profitable multinational companies are not paying their fair share, that is going to mean that other taxpayers, not just other businesses, but individuals – households, mums and dads, pensioners – are going to have to carry the can.”

A fundamental principle of tax law is that the affairs of all taxpayers, from individuals to big companies, are confidential.

Sharman says that while a company’s headline tax rate is usually about 35 per cent, the effective tax rate is about 12 per cent or much lower. ”You have a lot of companies that are paying 3 per cent of tax or no tax at all, depending on how they structure these things,” he says.

”If you look at the gap between a company’s headline tax rate and what it actually pays, it’s pretty substantial.”

A network of non-profit organisations is pushing governments to act not only to shore up their own tax bases, but also those of developing nations. Corporate tax evasion costs poor countries $US160 billion ($165 billion) a year, Christian Aid says. In Australia, Oxfam is urging resource companies in particular to pay a ”fair share” of tax in developing countries.

Too many resource companies shift profits out of developing countries into secrecy jurisdictions, says Oxfam mining advocacy co-ordinator Serena Lillywhite, who wants multinationals to ”actually pay their taxes in the country where the economic activity is taking place, or where the investments are located, rather than trying to shift their profits into low tax regimes”.

Top firms’ tax haven links revealed

May 25, 2013

Georgia Wilkins

Almost two-thirds of Australia’s top 100 companies listed on the stock exchange have subsidiaries in tax havens or low-tax jurisdictions, a new report shows.

Thirteen of the top 20 companies,  including two of the big four banks, have entities in well-known tax havens such as the Cayman Islands, Luxembourg, the British Virgin Islands and Bermuda.

A Uniting Church report, Secrecy Jurisdictions, the ASX100 and Public Transparency, reveals 61 of the top 100 companies held subsidiaries in ‘‘secrecy jurisdictions’’ as of April 2011 that have been targeted by tax authorities for sheltering companies dodging tax.

News Corporation, Westfield and the Goodman Group were  among the worst offenders, the group said, holding more than 50 entities in low-tax jurisdictions each.

The report shows that while many of the companies may do legitimate business in low-tax jurisdictions such as Hong Kong and Singapore, many subsidiaries exist with little evidence of commercial activity.

A subsidiary owned by the Commonwealth Bank called Burdekin Investments can be traced to Ugland House, a resort-style office building in George Town, the capital of Caribbean tax haven the Cayman Islands.

The building has become known for housing thousands of post-box companies that exist simply to take advantage of local tax rules. A spokesman for the bank said it was looking to close down the entity and would not explain what it did or whether it had any employees.

The report shows 10  ASX 100 corporations have subsidiaries in Jersey, making it one of the most popular locations for offshore entities among Australian companies, after Hong Kong and Singapore.

The Cayman Islands, Luxembourg, Switzerland and Ber- muda were also popular destinations, with many companies owning multiple entities in each.

“These are places that fail to meet international standards on transparency, on anti-money-laundering laws, and on tax law co-operation,’’ said Mark Zirnsak, the director of the church’s Justice and International Mission Unit and author of the report.

“Companies should be willing to be transparent and public about why these subsidiaries are in these locations given the concerns around inadequate regulation.’’

Mr Zirnsak  said the report came at a crucial time for the federal government, which was struggling to fund essential services without making cuts.

The report comes amid a global crackdown on the elaborate tax minimisation strategies of Apple and Google. This week, a US Senate inquiry exposed the elaborate corporate operating structure of Apple, which used subsidiaries in Ireland and Singapore to minimise its tax.

According to its 2012 annual report, Telstra controls 20 subsidiaries registered in well-known tax havens – 11 in the British Virgin Islands, four in Bermuda, four in Jersey, one in Mauritius and one in the Cayman Islands.

The company defended itscorporate structure, with a spokesman telling Fairfax Media: “Some of the subsidiaries are operating entities, others are companies holding investments in other companies, some are dormant and some are being liquidated.

”We pride ourselves on operating to the highest standards of corporate governance and on creating significant social value, through employment, investment and business activities.”

The report also shows News Corporation has more than 70 subsidiaries across the Cayman Islands, British Virgin Islands, Luxembourg and Mauritius. The company is registered in the US state of Delaware, which has attracted its own criticism for sheltering post-box companies taking advantage of the state’s soft tax rules.

Fairfax Media, owner of The Age, has two subsidiaries based in Singapore, and has closed a third that was based in Hong Kong.

The heavy use of offshore units by banks, particularly Macquarie, to minimise tax, has led the federal government to clamp down on the practice in the recent budget.

”If we see gaping holes in our laws then we need to do our best to legislate to close them,” Assistant Treasurer David Bradbury said this week.

Mr Zirnsak said the report was likely to be a ”significant underestimate” of the number of subsidiaries in secrecy jurisdictions.
Bag of tricks – how they do it

May 25, 2013 – 8:22AM

Georgia Wilkins and Ben Butler

Bag of tricks – where a haven comes in handy

Debt loading

The parent company loans money to its Australian subsidiary via an offshore finance arm based in a low-tax jurisdiction. The Australian operation then pays interest on the debt, which is tax deductible, rather than dividends, which are not. Thin capitalisation rules – strengthened in the latest budget – limit the amount of debt that can be used to fund Australian operations.

Transfer pricing

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The parent company sells its products to its Australian subsidiary at an inflated price, often via a subsidiary based in a low-tax jurisdiction. This means the Australian arm makes negligible profit on the product it sells and the profit is essentially shifted to another part of the company.

Intangible assets

The parent company houses its intangible assets – such as intellectual property or licences – in subsidiaries in low-tax jurisdictions. Its Australian operations then pay the tax-haven-based subsidiaries to use those assets.

Offshore billing

The parent company charges Australian customers for services using an offshore subsidiary based in a low-tax jurisdiction. Because the money goes directly from the customer to the tax haven it does not form part of the Australian arm’s income and is never taxed here.

Beautiful Bermuda, but investors told to tread with caution in the case of offshore listings

May 25, 2013

Ben Butler

Next week, if all goes to plan, the stock exchange will welcome the listing of Zeta Resources, its 11th company incorporated in the Caribbean tax haven Bermuda.

Bermuda is not the only exotic home claimed by ASX-listed companies – S&P Cap IQ data shows there are three groups from the Channel Island groups, one each from the Cayman Islands and British Virgin Islands, and even one from the Isle of Man.

But takeover drama at Miclyn Offshore Express, one of the 10 Bermudian companies already on the ASX, illustrates that investing in the sunny island nation poses more risks than just the possibility of a visit from Tax Office auditors.

Private equity firms CHAMP and Headland Capital Partners last month increased their joint holding in Miclyn, a shipping services company, to 75 per cent, without mounting a takeover bid.

This would have been impossible if Miclyn was an Australian company, because under most circumstances our laws require a takeover bid to be made when a shareholder reaches 20 per cent ownership. There is no such provision in Bermudian law.

Both the ASX and the Australian Securities and Investments Commission say that as long as Bermudian companies explain to shareholders that they have less protection than they would if the company was incorporated in Australia, it’s up to investors to make sure they understand the risks.

ASX spokesman Matthew Gibbs said the bourse ”focuses on ensuring adequate disclosure, so that potential investors can inform themselves about the implications of investing in a foreign incorporated company”.

Investors should take care when considering a company that is based offshore, an ASIC spokesman said.

”When deciding to invest in these companies, stop to consider where that company actually carries out its business and what challenges and risks might arise.

”Companies incorporated overseas will have different rules that apply to them, for example when there is a takeover.”

By contrast, the takeover rules in Singapore – a popular listing destination for Bermudian companies – state that they apply to ”corporations with a primary listing of their equity securities … in Singapore”, regardless of where they are incorporated.

As for Miclyn, it looks likely to pass into the hands of CHAMP and Headland.

A fortnight ago, the private equity funds asked Miclyn to hold a special meeting of shareholders to appoint two nominees to the board, giving them effective control.

And they have left the door open to privatising Miclyn at a lower price than the $2.20 they paid for their latest tranche of shares.

Miclyn’s general manager of investor relations, Adam Clayton, said he has never been to Bermuda.

The company has its offices in Singapore, a traditional hub for shipping companies servicing the offshore oil and gas industries.

Clayton said Miclyn’s decision to incorporate in Bermuda was ”not about getting around those corporate governance issues”.

”My understanding is that it’s more around tax issues,” he said.

He admitted that if CHAMP and Headland appoint their extra directors, Miclyn will be in breach of ASX guidelines requiring a majority of directors be independent.

”We are bound by Bermuda law,” he said. ”Those guidelines are just guidelines.”

Corporate governance expert Ian Ramsay, a professor at the University of Melbourne and a former member of the Takeovers Panel, said he wasn’t aware of Bermudian takeover rules.

The island was not one of the jurisdictions included in a paper he co-wrote last year comparing protection around the world. ”We’re extending the research now into more Asian countries. In summary, Australian shareholder protection is very strong – of the countries that we looked at over a 40-year period, Australian shareholder protection by and large has been the strongest.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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