BHP restructures to gain Australian tax certainty following settlement
Multinational mining company BHP has settled the long-running transfer pricing dispute over its Singapore marketing hub with the Australian Taxation Office (ATO), but has had to change its business model to guarantee future tax certainty.
BHP agreed to pay approximately A$529 million ($384.5 million) in additional tax for the income years 2003 to 2018 in relation to a dispute over the amount of Australian tax payable as a result of the sale of BHP’s Australian commodities to BHP’s Singapore marketing business.
BHP has already paid A$328 million of the settlement, but the total final amount is still lower than the assessments issued by the ATO of A$661 million primary tax (A$1,042 million including interest and penalties) for the income years 2003 to 2013. The cost actually runs into the billions.
“The A$529 million payable under the settlement is in addition to the more than A$75 billion in Australian taxes and royalties that has already been paid by BHP over that same period,” the multinational said in a press statement.
“The settlement fully resolves the longstanding dispute between BHP and the ATO for all prior years, being 2003 to 2018, with no admission of tax avoidance by BHP, and provides certainty in relation to the future taxation treatment,” it added.
However, future tax certainty has not come easily.
From July 2019, BHP Group will increase its ownership of BHP Billiton Marketing, which is the main company conducting BHP’s Singapore marketing business, from 58% to 100%.
“The change in ownership will result in all profits made in Singapore in relation to the Australian assets owned by BHP Group Limited being fully subject to Australian tax,” the company said. The company will continue to use Singapore for its marketing operations though.
Deputy Commissioner Jeremy Hirschhorn said the structural change means BHP is coming within the ATO’s ‘green zone’ for marketing hubs. “This is a landmark and precedential development in the execution of our marketing hubs strategy, and sends a strong signal to other industry participants,” he said.
Controversy experts have described the settlement as a very good return on the commissioner’s investment because of the change in the ATO’s approach to investigations. ATO officers are front-ending the evidence-gathering, which allows them to go into these settlement discussions from a much more informed position.
Jock McCormack, partner and head of tax at DLA Piper in Sydney, said with the revised BHP structure, the ATO has indicated that it seeks to “lock in future tax compliance outcomes”, which provide certainty and secure predictable revenue outcomes for both the ATO and the taxpayer.
The ATO has released its Practical Compliance Guideline PCG 2017/1, which was updated on June 27 2018 and includes guidelines on offshore marketing hubs as well as offshore procurement hubs. It is consulting on whether to update that guidance to include offshore shipping service hubs.
“This PCG continues the ATO’s focus on articulating risk assessment frameworks for what it considers potentially high tax risk structures including marketing hubs established by multinationals particularly in the resources sector,” McCormack explained. “These initiatives and related settlements secured by the ATO with particular taxpayers reflect a growing trend of pro-active dialogue with multinationals on their global tax affairs, as we’ve experienced with recent MAAL and related initiatives.”
This is also a big win for ATO Commissioner Chris Jordan, who has been fighting multinationals such as BHP, Rio Tinto, Microsoft, Google, Pfizer, AstraZeneca over their use of foreign marketing hubs (mainly in Singapore), which allows them to pay less tax. The Australian Senate’s Economics Reference Committee has been investigating the matter since 2014, questioning companies from the mining, technology and pharmaceuticals sectors. It released its final report and recommendations earlier this year.
Digging up the past
BHP and Rio Tinto began running marketing operations out of Singapore in the early 2000s. From 2008, both companies started selling iron ore to Singapore instead of directly to Japanese and Chinese steel mills. However, unlike companies such as Apple, which uses marketing hubs to mark-up and resell products, Australian resource companies sold iron ore to the marketing hub even though the ore is not needed in Singapore. This led to lengthy battles with the ATO on how much tax should really be booked in Australia.
While BHP has reached a settlement, Rio Tinto plans to fight against the ATO tax assessments for income years 2010 to 2013 which would lead to it paying additional tax of A$379 million plus interest of A$68 million – A$447 million in total. This payment would be in addition to the $A25.5 billion of taxes and royalties Rio Tinto paid in Australia during the same four-year period.
It believes it has done nothing wrong because it confirmed its pricing arrangements with the ATO more than a decade ago on certain transaction between entities in Australia and Singapore. It also believes the assessments paid will trigger double taxation, which it plans to reclaim via the Australia-Singapore double tax treaty.
Rio Tinto was unable to comment on how the BHP settlement will impact its case, but it may offer the ATO a boost when it has to defend its reasoning for the tax assessment.
Kerim Keser, managing director at Duff & Phelps in Munich, noted that BHP’s matter is just a settlement and not a court decision. “But seeing a big player settling on this – even if not admitting that the arrangement was not arm’s length – may increase the ATO’s confidence [in other similar cases],”, he said.
“They could therefore put more pressure on other companies,” added Keser, who once worked on the most important TP cases at the ATO.