Out of Africa, tax tricks emerge

Source: Sydney Morning Herald
Date: 6 Jul 2022

It was buried in a long and all-encompassing speech.

But to those in business attuned to the language, the Tax Office's warning to the Minerals Council of Australia in April could not have been any clearer: we know what you're doing, and we're coming after you.

And since Deputy Commissioner Mark Konza met the powerful mining group to warn that offshore restructuring was coming under the microscope, the Tax Office has gone even further.

It is working hard to catch up with the sophisticated profit-shifting techniques that developed among miners as rapidly as the mining boom itself.

''There's a view among some companies that if everyone is doing the same thing, then they're all relatively safe,'' Mr Konza told Weekend Business, describing the logic that has led up to two-thirds of Australia's top-100 listed companies, many of them miners, to rely heavily on tax havens and low-tax jurisdictions.

''It's concerning when you see people take things that are legal, put them on steroids, and try to get so much out of the arrangement that they lose contact with reality.''

Mr Konza's investigations add to the pressure on multinational resources companies operating in the developing world, with the OECD, non-government organisations and the African Development Bank all calling for more transparency around their activities.

In the Tax Office's 26 investigations into suspected profit-shifting, 15 of which are in the energy and resources sector, Mr Konza is looking for what he calls ''absurd'' financial information.

Fuelled by a funding boost received in the last federal budget, he signalled an additional 60 investigations, 20 of which will target energy and resources companies.

While mining companies are not a deliberate target, they make up a third of cases because of their sheer size and profits.

''Mining has been very profitable in the last decade,'' Mr Konza said. ''They're still making good profits, and of course the question arises, well, is there some way we could pay a lower portion of tax on these profits?''

On Monday, BusinessDay revealed that a new Tax Office taskforce would trawl through the contracts of suspicious subsidiaries and offshore accounts used by some of Australia's biggest companies.

Mr Konza, who heads the taskforce, said while miners were by no means alone, it had become common for those in the resources sector to set up complex ''value chains'' that extended way beyond their operations in Africa or south-east Asia and their headquarters in Perth.

The British Virgin Islands and Bermuda are well-known tax havens, but Fairfax Media has discovered that ASX-100 companies have no fewer than 22 subsidiaries registered in Mauritius, a tiny island in the Indian Ocean that often acts as a conduit for investment in Africa and India.

''They'll say, OK well, yes we dig up the minerals here in Australia, but this company located in another country - they're the ones that find the buyers,'' Mr Konza said.

''So we wonder whether these functions really are being done in the other place.''

Mr Konza said the Tax Office was scrutinising companies that established offshore ''marketing hub'' arrangements, an increasingly common move among multinational energy and resources companies. But he warned that investigations could take several years because of the required economic analysis, and the difficulty of getting ''secrecy jurisdictions'' to co-operate.

''What we're finding are instances where we think the prices being paid to the company in the low-tax jurisdictions are very, very high.

''Often intangibles are moved, things like rights to market, so you have to find out whether they have really moved … You need to interview their officers to see how they actually conduct their business.''

With about 240 Australian mining companies operating in Africa, the Tax Office is being forced to consider the problem on a much more global level.

''The reality is, Africa is being ripped off big time,'' African Development Bank president Donald Kaberuka told Reuters last month.

Speaking before the G8 summit, which brings together the leaders of the world's richest nations, Mr Kaberuka was giving a frank assessment of the foreign companies that mine Africa's resources - a business that non-government organisations complain enriches shareholders but does little for local people.

''Africa wants to grow itself out of poverty through trade and investment - part of doing so is to ensure there is transparency and sound governance in the natural resources sector,'' Mr Kaberuka said.

International pressure on Australian miners operating overseas is rising, with a new report by social justice group ActionAid claiming poor countries are losing more than $130 billion in tax revenues by giving generous tax breaks to big companies, including Australian miners.

''In most cases, these are backroom deals signed directly with politicians with little or no parliamentary scrutiny,'' ActionAid Australia head of campaigns Mark Chenery said.

''We know Australian miners are benefiting from these deals.''

Uranium producer Paladin Energy is one Australian miner under scrutiny for its tax arrangements in Malawi, where it runs a mine in Karonga.

A report by Norwegian Church Aid alleges there are discrepancies between Paladin's reported tax and the tax it actually pays the Malawian government, and says other payments by Paladin in Malawi are lower than the company reports.

The group alleges that although Paladin claims to have paid $US9.6 million last year, figures obtained by the aid organisation show it paid just $US5.75 million.

As part of a detailed response, a Paladin spokesman said the company was ''fully aware of the report and we strongly dispute all the claims made in the report''. He said taxes paid to the Malawi government last year totalled $7.8 million and raised issue with other figures provided in the report. The company did not respond to questions about its subsidiary in Mauritius.

Paladin is just one of the Australian companies using Mauritius as a stepping stone, where it has a subsidiary, Langer Heinrich Mauritius Holdings, as do eight ASX-100 companies.

In addition to its white sand beaches, casinos and luxury resorts, the tiny island's attractions include a favourable tax treaty that exempts Mauritian investors from capital gains tax in India.

In 2011, it was ranked 33rd on the Tax Justice Network's Financial Secrecy Index, criticised for its banking secrecy, lack of company ownership records and lax trust rules.

In recent months, Indian politicians have turned their ire on the tax treaty, saying ''post-box companies'' in Mauritius are used by both foreign multinationals and rich Indians to avoid paying tax in India.

These allegations have been denied by the Mauritian authorities and the island's financial services industry.

However, Fairfax Media found that all but three of 22 Mauritian subsidiaries of ASX-100 companies were classic ''post-box companies'' that gave a registered address care of an accountant or company registration service.

Of them, News Corp is the biggest user of Mauritian companies. Before its split last month into a publishing arm and a broadcasting company, the Murdoch empire controlled 14 entities in Mauritius, most giving an address care of offshore company formation group Multiconsult in the island's capital, Port Louis.

Some of the News companies seem related to Murdoch's pan-Asian TV service, STAR. However, others bear cryptic names such as Buzzer Investments, Acetic Investments and Riddle Investments.

A News Corp spokesman declined to comment.

Telstra, Transfield Services and AMP have used their Mauritian subsidiaries to invest in India.

Telstra declined to comment specifically on its Mauritian subsidiary, Reach Holdings, but has previously said it was a holding company for operations in India.

Recycler Sims Metal Management said its subsidiary in Mauritius, Sims Group Mauritius, was also used to invest in India but was in the process of being wound up.

Rio Tinto's two Mauritian companies, ProMark Services and Carrier Holdings, were acquired by the group in its 2011 takeover of Riversdale Mining, which has operations in Mozambique. Rio Tinto declined to comment.

''To be candid, it should have been shut down years ago - we simply haven't got around to doing so,'' Transfield Services spokesman David Jamieson said.

''No funds have ever moved through it.''

AMP spokeswoman Lara Evans said its Mauritian subsidiary was used to invest in Indian assets on behalf of the group's clients.

''This subsidiary has been liquidated and the proceeds repatriated back to investors,'' she said.

The government is under increasing pressure to introduce disclosure laws that would force companies to report what they pay governments in every country they operate in. Such disclosure laws would bring Australia in line with the US, the European Union and Canada.

Under the US and EU legislation, companies are required to reveal how much they pay a foreign government in taxes, royalties, fees, licences and bonuses. In Europe, they are also forced to disclose any social payments they make, such as building a school.

Advocacy group Publish What You Pay says ''country-by-country'' disclosure laws would protect poor as well as wealthy nations from corporate tax-dodging. ''We're talking huge sums that dwarf aid,'' spokeswoman Claire Spoors said.

By Georgia Wilkins and Ben Butler