Australian Financial Review, 5th February 1998
Article by Neil Chenoweth and Finonia Burke
The Australian Tax Office (ATO) has stepped up a secret two year national investigation into the offshore tax structures of Mr Rupert Murdoch’s media group, News Corporation Ltd.
The ATO launched the inquiry into the News group’s use of offshore companies after an internal compliance study assessed News as a “high risk” taxpayer in its treatment of foreign sourced income.
A confidential Tax Office report obtained by the Australian Financial Review, describes the ATO analysis of Australian companies that were “thought to represent significant FSI (Foreign Sourced Income) risks”.
“The analysis that was done resulted in News Ltd being classified as high-risk”, the memo of May 1996 said.
In a fresh development last night, The Independent newspaper in London reported that tax officials from four countries had joined to set up an unprecedented multinational investigation of News Corp’s tax structures.
The Independent said the ATO called a secret meeting in Sydney last December with tax investigators from Britain, the United States and Canada as part of its investigations.
News would not comment on The Independent’s article yesterday and would not confirm that it knew of an internal investigation.
A News spokesperson said, “News is subject to the normal rotational audits that all large corporations face and the company pays it taxes in accordance to the laws around the world.”
The ATO would not comment yesterday on its inquiry into News.
Although News has paid only 8.24 cents in the dollar tax on its operating profit since 1991, there has been no suggestion that it involves any illegal tax arrangements.
The focus of the joint talks appears to have been whether News is using legal loopholes which could be closed.
The legal tax strategies used by the crack News accounting team run by finance director Mr David Devos - which include running profits through 74 companies in the Cayman Islands, the British Virgin Islands and the Netherlands Antille - added Au$399 million to the News profit last year.
According to the ATO memo, “The risk assessment in respect of News Limited shows substantial funds movements from unlisted CFCs (controlling foreign companies) to the listed CFCs and the audit team is presently identifying the transactions and structures responsible for these movements.”
“The other CFC areas to be examined include the control rule, the active income test and the attribution percentages escalation,” it said.
Other issues studied by the ATO special audit of News included “implications of offshore structures, residency and PERs, royalties (transfer pricing), FIF, cross-border finance, losses on redemption of shares (and) increase in share premium account.”
Since 1991 News has paid 8.2 cents to the dollar on its operating profits, in part, reflecting its high growth rate.
At a nominal 36% tax rate, this has boosted News results by Au$2.18 billion - making Mr Devoe’s team one of the media group’s major profit centres.
The tax rate is boosted by higher tax payments by the group’s associated companies, such as BSkyB.
The average tax group for News Corp alone has averaged 5.8 % since 1991, when it fell to 2.3%.
In an unrelated speech this week Tax Commissioner Michael Carmody underlined the need for international co-operation by tax offices.
“The days of reliance on tax administrations working on a national basis are numbered,” he said.
“International co-operation between tax administrations will have to match the seamlessness of borderless trade.
“Exchanges of information under tax treaties and international co-operation have (already) developed... We are, however, entering a world where a new paradigm of international co-operation will be required.”
Analysts were last night sceptical of the effects of any tax inquiry.
“News Corp is a legitimate public company and they pay low taxes because they manage their tax,” one analyst said.
News has accumulated tax losses from its loss making operations in the UK in the 1980s and early 1990s, but they do pay significant taxes in Australia so as to fully frank their dividends.”
Another media analyst, sho declined to be named, said that a 9% tax rate was not unusual for a company of this sort.
“They have a lot of capitalised losses which are not reflected in the P&L statement,” the media analyst said.