BHP Billiton (ASX: BHP) has been in the news with its defensive move on tax reduction strategies against the Australian government (Australian Taxation Office, ATO) that is chasing companies for taxes payable on profits. Particularly, the miner intends to go in for a court action against the ATO with regard to payment of about $767 million in back taxes and penalties owing to use of a foreign tax haven (sale of Australian commodities to its Singapore marketing business). Two things to note here are –
Complying to United Kingdom tax regulations:BHP Billiton Limited (ASX: BHP) has released its second ever audited Economic Contribution and Payments to Governments report and this complies with United Kingdom tax regulations. Under this, large businesses with a permanent establishment in the UK are supposed to publicly disclose the details of the tax strategies. Meanwhile, BHP has reported that it has paid US$3.7 billion globally in taxes, royalties and other payments which is well below the US$7.3 billion reported in 2015. The group had paid about US$2.5 billion to governments in Australia in 2016 while paid US$5.24 billion in 2015, with US$1 billion paid as taxes. The remaining amount reflects US$1.5 billion in royalties along with US$230 million in other payments. The drop in global commodity prices is said to have led to the drop in contributions to governments to some extent. BHP has been said to get higher refunds and tax offsets as compared to the taxes paid in either 2015 or 2016, benefitting from UK being the only country that has a net benefit in contributions. Additionally, the business segments for projects within each country have changed substantially from 2016 to 2015, making comparisons difficult. As per BHP’s report, there is an adjusted effective tax rate (ETR) of 35.8% globally and 30.3% in Australia. These are significantly higher than the average ETR for companies on the ASX 200. If royalties are included, this rate (presumably the ETR of 35.8%) increases to 58.6% (globally) and 56.6% in Australia. BHP has been including royalties in its available ETR for some years now.
BHP’s Transparency Progress (Source: Company Reports)
Singapore Transfer Pricing:BHP has excluded Singapore (from information on low tax jurisdictions) which is the key jurisdiction that has created problems with respect to transfer pricing. BHP sells most of its production out of Western Australia and Queensland through its Singapore marketing hub. It pays zero tax on profits made in Singapore as compared to 30% in Australia. On the other hand, the group’s ownership structure for the Singapore company is 58% owned by the Australian BHP Limited (LTD) and 42% owned by the British BHP PLC. So, it may become immaterial to note the source of the profit (whether from commodities produced out of Australia, as far as the 58% share is considered). In its report, BHP highlighted that the Singapore government has granted the group a tax incentive for its marketing activities. All-in-all, what is highlighted is that BHP through its hub in Singapore is trying to run its business much better, leading to better profits for shareholders.
As of now, ATO has declined to comment on BHP’s stance.
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