Island allure: The tax secrets of big business
With many of Australia's largest companies owning offshore subsidiaries in exotic locations, there are fears the structures are being used to minimise tax, write Georgia Wilkins and Ben Butler.
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, the Commonwealth Bank, whose logo is proudly bornCAYMANe 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 the 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, which 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 been 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 pit 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 not-for-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".