ABC Four Corners and International Consortium of Investigative Journalists
5 November 2017
The Australian Tax Office (ATO) has taken action against 19 multinational companies as it unpicks a scheme capable of pushing millions of tax dollars offshore.
The ATO has taken action against 19 companies over a cross-currency interest rate swap scheme.
The ATO is seeking the Paradise Papers in order to analyse the Australian implications.
The Paradise Papers reveal mining giant Glencore used the currency swap scheme.
The ATO is also cracking down on high-profile Australian advisory firms and an international web of offshore law firms suspected of promoting tax avoidance schemes through tax havens.
The ATO investigations have come to light during a Four Corners project in partnership with the International Consortium of Investigative Journalists.
The largest leak of documents in history has exposed the tax secrets of a host of large multinational companies.
The Paradise Papers leak has uncovered confidential emails, board minutes and tax-structuring plans originating from global offshore law firm Appleby, Singaporean firm Asiaciti Trust and 19 corporate registries in tax havens, obtained by German newspaper Suddeutsche Zeitung.
The documents show how major multinationals have used the tax haven of Bermuda to structure their Australian debts and employ complicated financing schemes for their Australian subsidiaries, with the suspected goal of dramatically cutting their Australian tax bill.
The cache of leaked documents reveals an industry designed to sell secrecy. This is one story from a Four Corners investigation into the Paradise Papers.
ATO deputy commissioner Mark Konza said investigations had led to 19 companies that appear to be exploiting a scheme known as cross-currency interest rate swaps.
“It’s a two-step scheme, it’s difficult to detect, and it took us a little while to detect it, but now we have we are following it up, we’re making a lot of inquiries about it,” he told Four Corners.
The swaps can be perfectly valid – they can swap, for example, a loan in $US to a loan in $A, with each side effectively swapping the risks and interest rate of the original currency for the risks and interest rate of the swap currency.
Tax experts say when the swaps are done between a parent and its subsidiary they can sometimes be used by multinationals to avoid tax.
A total of 19 companies have faced ATO action over the scheme, with 13 of them still under review.
On top of the targeted companies, the ATO has issued legally-binding formal notices to advisory firms, asking them whether they helped implement the swaps or other tax-driven schemes.
Four Corners can reveal 21 formal notices have been issued to accountants and other so-called “intermediary” firms in Australia, with further action expected.
And Mr Konza said the ATO was stretching its net offshore, saying international tax regulators wanted to disrupt the operations of offshore law firms in tax havens.
He also said the ATO wanted the Paradise Papers data to begin “analysing the Australian implications”.
Coal miner Glencore used the scheme
The Paradise Papers show Australia’s largest coal miner, Swiss-based Glencore, used the swap financing scheme that has been the subject of scrutiny by the ATO.
Four Corners has also established the use of the swaps by Glencore was the subject of a voluntary review by the ATO.
Glencore, which is also the world’s biggest commodity trader, produces and exports coal, copper, zinc, nickel, oil, grain and cotton from Australia.
Its chief executive, Ivan Glasenberg, and four other executives became billionaires when the company listed on the London stock exchange in 2011.
But it reports very little taxable profit in Australia.
In 2014, Glencore made $23.7 billion in revenue (more than Australia’s second largest listed company, Westpac) and made $296 million in profit.
This figure represents about $1.30 in profit for every $100 in revenue. It paid tax of $55 million on its profit.
The leaked documents reveal Glencore used the swaps in a $3.7 billion refinancing of its Australian operations in 2013, and in a major Australian restructure in 2014 that left it with debts of $US11.6 billion.
The complicated swap financing structures used by Glencore were routed through Glencore companies in Bermuda.
High debt a tax avoidance strategy: Tax activists
Tax activists attribute Glencore’s low taxable profits in part to deliberately high levels of debt and the use of complicated financing structures to export taxable profits to low or no-tax countries such as Bermuda.
Major multinational companies, their lawyers and accountants work hard to ensure their activities comply with tax law that states any financial manoeuvring should not have a dominant purpose of reducing tax.
But Jim Henry, a New York-based senior adviser to the activist group Tax Justice Network, said it was no surprise to see mining companies loaded up with debt to avoid tax.
“Well, it’s a typical pattern that you would say many companies that are involved in the extractive industries have used to basically move income from high-tax jurisdictions to low-tax jurisdictions,” he said.
“It’s just a tax avoidance scheme. It’s been done by dozens of companies. The mineral industry is rife with this behaviour.
“I think Glencore is one of the more egregious participants in this, but it’s not unusual.”
Use of swaps dropped by Glencore
Glencore said it voluntarily participated in a “pre-lodgement compliance review” with the ATO and disclosed and discussed its use of the swaps.
It dropped the use of the swaps in 2016, but said this had nothing to do with ATO action.
Glencore said it had used the swaps to hedge foreign exchange risks, but they were no longer needed after a ruling from the ATO about how it reported its financial accounts.
Glencore said it had recently shut many of its Bermuda-based companies, it paid all taxes required by law, and debt had been cut in Australian operations by $US4 billion since late 2014.
It said it was not currently under ATO audit or review about its use of debt or the swaps.
However Glencore revealed it remained under ATO audit for its use of a Swiss marketing hub and was objecting to assessments from two other audits, which it has paid $US42 million to resolve.
The ATO now has about 20 major resources companies under audit as it steps up investigations into the high use of debt by big mining and energy companies, and their use of trading or marketing hubs.
Glencore said Australian income tax payments had been affected by challenging market conditions, including a slump in commodity prices and inherited tax losses, so “the business did not pay tax due to the lack of profitability in the underlying operations”.
“Glencore’s operations in Australia are now profitable and hence tax will be paid,” Glencore said.
Reporters: Stuart Washington, Marian Wilkinson