BHP’s decision to strike a $529 million settlement with the Australian Tax Office over its Singapore marketing hub sets a precedent for other mining and energy companies fighting the ATO over transfer pricing of Australian commodities, the tax office says.
BHP confirmed the settlement on Monday and vowed to change the ownership structure of the controversial Singapore hub, which buys Australian commodities from BHP’s other subsidiaries and onsells them to customers at higher prices.
Other companies, including Rio Tinto, have similar disputes underway, and the ATO’s deputy commissioner Jeremy Hirschhorn said BHP’s settlement was a message to other companies.
“This is a landmark and precedential development in the execution of our marketing hubs strategy, and sends a strong signal to other industry participants,” he said in a statement.
“Given the importance of mining and natural resources to the Australian economy, it is critical that exporters of Australian commodities, whether iron ore, coal, gas or other commodities, pay the correct tax in Australia on their profits.
“The ATO has had a significant focus on marketing hub arrangements to ensure profits generated in Australia, are taxed in Australia.
The ATO had challenged the price paid by the Singapore hub for Australian commodities produced by other BHP subsidiaries since 2003, and had asked BHP to pay $661 million worth of unpaid taxes.
The ATO’s total claim was $1.04 billion onces penalties and interest were taken into account.
BHP had repeatedly vowed to fight the issue in court, arguing that the marketing fees charged by its Singapore hub were in line with OECD standards and market rates.
But on Monday afternoon BHP said it had agreed to pay $529 million to settle the matter, of which $328 million had already been paid.
Despite settling, BHP said it made no admission of tax avoidance.
In a move that appears set to ensure the issue does not flare in future tax years, BHP said the Australian half of its dual-listed company structure would increase its ownership of the Singapore hub from 58 per cent to 100 per cent.
The changed ownership structure should remove one key aspect of the ATO dispute, by ensuring that Australian tax is payable on 100 per cent of profits earned in Singapore in relation to the mines that are both located in Australia and owned by the Australian half of BHP.
“The change in ownership will provide certainty for BHP and the ATO regarding the Australian taxation treatment of BHP’s Singapore marketing business for future years,” BHP said in a statement.
Despite the change in ownership, BHP signalled it would continue to invest in its Singapore hub, which has grown rapidly in recent years, often at the expense of the company’s global headquarters in Melbourne.
“BHP’s marketing operations will continue to be located in Singapore and remain an important part of BHP’s value chain. These marketing operations contribute to BHP’s ability to compete in the global market place and to the value of Australia’s natural resources,” the company said.
It was unclear on Monday whether the settlement would affect a separate dispute between BHP and the ATO over the Singapore hub, which has played out in Melbourne’s federal court this year.
In that dispute, the ATO wants BHP to pay $82 million of top-up tax on the portion of the Singapore hub’s annual profit that was earned by on-selling coal from the Mt Arthur coal mine in New South Wales.
The issue arose because unlike most of BHP’s Australian mines, Mt Arthur is owned by the British-domiciled half of BHP.
BHP is not the only big miner to have battled the ATO in recent years, with Rio Tinto also in dispute over taxes paid by its Singapore marketing hub.
Rio is yet to settle with the ATO, but many in the industry expect it will follow BHP’s lead.
Rio chief executive Jean-Sebastien Jacques said earlier this year that Singapore, which has a population of 5 million, had more of the skills Rio needed than any Australian city.
“Remember, 70 per cent to 80 per cent of our business is in Asia or the Asia-Pacific and I have got access to talent, people who understand the market, that I can’t access in enough scale in Darwin or in Sydney or in Melbourne or in Perth, and that is the reality of it,” he said.
“Singapore is a very open place and it can attract people from China, it can attract people from Indonesia, Canada, so on and so forth. I have got a very open platform in order to build the right capabilities, to have the right resources to develop this strong marketing capability.”