ATO eyes legal fight against BHP, Rio over Singapore hubs

Chris Jordan says he is prepared to go to court against BHP and Rio over their use of Singapore marketing hubs for tax purposes.

ATO tax commissioner Chris Jordan. Picture: Renee Nowytarger.

Tax commissioner Chris Jordan has laid the groundwork for a blockbuster legal action against BHP Billiton and Rio Tinto, saying he is prepared to go to court against the two mining heavyweights on their much-publicised use of Singapore-based marketing hubs for tax purposes.

But BHP last night returned fire, saying it would strongly defend its position, “including in court if necessary”.

In his interview series with The Australian, Mr Jordan said of the practice used by BHP and Rio, colloquially known as “the Singapore Sling”: “I think eventually there’ll have to be a court case to resolve marketing hubs, and unfortunately it could risk being very specific to the companies, but we’re trying to see if we can establish some principles.”

However, a BHP spokesman said last night: “We do not agree with the ATO’s position and intend to continue to defend our position, including in court if necessary.”

Through the use of the “Singapore Sling”, BHP and Rio are ­effectively able to “sell” commodities they have dug up in Australia, such as iron ore, to their marketing hub subsidiaries in Singapore, which has a much lower corporate tax regime. The commodities are then subsequently sold on, often with significant mark-ups, to China and other nations.

This has raised a broader question about whether the mining ­giants claim to make too much money for tax purposes from their hubs in Singapore, and not enough in Australia, as Mr Jordan thinks.

BHP and Rio have been under siege from the ATO for some time over their use of the Singapore hubs as part of their iron ore sales process. Both companies are still in dispute over huge tax bills from the ATO over their use of Singapore marketing hubs: BHP for about $1 billion including tax, interest and penalties, and Rio for about $450 million in tax.

Mr Jordan said he was increasingly seeing no choice but to test the issue through legal avenues.

“Marketing hubs and procurement hubs are a problem, and are eroding the (tax) base, so I think we will need some judicial guidance because it’s a transfer pricing (issue),” he said.

The BHP spokesman told The Australian the company had been one of the biggest corporate taxpayers in Australia over the past decade.

“BHP has paid $66bn in taxes and royalties in Australia since 2008, including on profits from Australian commodities sold through our Singapore marketing business,” he said.

The spokesman defended the company’s use of the Singapore hub to account for a significant amount of its profits. “Our marketing business is located in Singapore so that it is close to our Asian customers, which account for around 70 per cent of our total sales revenue,” he said.

“Our dispute with the ATO relates to amended tax assessments over 11 years, and the primary tax in dispute represents less than 2 per cent of taxes and royalties BHP has paid in Australia over that 11-year period.”

But at one point in his interviews with The Australian, Mr Jordan was barely able to conceal his scepticism about the process used by the mining giants. “So I set up a procurement buying function in Singapore or whatever, and it does all this incredible bargain buying for me,” Mr Jordan said. “And (then) it adds a huge value and it adds a big margin on, and (someone) buys it at a higher price.”

Mr Jordan has collectively accused multinationals with local operations of trying to have their cake and eat it too on their interpretations of the tax law on transfer pricing: whether it be Australian mining giants with marketing hubs in Singapore, or global technology giants with sales forces in Australia.

“So we’ve got the argument both ways (from companies we deal with),” he said. “Outward bound, they say the sales force in Singapore adds all the value, because they are sales from marketing hubs. (But) the foreign nationals that have their sales force here, they say that sales force adds no value (for tax purposes). So isn’t that interesting?”

Meanwhile, Rio has also publicly defended its position, saying it believes its practices in the area were “in accordance” with “OECD guidelines and Australian domestic law”.

Despite his current dispute with the two mining giants, Mr Jordan said his tough stance was nothing personal. “Obviously Rio and BHP are significant and pretty good taxpayers,” he said.

“We have a good transparent relationship with them. We just happen to disagree with their marketing hubs in Singapore.”

The tax commissioner has also left the door open to hammering out a compromise that avoids taking landmark court action against BHP and Rio. “Hopefully, we can come to some resolution at some point,” he said.

Between 2006 and 2014, BHP sold about $US210bn worth of resources, including iron ore, to its Singapore subsidiary, which was subsequently sold on to BHP customers for $US235bn.

This meant there was a mark-up of $US25bn over eight years, meaning that after expenses, BHP’s Singapore subsidiary retained a profit of nearly $US6bn.

This was taxed in Singapore, where the corporate tax rate is 17 per cent, instead of Australia, where it is 30 per cent: triggering the ATO’s demands for massive tax and penalties from BHP.