Alumina faces $1bn tax battle after tax office probe

A tax fight looms for Alumina as a bribery and corruption scandal returns to haunt joint venture partner Alcoa.

Portland's Alcoa aluminium smelter. Picture: Jake Nowakowski

Alumina’s jointly owned Australian operations face a tax fight ­potentially worth more than $1bn as a decades-old bribery and corruption scandal returns to haunt Alcoa of Australia and an accused middleman is convicted of tax evasion by Swiss authorities.

ASX-listed Alumina, which owns 40 per cent of Alcoa’s Australian operations, confirmed on Wednesday the venture, which owns Victoria’s Portland smelter, had been hit with a $214m bill from the tax office over historic sales of alumina to Bahraini aluminium giant Alba.

It flagged additional claims of $707m in interest payments from the ATO, as well as the possible imposition of penalties that could tip the total amount under dispute to more than $1bn.

Alumina did not detail the specifics of the ATO claims, but it is understood they relate to a long-running bribery scandal that ­engulfed the company a decade ago, centring on allegations Alcoa had used a London-based middleman to pay bribes to senior Alba executives to win favourable ­contract terms on alumina sales from the company’s Australian operations.

In 2014, Alcoa pleaded guilty in the US to a bribery offence relating to the payment of kickbacks to Bahraini officials through a middleman. It paid $US223m in fines to settle the case brought by the US Department of Justice, plus another $US175m in “disgorgement of ill-gotten gains” to settle a related action brought by the US Securities and Exchange Commission.

In 2012 it paid $US85m and entered into a long-term alumina supply contract with Alba to settle a racketeering and fraud lawsuit brought by the Bahraini company over the scandal.

Alcoa was accused by the UK Serious Fraud Office of using Canadian businessman Victor Dahdaleh as a middleman to allegedly pay more than $US110m in bribes to former executives of Alba and Bahraini officials between 1989 and 2009, in return for a cut of contracts worth more than $US3bn.

Mr Dahdaleh was charged with alleged offences relating to the bribery scandal in the UK in 2011, but the case was dismissed three years later after a key witness recanted earlier statements.

According to the SEC ­allegations, money used for the bribes came from commissions that Alcoa’s Australian subsidiaries paid to the companies controlled by the middleman as well as “price mark-ups the consultant made between the purchase price of the product from Alcoa and the sale price to Alba”.

Last month, Mr Dahdaleh was convicted by a Swiss Court of tax evasion related to payments through the shell companies used to facilitate the alumina transactions and ordered to pay 72 million Swiss francs ($110m), according to Swiss media articles. The businessman has denied any wrongdoing and said he will ­appeal against the judgment.

At the time of the US settlement in 2014, Alcoa said there was no allegation in the Department of Justice filings, and no finding by the SEC, that anyone at Alcoa Inc — the US-based parent company — “knowingly engaged in the conduct at issue”.

It is believed the ATO’s transfer pricing allegations centre around that difference in price, arguing Alcoa should have paid tax on the full amount paid by Alba rather than what it received from the middleman.

On Wednesday, Alumina said Alcoa would defend the ATO claims, saying it believes the sales “were the result of arm’s-length dealings by AoA, and made at arm’s-length prices to an unrelated third party that were consistent with the sales prices paid by other third-party alumina customers at the relevant time”.

It is understood the “unrelated third party” referred to by Alumina are companies associated with Mr Dahdaleh.

“Alumina notes that the ATO is seeking to assess tax on sales revenue which it contends that AoA should have received, rather than the amounts actually received by AoA. Neither AoA nor any related entity received any benefit other than the sales revenue received over the relevant period from an unrelated party,” Alumina said.

But that was not the view formed by the SEC following its investigation. In legal documents filed as part of Alcoa’s guilty plea to the bribery charge, the SEC said Alcoa’s relationship use of the middleman (not named in the SEC documents) helped it lift ­annual alumina sales to Alba from 300,000 tonnes in 1989 to 1.6 million tonnes by 2009.

And at times the company allegedly invoiced the businessman’s shell companies at below alumina market rates in order to allow room for a mark-up for bribes.

During negotiations over a new contract in 2004, the SEC documents say, the sales price for alumina offered to the shell company were less than those quoted earlier when Alcoa was negotiating directly with the Bahraini company.

Both Alcoa and Alumina will take an immediate financial hit from the claim, as Alcoa will be forced to stump up half of the disputed amount, or $107m, as it fights the claims.

Alumina said that payment would reduce its quarterly distributions from Alcoa’s Australian operations by about $US28m ($40.4m) in the September quarter as it defends the matter.

Alumina closed down 12c, or 7 per cent, at $1.59 on Wednesday.

The dispute could throw fresh uncertainty over the battle to save Alcoa’s Portland smelter, under threat of closure when its power deal runs out in mid-2021. It could complicate discussions with the Victorian and federal governments over a deal to keep the smelter operating beyond next year.