Alcoa boss Roy Harvey says $707m ATO interest bill will shield tax payments

A disputed $921m tax bill could shield Alcoa from Australian tax payments for years as it fights the issue through the courts.

Alcoa is fighting the tax office’s demand.

The massive $700m interest bill levied on Alcoa Australia’s alleged transfer pricing underpayments could shield the company from paying taxes in Australia for years as the matter is dragged through the courts, according to Alcoa boss Roy Harvey.

Alcoa of Australia was last week hit with a $921m bill from the Australian Taxation Office over alleged transfer pricing, relating to a decades-old bribery and corruption scandal in which the company allegedly used a London-based middleman to pay bribes to senior executives of Bahraini aluminium smelting giant Alba to win favourable ­contract terms on alumina sales from the company’s Australian operations between 1989 and 2009.

The bill was for $214m in back taxes, but the age of the alleged behaviour meant it came with an initial interest assessment of about $707m, according to ASX-listed Alumina, which owns 40 per cent of Alcoa’s Australian operations.

But the tax bill itself could shield Alcoa from paying taxes locally, Mr Harvey told analysts on Thursday, as it uses the accrued interest as a shield for profits from its local operations worth $528.1m in 2019, on earnings of $1.75bn, according to the company’s locally filed financial accounts.

“The tax is deductible immediately upon the assessment. So we will start using that $700 million as a tax deduction, and that will ultimately drive a better tax position in the near term,” he said.

Mr Harvey said Alcoa believed it was in a strong position to fight the allegations, and would take the matter all the way through the court system, saying he expected the matter could drag on for years.

“We simply don‘t agree with their assessment. We don’t agree with the way that they’ve chosen to calculate it nor that there has been any underpayment of taxes over these years,” he said.

“It could take years to resolve and we will dispute it all the way through.”

Alcoa’s Roy Harvey

Alcoa will stump up half of the claimed underpayment in cash, or $107m, as it fights the assessment.

Neither Alcoa nor Alumina have detailed the basis of the ATO’s transfer pricing claims, but it is understood they stem from an investigation of a bribery scandal that engulfed the company a decade ago.

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 $US1bn racketeering and fraud lawsuit brought by the Bahraini company over the scandal.

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”.

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.

“Alumina notes that the ATO is seeking to assess tax on sales revenue which it contends that Alcoa of Australia 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 on July 8.

Alumina shares rose on Thursday on the back of Alcoa’s quarterly earnings release, which beat analyst expectations despite grim conditions for the sector on the back of the coronavirus crisis.

Alcoa World Alumina and Chemicals partnership, of which Alumina owns 40 per cent, performed strongly in the period, Alumina boss Mike Ferraro said, with cash production costs down and production up.

Alumina received $58.6 million of net cash distributions in the second quarter from the partnership, up from $31.3 million for the previous quarter.

Alumina shares were up 2c to $1.705 at 1100 AEST.