BHP the first to get slugged as the ATO keeps digging

A $1bn tax bill levied on BHP Billiton is shaping as the first of many such actions against companies.

A $1 billion tax bill levied on ­mining giant BHP Billiton over its controversial marketing operation in Singapore is shaping as the first of many such actions against companies, with the Australian Taxation Office combing through more than 30 marketing hubs.

It is believed some multi­nationals queried by the tax office are finding it difficult to justify key assumptions underpinning their use of Singapore as a marketing centre, such as the need to be close to markets in China.

BHP revealed yesterday that its tax bill for the Singapore hub, including penalties and interest, had climbed to more than $1bn as the result of a second round of ATO audits.

Last month the ATO stepped up its rhetoric against Singaporean marketing hubs, declaring that any company with operations that made a profit margin of more than 100 per cent in the city state was at increased risk of a full-scale audit or legal action.

Leading taxation lawyer Niv Tadmore, a partner at Clayton Utz, declined to comment on particular companies, but described ATO activity over Singaporean operations as “quite intensive”.

“The ATO have reviewed about 30-40 hubs and the reviews are comprehensive and forensic,” he said.

He said a paper issued by the ATO last month, which gave hub operations colour-coded risk ­levels based on their profit level, “shows that the real practical crunch is evidence; that is, the ability to prove technical and pricing positions”.

“We are seeing the ATO focusing more and more on law and evidence, and I think it will issue more assessments, challenging taxpayers on precisely this issue of evidence and proof, rather than just the traditional pricing and ­accounting points,” he said.

BHP says its hub is a vital part of its business that keeps it close to customers in Asia and pumps up the price for commodities such as iron ore and copper.

International tax expert Mark Kobetsky, an associate professor at the University of Melbourne’s law school, said the ATO was ­applying a new approach to valuing marketing centres that was developed by the Organisation for Economic Co-operation and Development. The approach ­involved looking closely at how businesses actually function.

“The OECD approach is that you get rewarded for the assets you use, the functions you take on and the risk you take,” Dr Kobetsky said.

“So are those key strategic ­decisions being made in Singapore or somewhere else?”

BHP also defends its operation because, although it pays no tax in Singapore, 58 per cent of its profit is taxable under Australian law.

However, the remainder, which passes to BHP’s British arm, is not taxable there — an ­arrangement Mark Zirnsak, the Australian spokesman for activist group Tax Justice Network, said should end.

“When governments fail to tax profits they should be taxing, it creates incentives for companies to structure in ways to avoid paying taxes in places they should be paying tax,” Mr Zirnsak said.