Australian Tax Office to Fight BHP Tax Case Win

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Peter Hill

The Australian tax authority is preparing for a public court battle May 31, when it will appeal a tax court’s decision that favored global mining giant BHP Billiton Ltd. in a dispute over profit attribution under controlled foreign company rules.

The case ( MWYS and Commissioner of Taxation [2017] AATA 3037) was heard in secret behind closed doors late last year by the federal Administrative Appeals Tribunal, and involved amended assessments covering a nine-year period dating to 2006 seeking an extra A$82 million ($62 million) in income tax.

BHP confirmed May 10 that it was the company—MWYS—that won a legal dispute over whether the Australian Tax Office was right to attribute certain profits to it under the controlled foreign company rules.

It isn’t usual for large companies to utilize the AAT as a first step in fighting income tax assessments. BHP, however, exercised its statutory right to request the AAT hearing be conducted in private, and this was granted.

Not satisfied with the AAT’s decision in favor of BHP to set aside the amended assessments, the tax office lodged an appeal Jan. 19 directly to the Full Bench of the Federal Court. The public hearing begins May 31.

Currently, both BHP and the ATO are serving submissions and replies on each other in relation to the dispute.

Law, Not Fact

An appeal from an AAT decision can only be done on questions of law, not fact.

In BHP’s case, the question of law is whether UK-resident BHP Billiton plc’s indirectly wholly-owned Australian subsidiaries were associates of a Swiss-resident company —58 percent indirectly owned by BHP Billiton Ltd and 42 percent indirectly owned by BHP Billiton plc — by virtue of the “sufficiently influenced” test (Section 318, Income Tax Assessment Act 1936).

BHP Billiton Ltd has always included in its Australian tax income 58 percent of the Swiss company’s profits referable to commodities from the Australian production assets on the BHP Billiton Ltd side of the group (including West Australian iron ore), as CFC “tainted sales income.” However, it disputes being assessed on 58 percent of the profits from the sale of commodities on the BHP Billiton plc side (effectively just Hunter Valley, NSW, coal).

Key to the ATO’s argument that the “sufficiently influenced” test was satisfied was the simple fact that the boards of BHP Billiton Ltd and BHP Billiton plc were comprised of the same individuals in the relevant years.

However, Justice John Logan, sitting at the AAT, held that to accept that proposition would necessitate accepting a fiction that the directors of one company would need to give themselves directions or instructions in their capacity as directors of the other company, and vice versa.

“There are no shams abroad here. The evidence discloses meticulous attention within the Group to the legal realities of separate legal personalities,” Justice Logan found, in relation to how the Swiss company conducted its day-to-day business.

Transfer Pricing Dispute

Last year the ATO also hit BHP with transfer pricing assessments in connection with commodity payments to its Singapore marketing business. BHP objected to assessments spanning 11 years from 2003 to 2014 totaling A$1 billion, including A$661 million in income tax, and said in its 2017 Economic Contribution Report it will “continue to defend our position, including by initiating court action if necessary.”

BHP confirmed the ATO has yet to respond to those objections and was still auditing the three years from FY 2014 to FY 2016. In the interim, and in accordance with standard ATO policy, BHP has paid A$328 million of the tax involved in this dispute.

Royalty Tax Dispute

BHP told Bloomberg Tax it’s fighting multiple coking coal royalty assessments raised by the Queensland Office of State Revenue.

That dispute involves an 11-year period dating to 2005 and approximately A$329 million in royalties.

The case is scheduled to be heard by the Queensland Supreme Court by the end of the month.

To contact the reporter on this story: Peter Hill in Sydney at correspondents@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax