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By Peter Hill
Global medical device and software group ResMed has vowed to fight the Australian Tax Office over an adverse outcome to a recent tax audit of intra-group pricing among its Australian-based subsidiaries involving $190 million.
In its third quarter results for fiscal 2018, parent company ResMed Inc. revealed the Australian Tax Office wrapped up a transfer pricing audit for the years 2009 through 2013 and issued amended assessments totaling $151.7 million in extra income tax plus $38.4 million in accrued interest.
During an earnings call April 26, Brett Sandercock, chief financial officer at ResMed Inc., told shareholders that the company doesn’t agree with the ATO’s assertion it owes the tax and interest being claimed.
“We intend to pursue administrative and legal steps to defend our position,” Sandercock said, “and we continue to believe we will be successful.”
The ATO hit came by surprise in March, right at the end of the quarter. ResMed had previously said it didn’t believe the tax audit would result in any material adjustments.
ResMed hasn’t recognized any income tax expense in relation to the ATO’s assessments. Sandercock also told shareholders that, irrespective of the outcome, the company doesn’t expect it to materially change its underlying effective tax rate guidance for fiscal year 2019 and beyond.
However, he did acknowledge that, ultimately, if ResMed lost the dispute it would need to make a “significant” one-time tax expense and interest charge at that time.
Following receipt of the amended assessments, ResMed agreed to pay half the tax in dispute—$75.9 million in line with standard ATO policy, with the remaining tax and interest held in abeyance until the dispute is finally resolved.
In an April 30 email to Bloomberg Tax Sandercock declined to comment on the transfer pricing activities the ATO is focused on beyond what he told shareholders during the earnings call—that “essentially, this is a transfer pricing dispute around the jurisdictional split of certain activities and the tax on related income.”
According to the group’s 2017 annual report, a substantial portion of RedMed’s manufacturing and administrative functions in Malaysia and Singapore benefit from various tax holidays and tax incentive programs, with the Singapore tax benefits recently being extended from their original expiration date in 2020 to 2030. The group’s research and development activities are also conducted in Singapore.
For fiscal year 2017, ResMed’s effective tax rate decreased to 18.3 percent from 19.8 percent in fiscal year 2016, and this was affected by the lower taxes associated with its Singapore and Malaysia operations.
Sandercock told shareholders at the recent earnings call that ResMed’s non-GAAP effective tax rate for fiscal year 2018 will be in the range of 13 percent to 15 percent, but that it was maintaining the estimate of its fiscal 2019 effective tax rate as being “in the range of 21 percent to 23 percent.”
He said this range “reflects both the anticipated unfavorable impact of prospective Australian tax legislation and the favorable impact of the recent U.S. tax law changes.”
In its statement, ResMed noted that due to the U.S. lowering its corporate income tax rate from 35 percent to 21 percent and implementing a territorial tax system for foreign earnings, the one-time transition tax on unremitted foreign earnings results in additional tax of $5.6 million for the three months ending March 31, 2018, and $125.5 million for the nine months ending March 31, 2018.
The group recorded $11.4 million in income taxes payable and $114.1 million as long-term income taxes payable for the transition tax.
The lower U.S. rate also reduces net deferred tax assets by $6.7 million while income tax expense increases by $6.7 million for the nine months ended March 31, 2018.
“The amounts recorded as part of U.S. tax reform should be considered provisional and may continue to be revised through ResMed’s quarter ending December 31, 2018,” ResMed said.
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