Rio Tinto Tax Evasion Allegations Shouldn’t Scare Canadian Firms

By Peter Menyasz

Companies shouldn’t be afraid to conduct legal tax planning, despite tax evasion allegations against a Canadian Rio Tinto subsidiary, practitioners said.

Vancouver-based Turquoise Hill Resources Ltd. allegedly avoided as much as $470 million in taxes on its copper and gold mine in Mongolia, according to a watchdog group. But the company insists it is in compliance with Canadian law.

The discrepancy highlights the complex nature of interpreting tax law, which varies widely across countries, practitioners said. And tax avoidance is a major focus for countries, particularly as they look at how to treat multinational tech firms.

“You can’t dodge a tax that the statute doesn’t require you to pay,” Toronto tax lawyer Steve Suarez, who has previously represented Turquoise Hill and Rio Tinto, said May 2. “But there are people out there who are willing to apply the tax avoidance label to companies that are following the rules.”

The Canada Revenue Agency can’t indicate whether it is investigating the allegations against Turquoise Hill, agency spokesman Etienne Biram said May 2. But the government’s investment of nearly C$1 billion ($777 million) to address aggressive tax avoidance and evasion have enabled it to better identify cases and apply sanctions, Biram told Bloomberg Tax.

Misunderstandings Common

If all countries agreed on how income should be allocated and applied a uniform tax rate, there would be no need for “fancy” tax planning, Montreal tax lawyer David H. Sohmer said May 2. But there is no agreement, and the role of morality in tax policy remains controversial, he said.

“International tax policy must be based on the principle of comity, which will always present difficulties because of the disparities in power and wealth,” Sohmer, a founder of Spiegel Sohmer, told Bloomberg Tax.

Vancouver tax lawyer Joel A. Nitikman declined to comment on Turquoise Hill because his firm represents Rio Tinto, but said misunderstanding of complex tax rules is a major problem.

“People who write or argue about tax matters might want to take the trouble to understand the tax law and why it says what it says before they say anything,” Nitikman, a tax partner with Dentons Canada LLP, said May 2.

In a 2017 article in the Canadian Tax Journal, Nitikman stressed that while the definitions of “avoidance” and “evasion” can be elusive, the real problem is determining where they should be applied and who is applying them.

“Tax professionals know the difference,” he said in the article. “But it seems, from reading the newspapers or stories on the Internet, that we are the only ones who do (or at least might) know.”

Skirting Tax Bills

Dutch nonprofit Center for Research on Multinational Corporations (SOMO) alleged in a January report that Rio Tinto and Turquoise Hill used “mailbox” companies in Luxembourg and the Netherlands to avoid $470 million in Canadian taxes. A mailbox company, or shell company, exists only on paper and can be used to transfer assets.

“Rio Tinto seems to have no other links to Luxembourg, a country without a significant mining industry,” SOMO said in the report.

The allegations are baseless because the company obtained advance approval from the Canadian government, Suarez said. Rio Tinto came out against the report after it published, calling it “flawed.”

The company’s tax planning is based on Canada’s tax code, and while its only source of income is the Mongolian mine, Canada’s government made a conscious decision not to tax it, Suarez, a partner with Borden Ladner Gervais LLP, told Bloomberg Tax.

‘Structure is Legal’

Turquoise Hill not only followed Canadian law, but fully disclosed its actions to the Canada Revenue Agency before moving ahead and obtained a positive advance ruling, he said.

Other companies need not rush to change their tax planning, but should be more “vocal” in telling the public if what they are doing is within the rules, Suarez said. It’s always wise to review tax planning methods regularly, as approaches that were okay 10 years ago may no longer be appropriate, he said.

Rio Tinto paid $387 million in taxes in Canada in 2017, of which $129 million was corporate income tax, according to its report on its economic contributions.

Turquoise Hill says its practices comply with local laws and international standards, and it has made a voluntary commitment to pay all applicable taxes in Canada. Many of SOMO’s allegations are inaccurate or unsubstantiated, a company spokesman said May 3.

The company regularly reviews its financial structure to ensure that it remains compliant with Canadian law, the spokesman told Bloomberg Tax.

“The structure is legal and widely used by Canadian companies with assets and operations outside of Canada for the funding of their foreign-owned subsidiaries,” he said.

Investors Look Elsewhere

High tax rates and a growing regulatory burden in Canada, coupled with reduced U.S. corporate tax rates, provide more reasons for taxpayers to invest outside Canada, said Lauchlin MacEachern, a lawyer with Moodys Gartner Tax Law LLP in Calgary.

That is causing a flight of capital to lower-tax jurisdictions, including the U.S., and putting more pressure on tax authorities to investigate and act, he said. The U.S. cut its corporate tax rate to 21 percent from 35 percent as part of the 2017 tax act ( Pub. L. No. 115-97).

“It is important for all taxpayers with a foreign presence to be able to demonstrate both that they have a real presence in that jurisdiction, not just a paper presence, as well as the commercial or non-tax reasons for being in that jurisdiction,” he told Bloomberg Tax May 3.

To contact the reporter on this story: Peter Menyasz in Ottawa at correspondents@bloomberglaw.com

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

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