What: Fortescue Metals Group Limited (ASX: FMG) has been forced to further defend its Singapore-based office as part of an ongoing investigation into tax avoidance from the ATO. The office was mentioned in last month's Senate inquiry into corporate tax avoidance as a "very small" shipping office, however various media outlets yesterday reported that the "secret" office could be used to avoid tax if the company so desired.
Why does this matter? The only reason why this is a story is because Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) have similar offices in Singapore that process some of the group's ore and allegedly reduce their Australia-based tax payments.
Fortescue's Singapore business under question is FMG International Marketing Services. The company is currently dormant and has been since it was created in January 2014, however another Singapore-based entity FMG International carries out shipping services- as detailed by Fortescue CFO Stephen Pearce during last month's Senate inquiry. It generated a profit before tax of US$40m last financial year, paying tax of US$6.7 million in Singapore. Pleasingly for shareholders, Mr Pearce noted that the balance of tax owing in Australia had already been paid.
What now? Fortescue's tax situation is apparently simpler and more transparent than BHP and Rio's due to its sole listing on the ASX. BHP and Rio, which have listings in both Australia and Britain, can enjoy lower Singapore tax rates on income earned in Singapore because a double-tax treaty only exists between Singapore and Australia.
Fortescue says that this means any profit the company makes through Singapore would also be subject to tax in Australia, and therefore it ends up paying the same bill regardless of where the profits are generated. In contrast, BHP's Singapore operations are 42% owned by its British arm, meaning that it avoids the top-up between the Singapore and UK tax rate on that portion of earnings.
The ATO's investigation into 30 major multinational corporations, including Apple, Google, Microsoft and Adobe has wide-ranging consequences for Australian consumers, but perhaps less impact to those companies' shareholders. These types of investigations will remain a risk while inflation remains low and governments attempt to generate more revenue.
