Why ATO’s $1bn from Rio Tinto is a coup

THE Australia Tax Office has scored a big win over Australia’s second biggest mining group, the London-based Rio Tinto, which is at the same time both actually not that big but still quite a coup.

Rio is paying just under $1bn to settle all disputes with the ATO.

That might sound like a lot of money – as a former US senator once put it: “A billion here, a billion there, and pretty soon you’re talking real money”.

That though was said back in the 1960s.

These days – especially after the big-spending Covid years – you gotta be talking at least “$100bn here, $100bn there”, if not indeed a straight-out trillion here and there, for ‘big money’ in 2022.

So a billion ain’t really that much, when the ATO was chasing much more.

Further, that covers tax assessments over 12 years to 2021, or just $70m or so a year.

And as Rio rather dryly noted; it had paid around $80bn in taxes and royalties in Australia over that time. Now it’s $81bn.

Hardly likely to dent executive perks in and around Rio’s St James Square London head office and nearby clubs and Michelin-starred restaurants.

Nevertheless, it’s quite a coup for the ATO to get anything at all out of Rio. For two broad reasons. First, we are talking arcane areas of the tax code.

The ATO and Rio were battling over tax to be paid on profits made by Rio’s Singapore marketing hub – selling stuff dug out of Australia, mostly iron ore out of the Pilbara, on the way to mostly China, Japan and other destinations.

They were also battling over tax on intergroup financing between the British Rio, Rio PLC, and the Aussie Rio, Rio Ltd.

This turns on the quirky ‘dual-listed’ structure of Rio, where there are the two listings, in the UK and Aus, that aggregate to one company.

BHP had the same duallisting – and the same argument with the ATO over its Singapore marketing hub – but has collapsed back to its single Aussie listing as part of its reorganisation which saw its oil and gas business sold to Woodside.

That goes to the second part of the ATO’s coup.

In ultimate tax terms Rio is actually a UK company, because its ownership split is 77 per cent UK PLC and just 23 per cent in Aussie Ltd.

So for the ATO to get anything at all out of a UK company was quite a coup.

BHP was the opposite: 58 per cent in Aussie Ltd and 42 per cent in its UK PLC. BHP settled its dispute with the ATO over its Singapore marketing hub by paying $529m in 2018 – covering 15 years of assessments.

Even though Rio is ultimately a UK company, it pays Australian company tax (and state royalties) on its Australia-generated profits.

The issue was whether it (and BHP) ‘transferred’ some of that profit to Singapore – where it would pay between zero and 15 per cent tax – by selling its iron ore to its marketing arm at a cheap price, with the marketing arm then selling it on to the real buyers at a higher price.

Both BHP and Rio always rejected that claim.

But there was a crucial difference between the two, with BHP being 58 per cent owned via Australia but Rio only 23 per cent so owned.

This meant that in BHP’s case 58 per cent of the profit of its Singapore arm got taxed, in Australia at the Australian rate.

The ATO only ‘missed out’ on taxing the other 42 per cent of Singapore profits.

But in Rio’s case it missed out on the full 100 per cent of Singapore profit.

So getting anything now is quite a coup.