News Corp shows it’s all about how you present the numbers

“It is absolute nonsense,” News Corp Australia boss Julian Clarke told the Senate Inquiry into Corporate Tax Avoidance last month, when asked if News had paid a rate of just 4.8 per cent in income tax on its $6.8 billion in operating cashflows in this country.

The question was based on a Fairfax Media investigation into the tax affairs of media magnate Rupert Murdoch in Australia.

“We are happy to give a detailed response on this very question at any time but they have clearly got it hopelessly wrong, as I have already said,” Clarke told the parliamentary inquiry.

A few days ago, the answers to “questions on notice” from News Corp and the Australian Securities & Investments Commission (ASIC) came back to the Senate.

SIC’s response shows that, according to the filings, News Australia paid income tax for the 10 years to June 30, 2014, amounting to $326.4 million – the same numbers found in the Fairfax Media investigation.

On average that is $32.6 million a year paid in income tax. Income tax paid by News for the decade is 1.2 per cent of sales revenue, 4.8 per cent of operating cashflows and 15.4 per cent of profit before income tax.

How did News Corp find that the numbers in the story were “hopelessly wrong”?

For one, the ASIC and Fairfax numbers did not include withholding tax, only income tax, as stipulated in the story. Withholding tax is not income tax paid. It is tax withheld, or tax paid on behalf of other entities, that is, shareholders or debt holders in the company.

Secondly, the numbers were based – as stipulated in the story – on a 10-year analysis. In its submission to the inquiry, News had provided a five-year analysis.

Thirdly, News had conveniently left out the large tax refund it received from the Tax Office. The size of this refund has subsequently been found to be larger than the $882 million initially reported. It was $923 million.

Further, News has subsequently been identified as being the No. 1 multinational “tax risk” in Australia.

At the Senate hearing in April, it was revealed News Australia had internally generated goodwill of $7 billion. It claimed that under Australian GAAP accounting standards at the time in 2005, $7 billion of internally generated goodwill was recorded within its books and accounts.

This transaction, which created this $7 billion in intangibles, also inflated News’ share capital by the same amount and was later used to make repayments of capital to News Corp’s overseas entities with little tax consequences, as pointed out in the investigation.

However, as one of the accounting experts relied upon for the investigation said last week, the recognition of internally generated goodwill is, at best, “an irregularity”.

“Accounting standards in Australia and the US have never allowed the recognition of internally generated goodwill,” said Jeff Knapp, accounting academic at University of NSW.

“News Australia has publicly admitted to a $7 billion accounting irregularity, which is surely one of the largest in Australian history.”

News Australia chief Julian Clarke also told the parliamentary inquiry the company would be happy to provide a detailed response to Jeff Knapp’s calculations on how much income tax had been paid.

However, the response from News to the Senate questions on notice rebuffs the idea of a 10-year calculation, saying it would be “difficult for us to secure this information”.

Fairfax Media, in league with academic Jeff Knapp, was able to find this information. ASIC was able to find the information – and corroborate the Fairfax Media story.

News, however, has declined to find the information requested by the Commonwealth government because it would be too “difficult”.

“News Australia needs to get more serious about corporate responsibility and accountability,” says Jeff Knapp.

“In 2006, News Australia ceased to prepare general-purpose financial reports without any explanation. This meant News Australia ceased to comply with most accounting standards, including the requirements to disclose related-party transactions.”

If the government were to tighten the screws on multinational tax avoiders, it could start by insisting they prepare and file “general purpose” rather than “special purpose” financial statements.

The increased disclosure would shed more light on structures designed to siphon profits abroad tax free.