New Luxembourg leaks reveal James Packer’s PBL in secret Swiss tax deal
A secret deal with the Swiss government negotiated by media group Publishing and Broadcasting Ltd when James Packer was chief executive set a tax rate of less than 2.15 per cent on PBL’s intra-company loans.
“We do have good news for you!” Ernst & Young Swiss partner Markus Huber wrote to PBL’s Sydney accountants after the deal was confirmed in late 1996. “We are convinced that this is an extremely favourable ruling.”
The correspondence obtained by The Australian Financial Review provides the first glimpse inside a mystery finance business that was on the way to becoming one of the Packer’s profit drivers when James stepped up to become chief executive aged 28.
The unit was built up over a decade through an Australian company, PBL Securities. In 2008 it was transferred to Crown Resorts, where it is still active and has been renamed Crown Group Securities.
A spokesman for Mr Packer’s Consolidated Press Holdings denied any suggestion the offshore companies acted like a black box within PBL or that they moved profits offshore.
GLOBAL HAVENS
Neither PBL nor Crown have ever detailed the activities of the 35 subsidiaries PBL Securities set up in global tax havens, a process that started within months of Mr Packer’s appointment as chief executive of PBL in March 1996.
PBL was the Packer family’s main public company and owned the Nine Network, a magazine publisher and other media assets.
While PBL’s accounts showed subsidiaries in the Cayman Islands, the Bahamas, the Netherlands Antilles, Cyprus, Mauritius and Luxembourg, it made no reference to operations in Switzerland.
The 1996 Swiss agreement is part of a new tranche of tax documents obtained in a review led by the International Consortium of Journalists in Washington.
Mr Packer was appointed chief executive under executive chairman Brian Powers. PBL Securities was set up six weeks later and Packer became a director of the subsidiary on September 3.
On September 30, 1996, Mr Huber wrote to Walter Marti, a senior tax official in the canton of Zug, to follow up a phone call a week earlier.
“Due to the fact that the business activities of PBL Group have proved to be extremely profitable, it is contemplated to form a finance company in the Netherlands,” Mr Huber reminded Mr Marti.
“During the start-up phase approximately $200 million . . . will be allocated to such a company.”
Business would be conducted in Switzerland. “It is contemplated that the Dutch finance company will open a branch office in Zug,” Mr Huber wrote.
“As time passes by, numerous group companies, which for the time being are exclusively domiciled abroad, may borrow money from those financial institutions.”
ON-LENDING
As Mr Huber described it, PBL’s Swiss branch would on-lend money borrowed from banks to PBL group companies, apparently at a higher rate. It would make a profit on this exchange, so the issue was how much Swiss tax would be charged on that profit.
“During our telephone conversation we already discussed that it will be likely that the funds being allocated to the branch will be increased substantially within in the near future,” Mr Huber wrote.
He noted that under Swiss rules, debt could be up to 10-times the size of equity, which could lift potential assets beyond $2 billion.
Four days later Mr Huber faxed his Sydney colleagues: “We do have good news for you!”
Mr Marti had just signed the agreement, under which “we will get a look-through treatment which will allow us to use even Swiss banks to on-lend the funds to the Group companies”.
It’s not clear if, when PBL group companies loaned money through a bank, it was apparent that the PBL branch office in Zug had been interposed as the intermediate lender.
“According to our model computations, the effective tax rate on the interest income should be below 1.65 per cent. Should the balance sheet total of the branch office be less than 400 million Swiss francs ($503 million), then based on our assumptions the effective tax rate should be less than approximately 2.15 per cent.”
PBL’s June 1997 annual report showed a new offshore wing had been created. PBL Securities now had $210 million invested in Publishing & Broadcasting International Holdings in the Bahamas.
The Bahamas company had a subsidiary, PBL Capital (Malaysia) Sdn Bhd, which in turn had a Dutch subsidiary, PBL Financial Services BV, apparently the Dutch finance company described by Mr Huber.
By 1999 capital invested in the Bahamas-Netherlands companies had grown to $410 million, with another $345 million in a new Cayman Islands company, PBL (CI) Limited.
By 2005, when PBL stopped listing its subsidiaries, PBL Securities had invested $1.1 billion in 34 subsidiaries, including Publishing and Broadcasting Online One in the Bahamas, which had a subsidiary, PBL Gaming (Vanuatu) Ltd.
Another PBL subsdiary, Robbdoc, had a $260 million investment in preferred shares in part of the PBL Securities structure.
‘NO BLACK BOX’
A spokesman for Mr Packer’s Consolidated Press Holdings denied any lack of transparency. “There was not a black box or movement of profit offshore as you describe,” he said.
“Any interest paid by Australian group members on loans extended from non-Australian group members of either Crown or for that matter PBL is and was governed by Australia’s comprehensive Controlled Foreign Corporations regime.
“To be clear, in the case of any non-Australian subsidiaries of Crown Group Securities, any interest payments received on loans made to Australian group members were properly attributed to its Australian parent company as required by the regime, and taxable in Australia to that Australian parent accordingly.”
PBL Securities’s 2007 annual return showed consolidated assets of $2.6 billion but the entire offshore structure was about to disappear from public view. In 2008, when PBL dermerged its media and gaming operations, Crown Resorts invested $985 million to acquire the offshore operation, renamed Crown Group Securities.
A series of huge international casino investments followed. But the flow of reports about Crown’s mystery offshore banking operation, scant as it was, had stopped completely.
“Crown Resorts is one of the largest taxpayers in the country and takes its tax compliance seriously,” the CPH spokesman said. “Crown’s Australian resorts’ net profit last year was around $325 million after Crown had paid $590 million in taxes to governments.”
