Orica fights $50 million tax bill over ’round-robin’ financing

Orica has again found itself at odds with the Australian Taxation Office, this time over the circular financing arrangements the explosive maker put in place in 2002 to improve profits for the then struggling group.

Orica has disputed the amended tax assessment from the ATO in relation to its “round-robin” financing arrangements for the years 2004, 2005 and 2006, which totals $50.6 million, in the Federal Court.

The tax dispute, which was heard this week by Judge Tony Pagone in the Federal Court, has had former Orica chief executive, now Asciano chairman and BHP Billiton director Malcolm Broomhead, and PricewaterhouseCoopers International Tax leader Peter Collins take the stand to give evidence.

The matter comes amid a global crackdown on profit shifting and tax minimisation arrangements that has led many local companies, including Orica, to file submissions to a Senate inquiry looking into the issue, particularly companies’ use of related-party loans to reduce tax payments.
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Orica’s complex arrangement included three schemes, which, in part, had the group’s financing arm, Orica Finance, borrow $US265 million from its low-income- producing United States subsidiary to provide the entity with interest payments while assuming some of the entity’s losses.

At the same time Orica Finance provided loans to Orica’s New Zealand and Canadian businesses and received interest on these loans. The Tax Office alleges this arrangement led Orica to short-change the Australian government $50.6 million in tax over three years.

“Orica created a set of circumstances to get a tax deduction in Australia,” said lawyer for the ATO Gregory Davies, QC.

For its part, Orica says its structure is permissible under law and it was not trying to avoid tax.

Orica’s lawyer Simon Steward, QC, told the court the explosives maker made a choice to use debt to create a “virtually certain source of income” for its US subsidiary.

“One of the other possibilities was to do nothing and wait for the US to turn around and start to produce an income … That was never going to happen with sufficient urgency.”

Mr Broomhead told the court he had approved the complex inter-company arrangements because it met his goal of lifting profits.

“It met my objectives and on that basis I was happy to the proposal to go forward,” Mr Broomhead said.

Orica general manager taxation Adrian Muculj told the court if the tax bill had been higher for Orica Finance, he would have transferred more losses from other Orica vehicles to reduce Orica Finance’s tax bill to “nil”.

Mr Collins, who, like all the witnesses, had trouble recalling the finer details of the plan drafter more than 13 years ago, told the court the recognition of the US tax losses was “very important”.

The matter has been reserved for judgment.

According to its annual report issued in December, Orica is also disputing amended tax assessments from the Brazilian, Norwegian and German governments over separate arrangements.

It’s not the first time Orica has disputed a tax bill in Australia – in 2010 the company lost its fight with the tax office over a $226 million amended assessment for its 1998 accounts.