09 December 2015
by Neil Chenoweth
Orica ran $900m tax scheme to lift its share price
Mining services group Orica set up a $900 million tax-avoidance scheme to help inflate its share price, Justice Tony Pagone found in a judgment in the Federal Court in Melbourne on Monday.
Orica is facing a tax bill of almost $40 million, including interest and penalties, for the scheme, which operated from 2002 to 2006.
Orica Australia said the after-tax cost of the loss would be $36 million.
The judgment is the second win for the Australian Taxation Office over a Chevron-style scheme to claim inflated interest payments to a US subsidiary.
Orica and Chevron are both advised by PwC.
In October, when the Federal Court confirmed $268 million in assessments against Chevron Australia over interest payments to a US subsidiary, it was suggested similar structures had been marketed widely to Australian companies by tax advisers, raising the question of whether further Tax Office actions were under way.
The Orica scheme had its genesis in the aftermath of the company's $192.7 million loss in 2001, which included writing down much of its troubled US explosives division, which in turn included writing off $52.9 million in tax losses.
Concerned about possible takeover
Then managing director Malcolm Broomhead testified in the case that Orica management was concerned about a possible takeover, or action by its bankers if loan covenants were breached, meaning a need to lift the share price.
Adrian Muculj, Orica's general manager of taxation, met PWC partner Peter Collins to discuss ways to use the US tax losses, Justice Pagone said.
Under the scheme Orica increased internal debt in its Canada and New Zealand operations, with money channelled to Orica Finance Limited, then to another Australian company, Orica Explosives Holdings.
Orica Explosives Holdings invested funds in Orica US Services Inc in the US, which loaned the money back to Orica Finance at rates between 4.46 per cent and 5.4 per cent.
The money paid into the US company totalled $914 million over three years, but because it was a round-robin transaction it appears that the same money was cycled each time, with loans back to Australia funding the next year's round of US investment, with interest payments due to the US company building to $39.6 million a year.
Avoid having to reveal source
Justice Pagone said Mr Muculj and Mr Collins had discussed the need to "spread the increase in profits over a number of years" to avoid having to reveal the source of profit as a "significant non-recurring item, which the market might discount".
Orica denied the reason for the scheme was to avoid tax .
Rather, the company told the court, "it had intended to improve the perceptions of investors in relation to its financial performance through the US refinancing, with a view to securing an increase in its share price and that Orica avoided the risk of breaching financial covenants which it had given its lenders", Justice Pagone said.
Orica claimed $112 million in interest deductions from this scheme, Justice Pagone said, which lifted its net profit by $33.8 million, before it ran out of tax losses to claim against and shut down the scheme.
"The company is reviewing the judgment and seeking legal advice regarding an appeal to the full Federal Court," Orica said on Tuesday.