By Lucy Komisar
Aug 1, 2007
Where did Rupert Murdoch get $5 billion to buy up the Wall St. Journal? Beyond normal profits, his coffers were stuffed by dodging taxes in the U.S. and elsewhere. Some of that is your money!
The Economist, in 1999, investigated Murdoch’s corporate tax affairs and discovered that a collection of 800 offshore companies help him cut corporate taxes to 6%!
According to the magazine at the time, “In the four years to June 30th last year , News Corporation and its subsidiaries paid only A$325m ($238m) in corporate taxes worldwide. In the same period, its consolidated pre-tax profits were A$5.4 billion.
“So News Corporation has paid an effective tax rate of only around 6%. By comparison, Disney, one of the world’s other media empires, paid 31%. Basic corporate-tax rates in Australia, America and Britain, the three main countries in which News Corporation operates, are 36%, 35% and 30% respectively.
The Economist wrote, “Finding out the specifics of News Corporation’s tax affairs is difficult because of the company’s complex structure. In its latest accounts, the group lists roughly 800 subsidiaries, including some 60 incorporated in such tax havens as the Cayman Islands, Bermuda, the Netherlands Antilles and the British Virgin Islands.
“This structure, dictated by Murdoch’s elaborate tax planning, has some bizarre consequences. The most profitable of News Corporation’s British operations in the 1990s was not the Sunday Times, or its successful satellite television business, BSkyB. It was News Publishers, a company incorporated in Bermuda. News Publishers has, in the seven years to June 30th 1996, made around £1.6 billion in net profits. This is a remarkable feat for a company that seems not to have any employees, nor any obvious source of income from outside Murdoch’s companies.
“British taxpayers have been forced to pick up a particularly large slice of Murdoch’s tax bill: since June 1987, The Economist reported, the group made £1.4 billion in profits yet paid no net British corporation tax at all.
“The complexity of News Corporation’s structure baffles analysts and puts off institutional investors.
“Money men suspect that the company’s profits may be based not just on the returns from Murdoch’s businesses, but also on financial wizardry vulnerable to changes in tax law.
“This may be one reason why its share price has underperformed the American stock market over the past five years. A low share price makes investment more expensive for Murdoch than it would be were he an empire-builder with a more transparent business structure.”
Has Murdoch and NewsCorp changed? I doubt it. But if his corporations are now paying fair taxes, now’s the time for him to make their tax records public.
Tax dodging does not simply suck the resources from governments and citizens. The money that is diverted is used to buy political power — in this case through the media — that operates in favor of the privileged and, to help, keeps the offshore system running.
RUPERT LAID BARE
THE ECONOMIST BUSINESS, March 20, 1999
Newscorp Investments is Rupert Murdoch’s main British holding company. Although the group’s profits over the past 11 years add up to £1.4 billion ($2.1 billion), it has paid no net British corporation tax.
RUPERT MURDOCH is an exceptional businessman in many ways – in the risks he has taken to build News Corporation, in the global reach of his empire, in the way he has changed the rules of the game for other media companies. But one of his most remarkable achievements is his tax bill. In keeping with his anti-statist philosophy, Mr Murdoch hands very little of his profits to governments.
In the four years to June 30th last year, News Corporation and its subsidiaries paid only A$325m ($238m) in corporate taxes worldwide. In the same period, its consolidated pre-tax profits were A$5.4 billion. So News Corporation has paid an effective tax rate of only around 6%. By comparison, Disney, one of the world’s other media empires, paid 31%. Basic corporate-tax rates in Australia, America and Britain, the three main countries in which News Corporation operates, are 36%, 35% and 30% respectively.
Finding out the specifics of News Corporation’s tax affairs is difficult because of the company’s complex structure. In its latest accounts, the group lists roughly 800 subsidiaries, including some 60 incorporated in such tax havens as the Cayman Islands, Bermuda, the Netherlands Antilles and the British Virgin Islands, where the secrecy laws are as attractive as the climate.
This structure, dictated by Mr Murdoch’s elaborate tax planning, has some bizarre consequences. The most profitable of News Corporation’s British operations in the 1990s was not the Sunday Times, or its successful satellite television business, B Sky B . It was News Publishers, a company incorporated in Bermuda. News Publishers has, in the seven years to June 30th 1996, made around £1.6 billion in net profits. This is a remarkable feat for a company that seems not to have any employees, nor any obvious source of income from outside Mr Murdoch’s companies.
News Corporation does not help outsiders to understand its affairs. Its financial reporting is minimalist. Its full response to our questions about its tax affairs was, “News Corporation and its subsidiaries, including News International, prepares and files tax returns in every jurisdiction in which they do business. The company’s tax returns, and payments, are reviewed on a regular basis by relevant tax authorities.”
Investigating News Corporation’s tax affairs is made especially hard by accounting standards in Australia, where the company is incorporated. They are among the most lax of the developed economies. In America, too, many of the unlisted subsidiaries of Mr Murdoch’s listed companies are incorporated in Delaware, where there is no obligation on them to file publicly available accounts.
In Britain, however, the laws require Mr Murdoch to publish at least a few facts. That has enabled The Economist to go through 11 years’-worth of financial results of the 101 British companies listed in the latest set of News Corporation accounts as subsidiaries of Mr Murdoch’s main British holding company, Newscorp Investments, to find out how much tax they paid.
The answer is that since June 1987, although the group has made £1.4 billion in profits, it has paid no net British corporation tax at all. In some years the companies paid some tax (see table below), but in other years they claimed rebates.
|£m Pre-tax profit/loss||£m UK corporation tax paid/refunded
Source: Company reports
How have they managed this? Part of the answer lies with B Sky B , which is 40%-owned by News Corporation. The figure of £1.4 billion includes a net £317m from News Corporation’s share of B Sky B ‘s pre-tax profits. Tax is payable on those profits. But B Sky B has been able to set against them the substantial losses made during its expensive start-up of satellite broadcasting in the late 1980s and early 1990s.
Yet B Sky B accounts for only that £317m, leaving around £1.1 billion in other profits. Mr Murdoch might normally have been expected to pay around £350m in tax on this. To put that in perspective, such a sum could build seven new hospitals, 50 secondary schools or 300 primary schools.
There are few clues in the British accounts as to how Mr Murdoch has avoided writing the British government a large cheque. They disclose only that there are no tax bills because of the availability of tax losses. Yet the group has been profitable since its early losses from satellite television and the British recession in the early 1990s. Where do the tax losses come from?
In the short term, there is always a disparity between profits that appear in a company’s audited accounts, and profits that the Inland Revenue uses to calculate tax. Lots of adjustments are made to accounting profits to arrive at taxable profits. For instance, in Britain, tax allowances for capital expenditure can in some years be more generous than accounting provisions for depreciation. In the long run, however, accounting profits and taxable profits should generally correspond. Yet in News Corporation’s British companies, taxable profits are apparently zero, while accounting profits are £1.4 billion.
One explanation may be the extensive – but legal – use of tax loopholes (see ‘How profits wriggle through the net,’ below) to shelter profits in offshore tax havens. Nobody likes paying tax, but News Corporation’s British arm is unusual in the degree to which it manages to avoid it. Other well-known companies doing business in Britain tend to pay a great deal more in tax. (see table)
Tax returns Company results, cumulative, 1994-98
|Pre-tax Profits, £bn||Tax paid £bn||Effective tax rate*||% of profits# originating in the UK|
|Marks & Spencer||5.01||1.46||29.1||91.8|
|EMI Group/Thorn EMI||1.78||0.65||36.5||25.0|
Source: Company reports. *Tax paid as % of pre-tax profits #Operating profits before exceptional items
Another reason why News Corporation pays much less than comparable companies is its origins. It has always been an international company, balanced between Britain, America and Australia. That makes it easy to shift profits across national boundaries. Yet most big companies are increasingly international; they too could, if they chose, manage their affairs in a similar way to Mr Murdoch.
So why do they not do what News Corporation does? Perhaps their tax lawyers are not as bright. Perhaps their boards are stuffed with conventional people who would be embarrassed to shelter profits in tax havens. Or, more likely, they may conclude that there are costs to Mr Murdoch’s way of doing things.
In particular, the complexity of News Corporation’s structure baffles analysts and puts off institutional investors. Money men suspect that the company’s profits may be based not just on the returns from Mr Murdoch’s businesses, but also on financial wizardry vulnerable to changes in tax law. This may be one reason why its share price has underperformed the American stock market over the past five years. A low share price makes investment more expensive for Mr Murdoch than it would be were he an empire-builder with a more transparent business structure.
In the long run, too, doubts arise about the sustainability of News Corporation’s elaborate structure. Will Mr Murdoch’s children, who he hopes will eventually run the company, be able to master its arcane complexity? If not, the empire, low taxes or not, could start to fall apart.
How profits wriggle through the net
March 20, 1999
ONLY Rupert Murdoch and his closest advisers know just how he manages to pay so little tax. But one way that he may do so is through loopholes in tax law. Exploiting such loopholes, which can arise through drafting errors and ambiguities, is entirely legal. Below, we explain one that has become publicly well-known only because it was closed in Britain’s latest budget. And remember, if these things were easy to spot or to understand, all those highly paid tax lawyers and accountants would be out of a job.
Britain, like most other countries, has laws designed to prevent companies from avoiding tax by diverting income to subsidiaries in tax havens, where little or no corporate taxes are paid. These subsidiaries are known as controlled foreign companies, or CFC s. The laws bring a CFC within the British tax net by making its parent company pay tax on the CFC ‘s profits.
There are, however, exemptions. For instance, if the CFC pays its parent a dividend equal to at least 90% of its taxable profits, these profits are not taxed in Britain. This is because the Inland Revenue instead taxes the parent on its dividend received – and it would be unfair to tax the same profits twice over. British companies can transfer ownership of a British subsidiary to a CFC .
Because of the drafting of the tax law – and it is this that creates the loophole that allows part of a CFC ‘s profits to escape tax in Britain – dividends received from a British subsidiary do not count towards the CFC ‘s taxable profits. Hence the CFC can make its taxable profits smaller than its accounting profits. The CFC is assessed by the Inland Revenue only on its taxable profits.
Suppose that a British subsidiary pays dividends to a CFC , and that the CFC then passes these on to its parent in Britain. (These dividends are not, in effect, subject to British tax. This is because credit is given for tax already paid before the subsidiary sent them to the CFC .) As long as at least 90% of the CFC ‘s taxable profits are sent to Britain, the parent would not then be charged tax on the CFC ‘s own profits made offshore.
In this way, the CFC can consistently make accounting profits offshore, with a portion of them being sheltered from British tax.
Although baffling to understand, the loophole is delightfully simple to exploit. “What is surprising,” commented the website of Ernst & Young, an accounting firm, after Britain’s recent budget, “is not that this loophole has been closed, but that it has taken six years to do so!”
Copyright © The Economist 1998 All rights reserved.