From down under we have an incredible story of a US private equity firm dodging taxes made in profit on a recent Australian IPO…and hightailing that cash out of the country before the authorities could judicially claw it back… reporting from The Australian…
~~~”The ATO [Australian Tax Office] says the TPG [Texas Pacific Group] entities owe the commonwealth $452,236,874.70 in income tax and a further $226m in penalties automatically generated by assessments issued under the anti-avoidance tax provisions.”~~~
How fast can money move offshore?
Fast enough to shock the Reserve Bank of Australia into concern about the stability of several trading accounts in the payment and settlement systems…
~~~”A swath of major NAB accounts were frozen under orders issued by the Supreme Court of Victoria on Wednesday night after the ATO sought to prevent TPG from moving its Myer profits into one of two offshore companies in tax havens.
It is understood officials at the RBA contacted the trading bank on Thursday afternoon expressing concern over the systemic impact of a court-enforced suspension of several major NAB interbank trading accounts.
The frozen accounts included a Deutsche Bank settlements account whose daily trading statement would normally run to something near 65 pages, two big Myer family accounts and a Computershare settlement account.
Each was effectively suspended under Supreme Court orders, restricting access to accounts that in the past seven days had held more than $10 million of funds generated by the TPG-led, private equity consortium’s $2.3bn IPO of the Myer department stores…”~~~
The avoidance of taxes has been an increasing global concern as international firms have increasingly built offshore structures to skip on payments of taxes… TPG actions are a classic example…
~~~”The ATO applied for the court orders after issuing tax assessments totalling $678m against the two TPG-controlled entities that it regards as the taxable entities for the Myer sale profits. One of them is a Cayman Islands registered company, the other is in Luxembourg…“~~~
Good luck down under… this sort of action against large, predatory financial firms is needed in America to help get America moving again… when our public trust is not asserted against those financial entities which structure their trading and investing activities to skirt the payment of taxes we all lose faith in the protection of the public’s interest…. somehow I imagine that Texas Pacific Group has structured their US deals in a similar offshore manner to avoid US taxes… I wonder about this one… from Health News…
~~~”…Health care data company IMS Health Inc. said Thursday it is being bought by investment funds TPG Capital and CPP Investment Board for $4 billion, in a move to help the company restructure its business amid the shifting health care arena and sluggish economy.
IMS shareholders are getting $22 per share under the deal, marking a 31 percent premium to the stock’s closing price of $16.81 on Wednesday. Shares were up nearly 24 percent in afternoon trading, having earlier set a new 52-week high of $21.09 on the news.
The leveraged buyout deal, which has committed debt financing from the private-equity firms and Goldman Sachs affiliates, is valued at $5.2 billion including assumed debt, according to IMS. LBOs, which involve the buyer borrowing most of the money to fund the deal and putting up the takeover target’s assets as collateral, had fallen by the wayside during the recession as credit markets dried up. But this latest deal proves that private-equity firms are no longer sitting on the sidelines and are willing to jump back into the market…”~~~
So will green shoots in the financial space mean tax revenues for the US Treasury? Or will we be left high and dry like our cousins the Aussies? Well?
See more about tax havens in Riski…
Also according to this filing by TPG with the FSA 50% of their investors are “public funds”… I wonder if these various “public funds” would support TPG actions vis a vis the Australian tax authorities…
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Mystery clouds $700m tax claim
ELI GREENBLAT
November 17, 2009
THE Tax Commissioner’s $700 million claim against private equity firm TPG remains clouded in mystery as the Myer family considers its next legal step to recover losses caused by the Tax Office’s court attempt last week to freeze TPG’s profit from the Myer sharemarket float.
TPG is yet to be contacted by the Australian Taxation Office or be issued with a letter of demand for the payment of any tax liabilities flowing from the Myer sale. The Tax Office has consistently refused to comment on the issue.
It is believed the Myer Family Office, which offers investment and advisory services to wealthy families, foundations and charities, must issue a summons for new court proceedings to argue its case for compensation on behalf of its affected clients.
Last Wednesday’s court action by the ATO to freeze the proceeds of the $2.4 billion Myer float was taken too late. Most of the $1.4 billion in profit reaped by TPG from the sale of Myer to the public had already been sent to jurisdictions in Europe and the Caribbean.
However, as the Supreme Court was told last week, Myer Family Office was dragged into the tax imbroglio when the ATO’s gambit hindered its ability to return clients’ funds. Noel Magee, QC, representing Myer Family Office, said it had ‘’severely affected” the company.
He told Justice David Habersberger last week that Myer Family Office needed to identify the parties that had ”the benefit of the undertaking for damages [who] have accounts with us” and then would ”have to see whether we wish to quantify the loss and damage we say we’ve actually suffered as a result of the injunction”.
Today’s case listing for the Supreme Court has no mention of the Myer Family Office making any submission to the court.
Source: The Age
TPG: policy, practice on a crash course?
November 17, 2009
THE $678 million tax claim the Tax Office is mounting against private equity group TPG over the $1.5 billion profit it booked on the Myer float is generating fears that tax practice and tax policy are on a collision course.
Successive governments have relaxed the tax burden on foreign investors in Australia to strengthen this country’s attractiveness as an investment destination, and one of the key changes occurred in 2006 when the Tax Laws Amendment Bill exempted overseas investors from paying capital gains tax on sales unless the asset disposed of was property-rich, with at least 50 per cent of its value represented by real estate.
It was a controversial change for a couple of reasons, and one was political: the change came just as private equity investment and foreign bidding for Australian assets was peaking, with high profile bids for Qantas and the Coles Group.
As it turned out, the Qantas bid was rejected by a narrow majority of shareholders, and Coles fell to Wesfarmers as private equity bidders retreated in the face of the emerging markets crisis.
But the waiver is still a lightning rod for popular opposition to foreign investment, and the target of criticism from local private equity firms, who argue that it gives foreign firms an edge in asset auctions - an edge that flows from the fact that someone who doesn’t pay capital gains tax can afford to pay more for an asset and generate the same investment return as a competing Australian firm that must do its sums knowing that capital gains tax will have to be paid.
The capital gains change is, however, part of a general easing that has seen Australia also reduce the income tax burden on foreigners by signing tax treaties with the US, Britain, most of Europe and other developed nations that characterise profits generated by foreigners as a ”business profit” that is not liable for income where it is generated.
Until the 2006 capital gains tax change, for example, Australia levied capital gains tax on foreign investors who owned 10 per cent or more of a listed company, and any shares at all in an unlisted company. The problem was, none of Australia’s peers did the same thing.
The tax treatment conflicted with the global principle that income and capital gains should be allowed to flow back from where it is generated to the home of the investor, and be levied at that point. It made Australia a less attractive investment venue for foreign investors, and created problems in tax treaty negotiations: Australia was continually being asked to offer concessions to offset its idiosyncratic tax treatment of capital gains.
Under the principle that income and capital gains should be taxed where the investor lives, most of the tax payable on the Myer float will be paid in the US, Britain and Europe by pension funds and other money managers that have supported TPG equity raisings, and also by US-based TPG itself, which co-invests in the opportunities it discovers.
The rules make sense in a global context. Australia needs international investment capital to balance its books, and it would pull less of it in if it scrapped the concession. But the reality is, the concessions were inherited by the Rudd Government, serve a relatively small, non-voting constituency and are a net drain on revenue. Therefore, tax advisers are watching the ATO move very closely.
The ATO did not detail its reasons for pursuing TPG when it went to court last week in an unsuccessful bid to stop the profits from the float being transferred offshore. It nevertheless would be a stunning development if the ATO claimed that TPG owed capital gains tax: the 2006 law change means that only gains that foreign investors make on property-rich transactions are assessable. Myer leases all of its stores and does not go close to qualifying.
Nor does there appear to be a compelling argument that the deal generates income tax in this country. It has all the hallmarks of a capital profit: the consortium sold its shares in Myer into the float. And even if the ATO has decided that the float was an income- generating transaction and not a capital one, the law generally allows profits to be streamed back to the investor’s country of residence.
One clue may be the fact that the ATO told the court last week that it was relying on the general anti-avoidance provisions of the Tax Act, and had only moved after learning that TPG had structured its Myer ownership, with ownership spilling up from the retail group to a Dutch company, NB Swanston, then to a Luxembourg company, NB Queen SARL and finally to a Cayman Islands company, TPG Newbridge Myer.
The international tax system aims at eliminating the payment of double tax on deals that generate capital and income flows across tax jurisdictions, but also assumes that tax will be paid at the end of the chain.
The ATO may believe that the structure TPG has used seeks to somehow avoid tax entirely, and that would be a serious complication for TPG. But it would be a relief for corporate tax advisers at the top end of town who fear that a much broader move against the concessions they have been relying on has been launched by the ATO, perhaps even by the Rudd Government.
mmaiden@theage.com.au
Source: The Age
NAB challenges $479m tax bill
VANDA CARSON AND ERIC JOHNSTON
November 17, 2009
NATIONAL Australia Bank has locked horns with the Australian Tax Office over deductions that allowed it to reduce its Australian tax bill by nearly half a billion dollars between 2000 and 2003.
Hard on the heels of a billion-dollar stoush with tax authorities in New Zealand - along with Australia’s other big banks - NAB is challenging the ATO in the Federal Court after it was hit with six ”amended assessments” in December last year and May 2005.
The bank launched the case yesterday over the tax deductibility of interest on capital instruments, known as exchangeable capital units (ExCaps). It believes it should be able to claim a deduction on the ExCaps securities it issued between 2000 and 2003.
The securities paid annual interest of about 8 per cent to investors.
St George lost a similar case over the deductibility of $253 million in interest payments in the full Federal Court in May.
The court found that the interest payments made on securities bought from a St George-owned ‘’special purpose vehicle” based in the US corporate-governance haven of Delaware in June 1997 were not deductible because they were ”outgoings of a capital nature”.
NAB is challenging the $479 million tax bill, which is made up of $309 million in primary tax and penalties and interest of $170 million.
The bank received a total of six notices from the ATO, including four in May 2005 and two in December last year.
It has paid about $309 million, pending the outcome of the case, and has not claimed tax deductions on ExCaps interest after October 2003.
The case comes as NAB fights a tax case in New Zealand where it faces a $A528 million tax bill.
A scheduling conference has been set for February 2 next year before Federal Court judge Richard Edmonds.
NAB spokesman George Wright confirmed that the legal case related to the securities. ”The various applications relate to the ExCaps dispute with the Australian Taxation Office,” he said.
NAB’s court challenge comes amid comments from tax sources that the Government may be pushing the ATO to crack down on tax schemes employed by the banks.
Meanwhile, the ATO is cracking down on private equity groups using offshore structures to avoid paying capital gains tax on asset disposals, such as occurred with the float of Myer.
Source: The Age
The great ‘Texas’ tax dodge
PETER MARTIN
November 19, 2009
WHAT were they thinking? How could our leaders have made changes designed to ”better target and strengthen the application of capital gains tax” without seeing they would later allow companies associated with the misleadingly named Texas Pacific Group to make a billion or so dollars in capital-gains-tax-free profit from the sale of Myer because they were registered not in somewhere like Texas but in the tax havens of Luxembourg and the Cayman Islands?
In his explanatory memorandum in 2006, then assistant treasurer Peter Dutton said their cost to revenue was ”expected to be $65 million per annum”. His estimate was out, just a touch.
The whole thing’s only come to light again because of the Tax Office’s attempt last week to grab $452 million plus penalties it says the companies owe it after they banked $1.58 billion in proceeds and then withdrew almost the lot, leaving just $45 in their Australian accounts.
The Tax Office has now made clear that it isn’t after capital gains tax. It can’t be. The Dutton changes exempted the foreign owners of Australian companies from capital gains tax in all cases other than those in which they traded real estate.
Labor acquiesced, although during the Senate inquiry it was prescient enough to ask whether the changes would really only cost $65 million per annum, noting they could cost much more, ”especially in the event of a takeover bid for Coles”.
Barnaby Joyce was one of the few to point to the emperor’s clothes.
”It is quite clear that not only are we are about to pass a piece of legislation that discriminates against Australians but we are doing it at the behest of other people in other corners of the globe,” he told the Senate. ”This legislation is going to be sneaked through. Do you know that today we have overseas equity firms that in the United States have put in a bid for Home Depot of $100 billion? They have the ability to remove $100 billion from the sharemarket and the Labor Party is quite happy for that investment to be tax free.”
Both parties were happy about it. They said other countries exempted foreign investors from capital gains tax in the belief that they would pay it in their country of residence.
It seems not to have occurred to them that that country of residence could be somewhere like Luxembourg, without capital gains tax. It occurred to Barnaby.
”I will give you one place. It is not very far away and people might have heard of it: New Zealand. New Zealand has no capital gains tax, so you can launch from New Zealand, come into Australia, buy up Coles, hold it for a year, sell Coles, put your money in your pocket, take it back to New Zealand and not pay one cent of tax - and that is something you are agreeing to today.”
Why didn’t our Government instead set up a withholding tax refundable to the extent that capital gains tax was paid elsewhere so that foreign investors at least faced the same sort of tax bills as Australians?
Because it wanted to ”enhance Australia’s status as an attractive place for business and investment”, as Dutton put it. It enhanced it enough to bring us foreign equity owners of Channel Nine who seem to be in the process of destroying it, and a foreign equity bid for Qantas that might have gone down the same track had it not been narrowly rejected by Qantas shareholders.
It’s not the only ”what were they thinking?” moment being pondered by staff at the Henry tax review.
Another heist took place almost exactly 10 years ago. Under the cover of massive publicity for the impending goods and services tax the Howard government set up a less-publicised inquiry into business taxation headed by the prime minister’s friend John Ralph and included among his terms of reference one that was unusually specific, as it related to personal, rather than business, taxation.
Ralph was to examine ”the scope for capping the rate of tax applying to capital gains for individuals to 30 per cent”. Until then, capital gains made by individuals had been taxed at their marginal tax, minus inflation.
Unlike the changes associated with the new tax system that were vetted by the Treasury and accompanied by exhaustive analysis identifying which Australians would benefit, the change recommended by Ralph was accompanied by no such analysis and would not have passed muster in the tax division of the Treasury at the time.
The change, effectively a halving of the headline rate of capital gains tax, benefited well-off individuals far more than any of the other more rigorously examined changes introduced at the same time.
Ralph said the cut would lead to a boom in investment in ”innovative, high-growth companies”.
Instead we rushed into real estate. It wasn’t exactly the ”better allocation of the nation’s capital resources” he said he foresaw.
Labor was asleep and waved it through with only one dissenting voice, then backbencher Mark Latham.
It would ”add to the great Australian disease of asset and property speculation, particularly in our big cities”, Latham told an uninterested chamber.
He was right. Before the change, Australian landlords actually made money. In 1999-2000 they pulled in a net $219 million from rent. By 2006-07 they were losing a net $5.37 billion.
Ralph - prodded by Howard - turned Australia into a nation of losers. He encouraged us to deliberately lose money in order to replace highly taxed income with lightly taxed capital gains.
As Macquarie Bank’s Rory Robertson told his clients at the time, ”Since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries.”
It might not for much longer. Ken Henry is drafting his report.
Source: The Age
Inside the offshore web that captured the Myer millions
AMERICAN private equity company TPG triggered nationalistic hand-wringing when it bought the famed Myer department store chain on June 2, 2006.
But The Weekend Australian can reveal that by the end of that day, the department stores were not in US hands at all. In fact, they were effectively owned by a shelf company, set up just months earlier, in the grand duchy of Luxembourg. And that company was itself wholly owned by another outfit in the Cayman Islands.
The Australian company set up to buy Myer, NB Flinders, would file its annual report two months after the Myer takeover, saying its parent company was NB Swantson, based in The Netherlands.
But at that time the Dutch company held no shares in Myer. It had not even been created at the time of the Myer deal, according to an investigation by The Weekend Australian into the web of companies set up by TPG in the Cayman Islands, Luxembourg, The Netherlands and Australia to house its interests in Myer.
The way these companies were structured is at the heart of the pursuit by the Australian Taxation Office of the $1.5 billion profit that TPG made on its three-year investment in Myer, which ended with last month’s sour stockmarket float.
No specific allegations have been made. But the tax office’s lawyer said in a dramatic late night court hearing last month that it had issued tax assessments of $452m, and $226m in penalties under the anti-avoidance provisions of the Tax Act.
TPG’s offices in Australia were not notified by the tax office when the matter was taken to court last month. But the ATO was clearly worried no income tax would be paid on the profits. Authorities tried to urgently freeze the bank accounts that held the $1.5bn but the following day it was discovered that TPG’s accounts in Australia held just $45. The money had been sent overseas.
The story starts on April 3, 2006, when NB Flinders, the Australian company, was set up with Ben Gray as its director. Gray is the head of TPG’s operations in Australasia. He has so far refused to be drawn into the tax saga. He would not comment yesterday and a spokeswoman for TPG said the company would not respond to detailed questions about what it believed were “standard or publicly available documents”.
On the same day NB Flinders was created another company, TPG Newbridge Myer, was set up, this time in the known tax haven of the Cayman Islands in the Caribbean.
Later that month, a lawyer for TPG Newbridge went to Luxembourg to establish a company there, NB Queen Sarl. Established in early May 2006, it had 500 shares owned by TPG Newbridge, which paid E25 a share.
The two managers of the company were TPG’s Texan-based general counsel David Spuria and Luxembourg company NEW Luxco Sarl.
More recent records show managers of the company include three other US-based TPG executives.
When TPG led the acquisition of Myer from the Coles Myer group in June 2006, the $1.4bn price tag involved TPG and its private-equity partner Blum Capital putting in $390 million in capital and the Myer family contributing $38m. The balance of almost $1bn was funded by borrowings.
NB Flinders was the company created to hold all the Myer interests. According to company searches, on June 2, NB Flinders issued 428 million shares, reflecting the $428m equity injection by TPG and the Myer family.
The Luxembourg company, NB Queen Sarl paid $390m for 390m shares in NB Flinders on the same day, making it the majority and, effectively, controlling shareholder. A Myer family associated company, MF Custodians, paid $38m for its stake.
Gray was a director of NB Flinders for only a short time, resigning on April 21, 2006. By that stage veteran retailers Bernie Brookes and Bill Wavish had been brought in to help turn Myer around. Wavish was appointed a director of NB Flinders in April and was chairman of the company. Brookes was appointed as director and chief executive in July 2006.
The company’s annual report, detailing its performance June and July of that year, show the company actually made a loss of $16.4m.
The annual report, which was not put on the ASX website along with later reports when the company was floated last month, says that its “immediate parent entity” was the Netherlands-incorporated NB Swanston, and that its ultimate parent company was the Caymans-based TPG Newbridge Myer.
There’s no mention of the Luxembourg company, which was by this stage holding 390m shares in the company, in this or any subsequent annual report.
The Netherlands company, owned by the Luxembourg company, was set up on June 13, 2006, with its “principal activity” to “act as a holding and finance company”. Its two managing directors are TPG Advisers IV Inc, a company linked to the US-based TPG, and a Netherlands company, Fortis Intertrust, a financial advisory company.
It wasn’t until August 23, 2006 that it purchased the $390m stake in Myer from the Luxembourg company, NB Queen Sarl.
The Dutch company’s annual accounts for the year ending December 31 2006 show it has a E234m in fixed assets, the equivalent of $390m.
The accounts also show that its only interests is in a company called NB Flinders — although it says this company is domiciled in Amsterdam, The Netherlands. It says it has an 85.96 stake in the company. The company has no employees “and hence incurred no wages, salaries or related social security changes during the reported year”.
The following financial year was a good one for the private Myer company. It sold various Melbourne properties, making a tidy $236m profit, reduced its inventory and in August 2007 decided to distribute surplus capital back to shareholders. A fully franked dividend of $196m was paid as well as a capital return of $364m.
TPG’s cut of this was $510m. In just over a year it had already made a profit on its initial $390m investment in Myer.
This money flowed back out of Australia, and, it would seem, some or all of it went back through the Dutch companies and up the chain to the Cayman Islands.
In its annual report for the year ending December 31, 2008, the Dutch company shows a marked reduction in its fixed assets, it is down to E41m from E234m. Its sole interest remained its stake in the “Amsterdam domiciled” NB Flinders.
The privately owned Myer continued to do well under Brookes and Wavish. Last month, it returned to the stock market, with thousands of mum-and-dad investors putting their money into a $2.4bn float spruiked by model Jennifer Hawkins. The Weekend Australian understands that the tax office was aware of TPG’s offshore structure as far back as 2007 and saw nothing unusual about it until after the Myer float, when it issued its $678m of assessments.
But it’s clear the two did not agree on the nature of the deal. The tax office says TPG was in the business of buying and selling businesses and therefore should pay 30 per cent tax on the deal. TPG believes it does not owe any money at all; It views the deal as a capital gain, and foreign companies are exempt from capital gains tax. The next complication in the saga is the offshore structure. Because The Netherlands has a double tax treaty with Australia, a company registered there would not have to pay Australian tax because, theoretically, it would be paying tax in the Netherlands.
But if a Dutch company has a parent in a European Union country, such as Luxembourg, it can pass its dividends up the chain tax-free, and the money can flow out of the EU and on to other jurisdictions. This is where a country such as Australia, would seek to enforce its claim on the income tax, as part of anti-avoidance rules. The details of what is said to have occurred with TPG are still not yet known, and are likely to remain a mystery unless the Caymans Island and Luxembourg companies decide to challenge the ATO in the Australian courts.
To do that, it would need to lodge half the money it has been assessed for, $339m, as security.
After the tax scandal hit, Brookes said he no knowledge of TPG’s tax structure. He could not be reached for comment yesterday.
Wavish, who has left Myer, and was also aware of the Dutch and Luxembourg share ownership of Myer, yesterday said he could offer “no insight at all” about the offshore tax structure. He said he hadn’t “the faintest idea about these things”, saying he was concentrating on running the business during his time at Myer.
http://www.theaustralian.com.au/inside-the-offshore-web-that-captured-the-myer-millions/story-e6frg8zx-1225807122567
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