Via Ritchie, we find an article that sensationally claims to expose how News Corp pays tax on its accounting profits at a rate of -46%. Yep, negative.
There are three main parts that give rise to this:
- the use of transfer pricing to move profits from high tax jurisdictions to lower tax ones.
- buying businesses that have brought forward losses that can be utilised.
- using deferrals.
David Cay Johnston attempts to paint each of these as evidence of gross tax avoidance. Unfortunately, he fails miserably on each account.
Transfer pricing
One is the aggressive use of intra-company transactions that globally allocate costs to locations that impose taxes -- and profits to areas where profits can be earned tax-free.
For that Murdoch can thank laws and treaties that treat multinational corporations much more generously than working stiffs, such as those who make up the audience for his New York Post and for his British tabloids with bare-breasted women. Working stiffs have their taxes taken out of their pay before they get it, while Murdoch gets to profit now and pay taxes by-and-by.
News Corp. has 152 subsidiaries in tax havens, including 62 in the British Virgin Islands and 33 in the Caymans. Among the hundred largest U.S. companies, only Citigroup and Morgan Stanley have more tax haven subsidiaries than News Corp., a 2009 U.S. Government Accountability Office study found.
News Corp. had nearly $7 billion permanently invested offshore in 2009, money on which it does not have to pay taxes unless it brings the money back to the United States. Meanwhile, it can use that money as collateral for loans in the United States, where interest paid is a tax-deductible expense.
Johnston appears to want us to believe that tax authorities have never heard of transfer pricing and are completely powerless to prevent companies moving their profits around at will. In fact, they're very wise to the tricks companies try and play. All transactions between group companies are measured for tax purposes on an arm's length basis. So if Murdoch tries any really funny business between subsidiary companies, the tax authorities will merely stick in the figures he should have used.
Conversely, we can conclude that any transfer of profits between jurisdictions is done with the express blessing of the IRS. Otherwise they would have challenged it.
The last paragraph raises a different point. US companies don't have to pay US taxes on their overseas profits until those profits are remitted to the US. The idea here is to prevent a nasty regime (think Zimbabwe) nicking all your profits but you still getting landed with a big tax bill from Uncle Sam. Local tax will have been paid locally, so the only difference is the margin between local and US corporate income tax. The local tax does form part of the group's overall tax paid.
Purchased losses
Buying companies with tax losses is a second way Murdoch can pocket, rather than pay, taxes. In three deals to acquire American television stations -- in 1985, 1990 and 2001 -- questions were raised about whether Murdoch entities were in compliance with American rules limiting the ownership stakes of foreign investors.
A memo, turned over to the Federal Communications Commission during one of these inquiries, showed that in 1990 Murdoch's advisers were, in the words of Michael Gardner, an outside counsel to News Corp., "in agreement that it is paramount to avoid any corporate restructuring which would potentially invite reexamination of Fox TV's ownership structure" by the FCC.
In 1995, the FCC general counsel, William Kennard, said that a two-year investigation requested by rival NBC and the National Association for the Advancement of Colored People (NAACP) found that "Fox did not clearly or explicitly disclose" News Corp.'s ownership stake in American television stations as required. However, Kennard said this lack of candor was insufficient to require a hearing into whether Fox had intended to deceive the commission.
In contrast to News Corp.'s aggressive tax and regulatory strategies stands The New York Times Company, which in 1993 bought the Boston Globe in a way that did not allow it to deduct its goodwill, as is standard practice today. The Times company has paid a cash tax rate of 71 percent over the last decade, more than twice the statutory corporate income tax rate of 35 percent. That is because while most companies, like News Corp., get to take more generous deductions on their tax accounts than their shareholder accounts, the terms of the Globe deal left the Times company in the opposite position: required to deduct the Globe's intangible values for shareholder accounting, but not allowed to deduct it for tax purposes.
If a business makes a loss, of course it should get tax relief for that loss. The sad fact is that many loss making businesses never make another profit and go bust. For a profitable business like News Corp to acquire these businesses is good news for everyone, as it helps preserve jobs and turns them around and back toward profitability.
It's absolutely right that News Corp should get the benefit of these losses because they're taking the risk.
The last paragraph is either quaint or laugh-out-loud funny, depending on your mood. The "way that did not allow it to deduct its goodwill" is merger accounting. In the 1990s, the SEC was desperately trying to stop companies from adopting merger accounting - businesses preferred it because they didn't have to set up massive goodwill accounts, which (back then at least) had to be amortised through the profit and loss account, reducing earnings. The very idea that NYT was somehow more virtuous because it adopted merger accounting while News Corp did not is completely bonkers.
Tax deferrals
Third, Murdoch's tax lawyers are expert at maximizing the benefits of deferrals. Incurring a tax today, but paying it by-and-by can be profitable. A dollar of tax deferred for 30 years, and invested at 8 percent real growth while inflation runs 3 percent, is worth more than $10 at the end of the period, while the real value of the tax when it is ultimately paid is just 40 cents.
Last year News Corp. had net future tax assets of $3.3 billion. In the past four years News Corp. has either used up a lot of its tax benefits or had them expire. In 2007 its net tax assets were $5.7 billion.
Hmm, at this point I had to go look up News Corp's 10-K because it was obvious that Johnston was talking complete bollocks. Tax deferrals are a deferred tax liability, not an asset. They represent a tax benefit you've already received (by paying less tax today) but which you will most likely have to pay in the future.
Can we really take a journalist seriously when he can't even tell an asset from a liability?
The point is also a completely stupid one. To adopt Johnston's rhetoric, we render unto Caesar that which is Caesar's. And taxes are based upon taxable profit, not accounting profit. For a variety of excellent, good, not-so-good and virtually fraudulent reasons, our politicians have deemed that various transactions may be treated differently in the tax computation than the accounting standard setters have ruled they must be treated in preparing the accounts. In order that investors can understand how accounting profits relate to tax due, the accounting standards require deferred tax to be established for asset (or liability) carrying values that differ from their taxable values.
The $3.4bn liability represents the amount by which News Corp has recorded accounting profits on which tax has not yet been paid but which is expected to be paid in the future. That's not their fault. If you want to blame anyone, you should blame the politicians who wrote those concessions into our tax laws.
There's also a classic howler: Johnston compares the tax paid over 2007-2010 with the profits earned over 2007-2010. This is a howler, because the tax paid during 2007-2010 is in relation to taxes earned during 2006-2009.
Is there any journalist out there that understands tax?
Filed under: Current issues, Taxation with tags corporation tax, david cay johnston, deferred tax, idiots, merger accounting, news corp, richard murphy, rupert murdoch
1 Comment »
