10/06/2010 - 00:00

Tax shopping, country hopping miners

10/06/2010 - 00:00

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Xstrata may have got the jump on its mining rivals.

ZUG, a small town in Switzerland, has played a special role in Australian business life since Alan Bond decided to do his banking there after a few problems with corporate regulators at home.

Rather than being seen as the odd man out, however, Bond might soon be seen as nothing more than an early mover, as rising tax rates bite the Australian mining industry.

Shopping around for a lower tax rate, or a higher level of banking secrecy, is one of the oldest games in the world. That’s why Bond deposited some of his money there after the 1987 stock market crash and before his business empire collapsed into a sea of litigation.

What’s good enough for a man with a need to park some spare cash might soon to be irresistible to some of the world’s biggest companies. And while it sounds unlikely, there is no doubt that BHP Billiton and Rio Tinto will be looking enviously at Zug, or other Swiss cantons, as a possible location for a new head office.

What the big two of Australian mining will find if they do a runner to Zug is that they are far from alone. One of their archrivals, Xstrata, is already there – enjoying a tax rate of 16 per cent.

No-one, not even Bystander, needs help in understanding that a tax rate of just 16 per cent has magnetic appeal, especially if you’re looking down the barrel of a future tax rate at home of 57 per cent under the Australian government’s proposed super tax.

Whether Australian miners can make the shift is the interesting question; and while it might be difficult, there are billions of dollars at stake, each year – and that buys a lot of legal firepower.

The fact that Xstrata already calls Zug home, despite mining coal and nickel in Australia, and other minerals around the world, is a pointer to how logic flies out the window once the question of tax enters the equation. And right now there is a global stampede under way to cut taxes.

For the Swiss this is a marvellous business opportunity, as they seek to capture more big companies, marketing themselves as the ideal tax haven.

There is actually nothing new in using Switzerland as a low-tax address, it’s just that the appeal has become greater after the global financial crisis and the current scramble by governments to repair their damaged budgets – a step being achieved by a modest dose of austerity, and a large serving of higher taxes.

A few weeks ago the world’s biggest manufacturer of electronic connectors, Tyco, shifted its head office from the US state of Pennsylvania to Zug – even getting a 10-year discount on the already ridiculously low 16 per cent tax rate.

Tyco was following the world’s third biggest chemical maker, Ineos, to Switzerland. Ineos estimated that its move to the canton of Vaud would generate tax savings of about $US550 million over four years.

Not only are more companies being lured to Switzerland, the Swiss themselves are ratcheting up the pressure, with their 26 cantons competing for business by offering special deals to anyone who wants to make the move.

Low taxes, plus plenty of mountain scenery, skiing and cheap chocolate, is a potent business recipe with Switzerland sailing through the GFC relatively unscathed, ending 2009 with a budget surplus, which means there is even more firepower to go on cutting tax rates just as the rest of the world raises rates.

BHP Billiton and Rio Tinto will find a Swiss tax holiday difficult because they obviously cannot relocate their mines in the same way Tyco and Ineos can move their factories.

But the fact that Xstrata already has a Swiss home will eventually prove to be more than annoying.

It means that Xstrata will be able to beat everyone else in the next round of corporate takeovers because its cost of doing business is much lower, thanks to a town called Zug.

Serving up an option

WHILE Australia’s miners face a sticky future as tax hostages and whipping boys for the prime minister, Kevin Rudd, there is one opportunity emerging for investors in the resources sector – service companies.

Over the past two months the slump in mining shares has rubbed off on the service companies, such as WorleyParsons, Monadelphous, Decmil and Clough, perhaps unfairly leading to a theory that they represent good buying.

The argument is that while the miners are being slugged with high taxes they will continue to produce the same volumes of ore, and might even produce more given that Chinese demand remains largely intact.

The service companies, much like the way state government royalties operate, are generally paid on a ‘per-tonne’ basis, or on some other volume rate, eliminating exposure to the risks of marketing what’s mined or being hit with a super tax.

It is an interesting theory and, while Bystander is not convinced, it is a development worth watching.

BP pared to the core

IF BP really is in danger of being bought by a rival such as Shell or ExxonMobil because of its troubles with a leaking oil well in the Gulf of Mexico, then the knock-on effects might be felt as far away as Western Australia.

First factor is BP’s share of the North West Shelf project, with a new owner of the parent company possibly triggering an ownership shake-up, including the long speculated raid on the shelf’s operating company, Woodside Petroleum.

More likely is pressure on the Australian oil refining business, including BP’s Kwinana refinery, which struggles to compete on a cost-per-litre basis with big Asian refineries, which can deliver fuel here cheaper than it can be refined.

Of all the Australian oil refineries, Kwinana is the least likely to face the threat of closure if BP falls to a new management team.

But even if BP survives intact there will be enormous pressure for the company to increase efficiency across all business units to make up for the gulf losses, and that means taking a hatchet to anything surplus to the core operations of the parent company.

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“A fellow who’s always declaring that he’s no fool usually has his suspicions.”

Wilson Mizner

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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