FactCheck: Is BHP Billiton Australia’s largest taxpayer, averaging $8-10b in tax a year?

BHP Billiton’s Andrew Mackenzie said his firm has an effective tax rate of 45%. AAP Image/Tracey Nearmy

We pay on average $A8 billion to $10 billion of tax in Australia every year… We are Australia’s biggest taxpayer by far, we have an effective tax rate of 45%… – Andrew Mackenzie, Chief Executive of BHP Billiton, interview with Fran Kelly on ABC radio RN Breakfast, May 19, 2015.

After years of flying under the radar, company income tax is suddenly headline news in Australia.

Andrew Mackenzie’s comments on BHP Billiton’s tax affairs came in the wake of a parliamentary committee into corporate tax avoidance, new multinational tax policy announcements from both major parties and several high profile investigations by the Australian Tax Office into some of the biggest firms operating in Australia.

There are three statements of fact contained in Mr Mackenzie’s recent quote:

  • That BHP Billiton is by far and away Australia’s largest taxpayer
  • That BHP Billiton pays an average of $A8 billion to $10 billion of tax in Australia every year
  • That BHP Billiton has an effective tax rate of 45%

When asked for a data source to substantiate his claims, a spokeswoman for BHP Billiton sent The Conversation a copy of BHP’s answers to questions on notice from a public hearing of the recent Senate Inquiry into corporate tax avoidance.

That statement also noted that the Australian Tax Office is chasing BHP for $522 million (being primary unpaid tax of $301 million, interest of $145 million and penalties of A$76 million). BHP Billiton has objected to these assessments.

We checked Mr Mackenzie’s statement using data from the Morningstar DatAnalysis financial database, a subscription-only database that logs information on companies listed on the Australian Securities Exchange.

We cross-checked the BHP information we found on Morningstar with data from BHP Billiton’s financial statements.


Here’s what we found.

Is BHP Australia’s biggest taxpayer?

Yes. According to the data collated by Morningstar, BHP has paid the highest amount of consolidated company tax in total between the financial years 2005 to 2013. BHP paid almost $54.4 billion in consolidated tax over that time, with Rio Tinto in second place with almost $39 billion, and the Commonwealth Bank of Australia is in third place, paying almost $20 billion.


Does BHP Billiton pay an average of $8 billion to $10 billion of tax in Australia every year?

BHP paid above $8 billion in consolidated company income tax in 2012 and 2013. But the average consolidated company income tax paid by BHP over 2005 to 2014 is $5.85 billion.


According to Morningstar, the firm paid an average of just over $6 billion in consolidated company income tax between 2005 and 2013. In 2014, BHP paid $5.937 billion in consolidated company income tax.

In a statement to the Senate Inquiry into tax avoidance, BHP said:

BHP Billiton paid A$4.9 billion of corporate tax in Australia last year. When royalties and resource rent taxes are taken into account, BHP Billiton paid more than A$8.7 billion in Australia last year.

But paying royalties on a resource owned by the Australian people is not company income tax.

Does BHP Billiton have an effective tax rate of 45%?

Morningstar data showed that the consolidated effective tax rate (ETR) for BHP was above 45% in 2013, based on the cash ETR measure (cash tax paid /total pre-tax profit) and in 2009 based on the GAAP ETR measure (total tax expense /total pre-tax profit).


However, the average ETR for BHP between 2005 and 2014 is almost 31% based on GAAP ETR and 28.1% based on cash ETR. The ETR based on the most recent available figures is 31.2% (GAAP ETR) and 25.15% (based on cash ETR).


Verdict

The first fact that BHP is by far and away Australia’s largest tax payer is correct.

The second statement is correct only for company income tax paid in 2012 and 2013. The average company income tax paid by BHP is closer to $6 billion a year. That figure inflates if you count royalties and resource rents as taxes.

Unless Mr Mackenzie was referring specifically to 2014 or 2009, BHP does not have a 45% effective tax rate and certainly not an average effective tax rate of 45% over the years 2005 to 2014. In fact, on average, Rio Tinto has a higher effective tax rate than BHP.

Review

This is a sound and deliberately constrained analysis.

Measuring a company’s “effective tax rate” (how much tax they pay as a percentage of profits) and comparing effective tax rates across companies is a challenge for two reasons.

The first is that large multinationals such as BHP divert some profits to low tax jurisdictions. In BHP’s case, this includes a diversion to Singapore, currently the subject of ongoing disputes with the ATO. In BHP’s company accounts, the profits diverted to tax havens or low tax jurisdictions are treated as expenses, so the “taxable income” is reduced by the diverted profits. So the tax paid worldwide by BHP is reduced.

The second is the unique nature of BHP’s trading stock. While most businesses manufacture from raw materials they buy from other businesses or sell goods they acquire from wholesalers or manufacturers, BHP buys its trading stock from State governments, with the purchase cost of the materials called a “royalty”. In many of their public statements, BHP treats this as a tax and as a result shows its total effective tax rate is higher than the company tax rate. To compare rates properly, we should either deduct the royalties from the total taxes paid or allow all other businesses to deduct all the cost of their trading stock when calculating their effective tax rates. – Rick Krever


Have you ever seen a “fact” that doesn’t look quite right? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.