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13
NOV 14

Red ink and corporate welfare go hand in hand - Chalkie




Grants are a problem: using the tax system is better justified on the capability development spillovers, the fact that it balances what other countries do and the reach goes beyond the favorites and those who can game the system.

The rules applied by the IRD are much less susceptible to the biases that come with grant based handouts.

The following opinion piece by Tim Hunter (Chalkie) first appeared in The Press - click here to view original.

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Spongers and parasites the lot of them. While decent Kiwi battlers get stuck in and work hard to earn their keep, this bunch are always on the take for someone else's tax dollars.

Government programmes are supposed to be there to help the less fortunate - a safety net for the needy. But there are always a few who think they can play the system and take the rest of us for mugs. Millions of dollars goes to waste on these buggers while kids go hungry. It's a bloody disgrace.

Chalkie reckons it's time we stopped pussyfooting around with these companies and gave them a short, sharp shock.

You want examples? Chalkie will give you examples.

Bayer New Zealand. In August this outfit was approved for a taxpayer grant from Callaghan Innovation. Exactly how much it can get is supposedly a secret - "commercially sensitive" - but it was one of 23 companies granted $41 million at the same time, so on average they would get $1.8m.

Why would Bayer NZ have its hand out for $1.8m from taxpayers? This is a company with revenue last year of $183.8m. Its owner, German multinational health, agriculture and materials science group Bayer, had sales last year of €40 billion, producing a net profit of €3.2b.

As a group specialising in creating value from science, it spent 8 per cent of sales on research and development activity.

To qualify for a Callaghan grant, companies must commit to spending 1.5 per cent of annual revenue on R&D and satisfy a number of other criteria specified by the Government.

Surely Bayer NZ wouldn't waste effort on a measly free couple of mill? But wait - maybe Bayer NZ doesn't have much money. It made a net loss last year of $57.5m and a loss of $4m in 2012. Those losses produced tax credits of $3.9m and $1.2m.

Poor Bayer. It did so badly it couldn't pay tax and needed a government handout to help fund its research effort.

Ahem. Of course it didn't.

The losses can be sheeted home to the amortisation and write-off of goodwill from Bayer NZ's acquisition in December 2011 of New Zealand animal health group Bomac for $138.4m.

However, the deal wasn't done by Bayer NZ directly. Instead, Bayer in Germany bought Bomac for €73m, equivalent to about $126m at the time, then sold it to Bayer NZ in a related-party transaction, which wrote off $54m in goodwill a little more than a year later.

Chalkie finds that a strange way to do business, but hey, it does appear to have helped Bayer NZ pay less tax - and every multinational likes to pay less tax.

Although headquartered in Leverkusen, Bayer owns its New Zealand subsidiary through a company in the Netherlands. No doubt there are good commercial reasons for this, but Chalkie can't help thinking they probably include the Netherlands' famous tax advantages.

The details of Dutch tax are best left to those with a high tolerance for throbbing pain in the temples. Chalkie will merely point to a report by the Centre for Research on Multinational Corporations, which has said that: "All the empirical evidence indicates that the Netherlands is a tax haven. This is because it deliberately offers companies who would not otherwise seek to be resident within its territory the means to reduce their tax charges on interest, royalties, dividends and capital gains income from subsidiary companies."

So one way of looking at it is that Bayer likes to take handouts from taxpayers, while simultaneously avoiding paying its share. Never mind, there's always one. Surely none of the other 110 companies getting Callaghan grants have creative tax arrangements.

Well, maybe one or two.

Radio specialist 4RF received a grant in the January round. It is 81 per cent owned by a holding company in the Cayman Islands.

Networking company Endace Technology, which was taken over in 2012 by United States company Emulex, is owned by two tax haven-domiciled entities, one in the Isle of Man and one in Ireland. It also got a grant in January.

Atlantis Healthcare Group, a "world leader in designing and implementing patient support and adherence programmes", was approved for a Callaghan grant last month. It is 76 per cent-owned by an entity in the British Virgin Islands, where the company tax rate is zero.

Cattle breeding specialist CRV also got its grant in October. It is 100 per cent-owned in the Netherlands, although this might just be because its owner is actually Dutch.

Then there's whiteware maker Fisher & Paykel Appliances, taken over in late 2012 by big Chinese company Haier. Well, Haier is Chinese, but it holds F&P through a subsidiary in the low-tax jurisdiction of Singapore.

F&P Appliances got a Callaghan grant in January that it described as "commercially sensitive", adding to previous grant funding recognised last year of $1.3m.

Chalkie wonders why Haier, which paid $741.6m for the 80 per cent of F&P Appliances it did not already own, merits taxpayer support. Perhaps it is because under Haier's ownership F&P has changed from a profitable business to a loss-making business. After a change of balance date, F&P lost $31m for the nine months to December 2013, producing a tax credit of $11.4m.

Or perhaps not. F&P's operating cashflow for the period was $33m, so the loss probably comes from somewhere else, such as interest, depreciation or amortisation.

After examining F&P's financing, Chalkie reckons it might have something to do with related-party loans from Haier Singapore of $756m.

Of that, $302m carries interest and the rest is interest-free, maturing in 2018. However, it appears that accounting conventions think nothing is free, so the value of the loan is discounted. This creates a gap between discounted value and face value, which apparently gives rise to an amortisation charge. For the 2013 period F&P's amortisation charge was $32m, which makes quite an impact on the bottom line.

CHALKIE is not surprised to find an overseas-owned company reporting accounting losses - in his observation red ink tends to arrive with foreign ownership the way a shining cuckoo arrives in spring.

The issue here is the hypocrisy of multinational corporates doing their best to limit their contribution to government coffers, while holding their hands out for whatever they can get from taxpayers.

Out of 110 companies granted $293m of Callaghan money so far this year, seven had ownership in overseas tax havens and another 20 were owned directly by wealthy multinationals.

Of 83 grant recipients predominantly New Zealand-owned, 12 were listed on the NZX, with ready access to investment capital (Chalkie includes Orion Health, which has just raised $120m to invest in software development).

The rationale behind the grants is to encourage companies to boost their local R&D effort beyond previous levels and in so doing build a stronger "ecosystem" of R&D expertise.

It seems to Chalkie that although all of the companies that receive grants no doubt satisfy the eligibility criteria, there is no way to ensure many don't just pocket the money as a helpful subsidy for work they were going to do anyway.

You can debate the merits of these grants till the cows come home - and Chalkie reckons they are just corporate welfare - but if you are going to have them it surely makes sense to target them at companies that first need the money and second don't avoid tax.

Chalkie reckons that excludes 39 of the current Callaghan grant recipients, which if they got a pro rata share of the cash represents about $102m.

To put that in context, last August Associate Social Development Minister Chester Borrows announced the Government's focus on welfare fraud was making progress. In the 2013-14 year, investigators prosecuted 893 people for welfare fraud and illegal overpayments totalling $88.4m.

Maybe we could save more by clamping down on corporate welfare than from jailing dole bludgers.

Chalkie is written by Fairfax business bureau deputy editor Tim Hunter.


tags: chalkie, welfare, corporate welfare, grants, r&d, tax credits, tim hunter
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