Rupert Murdoch, Or, How To Confuse The Taxman Into Leaving You Alone

Caroline Maxwell, InvestorsOffshore.com

17 January 2001

News that Rupert Murdoch's News Corp organisation may have fallen foul of an arcane rule which could force it to pay an extra billion dollars in tax may come as a surprise to many, as the media mogul has a reputation for remaining relatively unscathed by US and Australian tax laws, due to a combination of astute financial planning and a great deal of obfuscation.

The problem stems from the complicated structure of News Corp, which remains an Australian interest, despite the fact that Murdoch himself became a US citizen in order to facilitate company purchases there.

Mr Murdoch may, however, have made a rod for his own back, particularly in the case of the proposed Chris- Craft purchase, as the FCC (Federal Communications Commission) has recently questioned whether this deal contravenes foreign ownership rules, which prevent foreign interests from owning more than 25% of a US broadcaster. The FCC rules mean that News Corp can only acquire stations through its Fox Television Stations subsidiary, and the company has tried to comply with this by merging the 10 Chris-Craft stations into a newly created subsidiary, and then transferring those assets to Fox. However, in doing this, they have run up against the IRS, with a resounding thump.

The IRS offers tax-free eligibility only to 'vertical' transfers (which is not a viable option in this case, as it would be in direct contravention of the FCC's foreign ownership regulations), so this sideways transfer from the new subsidiary to its sister company, Fox, will not be eligible, and News Corp is likely to be saddled with a tax bill in excess of $1 billion as a result.

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Say what you will about the man himself (and many do!), News Corp's famously labyrinthine structure has proved exceptionally tax efficient over the years, with the exception of this rare blip in the smooth running of the organisation, and it may be worth examining how such consistently low tax bills have been achieved.

It has been suggested that the complicated structure of News Corp, far from being the accidental result of poor organisation, is actually making deft use of international accounting loopholes and offshore incentives; in 1997, the company's organisational chart showed no less than 789 business units, incorporated in 52 countries, and this figure has no doubt risen considerably since . This obviously causes difficulties for anyone wishing to determine how the corporation arrives at its taxes; as William Markell, an expert on international accounting and former chairman of the University of Delaware's accounting department, points out: 'Each country has its own rules and regulations, and Murdoch has the organization and talent to figure out the best way to work all of them. He's an operator. If there are advantages, he can find them.'

As previously stated, Rupert Murdoch himself is now an American citizen, but News Corp remains Australian, which is beneficial in terms of tax efficiency in a number of ways. Discrepancies between the accounting practices of the two countries mean that the company is able to utilise arcane accounting rules to pump up reported profits, which helps portray News Corp in a more favourable light to investors.

IRS officials have also pointed out that US based companies face US taxes on their offshore subsidiaries offshore if more than 50% of the subsidiary is controlled by American shareholders, but as News Corp is an Australian company, this doesn't apply.

The company's use of offshore tax havens is legendary (as might be suggested by the number of business units and locations mentioned earlier), and by routing profits through low tax jurisdictions, and simultaneously accumulating expenses and recording losses in high tax domains it is able to reduce its overall tax bill greatly, a fact which has not gone unnoticed by the authorities in News Corp's native Australia.

Although this synopsis is only very brief, it has hopefully provided at least a little insight into the magical world of Murdoch for the would-be media mogul (or the merely curious!) However, his tax planning strategies, and those of News Corp have long been shrouded in mystery, and leave Wall Street analysts scratching their heads in puzzlement. One investment banker active in the media business was quoted as saying: 'Wall Street doesn't have a handle on [Murdoch] for a lot of reasons. He is perpetually able to have the best of both worlds. He doesn't tell as much as people would like to know, and he doesn't have to.'

The fact remains, however, that until recently at least, whatever he has been doing seems to have been working. In light of recent events, however, investors stung by the recent developments in the offshore world may want to keep an eye on News Corp and its seemingly Teflon-coated proprietor, in order to ascertain whether this incident is indeed a routine matter (as asserted by the company itself), or whether the current climate of uncertainty and scrutiny is beginning to affect the big boys as well.

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