3 May 2016

Questions over Compass' tax payments

8:31 am on 3 May 2016

Catering company Compass is under fire for the food it's been serving up to hospital patients, but now questions are being asked about whether the multinational is paying enough tax.

Compass New Zealand has lent its British-based parent millions of dollars while the fees and royalties it has paid to the UK have quadrupled over the last four years.

Tax experts have said such transactions are commonly used by multinationals to shift profits between subsidiaries to avoid paying tax.

Compass said it used local Otago suppliers for fruit and vegetables.

Hundreds of people have protested over Compass Group's contract to provide food to hospitals in Otago and Southland. Photo: RNZ / Peter Newport

Compass is one of the world's biggest catering companies, and supplies nearly half of all public hospital meals in New Zealand.

Accounts filed with the Companies Office show its New Zealand arm has been lending the company's British parent millions of dollars.

Those loans increased six-fold over the last four years to $33 million for the year ended September 2015, up from $5.5m in 2012. Royalties and fees quadrupled over that same period, from $805,000 to $3.5m.

Such so-called transfer pricing transactions are all legal.

However, Auckland tax consultant Terry Baucher described the loans as "unusual", especially given the interest rate of between 2.9 percent to 3.8 percent was a lot higher than what Compass would pay for borrowing money in the UK and none of the money had been repaid.

"It's unusual to see. It's not surprising - intra-company loans go on all the time. But you would think that given low rates of interest available in the UK there was no need for those advances to be made," he said.

RNZ News asked Compass to explain why a multinational that made a global profit of $2.5 billion last year needed to borrow $33m from its New Zealand arm.

In a statement, Compass said there were no loans.

"The figure shown in the accounts is a standard cash deposit facility, effectively like a current account, used by Compass to manage its working capital requirements," Compass national development and innovation manager Lauren Scott said.

The accounts filed with the Companies Office describe the transactions as loans. The 2015 accounts state "the receivables from related parties arise mainly from loans and are receivable on call".

When this was put to Compass, the company added: "They are effectively a cash deposit facility. Compass Group NZ deposits and withdraws cash from this facility on an almost daily basis. It gets the appropriate interest return on it and that interest income is subject to the full rate of NZ corporate income tax."

Compass said it conducted an open and transparent relationship with the Inland Revene.

"As a large tax payer with turnover greater than $80 million, Compass NZ is subject to the IRD's Basic Compliance Package, an additional layer of tax compliance for large multinationals. As part of the annual BCP process, Compass NZ is subject to a review of all its income tax affairs, including its international transactions," it said.

Compass New Zealand has not paid a dividend to its British parent in the last four years, but has paid about $1m in fees and services to its Australian arm each year. Fees and royalties to its British parent between 2012 and 2015 have quadruped to $3.5m.

Dividends and royalties were taxed by Inland Revenue (IRD), and loans were not. Compass New Zealand paid $2m in tax last year, just over 1 percent of its revenue of $170 million.

Compass said it paid that amount because its costs were high and its margins low.

Auckland University tax professor Craig Eliffe said intra-company loans, along with fees and royalties paid to parent companies, were all used by multinationals to move profits around.

"If they've got more money than they can use in their New Zealand operations, you would expect it to be repatriated by way of a dividend. So this could be viewed as effectively as a device or mechanism of effectively repatriating the cash without paying a dividend."

Compass said it was required by law to pay fees to its affiliates for any support received from them.

It did not answer questions about whether it had tried to avoid paying tax in this country but said it employed 4000 people and expected to spend $70m with suppliers in New Zealand this year.

Green Party co-leader James Shaw said New Zealand needed follow Australia's lead in tightening rules around transactions between multinational subsidiaries.

"One of which would be compulsory reporting from multinational companies about how they're accounting for their transfer pricing because currently in New Zealand they don't have to report on that and so it's very very difficult to get a clear picture of what's going on," he said.

Greater resourcing of IRD was also needed so it could better police multinationals operating in New Zealand, he said.

Mr Shaw questioned the value of outsourcing public services to multinational companies, which he said as a rule tried to pay as little tax as possible.

Protests over hospital contract

Meanwhile, Compass has also been in the spotlight in recent weeks after protests about the quality of the food that it has supplied to hospitals in Otago and Southland.

Compass has a 15-year meal supply contract, which has termination clauses based on key performance measures such as nutritional value, taste and presentation.

The company said last week it had the right to remedy any issues raised, and a qualitative survey at Dunedin Hospital had shown three quarters of patients were satisfied with their food.

Southern DHB chief executive Carole Heatly, speaking on Friday, also pointed to the company's patient satisfaction surveys, saying opponents of the contract were not providing the full picture.

Compass prepares much of its food in the North Island and then freights it south.