US aluminium giant Alcoa has flagged its prepared to battle with the Australian Tax Office (ATO) in court after its local operations were hit with a $921 million tax bill that could easily grow above $1 billion if the agency issues administrative penalties next month.
The tax bill applies to Alcoa of Australia Limited (AoA), which is 60 per cent owned by Alcoa and 40 per cent owned by ASX-listed Alumina.
In a statement to the ASX on Wednesday, Alumina chief executive Mike Ferraro said the ATO had carried out an investigation focused on AoA's sales over a 20-year period.
The ATO is claiming AoA under-priced alumina sales that eventually flowed through to Aluminium Bahrain, also known as Alba.
Alba is one of the largest industrial companies in the Middle East and one of the largest aluminium producers in the world.
Alumina's statement said the ATO was claiming the company owed $214 million in back taxes, plus interest worth $707 million.
The ATO has not yet indicated the amount of administrative penalties it proposes to apply on top of the tax and interest bills, but once it issues this assessment in August, the amount the revenue agency claims the company owes it could easily hit $1 billion.
Alcoa and Alumina have rejected the ATO's claims and say AoA intends to challenge the tax bill.
"AoA will defend its position in respect of the ATO's [assessment] notices and [will] pursue all available dispute-resolution methods, up to and including the filing of court proceedings," the statement said.
AoA will pay half the tax bill for now
Alumina said AoA expected to have an opportunity to respond to the ATO's claims prior to receiving a formal penalty assessment after August 1.
In accordance with the ATO's dispute-resolution practises, AoA expects to pay 50 per cent of the assessed primary income tax amount, or $107 million, out of cash flows in the third quarter of 2020.
Alumina Limited said that in exchange, the ATO was not expected to seek further payment before a final resolution of the dispute.
"AoA's obligation to make any further payment of this primary tax amount, or payment of any penalty or interest amount advised by the ATO, will be determined through the objection and court processes available to AoA," Alumina Limited said.
"If AoA is ultimately fully successful [in fighting the tax bill], the 50 per cent part payment to the ATO would be refunded."
Alumina Limited said the historical alumina sales to Aluminium Bahrain were the result of "arm's-length dealings by AoA" and made to an unrelated third party at prices consistent with other sales to third-party alumina customers.
It said the ATO was seeking to assess tax on sales revenue, which it claimed AoA should have received, rather than the amounts it actually received.
"Neither AoA nor any related entity received any benefit other than the sales revenue received over the relevant period from an unrelated party," the statement said.
Companies often opt to settle on tax bills
In December, ATO second commissioner Jeremy Hirschhorn told ABC News that to crack down on alleged multinational tax avoidance, the agency had been using transfer-pricing laws under previous governments, as well as stronger anti-avoidance laws introduced under the Coalition in 2016.
Mr Hirschhorn noted at that time that companies across the mining, oil and gas, e-commerce and pharmaceutical industries were disputing billions of dollars in tax assessments.
If AoA does take the dispute to court, the matter could take years to resolve.
But more often than not, multinationals agree to settle out of court with the ATO and end up paying far less than the amounts initially assessed.
According to the ATO's latest annual report, in the public group and multinational business line, the agency settled with 98 companies in 2018-19.
It had originally hit these companies with $3.5 billion worth of tax bills, but ended up collecting about $1.9 billion.
Prior to the federal election, Labor had proposed introducing even tougher powers to fight tax avoidance, in matters other than transfer-pricing disputes.
Its proposal, which was never implemented because the Coalition took office, had included denying multinationals a deduction when they sent royalty payments to related companies that posed a tax risk.
The ATO said between July 1, 2016 and April 2020, its Tax Avoidance Taskforce raised $17.2 billion in tax liabilities and collected $10.8 billion from large public groups and multinational corporations, wealthy individuals and private groups.