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Loopholes Boost Murdoch's Profits
By Paul Farhi
Today those U.S. subsidiaries provide Murdoch's company, News Corp., with the vast majority of its revenue and profit. But through the deft use of international accounting loopholes and offshore tax havens, Murdoch has paid corporate income taxes at one-fifth the rate of his chief U.S. rivals throughout the 1990s, according to corporate documents and company officials.
There is no suggestion from U.S. authorities of any impropriety in the way the 66-year-old Murdoch has done business as he has risen from obscure press baron to the global village's de facto communications minister. The international tax and accounting strategies employed by News Corp. may, in fact, make Murdoch a model for the 21st-century entrepreneur -- a captain of industry who operates under so many flags at once that it's hard to know where his allegiances lie or how his businesses function.
News Corp., in its most recent fiscal year, reported paying $103 million in worldwide taxes on operating income of $1.32 billion, an effective tax rate of 7.8 percent, according to company documents. By contrast, American-based competitor Walt Disney Co.'s effective tax rate was 28 percent. Viacom Inc., the parent of MTV and Paramount Pictures, paid 22 percent. Time Warner Inc., a U.S. media and entertainment company that is roughly the same size as News Corp., paid taxes at a 17 percent rate.
Whereas Murdoch became a naturalized U.S. citizen in 1985 -- and the man behind such American staples as Bart Simpson, the movie "Independence Day" and soon, the Los Angeles Dodgers -- News Corp. has remained incorporated in Australia. Consequently, it's not clear how much -- if any -- of News Corp.'s income tax payment last year went to the U.S. Treasury, despite such highly profitable American operations as its Fox TV station group, which includes WTTG (Channel 5) in Washington.
While declining to provide specifics on News Corp.'s U.S. taxes, Arthur Siskind, the company's general counsel, said in an interview, "We had a lot of start-up businesses in the U.S. that lost money, and that creates [deductions and credits that offset taxation]. It has an effect on the amount of taxes we pay." Murdoch declined to be interviewed for this article.
Murdoch's holdings are many times larger than they were a decade ago and now span five continents. Because his publications and TV stations influence the culture and politics of dozens of countries -- including the United States -- a biography by William Shawcross has dubbed him "one of the most powerful men on earth."
"Each country has its own [tax and accounting] rules and regulations, and Murdoch has the organization and talent to figure out the best way to work all of them," said William Markell, former chairman of the University of Delaware's accounting department and an expert on international accounting. "He's an operator. If there are advantages, he can find them."
Two features particularly stand out in News Corp.'s operation, with regard to its financial picture. First, by remaining Australian, the company is able to utilize arcane accounting rules that have pumped up reported profits and greatly aided Murdoch's periodic acquisition sprees.
Under Australian accounting practices, for example, News Corp. legitimately reported that it earned $561 million last year. Under the tougher rules required of U.S.-based corporations, however, News Corp. would have lost $155 million, according to documents the company filed with the Securities and Exchange Commission. The Australian difference helps portray News Corp. in a more favorable light to investors -- particularly when the company is stacked next to its American-based competition.
Second, News Corp. has mastered the use of the offshore tax haven. The company reduces its annual tax bill by channeling profits through dozens of subsidiaries in low-tax or no-tax places such as the Cayman Islands and Bermuda. The overseas profits from movies made by 20th Century Fox, for instance, flow into a News Corp.-controlled company in the Caymans, where they are not taxed, according to an executive familiar with the operation.
Figuring out how News Corp. arrives at its taxes is difficult because of the sheer sprawl and complexity of the company. That may be, as some analysts have suggested, the very reason for the company's convoluted structure. News Corp.'s organizational chart consists of no less than 789 business units incorporated in 52 countries, including Mauritius, Fiji and even Cuba. A simple one-line listing for each operation requires 10 pages of small type in News Corp.'s annual report.
News Corp. doesn't reveal much about these businesses. It's impossible to tell from public documents, for instance, how much profit or revenue each unit generated, even in such major operations as 20th Century Fox and the Fox broadcasting network. The overall financial picture is further muddied by complex inter-company borrowings and financings, and by complicated joint ventures. Murdoch himself once conceded that the company's intricate financial interior confused even some of his most senior executives.
"One of the things I would never attempt to calculate is how News Corp. arrives at its tax rate, or why," said John Reidy, a Wall Street analyst who has followed the company for years.
News Corp.'s tax structure has, however, drawn interest from governments on at least two continents in recent years. Officials in Murdoch's native Australia have highlighted News Corp.'s use of offshore shelters to minimize its Australian tax bill.
A 1989 report by an Australian parliament committee -- apparently the only government accounting of News Corp.'s taxes made public -- found that the company earned all of its total annual profits through subsidiaries in low-tax countries such as the Netherlands Antilles and Bermuda.
In contrast, News Corp.'s main subsidiaries in Australia, Britain and the United States, all relatively high-tax countries, recorded losses that year. Thus, by routing profits through low-tax jurisdictions and, simultaneously, accumulating expenses and recording losses in high-tax domains, News Corp. was able to greatly reduce its overall tax bill.
Israeli officials late last year went beyond merely studying News Corp. Tax authorities in Jerusalem and Haifa raided a News Corp. subsidiary in an investigation into whether the company had schemed to evade taxes on $150 million in income, according to published accounts. News Corp. has vigorously denied any wrongdoing.
While the case remains open, Siskind said his company "is very close to resolving this. The settlement will be small, and it will be done for its nuisance value." He said the company hopes to pay a settlement "in the low seven figures" to end the matter.
In the United States, Murdoch's machinations generally remain a mystery even to those who watch closely. "Wall Street doesn't have a handle on [Murdoch] for a lot of reasons," said Porter Bibb, an investment banker active in the media business. "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" -- except for meeting minimal disclosure standards required by stock exchange regulators.
Another longtime analyst, who requested anonymity, said: "No one on Wall Street is particularly knowledgeable about this [because] they do not allow us to look behind the curtain."
Some other multinationals adopt similar tax strategies, of course. For example, American drug companies for years reduced their U.S. taxes by assigning huge research costs to their American operations -- and huge taxable profits to tax-exempt subsidiaries in Puerto Rico and Ireland, according to Bob McIntyre of Citizens for Tax Justice, a Washington-based advocacy group.
IRS officials point out that U.S.-based companies face U.S. taxes on their offshore subsidiaries in the Caymans and elsewhere if more than 50 percent of the subsidiary is controlled by American shareholders. But that doesn't apply to News Corp., an Australian company.
As for playing by Australian accounting rules, the IRS said it would treat any effort by a U.S. company to reincorporate in Australia as a taxable transaction, exposing the company to a massive tax bill.
Spokesmen for Disney, Viacom and Time Warner declined to comment on Murdoch or News Corp.'s tax structure.
If information is power, then News Corp. easily ranks as one of the most powerful entities on the planet. No other media company can make the claim that Murdoch's company now does: that it will soon have the means to address more than 75 percent of the world's population simultaneously through satellite, broadcast and cable TV entities it owns wholly or in part.
That is in addition to News Corp.'s print properties, such as the book publisher HarperCollins, its highly profitable British newspapers, principally the Times of London and the tabloid Sun, and the Sun's American cousin, the New York Post.
This collection of media properties is the handiwork of one man, Murdoch, who has spent the past 45 years relentlessly acquiring, building and risking.
Today, Murdoch and his family control just over 30 percent of News Corp., though for practical purposes Murdoch is the company. As Richard Searby, a prep school chum of Murdoch's in Australia and later a director of the company, once noted: "Most boards meet to make decisions. News Corp.'s board meets to ratify" Murdoch's.
With its headquarters in Sydney, News Corp. traces its roots to predecessor firms that began in Australia in the late 1920s. Murdoch himself took over the company in 1953 from his father shortly after the elder Murdoch's death. His entrepreneurial beginnings were modest; the young Murdoch began with a single newspaper, the Adelaide News, located in a small city in south Australia.
Brash and ambitious, Murdoch struck out across Australia, adapting and refining his formula for newspaper success along the way: tabloid journalism mixed with big-money reader contests, heavy promotion and frequent photos of bare-breasted young women on Page 3.
Murdoch repeatedly plowed the profits from these newspapers into bigger properties. He expanded into the British newspaper market in the late 1960s, and made the leap to the United States with his purchase of the San Antonio Express newspaper in 1973 and the Village Voice and New York magazine in 1977. (All three properties have since been sold.)
Murdoch's first major foray into the entertainment business came in 1985, with his purchase of the ailing 20th Century Fox studio. The next year, after becoming a U.S. citizen, he bought his first six U.S. TV stations from Metromedia, including WTTG. Those stations formed the nucleus of the Fox network, which eventually challenged the longstanding dominance of ABC, NBC and CBS.
Lately, Murdoch has turned his acquisitive gaze to the heavens. With the recent success of his British-based Sky Television system -- whose immense start-up costs nearly drove News Corp. into insolvency in 1990 -- Murdoch has assembled a planet-girdling ring of satellite TV systems that nearly fulfill media theorist Marshall McLuhan's 1967 prophecy that TV would create a "global village."
Through joint ventures or direct investments, News Corp. has a stake in satellite TV systems in Japan, continental Asia, Great Britain, Europe and Latin America. It also has a pending deal to join with five major cable TV companies in a U.S.-based satellite TV venture, known as Primestar.
Along the way, Murdoch's corporate appetite has been aided by Australia's accounting methods, which some accountants consider among the most liberal in the world.
Though little understood by non-experts, cross-border differences in accounting methods can substantially alter a company's financial picture. In News Corp.'s case, the differences can also complicate comparisons between it and its U.S.-based competitors.
Last year, for example, when News Corp. publicly reported handsome earnings, the company was applying Australian accounting methods. But American "generally accepted accounting principles" (GAAP) produced the radically different result of a substantial loss.
Among other factors, U.S. GAAP would force Murdoch to reflect the value of his media assets at their cost, instead of permitting -- as Australian rules do -- News Corp. to reappraise its stations, trademarks and TV programs at a higher value each year. In addition, unlike Australian practice, U.S. rules would force News Corp. to write off, or amortize, some of the value of these holdings each year, thereby reducing News Corp.'s reported profit.
"The reason our accounting standards differ is because [American regulators] believe [U.S.] numbers give a truer picture to the investor," said Charles Heeter, a partner in the Washington office of Andersen Worldwide, a major accounting firm. "But the Australians would say theirs are perfectly valid, too."
News Corp.'s shareholder equity -- essentially, the company's net worth -- falls by nearly half the $16.7 billion it reported to investors in Australia once U.S. accounting principles are applied, according to SEC documents. The higher valuation is important because the greater the equity, the greater Murdoch's borrowing power. The extraordinary growth of News Corp. over the past dozen years has been fueled by Murdoch's heavy borrowing; at the end of the past fiscal year, the company had nearly $13 billion in outstanding debt and other liabilities.
News Corp. largely ignores the U.S.-derived results and emphasizes the more favorable Australian outcome in the company's most widely circulated public disclosures -- its quarterly earnings releases and its annual report. In the absence of internationally accepted accounting rules, this is a legitimate way for a foreign company to report results, according to U.S. and Australian financial analysts.
But these days, News Corp. is Australian primarily in the legal and historical sense. The company's U.S. holdings generated 70 percent of News Corp.'s revenue and 66 percent of its profit before taxes and other charges last year. Only 12 percent of News Corp.'s revenue and 5 percent of operating profit came from its businesses in "Australasia," which includes Australia, Asia, New Zealand and other Pacific island nations. Those statistics are disclosed in the company's annual report as well as a brief document sent to shareholders to satisfy U.S. SEC requirements.
News Corp.'s annual tax bite in the 1990s -- swinging between 1 percent and 8 percent -- is well below Australia's 35 percent corporate rate, as well as the rate paid by large U.S. competitors. In recent years, the company's taxable income has been offset by "tax-loss carryforwards" -- primarily credits saved up from losses made during the company's near-bankruptcy in the early 1990s. It is those losses, coupled with the creative use of offshore tax havens and international accounting rules, have permitted News Corp. to pay a fraction of the Australian rate, while minimizing taxes paid elsewhere.
The extent of News Corp.'s current tax shelter activities isn't publicly available. But as of June, News Corp. listed more than 60 subsidiaries incorporated in the Cayman Islands, Bermuda, the British Virgin Islands and the Netherlands Antilles, all nations that have low or no corporate taxes and limited financial disclosure laws.
Among others, Star TV -- the company's satellite TV service in Asia -- was incorporated half a world away in the British Virgin Islands. This was done, one former News Corp. executive said, primarily to shelter eventual profits.
Similar offshore entities were established over the years to minimize the tax liability in higher-tax jurisdictions, such as the United States, said the former executive who helped establish some of the subsidiaries.
"Rupert will never violate the law. He will not do anything unethical," said George Vradenburg, a former executive at Fox Inc. "But he will take advantage of all the rules allow. . . . Rupert is willing to take controversy."
News Corp.'s Siskind said, "Suffice to say, everywhere we do business, as large multinationals, we are subject to constant scrutiny by tax authorities. As far as I know, we have had no material assessments [for back taxes] in any of the countries in which we operate."