The Singapore Shuffle

BHP runs a marketing hub in Singapore. So does Rio Tinto. So does Glencore. So does Chevron. The structure is similar for all of them. The Australian subsidiary extracts the resource. The Singapore subsidiary sells it to the world. The price between the two is set by the company.

How it works

The mechanism is called transfer pricing. It is a standard practice used by multinational companies in every industry, not just mining. An Australian mining subsidiary sells iron ore, coal, or gas to a related Singapore entity at a price the company sets itself. That Singapore entity on-sells the commodity to the actual buyer at the market rate.

The difference between the two prices is profit. That profit is booked in Singapore, where the corporate tax rate on qualifying trading income sits between 0 and 5 per cent. The Australian corporate tax rate is 30 per cent.

The gap between those two rates is the incentive. A company moving $1 billion in profit from the 30 per cent column to the 5 per cent column saves $250 million in tax. The resource came out of Australian ground. The profit landed in a Singapore ledger.

BHP: $529 million

BHP operated its Singapore marketing hub for at least 15 years. The Australian Taxation Office investigated. In 2018, BHP settled for $529 million, covering the period from 2003 to 2018.

The settlement related to the prices BHP’s Australian operations charged its Singapore subsidiary for iron ore. The ATO argued the transfer prices were below market. BHP argued they were not. The settlement resolved the dispute.

In 2020, BHP lost a separate High Court case over related issues. An additional $125 million tax bill followed.

Both matters were settled without admission of fault.

Rio Tinto: $1 billion

Rio Tinto used a similar structure. Its Singapore marketing hub purchased Australian iron ore and aluminium from Rio’s Australian subsidiaries and on-sold to customers in Asia and beyond.

In July 2022, Rio Tinto settled with the ATO for approximately $1 billion including penalties and interest. It was one of the largest tax settlements in Australian history.

Rio Tinto’s settlement covered years of disputed transfer pricing. The company did not admit fault.

Rio Tinto is 95 per cent foreign-owned. Chinalco, a Chinese state-owned company, holds 14.55 per cent, making it the single largest shareholder. When Rio’s Singapore hub booked profit at lower tax rates, the benefit flowed to a shareholder register dominated by foreign institutions.

Chevron: the loan that cost $340 million

Chevron used a different version of the same mechanism. Instead of selling commodities to itself at a discount, Chevron lent itself money at a premium.

The company arranged a $2.5 billion intercompany loan from a related entity to its Australian subsidiary. The interest rate on that loan was higher than what Chevron could have borrowed at on the open market. The Australian subsidiary paid the higher interest. Interest payments are tax-deductible. Higher interest meant lower taxable profit in Australia.

The Federal Court ruled against Chevron in 2017. The court found the interest rate was not arm’s length. The tax bill was $340 million. Chevron did not appeal.

This case established in open court that the ATO could challenge related-party financing arrangements where the terms shifted profit out of Australia.

Glencore: still running

Glencore moved approximately $30 billion of Australian coal revenue through Singapore-based structures. When the ATO came looking, Glencore tried to suppress the documents.

The ATO audit has been running since 2015. It is still ongoing. Glencore has not settled. No admission of fault has been made because the case has not concluded.

Glencore is over 90 per cent foreign-owned. It is domiciled in Switzerland. When Australian coal revenue routes through Singapore before reaching the Swiss parent, the Australian tax base shrinks at two steps: once at the Singapore booking, once at the Swiss domicile.

The pattern

Four companies. Four structures. One mechanism. Set the internal price so that profit lands where the tax rate is lower. The resource comes from Australian ground. The company sets the internal price. The profit is booked in Singapore at 0 to 5 per cent tax.

The ATO has recovered roughly $1.5 billion from BHP and Rio Tinto combined. That represents what the tax office assessed as underpaid. It does not represent what the companies may have saved over the years the structures operated before the ATO reviewed them. The settlements cover specific periods. The structures may have run longer than what was audited.

All four settlements and judgments were made without admission of fault. The companies agreed to pay. They did not agree that they had done anything wrong.

The Other Side

Transfer pricing is a standard global business practice used by multinationals in every sector - technology, pharmaceuticals, finance, and resources alike. Companies are entitled to structure their affairs within the law as it exists.

Singapore actively courts these marketing hubs as part of its economic policy. Australia agreed to the bilateral tax treaty that enables this structure. The treaty was negotiated and signed by both governments.

BHP and Rio Tinto both paid the settlements and restructured their marketing operations afterward. In both cases, ATO enforcement produced results - large sums were recovered and the structures were changed.

The companies involved have stated they complied with Australian tax law as it existed at the time. Transfer pricing rules involve judgement calls about what constitutes a “market” price for commodities sold between related parties in different countries. The ATO and the companies disagreed on where that line fell.

Settlements without admission of fault are standard legal practice in tax disputes globally. They resolve disagreement without requiring either side to concede that a law was broken. They are not, by themselves, evidence of wrongdoing.

The Way Forward

The cases above show that the current system relies heavily on after-the-fact enforcement. The ATO must audit, investigate, and litigate to recover revenue that may have shifted offshore. There are structural changes that could reduce the need for that enforcement cycle.

• Renegotiate the Australia-Singapore tax treaty. The current treaty enables profit shifting through Singapore marketing hubs. A renegotiated treaty could include provisions that allocate taxing rights differently for Australian-origin commodities.

• Require advance pricing agreements for major resource exporters. An advance pricing agreement (APA) is a binding agreement between a company and the tax office on what transfer prices will be acceptable, agreed before the transactions occur. This removes ambiguity and reduces disputes.

• Strengthen country-by-country reporting requirements. Require detailed public disclosure of where profit is booked, where revenue is earned, and where tax is paid for all large resource companies operating in Australia.

• Mandate transparent benchmark pricing for Australian resource sales. Require that intra-group sales of Australian minerals be priced at published, independently verifiable benchmark rates, removing the ability to set discounted internal prices.

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Sources

• ATO, “BHP Group settlement” (2018)
• Australian Financial Review, “Rio Tinto settles $1B tax case with ATO” (July 2022)
• Federal Court of Australia, Chevron Australia Holdings v Commissioner of Taxation (2017)
• Sydney Morning Herald, “Glencore’s $30B coal revenue routed through Singapore” (2021)
• The Guardian, “BHP loses High Court appeal over Singapore hub tax” (2020)
• Australian Taxation Office, “Tax transparency report” (2024)
• Federal Treasury, foreign ownership of Australian mining (cited in Lowy Institute analysis)