Mr Murdoch's global paper-chase

Taxing the media: Magnate's advisers have gone to extraordinary lengths to minimise tax liability for his businesses' profits

MATHEW HORSMAN

and JEREMY WARNER

The 1995 annual report of News International (NI), part of Rupert Murdoch's global media empire and the owner of four national newspaper titles, is a drab and sparse document.

It serves up the bare legal minimum, a terse acknowledgement of the requirements for published audited accounts, and, to the untrained eye, a seemingly meaningless array of facts, figures, and accounting-speak.

Buried in the footnotes, however, is a statement of more than passing interest: "Due to the availability of tax losses, there is no UK corporation tax charge."

For a company which last year made profits of more than pounds 779m, this might seem a remarkable thing. But for NI, part of Mr Murdoch's News Corporation, and a key cash powerhouse, it is nothing out of the ordinary.

NI, publishers of the Times, the Sunday Times, the Sun and the News of the World, has paid little or no UK tax on its core activities for 10 years - and despite presently enjoying buoyant profits, does not expect to do so for some years to come.

An investigation by the Independent among filed News Corporation subsidiary accounts has uncovered a bewildering array of intra-group financial transactions, sometimes involving letter-box companies in offshore tax havens such as the Netherlands Antilles and the Cayman Islands.

The purpose of these transactions remains unknown - a closely-guarded commercial secret, shared only among a small group of Mr Murdoch's longest-standing directors and advisers.

A senior executive no longer with NI recounted that there was little unusual about executives and directors not knowing the purposes of these transactions. "These transactions were part of the larger company's dealings, and were directed out of New York."

In many cases, the principal activity of the companies involved, according to the accounts, is "the provision of finance to other group companies". Beyond that, there is no comment on their meaning and raison d'etre. NI declines to elaborate.

Frenetic periods of activity in subsidiary companies, sometimes late in the financial year, are followed by months of little movement. Loan stock changes hands; dividends are paid up the corporate family tree, merging into the consolidated accounts; loans are subscribed for in one currency, and then redenominated into another, as losses and profits are moved around the group in the interests of the corporate parent.

By shifting capital and loan stock, thereby generating profits and losses, NI can claim "group tax relief" sufficient, together with other tax techniques, to avoid paying any corporation tax in the UK.

The auditor of all these inter-related NI companies is the blue-chip global firm of Arthur Andersen, which helped devise some of the strategies with Mr Murdoch's tax lawyers and accountants. In the published accounts, Arthur Andersen confirms that the dealings meet normal accounting standards.

Since 1986, NI has made accumulated pre-tax profits of pounds 979.4m (net of the losses clocked up by satellite broadcasting companies Sky and BSkyB in their early years) but paid just pounds 11.74m in net tax, a rate of less than 1.2 per cent.

Corporation tax in the UK is set at 33 per cent, and most companies pay tax of between 20 and 30 per cent of profits.

The Telegraph group, for example, paid pounds 13m in tax on its pounds 45m profits in 1994, or a rate of 29 per cent. The Mirror Group (which owns 43 per cent of the Independent) paid pounds 17m on profits of pounds 84.7m in the year to 1 January 1995, or 20 per cent. United News and Media, owners of the Express titles, earned pounds 138m last year, and paid tax of pounds 40m, or 29 per cent.

NI's tax position looks even more favourable on a five-year view. In the years since 1991, the company recorded total profits of just over pounds 1bn, on which it paid tax of a net pounds 2.6m, less than a third of one per cent.

The cumulative net figures hide the wide range of profits, losses and taxes from year to year. In 1989, for example, NI paid pounds 9.1m in total tax (including deferred and overseas taxes) on profits of pounds 20m, or 46 per cent.

In the early 1990s, as the company's parent, News Corporation, teetered on the edge of financial failure, NI actually received tax credits - pounds 20.7m in 1990 alone, a year in which the company posted pre-tax losses of pounds 266m.

The profits recovery since 1992 has been dramatic. From just pounds 48m that year, profits rose to pounds 161m in 1993 and pounds 361m in 1994. In the year ending 30 June 1995, profits soared to pounds 779m, of which pounds 400m came from the one- off gain from the sale of shares in BSkyB.

While profits have recovered, tax paid has remained virtually non-existent. In part, this is explained by the entirely normal use of past tax losses and capital allowances. However, available tax losses fail to account for the scale of the tax holiday now being enjoyed by Mr Murdoch.

NI's 1994 accounts report the company as having pounds 300m of past tax losses to carry forward against future profits. By the end of the following year - the year to June 1995 - some pounds 50m of this "tax loss" fund had been used up. Of itself, however, this cannot account for the fact that the company paid only pounds 8.3m of tax on its pounds 779m of profit that year.

News Corporation, Mr Murdoch's Australian-based master company, has been in dispute with tax authorities in at least three jurisdictions - Australia, the UK and Israel.

All told, News Corporation, which includes NI, pays very little tax on its huge global operations. In the year ending 30 June 1995, News Corp had operating profits of A$1.4bn, and paid tax of just A$143m, including tax on abnormal items. The year before, profits totalled A$1.36bn, while the tax bill was just $A67m. Tax paid has averaged at just 10 per cent of News Corp's profits.

Asked for comment on the detail of its labyrinthine financial transactions, NI issued the following statement: "It is our policy not to comment on financial or tax matters outside the normal course of publishing the company's accounts.

"For the record, the company has complied fully with its obligations under all tax laws to which it is subject. including those of the UK.

"In the past, the company's tax returns have been audited by the Inland Revenue on a regular basis."

A favourite vehicle for NI's tax arrangements is News Times Holdings (NTH), an "off-the-shelf" company set up in 1991 by Allen and Overy, a City law firm.

On 14 March 1994, NTH paid pounds 1.48bn for News Publishers, a Bermuda-registered shell company also owned by News International. It is not revealed what assets or operations were worth that kind of money, or why NTH should be buying a Bermuda-registered company owned by its parent. NI has declined to elaborate.

Intriguingly, the transaction was financed by a loan issued by NTH and payable to News International. In the remaining four months of the financial year, News Publishers made a dividend payment of pounds 425m to NTH, which in turn passed it up to News International.

In that year, News International had a declared retained profit of pounds 349m, after receiving "other investment income" of pounds 410m and paying out pounds 324m in interest and similar charges on which tax relief is available.

Past directors of NTH contacted by the Independent could not recall much about the details of the company for which they were responsible.

Eleanor Rogers, former assistant company secretary, "can't recall" what assets were held by NTH, of which she was a director. Steven Brown, who worked until recently for News Datacom, could not specify the activities of NTH, of which he had been a director. "It was set up as a holding company to hold investments," he said. "I don't recall what those were."

Revealed: The anatomy of a Murdoch transaction

31 May 1991: News Times Holdings acquires two discounted loan notes receivable with total face values at maturity of A$635m, issued by a fellow News Corp subsidiary

31 May 1991: NTI issues interest-bearing loan of A$565m to cover the value of the notes at the time of the purchase, net of unamortised discounts.

6 June 1991: loan note redenominated into sterling, giving a face value of pounds 253m, and creating a foreign currency exchange loss of pounds 5.3m, taken into profit and loss accounts.

26 June, 1991: NTH acquires 100 per cent of associated company News Notes Ltd.

29 June 1991: NTN assigns the two Australian loan notes to News Notes. In exchange, News Notes issues interest-bearing loan note of pounds 265m, the sterling value of the notes on that date. A profit of pounds 16m arises from the $A-sterling rate.

30 June 1992: News International makes a "capital contribution" of pounds 36m to NTH, which in turn contributes pounds 46m to News Notes, itreating this investment as written off.

30 June 1992: Year-end results reveal interest income receivable of pounds 34m (arising from the News Note loan stock), interest payable of pounds 34m and a provision of pounds 46m to cover the capital contribution to News Notes. Factoring in pounds 10m in foreign exchange gains, NTH had a loss for the year of pounds 36m, arising from the shuffling of the loan notes, the write-off of pounds 46m and the "capital contributions" between subsidiaries.