UK betting giant, William Hill, is selling out of its Australian gambling operation, this country’s biggest, while it is under investigation by the Tax Office, likely for dubious transactions exposed here.
The wagering and gaming industry loves nothing better than a big gambler losing millions of dollars on the punt, a punter who can be swung into “credit-betting” to keep the losses coming. Sometimes they go too far.
Few if any of this country’s gambling companies have ever had a bigger single debt than William Hill. According to industry sources, real estate impresario John McGrath is in debt to William Hill to the tune of $16 million, a debt racked up as the bookmaker pushed ever more credit to McGrath to keep his betting revenue turning over.
It has not engendered investor confidence, for a stock already beset by falling earnings. McGrath shares have almost halved on the ASX. But while William Hill has been prosecuting its campaign to strip licks of cash from McGrath, it has also been engaged in battle on another front: the Australian Tax Office (ATO).
And while the Tax Office is investigating William Hill the company is preparing to sell out of Australia having struck a deal with Canadian gaming company The Stars Group. Stars, for its part, has form on the tax avoidance front too, with its associates in Cayman Islands, Delaware and The Netherlands.
According to the last set of William Hill accounts:
“The Australian Group entered into discussions with the Australian Tax Office (ATO) in relation to tax affairs under the terms of the ATO’s “Early Engagement Process”. Subsequent to those discussions the ATO commenced an audit in 2016.”
While the company says it is “confident that its tax positions are sound” it still made a provision of £4 million “based on the best estimate of the likely outcome of the ATO audit”.
The accounts of William Hill Holdings Pty Ltd had showed a loan of £334 million ($580 million) from a company in Gibraltar called Steeplechase, as reported here three years ago; and the 5.79 per cent interest rate on the loan meant the group was extracting $40 million of profits offshore, tax free, each year.
Besides that, forensic accountant Jeff Knapp discovered a $55 million “black hole” in the financial statements and has said the British wagering giant had deliberating set up its operations in Australia to lose money.
Betting industry sources told michaelwest.com.au it appeared William Hill might be “fleeing the country while under ATO audit”.
“Also, their exit is likely to be on a tax-free basis which is very aggressive considering they have enjoyed the benefits of millions of dollars of tax deductions from sceptical financing arrangements over the past 5 years,” said a source.
As for the acquirer, The Stars Group has a highly geared balance sheet and has been aggressively acquiring businesses around the world and bumping up against the local laws in the jurisdictions in which they operate. They have also been using low tax jurisdictions to consolidate profits.
William Hill’s Uncertain Tax Liability Provision (UTP) is timed with the sale of the Australian business. Typically UTP’s are only recorded where there is an existing review or audit by a tax regulator or if a position adopted is a position that the tax regulator has published, in either a ruling or taxpayer alert, that will be subject to review or audit.
Meanwhile, it is speculative but the question should be asked; is it coincidental that William Hill is unwinding its provision while it is divesting its Australian business?
The latest results from head office in London:
“The Group’s tax charge was £8.6 million on losses of £74.6 million, giving an effective tax rate of minus 11.5 per cent (2016: 9.3 per cent). The rate is adversely impacted due to the non-deductibility of certain exceptional costs (principally the impairment of Australia goodwill) and benefits from a net release of provisions of £14 million in respect of prior year specific uncertain tax positions and a lower rate of tax on overseas profits. The forecast effective tax rate for 2018 is around 14 per cent.”
According to the note detailing subsidiaries in the William Hill Australia financial statements, the company owns an “LLP”. Financing arrangements involving LLPs are subject to ATO Taxpayer Alert 2016/3 Arrangements involving related party foreign currency denominated finance with related party cross currency interest rate swaps.
“It is likely that such financing arrangements involving LLPs create significant tax deductions as well as avoidance of interest withholding tax, and typically deductions greater than what the interest deductions would give,” said the betting industry source.
“The related party loan (Gibraltar), is likely to be capitalised before the transaction occurs, creating a mechanism to facilitate an Australian tax free exit for William Hill PLC, whilst all this time Australian interest deductions have been claimed.”
This loan, reported in the September 7, 2014 accounts has continually been capitalised into issued capital, likely to ensure interest denial (pursuant to the Australia thin capitalisation rules) is avoided.
The Stars Group is paying $804 million (including contingent consideration) for William Hill Australian and Crownbet. The majority of this has been paid via debt. It is likely this debt will be pushed into Australia to create significant interest deductions for the new Australian group.
The Stars Group operates through the tax havens of Malta, Netherlands and Isle of Man, and also has connections in the Cayman Islands and Delaware. There must be a high risk that profits from the Australian operations will be shifted to one of these low or no-tax jurisdictions.
The Canadians don’t even try to hide it. Their fourth quarter filings:
“The Corporation’s effective income tax rate for the year ended December 31, 2017, excluding prior year adjustments, was 2.03% (December 31, 2016 – 2.96%), significantly lower than the main Canadian corporate income tax rate. The main driver of this is that the Corporation primarily operates from the Isle of Man and Malta, which are jurisdictions with low corporate income tax rates”.
The group’s effective tax rate of 2.03 per cent is a fraction of the Canadian statutory rate of 26.7 per cent.
It is highly likely, given the brazen admissions of The Stars Group that these new owners of Australia’s largest betting shop will aggressively transfer-price their new profits to Netherlands, Isle of Man or Malta.
In December 2015 the state of Kentucky fined The Stars Group $US870 million for breaching the Unlawful Internet Gambling Enforcement Act (UIGEA). Kentucky alleged that Poker Stars had illegally provided gambling services to 34,000 Kentucky players between October 2006 – when the UIGEA was introduced – and April 2011.
The appeal against this fine continues costing both TSG and the state of Kentucky significant expense.
Russia delivers up to 12 per cent of the group’s revenue yet Stars does not hold a local license to operate in Russia. According to TSG, its online poker and casino products are currently available in Russia even though gambling activities in the country are restricted by law.
It has recently been reported that Russian authorities will be cracking down on illegal operators. In response to this, Stars has said, it had developed a “quite robust mitigation plan” to deal with whatever crackdown Russia’s digital enforcers might be prepping, drawing on the company’s experience with remaining operational in other markets that have imposed similar restrictions.
This clearly shows the group intends on working around the laws like it has done in other markets that have similar restrictions. This raises the question too of what regard Stars will have for local Australian laws which prohibit online poker, the main source of revenue for the company.
Further to the questionable benefits of this deal for Australia, The Stars Group CEO has been charged with insider trading. David Baazov is facing five charges “for aiding with trades while in possession of privileged information, influencing or attempting to influence the market price of the securities of Amaya Inc (subsumed by Stars) and communicating privileged information”
Three questions need to be answered:
1. What conditions will the Foreign Investment Review Board (FIRB) place around the transaction to ensure that Australian tax revenues are protected?
2. What measures can the ATO enact to ensure that any potential liabilities are settled by William Hill Australia prior to exit? How does the ATO and step in and make sure that this multi-national pays its fair share before leaving our shores.
3. Both William Hill and Crownbet are licensed by the Northern Territory Racing Commission (NTRC). The NTRC continually talks about integrity and probity to ensure operators are of a good standing. Will the Commission step in and challenge The Stars Group on its prior convictions or will meekly rubber stamp another multinational transaction?
I look forward to reading your thoughts on this issue, I’m sure you’ll agree there are number of concerns with the transaction that need reporting on.