It appears management experts Boston Consulting have managed to burn off millions in tax by paying large whacks to “consultants”, possibly themselves. Luke Stacey investigates how the US consultants have been trying to trick the Tax Office.
Heard the one about the multinational management firm that looks like it can’t manage itself – paying out millions to someone by way of management fees? You may not have heard about them, but it appears as though the ATO has been having a close look.
Could it really be that The Boston Consulting Group Pty Ltd – head Australian entity of one of the world’s Big Three management consultancies – has forgotten the art of consulting when it comes to its in-house operations?
One would hope not given BCG was awarded a $3 million contract to review the Defence Department’s naval shipbuilding projects including the $90 billion future submarine project, as well as tenders worth millions of dollars to advise the Morrison Government on Australia’s ‘gas-led recovery’. BCG was also the consultant for the debacle that was the covidsafe app.
It all depends on which story you happen upon in its 2020 financial accounts. For BCG, a $37.5 million expense – down from $68 million in 2019 – is either a management fee, a stock option or a global partner performance bonus. Well, which is it?
It’s worth figuring out given these management fees reduced its taxable income from over $96 million down to $28 million in FY19 – creating a tax benefit of roughly $28.8 million.
Wild goose chase
Upon first inspection, it would seem BCG would rather keep the nature of these fees to themselves, as it directs the reader to Note 3 in the accounts, which merely re-state the expenses shown above with no further explanation.
There is an explanation, however, though you would be hard-pressed to find it. The breakdown for the management fees is outlined in Note 25 on the final page of the accounts – a note not previously referred to as part of the company’s expenses, or anywhere else in the report for that matter.
If Note 25 details BCG’s management fees, why does it refer the reader to Note 3 instead?
According to Note 25:
BCG (ultimate holding Company) has issued a variety of stock options and restricted shares to its employees, including certain employees of its subsidiaries. The total expense recognised by the entity in respect of this plan is $37,496,980 for year ended 31 December 2020 (2019: $68,106,550).
BCG ANZ reimburse BCG (ultimate holding Company) for the administration and costs associated with this plan and therefore is recognised as an expense in BCG ANZ.
This still does not tell the full story, however, as the breakdown of ‘employee benefits’ in Note 1(n) of the financial report states that the Australian entity “has no control over determining the number of options to be issued”.
Further, “the terms of the agreement (with) the Parent Company (in the US are) entitled to be reimbursed for all costs incurred in administering the stock option plans for the benefit of Australian employees. The expected costs are accrued in the books of the Company as a management fee”. Here, these same management fees are referred to as a ‘global partner performance bonus’.
This one expense now holds three different titles: management fees, stock options and global partner performance bonus. Is there a hidden benefit to this wordplay and the fact that the same story is told three different ways?
At the very least, we can rest assured that the consultancy firm in Australia hasn’t forgotten how to manage itself, rather it is reimbursing its parent entity in the US to receive exclusive stock options.
What’s more, the price of this murky reimbursement is entirely in the hands of the parent company; like a magical tap that it can turn on and off and disguise under three different names.
And, we respectfully ask, could this have anything to do with the fact that there is no withholding tax on fees you might pay your US parent?
Cracking the whip
Considering this obfuscation around the company’s second-largest expense behind employee benefits, it is no wonder the ATO might be concerned and has decided to have a look at BCG’s head Australian entity.
How do we know this? The cash flow statement shows that in FY19, BCG was hit with a $36.3 million tax bill from the ATO.
Quite the fee considering ATO tax transparency data dating back to FY 2013-14 shows BCG reduced its taxable income to $0 between 2013-14 and 2015-16, a mere $70,000 in 2016-17 and $8 million in 2017-18.
The $36 million is also significantly out of line with what the company expects it will pay in income tax ($9 million in FY19 and $3.8 million in FY20).
Considering BCG has some catching up to do with its poor track record in paying tax, could this be a back payment for previous years?
In keeping with past trends, the financial account provides no explanation for the anomalous tax bill – or for anything related to the cash flow for that matter – except to merely acknowledge that this amount was actually paid in tax.
Nevertheless, is this a sure sign that the ATO is clamping down on a known tax dodger, coupled with the fact that the US parent for BCG cut the infamous management fees (stock options) from $68 million to $37.5 million last year?
Perhaps, although with the drop in management fees came an almost 1:1 rise in executive bonuses between 2019 (right) and 2020 (left):
Even though BCG’s Australian entity has no control over the price of its management fees, can the same be said for issuing executive bonuses which more than doubled over one year; a year that involved a global pandemic?
It is no coincidence that these increased bonuses pick up the slack for reduced management expenses as they go towards maintaining its taxable income to a tidy $13.8 million.