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Liberty steers F1 around the tax man

NEWS STORY
23/01/2017

Regular readers of this website may remember an article from November about a report on ITV's News at Ten which revealed that F1 paid just $6.5m in tax on profits of $463.6m last year. John Malone, chairman of F1's incoming owner Liberty Media, described it as a "great structure" whilst Liberty's boss Greg Maffei said the tax arrangement is "attractive". An article in the Guardian by Christian Sylt has now revealed that Liberty liked it so much that they copied it in America.

To recap, the tax trick under F1's bonnet involves huge internal loans being given by the sport's offshore parent companies to their UK-based subsidiaries.

The UK companies make the vast majority of F1's money from race hosting fees, television rights, sponsorship and hospitality ticket sales so they should have a turbocharged tax bill to pay. However, every year they have to pay huge amounts of interest on the loans they get from their parent companies. As this interest is a cost to the UK companies they are driven into a loss and pay very little tax. Their profits are wiped out by the interest payments which end up in the bank of F1's parent companies and as they are offshore no tax is charged there.

In summary, the loans are moving from one hand to the other as both the UK companies and their offshore parents have the same owners. The loans are used to shift F1's profits from the UK - a country with a high tax rate - to one where no tax is charged.

It explains why F1's tax rate (based on the amount of tax it actually paid) came to just 3.3% over the past decade even though the standard rate in the UK is 20%. F1 has done it through a perfectly legal manoeuvre, indeed, the UK's tax man has signed off the amount of loan interest that F1 can deduct from its profits to reduce its tax bill.

The amount varies from around 70% to 127% which was signed off by the UK tax man in 2011 meaning that F1 actually had more interest to deduct than it had profits. It made it as good as impossible for F1 to pay tax and its bill was largely based on the small amount of profit it made in countries outside the UK. It is why F1 paid a total of just $3.8m in tax on $474.4m of profit in 2011. It left Liberty fawning.

"F1 has done a wonderful job in terms of creating a structure that is extremely tax efficient," said Liberty's chief corporate development officer Albert Rosenthaler, last year.

In an interview with business channel CNBC Malone boasted that "it's a great structure. It's a great tax arrangement." It was a staggering thing to say as heavyweight executives rarely praise tax avoidance schemes in public for fear of the impression it could give, especially in these tough economic times.

But Liberty didn't just boast about F1's tax avoidance scheme, it has copied it and told the world about it.

Liberty is listed on the Nasdaq stock exchange in New York and registered in the US state of Delaware so one would have thought that the tax game would now be up. After all, when F1's parent company pays profits to its new owner in America the money should get taxed there. Not according to Liberty.

"We have managed to do the transaction in a way that will permit an efficient repatriation of money back to the US without incremental tax for many, many years," said Rosenthaler last year. "We will be able to repatriate cash to the US in the future to the extent that seems to make sense with no additional taxes." Yes, you read that right.

If only we could all be so lucky. It's a strong statement to make and is one which some might call putting one's head above the parapet. One assumes that Liberty must be absolutely sure its scheme is watertight to start crowing about it in public so how could it pull it off?

A possible clue comes from Rosenthaler's comment that "we do not believe there is any incremental tax on the repatriation of earnings back to the US. We've been able to replicate their structure."

Liberty may indeed have copied F1's UK tax structure in the US just as Rosenthaler said. If Liberty directly owned F1 it would be paid by the sport's parent company and when the money arrived in the US it would be taxed. When a company makes a payment to its owners it is known as a dividend but that's not the only way to get money out of a business. If a company is lent money it has to pay the loan back along with interest and it just so happens that there is no corporation tax on interest in Delaware where Liberty is registered.

Company documents show that Liberty Media itself is not directly acquiring Delta Topco. Instead it is being bought by Liberty's indirect wholly-owned subsidiary Liberty GR Cayman Acquisition Company, which is based in the tax haven of the Cayman Islands. It will need money in order to make the purchase and if this comes in the form of a loan from Liberty the interest on it will need to be paid to Liberty.

When F1 pays a dividend it will be received by Liberty GR Cayman which would itself have to pay loan interest to its ultimate parent Liberty in Delaware where it would not be taxed. The profit from the dividend received by the Cayman company would be wiped out by the interest payment to Liberty in Delaware where it would not be taxed. The net result would be that F1's profits would end up in Delaware without any tax deducted just as Rosenthaler said.

Whatever the method, it reveals Liberty's true colours. It's not buying F1 for altruistic reasons as some have suggested. It's in it for the money. Indeed, it says a great deal that Liberty has copied the tax avoidance scheme set up by F1's previous owners the private equity firm CVC. Then comes the fact that Liberty reportedly hopes to introduce a budget cap, just as F1 tried several times under CVC. There is even talk of Liberty moving F1 on to more pay television channels to make even more money. That doesn't mean to say it will have an easy ride with all this.

F1's agreement with the UK tax man expires at the end of this year and it remains to be seen how much interest the sport will be allowed to deduct from its future profits. As if that wasn't enough, in April changes to UK law will limit the amount of interest which can be deducted at 30% of profits. It is a quarter of the 127% level which F1 peaked at in 2011. The effect is that F1 should pay more tax in the UK meaning that its profits reverse leaving it with less to pay to Liberty.

In November ITV calculated that if this formula had been applied in 2015 F1's tax bill would have accelerated around ten-fold from $6.5 million to $64.9m. It reflects comments in F1 company documents that "the new rules could reduce significantly the amount of Formula 1's interest expense that qualifies as tax deductible. These changes could adversely affect Formula 1's financial results and position."

Rosenthaler is more bullish and says "there are some changes on the horizon, broader changes from the UK perspective that will have a modest increase in the amount of taxes going forward once those become law. But we think the structure is going to remain extremely efficient."

Liberty's shareholders must have their fingers crossed that he is right.

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