Cadbury tax adds sweetness to its results

CHALKIE - TIM HUNTER
Last updated 05:00 03/07/2013

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OPINION: Every good marketer knows you can't turn a whangdoodle into an oompa-loompa, but it doesn't stop some trying.

Chocolate maker Cadbury, for example, has co-opted the image of Willy Wonka's wee workers as it tries to rehabilitate its brand, seriously tainted by palm oil and product shrinkage.

The company's website and advertising is festooned with tiny purple people mixing rivers of chocolate on fantastical machinery, no doubt incentivised to relentless cheerfulness by bonus cacao beans for grinner of the month.

This is all well and good, but a happy marketing message can be undermined if a company doesn't walk the talk. In Cadbury's case, Chalkie reckons the oompa-loompas do rather jar with Cadbury's recent exposure as a whangdoodle of a tax avoider.

According to Roald Dahl's book, you may recall, whangdoodles eat oompa-loompas.

In a long investigative piece published two weeks ago, Britain's Financial Times revealed Cadbury's culture of aggressive tax avoidance before its acquisition by United States food giant Kraft in 2010.

Using elaborate - and apparently legal - schemes and networks of overseas subsidiaries in the Cayman Islands, Holland and Ireland, Cadbury cut its tax bill by almost 80 per cent over 10 years, the paper said.

As a former Cadbury executive told the FT: "Cadbury has been very aggressive on the tax side, which goes against what you would think about the reputation of the company from its philanthropic background."

Just so, but Chalkie can't help wondering whether Cadbury was as aggressive in New Zealand and if it still pays an unusually small amount of tax.

After scouring various public documents, Chalkie reckons the answers are yes it was, and yes it does. The first figure leaping into the foreground is the tax expense for Kraft Foods Investments (New Zealand), Cadbury NZ's owner, in the year to December 2012.

This number was $598,000, about 5 per cent of the company's pretax profit for the year of $12.2 million.

Had Kraft paid the standard rate its tax expense would have been $3.4m.

What about previous years?

At first glance it seems Kraft/Cadbury is in aggregate paying only a little less than the standard amount because its tax expense over the last five years adds up to $14m, about 26 per cent of its pretax profits of $54m.

A closer look tells a different story.

The vast bulk of the tax expense, $11.7m, occurred in one hit in 2010. That was the year the Budget changed depreciation rates on buildings, forcing many companies to book big expenses in their accounts because of the effect on their future tax obligations.

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The general impact was decried at the time by professional directors unrelated to Cadbury. Chalkie recalls Tony Frankham and Rob Challinor holding a press conference to complain about it, saying reported profits were being distorted by "a quirk of international accounting standards" and "many professional directors do not regard this accounting entry as a real liability in an economic sense".

Still, one of the companies affected was Cadbury, which booked a 2010 tax expense of $9.7m for the loss of a deferred tax asset on buildings.

Stripping that out of the numbers on grounds of its quirky unreality, Cadbury's five-year tax expense becomes $4.5m, or 8 per cent of pretax profit - an achievement that would surely have high-fiving tax advisers heading off to celebrate with raw fish and Krug at the nearest Japanese bistro.

Chalkie asked Kraft to explain why Cadbury appears to have paid 8 per cent tax in the last five years. In a statement it said: "We pay tax in line with the laws in all the countries in which we operate. However, we do not provide tax figures for any specific market."

In Chalkie's view, we can infer two things from this statement. One, it is indeed paying very little tax. Two, it doesn't want to talk about it.

Too much whangdoodle vibe, obviously.

Unfortunately, Chalkie is not clear how the more recent low tax bills were achieved. Kraft made use of standard lawful profit-lowering techniques such as related-party lending and royalty fees, but it doesn't explain the tax outcome.

The loan was $120m from Kraft in Australia at 7.15 per cent interest, producing a finance cost of $8.5m in 2012, while royalties and marketing fees totalled $10m.

Neither of those figures looks outrageously out of whack.

According to the accounts, the main tax-lowering effect was an adjustment for excessive tax provision in the previous year. Since the previous year's tax was also on the low side, we are looking at tax accounting beyond Chalkie's limited ken.

However, whatever was going on there it looks like something more exotic was happening in the years before Kraft bought Cadbury NZ for $200m, using a $120m related party loan and an equity injection of $80m.

Digressing momentarily, Kraft seems to have bought well - the purchase settled in January 2011 and within two years Kraft had extracted a dividend of $40m, equivalent to an annual dividend yield of 25 per cent. Nice.

But back to the tax thing.

Trawling through the books reveals some interesting structures in the Kiwi corner of Cadbury's empire, although their place in the global jigsaw can only be guessed at.

For example, finance for Cadbury NZ, and possibly other parts of the group, was channelled through a pair of New Zealand trusts ultimately owned by Cadbury in the UK, via Holland - Landrew Holdings Trust and Teming Investment Trust.

Landrew Holdings appears to have got its money through borrowing $215m, of which about $142m came from Cadbury Schweppes Finance in Australia and about $73m came from Cadbury NZ, the latter interest-free.

Landrew used the money to buy units in Teming Investment Trust, which loaned the money back to Cadbury Schweppes Australia and Cadbury NZ, the latter at about 8 per cent interest.

The ultimate effect of this money-go-round is not obvious, but one effect looks clear enough - Cadbury loaned money interest-free and then borrowed it back with interest. It's hard to see the commercial benefit to Cadbury of doing that, but the process would appear to shift income from Cadbury to the trust.

There is more to the money-go-round though. For example, other accounts show Cadbury NZ was financed by borrowing from a subidiary called the Natural Confectionary Company, which itself was financed by an investment from Cadbury NZ of $53.1m.

Natural Confectionary Co seems to have used the money to acquire a 20 per cent shareholding in Irish company Seurat. The exact same sum was returned to it by Seurat as a capital repayment in 2003.

Chalkie's head is spinning, but all this shuffling of assets and liabilities would seem to have little to do with making chocolate.

In an ironic twist, while all this tax minimising was going on Cadbury NZ received cash grants from the Government totalling $1.8m in 2007 and 2008 to help pay for a pilot plant and research in a joint venture with the University of Otago. According to the accounts the plant cost $813,000 and had a useful life of 10 years.

Why Cadbury NZ, which paid dividends of $30m in 2008 and $102m in 2009, needed $1.8m taxpayers' money to pay for a pilot plant is not clear. At any rate, the Government's encouragement of Cadbury did not produce anything positive in the short term, because in 2008 the company announced it was cutting 145 jobs at the Dunedin plant as it reorganised regional production.

Reports at the time said Cadbury's quid pro quo was an investment of $51m in Dunedin during the next 2 years, although Chalkie has scoured the accounts for signs of this investment and come up empty-handed.

What we have here, in the end, is a picture of corporate behaviour at odds with the image it is trying to project.

Sweet as? Yeah, right.

- BusinessDay.co.nz

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