Royal Gold's Swiss Tax Holiday

Issue 141, September 2015

Continued from Page 1

...equal to 14 per cent of his holding.

Switzerland

But a second factor, tax, is also driving Royal Gold's anxiety to gun money out the door.

The majority of its royalty and streaming revenue is earned on mines outside the US, so rather than funnel cash through its corporate accounts in Denver, the company can divert payments through a wholly-owned subsidiary, RGLD Gold AG, which is domiciled in a bland looking concrete office block in the Swiss city of Zug.

Described as “tax-light” by The Financial Times, Zug houses more companies than people. It is seen by tax experts as “a badland” for commodity traders, where transparency is minimal and rates can be negotiated behind closed doors.

0.5 per cent

According to one source, which Royal Gold declined to verify or deny, the company has negotiated a tax rate in Zug below 0.5 per cent. On top of flat Swiss federal rates of 8.5 per cent, its total tax bill in Switzerland is less than 9 per cent.

And increasingly, the company is reshuffling its cash flow away from the US. All its deals this year have been structured through Zug and in July, it swapped a US-taxable royalty over Teck's Andacollo copper mine in Chile for a larger Swiss-structured stream. Its overall tax bill has meanwhile obligingly dropped from $64m in 2013 to $19m last year, equal to an effective tax rate of 23 per cent.

Silver Wheaton paid zero tax in 2014, but was recently clobbered by a $265m fine for alleged underpayment, whilst Franco-Nevada paid 32 per cent in its last full year. Seemingly, Royal Gold is operating under a large tax advantage, allowing it to pay more fully for assets and land the biggest deals.

Deferred Bill

But is the company storing up a problem for itself, by signing agreements inflated by low levels of tax?

Royal Gold is in good company when it comes to US corporates holding money offshore. From Apple, MasterCard and eBay to Citigroup and General Electric, an estimated $1.95 trillion falls into the same bracket, with tech groups and drug companies the biggest culprits.

Offshore profits are only exempt from US tax if they are “indefinitely reinvested” offshore, blocking companies from using the money to pay dividends, buyback shares or strike deals in the US, which would be clocked with a tax rate of 35 per cent.

Buying Binge

One solution adopted by eBay was to splurge money on experimental acquisitions outside the US, spending $4.6bn over ten years in a dizzying spell of deals, everywhere from Turkey and Luxembourg to Spain.

Recent big-ticket deals by Royal Gold in Ghana and Macedonia, jurisdictions that would look out-of-place in Silver Wheaton's portfolio or Franco's, suggest it may be following a similar, tax-driven model. eBay's buying binge however only added to its treasury overseas and the company finally decided to cop a $3bn tax bill last year, by repatriating $9bn of cash.

As one buy-side analyst puts it, in the long term, Royal Gold's tax advantage may not be an advantage after all. But one group of companies is definitely benefiting: mine operators offered a lofty sounding deal by Royal Gold's Swiss office should jump at the terms, because the group's tax tailwind may one day change course.

CORRECTION: Silver Wheaton's fine for alleged underpayment, which is under contest, corrected in paragraph 7 from $567m to $265m.

“The mills were turning… but slowly.”

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