Xstrata cornered by tax office for loading local debt GLOBAL miner Xstrata was subject to a lengthy investigation by the Australian Taxation Office after using its Australian arm to make a debt-fuelled $19 billion acquisition of Canadian nickel miner Falconbridge six years ago. It is understood the ATO subjected Swiss-based Xstrata (which was this month taken over by its major shareholder Glencore) to heavy scrutiny over the acquisition and related-party transactions of Australian, Canadian, Caribbean and Middle East subsidiaries to do the deal, and the use of legislated Australian investment incentives. The investigation, which ended this year under confidential terms after the mining giant was found to be compliant with tax laws, came ahead of this week's federal budget crackdown on multinationals loading local subsidiaries with debt to reduce tax. Government officials have privately pointed to one of the drivers of the budget crackdown being a European domiciled company with Australian operations using its local subsidiary to make a North American acquisition. There has been no confirmation from the company or the government that the Falconbridge acquisition helped drive the budget decision to tighten thin capitalisation rules to limit multinationals' local debt levels. Tax experts said the move to tighten the regulations was in place before the only public airing of the Xstrata dispute -- a Federal Court case over a $259m Xstrata tax deduction claim knocked back by the tax office. The Gillard government has said it is "closing down loopholes and abuses (that) take advantage of design flaws, vulnerabilities and unexpected interactions from earlier Howard government changes to the corporate tax system." These include reducing the amount of debt multinational subsidiaries can hold, and therefore the amount of interest they can claim against their earnings in Australia, which has a higher tax rate than many other jurisdictions. Information technology giants Google and Apple have come under fire from the government because of the relatively low levels of tax they have paid in Australia compared to their revenues. Industry opponents of the moves say the changes are weakening Howard government incentives that encouraged investment, including ones Xstrata took advantage of that encouraged it to set up the head offices of its global coal and copper businesses in Australia. Neither Xstrata nor the tax office would comment on the broader investigation or the associated court case, which focused on a $259m tax deduction claim Xstrata made for foreign exchange losses. That case, which went to court last year, was withdrawn in March. It is believed that happened after Xstrata backed down. There is limited public information on how Xstrata organised its subsidiaries to fund the Falconbridge deal, which at its parent level involved the company taking on a $US9.5bn debt facility. However, Federal Court documents filed by the Tax Office show a series of complex related transactions between Xstrata subsidiaries based in Australia, Canada, Switzerland (Xstrata's home base), Aruba and Dubai were involved in completing the acquisition. This included the mining giant's Australian arm Xstrata Holdings (which runs Xstrata's copper business) lending its own Canadian-based subsidiary $C13.56bn. Xstrata Holdings was then owed $C4.72bn from its parent company, with the rest offset against amounts owed by Xstrata Holdings to Xstrata. The court case came after Xstrata filed a 2011 objection with the ATO, claiming a foreign exchange loss of $259m on the $C4.72bn it was owed by its parent company. It is not clear whether Xstrata would have been forced to structure the deal differently, or would have paid more tax, had the new budget measures been in place.