BHP has settled a longstanding dispute with the Australian Taxation Office (ATO) for $529 million, in relation to taxes it allegedly owed between 2003-18.

Key points: ATO deputy commissioner described the settlement as "a fair and reasonable outcome"

ATO deputy commissioner described the settlement as "a fair and reasonable outcome" All profits from the sales of BHP's Australian-owned commodities will be taxed in Australia in future

All profits from the sales of BHP's Australian-owned commodities will be taxed in Australia in future Rio Tinto also being investigated for allegedly shifting profits through Singapore

The mining giant said it had already paid $328 million of this amount, in response to amended tax assessments.

As part of the settlement, the company will not admit it engaged in tax avoidance.

The "transfer pricing" dispute relates to the amount of tax BHP owed for selling its Australian commodities via its Singapore marketing business — or allegedly shifting its profits offshore.

Low-tax Singapore hubs

Singapore's corporate tax rate, at 17 per cent, is significantly lower than Australia's rates.

But the Singaporean rate which applies to companies like BHP, in recent years, has been legally reduced to almost zero — thanks to generous incentives from Singapore's Government.

Marketing hubs established by the mining giants allow for iron ore and coal to be dug up in Australia, then sold to the companies' own operations in Singapore, before they are subsequently sold with a high mark-up to China and other nations.

"The $529 million payable under the settlement is in addition to the more than $75 billion in Australian taxes and royalties that has already been paid by BHP over that same period," said BHP's chief financial officer Peter Beaven.

"The settlement provides clarity for BHP and the ATO in relation to how taxes will be assessed and paid on the sale of Australian commodities."

The ATO initially sought $661 million in primary tax from BHP.

But when interest and penalties are factored in, that takes the tax bill to more than $1 billion.

In a statement, BHP said from July 2019 all profits made from its Singaporean marketing hub — in relation to Australian commodities — would be "fully subject to Australian tax".

A 'landmark' outcome

ATO deputy commissioner Jeremy Hirschhorn called it a "landmark and precedential" outcome.

"While confidentiality provisions prevent us from commenting on specific details of the settlement, we are confident that a fair and reasonable outcome has been achieved for the Australian community," he said.

"However, the more important announcement is that going forward, BHP is coming within the ATO's 'green zone' for marketing hubs, and all the profits from their sale of Australian owned commodities will be taxed in Australia."

Rio Tinto is also being investigated by the ATO for allegedly shifting its profits through Singapore's lower-tax marketing hubs.

The company was hit with a $500 million tax assessment for the calendar years 2010-13 and said in October it plans to fight the case.