Murdoch faces global tax inquiry, but Blair backs him

Move against tycoon as ministers prepare to defend his British interests in the Lords

A SECRET international task force of investigators has been set up to examine why Rupert Murdoch's News Corp pays virtually no tax. The unprecedented move against the Murdoch empire comes as ministers prepare to go into battle to defend the media baron's British interests.

An agreement to launch the inquiry, involving tax investigators from Britain, America, Canada and Australia, was reached at a secret meeting in Sydney in December. The authorities are concerned that Mr Murdoch's companies pay a fraction of the taxes paid by his competitors in the cut- throat media business.

At the same time, however, The Independent has learnt that Tony Blair has ordered total retreat from any government confrontation with Mr Murdoch over his aggressive pursuit of a price war in the newspaper industry.

Reneging on pre-election pledges, Labour peers have been ordered to oppose an all-party attempt to curb Mr Murdoch's power in a crucial House of Lords vote next Monday.

The amendment, tabled with all-party support from Labour and Tory peers, would outlaw, "any conduct on the part of one or more national newspaper undertakings ... if it may reduce the diversity of the national newspaper press in the United Kingdom by reducing, retarding, injuring or eliminating competition".

The amendment directly targets the predatory price-cutting operations of the Times; clearly designed to damage vulnerable or less wealthy competitors like The Independent and Daily Telegraph.

It is understood that the secret meeting of tax investigators was called by the Australian authorities, who have been unhappy about Mr Murdoch's level of tax payments since the 1980s. Although he renounced his Australian nationality in order to become a US citizen in the mid-1980s - allowing him to own American television interests - his company is still based in Australia.

Last year, while other international media groups, such as Walt Disney, paid up to 28 per cent of their income in tax, News Corp reported paying $103m (pounds 62.42m) on operating profits of $1.32bn (pounds 800m) world-wide - a rate of just 7.8 per cent.

In 1989, an Australian parliamentary investigation found that News Corp had routed all its profits through subsidiaries in low-tax countries like the Cayman Islands, the Dutch Antilles and Bermuda. By the time the money had finished its journey, a loss was recorded in Australia, greatly reducing its overall tax bill.

In the United Kingdom, News International, the UK arm of News Corp, which owns the Times, the Sun, the Sunday Times and the News of the World, recorded profits of almost pounds 1bn from 1985 to 1995. An Independent investigation showed that the group paid just pounds 11.74m tax - a rate of 1.2 per cent. At the time, corporation tax was levied at 33 per cent.

The avoidance methods used by Mr Murdoch's accountants are legal, but there is a political and moral groundswell of opinion which believes News Corp's tax burden should reflect its profits. "No one is happy with the way Mr Murdoch is behaving," said a source close to the investigation. "The [investigators] are querying whether he legitimately makes a loss or not. A plan has been put into place to tackle his empire."

However, unless taxation systems can be unified internationally, it is not clear what the authorities can do. News Corp's avoidance methodology involves inter-company loans, the use of subsidiaries in off-shore tax havens and the tax-relief granted on interest on loan repayments - some of which the task force will want to examine. All such methods, however, are quite legal.

"The problem the tax authorities have with Murdoch is that he has all the facts about everything in his empire but if you are an investigator in the UK, you can only find out about the UK business; if you are an investigator in the US, then you can only look at the US end," said the source.

"The purpose of this meeting was to break across that boundary and share information to try and match [the investigators'] knowledge with his."

All Labour peers have been ordered to vote against the Murdoch amendment on Monday, and Lord Simon of Highbury, the trade and competitiveness minister, has said that the Government will not depart from a European "model" on tackling abuse of market power. But Cabinet sources have told The Independent that the order had "come down" from No 10 that nothing was to be done to disturb or interfere with the newspaper proprietors. Margaret Beckett, President of the Board of Trade, has been told to maintain a "hands-off" approach.

If the official Opposition backs the Government, or abstains, it is unlikely that the Murdoch amendment can be carried in the Lords - or upheld in the Commons.

Leading article, page 18