4/14/2017 PrintArticle:Glencoretaxbillon$15bincome:zip,zilch,zero

Printthisarticle| Closethiswindow

Glencoretaxbillon$15bincome:zip,zilch,zero
MichaelWest
Published:June27,20148:04AM

NOTE:ReportsonthissitesaidthatGlencorehadpaidnoincometaxforthepastthreeyears.Thisisincorrect.
Thecompanyhasstatedthatitpaidmorethan$400millionincorporateincometaxinAustraliaoverthisperiod.
FairfaxMediaalsowishestoclarifythatthe$15billionpresentedastaxable"income"inthesestoriesrelateto
revenueandnottaxableprofits.

Australia'slargestcoalminer,Glencore,paidalmostzerotaxoverthepastthreeyears,despiteincomeof$15billion,asit
radicallyreduceditstaxexposurebytakinglarge,unnecessarilyexpensiveloansfromitsassociatesoverseas.

Atupto9percent,theinterestratesonthese$3.4billioninloansweredoublewhatthecompanywouldhavehadtopay
haditsimplyborrowedthemoneyfromthebank.

AsitwasclaimingtaxbreaksinAustraliaontheseinflatedinterestpayments,thesecretiveSwissbasedmultinational
actuallyincreaseditslendingtootherrelatedpartiesinterestfree.Thismayincludeitsexecutives.NobodyfromGlencore,
whichusedtobecalledXstrata,wasavailableforcommentdespiterepeatedrequests.

TheaggressivetaxavoidancetacticsofGlencoreCoalInternationalAustraliaPtyLtdhavebeenidentifiedinan
independentanalysisofthecompany'saccountsforFairfaxMediabyanexpertinmultinationalfinancing.

Alongwiththeblatantirregularitiesinitsborrowingandlending,thestudyalsofoundaheftyincreaseinGlencore'scoal
salestorelatedcompanies(upfrom27percentto46percentoftotalsales,withnoexplanation),indicativeoftransfer
pricingalsoknownasprofitshiftingandanactivitythatappearstobreachSectionIVAoftheIncomeTaxAssessment
Actthepartthatdealswithschemesdesignedtocomplytechnicallywiththelawbutwhose''dominantpurpose''isreally
toavoidtax.

''TherealityisthatthewholeoftheGlencoreXstrataGroupisnowrunasaseriesofbusinessunitscontrolledbyone
company(GlencoreXstrataPlc,incorporatedintheUK,listedontheLondonandotherstockexchanges),withits
registeredofficeinJersey(ataxhaven)anditsheadofficeisinBaar(Switzerland),''thereportsaid.

''ThetruthisthatGlencoreCoalInvestmentsAustralia'soperationsinAustraliaare,becauseoftheGroup'sbusinessmodel,
branchoperationsoftheSwissdomiciledparententity,whichusesthenowdormantlegalshellofanAustralianbody
corporateinanattempttohidetherealityofitsbranchbusinessinAustralia.

''Therealsoappearstobeanincreaseintransferpricingactivitywhichmayexplaindifferencesinrevenuesdisclosedinthe
Australianaccountsversusrevenuesreportedasbeingfromthesamesourceinthegroup'sconsolidatedaccounts.''

ThesourceoftheanalysisisaformermultinationalexecutivewhoisindependentofGlencoreanditscommercialrivals,
preferstoremainanonymousbutispersonallyconcernedattherampantlevelsoftaxevasionandtaxavoidanceby
multinationalsoperatinginAustralia.

ThefocusonGlencore'staxistimely.ResearchfromtheAustraliaInstitutethisweekidentified$17.6billionin
governmentsubsidiesandassistancefortheminingindustry.AsthethirdlargestresourcesgroupinthecountryafterBHP
andRioTinto,Glencoreisabeneficiaryofthislargesse.

Thefiguresearlierinthestoryrefermerelytothegroup'scoalinterests.Itsnickel,copperandzincassetsareofasimilar
sizetoitscoaloperationsanditspresenceinQueenslandwheretheAustraliaInstitute'sstudyhighlighted$9.5billionof
taxpayerassistanceisenormous.

Asisthetrendamongthenewwaveofdigitalgiants,suchasGoogleandApple.Multinationalsareincreasinglylikelyto
regardthepaymentoftaxinAustraliaasanoptionalaffair.Theramificationsforthecountry'staxbasearedire.

Glencoreisanextremecase:foundedasitisbyUStaxexileMarcRich,controlledfromataxhaven,andwithacolourful
historyasacorporatemaverick.

ItischairedbySwissbasedIvanGlasenberg,whoranksNo.5onBRW'srichlistannouncedthisweek,afterliftinghis
wealthby$1.01billiononthebackofGlencore'srisingshareprice.
http://www.smh.com.au/action/printArticle?id=5547456 1/4
4/14/2017 PrintArticle:Glencoretaxbillon$15bincome:zip,zilch,zero

Inthepasttwoyearsglobally,thiscompanyhaspresidedover53workplacedeaths,aworsesafetyrecordthanBHPand
RioTinto.

GlencoretakesoverXstrata

In2012thechiefexecutiveofGlencoreXstrataGroupPlc,IvanGlasenberg,announcedtherestructureofthecompanys
operationsinAustralia.Glencore,thecommoditytrader,wastotakeoverXstrata,themininggroupinwhichitalreadyhad
thecontrollingstake.

Thedealwouldthrowupannualsynergiesof500millionpounds.Sydneywouldbetheonlyremainingcorporateofficein
thiscountry.Severalotherswouldclose.Thecoalbusinessunit(GCIA)wouldshareofficeswithGlencore/Xstratasmetals
businessinAustralia.ThereweresavingstobehadbydoingawaywithduplicationofactivitiesinAustralianbusinesses.
Therewouldbejoblossesandsomefunctionsreplacedbyoffshoreserviceproviders.Asignificantproportionofsavings
shouldthereforebereflectedintheresultsofAustraliancoaloperations,youwouldthink.

WiththepresentheadofoperationsinAustraliaandoneofGCIAstwodirectorsPeterFreybergresponsibleforrolling
outthechanges,heshouldbeinapositiontoadvisehowmuchinsavingswasdeliveredtoGCIAsbottomlinein2013,
andtheforecastforfullyear2014.HewouldalsoadviseonthetaxeffectsofthemergerofGlencoreandXstrata.

Administrationanddistributionandsellingexpenseswerebothlowerin2013thantheir2012equivalents,buttaxexpense
alsowentdown.Thisispartlybecausevolumeswereupsotheincreaseincostofgoodssoldmorethanoffsetthereported
savings.Marketpricesweredownin2013sosalesrevenuewasdowntoo,butitisdifficulttoisolatehowrevenuemay
havebeenaffectedbythemassiveincreaseinthepercentageofsalesstruckwithrelatedparties.

Oftotalsalesof$4.3billionlastyear,almost$2billionweremadetorelatedpartiestootherGlencoreentitiesthatis.
Thisrelatedpartybusinessasaproportionoftotalsaleswas46percent,upfrom27percentintheprioryear.Itaccounted
forjust10percentoftotalsalesin2010.Herewasacompanywhosesalestoitselfhadmultipliedbyafactorofalmost
fiveinfouryears.

Meanwhile,theintegrationwasafootintopmnagementtoo.MarketingofGlencoresAustraliancoalhadbeenbrought
underthecontrolofTorPeterson,directorofCoal/CokeCommodityDepartment,GlencorePlc.PetersonisanAmerican
andoneofthesixinstantbillionaires(awardedafivepercentstakeinthenewcompanylistedontheUKbourse)tobenefit
fromGlencoresmergerwithXstrata.

HeisalsobasedinGlencoresheadofficeinBaar,Switzerland,andreportstoIvanGlasenberg,CEOoftheGlencore
XtrataGroup.PeterFreybergisGlobalheadofIndustrialforCoalandisbasedintheGatewaytowerinSydney.

FreybergisresponsiblefortheoperationsoftheCoalBusinessUnitandhealsoreportstoIvanGlasenberg.Theonlyother
directornowinAustraliaisEarlMelamed,alsobasedinSydney.HisfunctionalreportinglineisnowtoGlencoresCFO
StevenKalmin(awardeda1percentstakeinUKlistedGlencoreXstrata)whoisbasedinBaar,Switzerland.

BynowbothFreybergandMelamedarewellestablishedasreportingdirectlytotheirsuperiorsatGlencoresglobal
headquarters.Theircareersdependonit,sothereispotentialforconflictofinterestinrelationtotheirdutiesasdirectors
ofGCIA.Theyalsonowhavecrossborderauthoritydelegationsdirectfromtheirseniorsintheglobalcompany.

SydneyhasnowbeenreducedtothestatusofaBusinessUnit(Glencoresownterm)whichincludestheAustralianCoal
BusinessUnit.Giventhenewauthoritystructure,itseemstherealdirectorsoftheAustraliancoalcompaniesmayinclude
Glasenberg,PetersonandKalmin.ItmightalsoextendtoallmembersoftheboardofGlencoreXstrata(actingasshadow
directors).

Ifthisisthecase,itpotentiallyexposesthemtoobligationsimposedbyAustralianlegislation,onsafetyforinstance.Any
businessculture,includingworkplacesafety,emanatesfromthetop.Theboardisapparentlyadaptingsomepracticesused
intheAustraliancoalbusinesswhichhaveachievedgoodresultsinthepast.However,Glencorespeoplecomefroma
tradingbackground.Theyaretradersnotminers.PeterFreybergistheonlylocaldirectorinchargeofoperations.
Malamedisafinanceman.

TherolesofthesetwoasdirectorsofanAustralianbodycorporateappeartobenowmerelywindowdressingtocomply
withCorporationslaw.ThefactthatGCIAsdirectorscontinuetoberesidentsofthiscountryisprobablyalsoanindication
thatthegroupconvincesitselfthatitsAustralianincorporatedsubsidiariesarestilloperatingasbodycorporateswhich
satisfytheAustraliantaxresidencytest.

TherealityisthatthewholeoftheGlencoreempireisnowrunasaseriesofbusinessunitscontrolledbyonecompany
whichisincorporatedandlistedintheUK,registeredinJersey,andwithitsheadofficeinSwitzerland.Australiahas
becomebutabranch,orperhapsmoreaccurately,ithasbecomemoreofabranchthanitalreadywas.

GlencoreXstrataPlcsown2013annualreportdescribesitselfasanintegratedproducerandmarketer.Inanoperational
andfinancialsense,thiscompanyisevenmoreglobalisedthananoilgiantthelikesofShell,butlikeShellitscorporate
http://www.smh.com.au/action/printArticle?id=5547456 2/4
4/14/2017 PrintArticle:Glencoretaxbillon$15bincome:zip,zilch,zero

bordershavebeensweptaside.GlencoreXstrataPlcnolongeroperatesbehindcorporateveilsorglasspartitionsbetween
legalentities.TheveilsandglasspartitionshavebecomesotransparentthatlocaltaxauthoritiessuchastheATOareyetto
seethattheyaregone.

Theheadcompanyfinancialstatementsalsoprovideadescriptionofthegroupbusinessmodel.Notonementionismade
hereoflegalentitiesorevenofworkingwiththeboardsofthoseentitiestoachievetheobjectivesoftheglobal
managementteam.Theheadboardpayslittleheedatalltotheexistenceoflegalboundariesorsovereignjurisdictionsif
theyconstituteanuisancetoitscorporateobjectivesliketaxavoidance.

ThentherearethepolicystatementsregardingPrincipleofRisksandUncertainties.Thesefailtorecogniseanyriskin
themethodbywhichthisborderlessbusinessmodelhasbeenimplemented.Perhapstheyseelittleriskofanynearterm
actionbyauthoritiessuchastheATOorsuccessiveAustraliangovernmentstoprotecttheirAustralianrevenue.

Thereiscertainlynohintofanimpendingthreat.FinanceMinisterMathiasCormannwasbusysidesteppingquestionsthis
weekastowhyAustraliahadnotsigneduptoamultilateralantiavoidanceagreement.

Intragrouploans

The2013financialreportfortheGlencoremothershipgoesontosaythatgroupdebtfundingisarrangedcentrally,with
proceedsappliedtomarketingandindustrialactivitiesasneeded.ActivitiesareonestepbelowBusinessUnitsinthe
hierarchyoftheGlencorebusinessmodelthoughneitheriscapableofborrowing.Onlylegalentitieshavethecapacityto
borrow.

Thecommenthoweverillustratesthattheprocessofallocatingdebtisdirectedfromthetop.Nomentionismadeofthe
legalentitieswhichownandoperatethoseactivities.Noristherementionofworkingwithdirectorsoflocalentitiesto
ensurefundsprovidedarestructuredtobestmeetthecommercialneedsofeachlegalentityasappropriate.

ThereisnodoubtthatGlencorehasordereditsaffairsinthiscountrywithtopflightlegaladvice.Perhapsitisavailedof
themostexpensiveadviceavailable.Indeedtheworldoftoptaxlawyersandchieffinancialofficersisrarifiedandgrey,
evenarcane.Itisnotsomuchaboutrightandwrongbutaboutwhatmaybepossiblyestablishedasarguablyrightor
wrongaftersixweeksandmillionsofdollarsintheFederalCourt,andtheriskandthepriceofavoidingsuchacontest.

AndGlencorewouldrightfullycontendthatitisthedutyofdirectorstominimisetaxforshareholders.Thequestionis,are
theysailingtooclosetothewind,andshouldtheATObeatleastseemingtodosomethinginthefaceofaggressive
avoidance?

Inanycase,debtfundingoftheparententity,at51percent,isslightlyhigherthanthatofGCIA.UnlikeGCIAthough,
theparentdoesnotborrowtoprovidenoninterestbearingdebttoentitiesoutsideitsgroup.Nordoesitholdsuch
comparativelylargeamountsofcashandcashequivalents.

GCIAispaying8.25percentto9percentfixedratesonintragroupdebtthoughdisclosurefallsawayinthemostrecent
twoyearswhenitcouldborrowfromlocalbanksatlessthanhalfthatrate.Itclaimstaxreliefonitsinterestpaymentsbut
lendsalargeproportionofthatmoneytorelatedpartiesinterestfreeandalsoplaceslargeamountsondepositatnominal
floatingrates.

In2013,only75percentofborrowingsweredeployedinthebusiness,butinprioryearsthefigurehasbeenaslowas33
percent.Theamountsdisclosedasinterestintheincomestatementandcashflowstatementarenormallynearlyidentical.
However,inGCIAs2013financialstatementsthecashflowstatementshows$130millionmorehasbeensupposedlypaid
asinteresttorelatedpartiesthanwasbookedintheincomestatement.Therewasnoexplanationprovided.

Productsalestorelatedparties

GCIAdoesnotbreakoutsalesvolumesforthecoalitproducesinAustralia.Howeverthereissomeinformationavailable
intheparentsconsolidatedfinancialstatements.

TheparentalsoprovidesconsolidatedsalesrevenueforAustralianproducedcoal.Thesefiguresexcludeboughtincoal
(volumesacquiredbythetradingarmshouldexplainmostofthat),butcuriouslytheconsolidatedrevenuesdisclosedbythe
parentaremuchhigherthanthosedisclosedbyGCIA.

AustralianGroupvolumesshouldbecomingfromGCIA,sowhyistheGroupsconsolidatedrevenue,reportedas
Australiansourced,roughly50percenthigherthanthatdisclosedbyGCIA?Doespartoftheexplanationinvolvetransfer
pricing?askstheanalysisoftheaccountspreparedforFairfaxMedia.

Priorto2012,thelocalfinancialstatementsdisclosedCoalSalesCommissionspaidtoGlencore.Nodisclosureswere
madeineitherthe2012or2013financialstatementspreparedundertheinfluenceofGlencoreintheUKandSwitzerland
(thatis,followingthedecisionthatGlencorewouldmergewithXstrata).

http://www.smh.com.au/action/printArticle?id=5547456 3/4
4/14/2017 PrintArticle:Glencoretaxbillon$15bincome:zip,zilch,zero

In2012,salesfromwhatwasthenknownasXstrataCoalInvestmentsAustraliatorelatedpartiesincreasedfrom16per
centoftotalsalesto27percent.In2013therenamedGCIAsalestorelatedpartiesincreasedagainto46percentoftotal.
Glencoreanditssubsidiarieswererelatedinbothyears.Theincreaseseemstobeareflectionofthelevelofinfluencethat
TorPeterson(andpossiblyIvanGlasenberg)hashadonthemindandmanagementofGCIAgiventheGroupsdesireto
growthemarketingsideofthebusiness,saysthereport.

Whiletherearespotpricemarketsforcoal,mostminesinitiallyrequiresecurityofofftakecommitmentsbeforemine
developmentbegins.Salescontractswiththirdpartiesthereforetendtobelongtermsupplyagreements,whereprices(coal
andfreight)areperiodicallyrenegotiated.Theycanevenincludetakeorpayterms.Giventhisphenomenon,onewonders
howGCIAhasmadesuchlargeandrapidtransitionfromthirdpartytorelatedpartysalesandwhy?

WereGCIAscontractrightswiththirdpartiesactuallyassignedbyGCIAtoGXstradingcompanyorhastheborderless
companyoverlookedtheneedforwindowdressingandmerelytransferredtheseactivitiesfornilconsideration?
Presumablybuyersconsentrequirementswerecovered.Ifthecontractswerelegallyassigned,howwasGCIA
compensated?IsthecompensationonarmslengthtermsandwhereisthiscompensationdisclosedinGCIAsfinancial
statements?askstheGlencoreresearch.

Theanswerstothesecriticalquestionscannotbefoundinthestatutorydisclosures.

Meanwhile,GCIAscostofgoodssold(COGS)asapercentageofsalesrevenuehasbeentrendingup,whichisnot
surprising(inlightoffallingcoalprices),butifyoulookattheinformationprovidedintheparentcompanyaccounts
aboutAustralianvolumesandaveragemarketpricesandalsomakesomereasonableassumptionsaboutthemixof
volumesbetweenthermalandsemisoftcoalplusdomesticvolumessoldatlowerpricesandthetimingofpricechanges
thecalculationsofexpectedsalesrevenuefor2013(andthe2012comparativedata)isclosetotherevenuefromAustralian
sourcesreportedbytheparent.

Incontrast,therevenuereportedbyGCIAisroughlyonlytwothirdsofeachofthoseamountsthatis,closetothefigures
reportedintheconsolidatedaccountsasAustraliansourcedrevenue.

Whilepartoftheexplanationmustrelatetomarketingactivitiesandthegroupsabilitytoidentifyandarbitragegapsinthe
market,itisimpossibletoidentifytheextenttowhichGlencorehasshiftedmarginsoffshoretothedetrimentofAustralian
taxpayers.

"Anyshiftoughttoreflecttherelevantriskstakenbyeachrelatedparty.Tradersgenerallytrytopushriskbacktoboththe
supplierandtheendbuyersothattheirexposureisusuallyminimal.However,whenthetraderandthesellerarepartofthe
samegroupandthesellerisinahightaxlocationandthetraderisinalowtaxoneorataxhaven,pressureisusually
broughttobear(bythetraderwiththesupportoftheParent)onthesellertoacceptnonarmslength(lower)prices.
Tradersmarginstendtobehigh,butdonotreflecttherisktheyaretaking.Theincreaseinrelatedpartytransactions
wouldprobablybeworththeATOhavingacloserlook.

Thisstorywasfoundat:http://www.smh.com.au/business/glencoretaxbillon15bincomezipzilchzero201406263awg0.html

http://www.smh.com.au/action/printArticle?id=5547456 4/4