Glencore (LSX:GLEN) has been accused of dodging millions of pounds in tax through the use of complex derivatives to artificially reduce profits.
According to the Guardian tax specialist Richard Murphy of Tax Research UK says Glencore UK has used derivative trades with other parts of the Swiss-headquartered commodities giant to log a $122.8 million loss, thus shifting profits to the main group which is situated in a low-tax district in Switzerland.
The derivatives are ostensibly insurance contracts which are widely employed in corporate finance as a hedge against financial risks. Murphy points out the absurdity of Glencore using its own subsidiaries to take out insurance for itself with itself:
Glencore is insuring itself with itself. If I insure my house for fire with myself and it burns down, I've got to pay myself for the house which has burnt down. That's what Glencore is doing, and the consequences are that the risk is never leaving Glencore; it's still inside the group. That's $383bn worth of trades that, on the face of it, make no sense whatsoever. We don't know, but it is highly likely that the motivation is not genuine insurance and it looks like a significant amount of tax planning takes place within this trading function.
Glencore UK's logged 2011 turnover of $59.8 billion, yet its pre-tax profits were less than a percent of that amount at $99.1 million. Without the derivatives trades Glencore would have been liable for tax payments of $32 million.
Despite its transparent purposes the practice remains entirely legal and is increasingly implemented by multinational corporations, especially in extractive industries such as mining, oil and gas.
The allegations arise just as the London-listed firm is on the verge of finalizing a deal with fellow Swiss-based commodities giant Xstrata (LSX:XSTA) for a merger which see the emergence in a major new force in the global mining sector.