Bob Brown played a canny hand yesterday with his National Press Club address by releasing a report on the level of foreign ownership of the mining industry, showing 83% of mining companies are foreign-owned.
It’s a figure to dismay everyone who complains that we’ve “sold off the farm”, from dewy-eyed Whitlamites to Eureka flag-waving bigots.
Indeed, “selling off the farm” is no longer a metaphor, with a rising tide of complaints about foreign ownership of agricultural land, even here in Crikey. “Food security” is the theme of complaints about foreign companies or even foreign governments owning farms, although no one is ever able to specifically identify what the threat to our food security is, short of foreigners shipping our soil offshore.
A similar problem plagues the report put together by Greens economist Naomi Edwards (who’s been smeared by Greens critics for her trouble). The report is a handy dissection of how dominant foreign investment is in the industry, how profitable it is and even the case for slowing down the sector’s rapid expansion. But it doesn’t really address why foreign ownership is a bad thing, except for its impact on the current account deficit.
For economic nationalists — whether Barnaby Joyce complaining about foreign ownership of farms or Bob Brown on mines — there’s no need to justify why foreign ownership is bad: it simply is, certainly in large amounts. Even then there’s a fallacy at work, because foreign investment in mining or agriculture is considered to be worse than foreign ownership of food manufacturing or minerals processing, which is in turn worse than foreign ownership of supermarket chains or metal manufacturers. Indeed, the continuing presence in Australia of multinational car manufacturers Ford, General Motors and Toyota is considered a positive thing by the same people who rail against “selling off the farm”.
There is a reason to be concerned about foreign ownership of mining companies, but the Greens’ report doesn’t discuss it and it’s not on anyone’s radar except, hopefully, that of the ATO.
In April, Crikey reported that Glencore, the parent company of mining giant Xstrata, had been exposed as having used transfer pricing to systematically rip off Zambia of tax revenue from the copper operations of its subsidiary, Mopani. While Zambia was being held up during the RSPT debate of how Australia should treat mining companies, Mopani was avoiding US$120m in tax to one of the world’s poorest countries by selling copper to Glencore at 25% of the international price. The giant multinational company, which listed on the London Stock Exchange earlier in the year, is domiciled in the Swiss tax haven of Zug.
Transfer pricing is not permitted in Australia and the ATO has wide powers to determine whether companies like Xstrata, which is 34% owned by Glencore, are selling products to, or buying products from, related companies for less than what an independent transaction would yield. However, last year the ATO lost a Federal Court case against French subsidiary SNF over its purchase of chemicals from its parent company, and early in June this year lost an appeal against that decision, significantly narrowing the basis on which the ATO could assume transactions were not independent.
It’s not suggested that Xstrata engages in the sort of blatant transfer pricing that occurred in Zambia. But there are other, perfectly legal ways to achieve the goal of shifting revenue to a foreign tax haven. Xstrata has an extensive series of contracts to sell its minerals to Glencore, which it insists in its annual reports are “on arm’s length terms and conditions” or reflect global spot prices. But Glencore also has “servicing” or “marketing” agreements with Xstrata. For example, for coal, Xstrata and Glencore have a 20-year “market advisory agreement” with fee reviews every five years:
“Glencore acts as the Group’s market adviser with respect to its export production of coal (other than for Xstrata Coal’s share of production from the Cerrejón thermal coal operation in Colombia). The fee payable to Glencore is US$0.50 per attributable tonne of coal exported by the Group from Australia or South Africa.”
Last year, Glencore — rather than, say, a company from Australia’s burgeoning mining services industry — entered into a five-year contract with Xstrata to supply diesel fuel to Xstrata in NSW and Queensland, worth nearly US$150m. Xstrata doesn’t say whether the contract was subject to a tender process, although of course a company can source its goods and services however it wishes.
On copper, Xstrata Copper has a permanent “service agreement” with Glencore “for the supply of advice, support and assistance with regard to its marketing and operational hedging activities.” There are similar service agreements for zinc and other metals mined by Xstrata in Australia and elsewhere. One contract, for alloys, requires Glencore to be paid a marketing fee even if Xstrata finds a buyer willing to pay a higher price than Glencore.
All the revenue earned by Glencore from its “marketing” and “service” agreement with Xstrata, which increases Xstrata’s costs and therefore reduces its taxable profits, flows back to Switzerland and the tax haven of Zug.
But you don’t have to be separate companies to engage in channelling revenue to a tax haven.
There’s another Australian mining company that has a “marketing” office in Zug — BHP-Billiton. As James Chessell noted a few years ago, the company insists the office is located there because it is close to key customers.
The town of Baar, where BHP’s marketing office, Glencore and Xstrata are all located, has a population of 21,000. According to Wikipedia, fully one-quarter of the inhabitants are foreign nationals. It appears the best reason for being located in Baar is to be near other tax avoiders.