The Australian arm of the global mining giant Glencore has been involved in cross-currency swaps of up to $25bn of a type under specific investigation by the Australian tax office.
Glencore, the world’s largest mining company by revenue, has attracted significant controversy since its entry into the Australian market in the mid-1990s over its tax strategies, degradation of sacred Indigenous lands, and black lung and lead blood poisoning among its workforce and their families.
Its massive global network of subsidiaries and related companies has been revealed by the release of the Paradise Papers, a cache of more than 13m documents including files from the premier offshore law firm Appleby. Glencore is one of Appleby’s largest clients. The material in the Paradise Papers comes from two offshore service providers and the company registries of 19 tax havens, and was obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists with partners including the Guardian.
The Paradise Papers reveal Glencore Australia was involved in huge cross-currency interest rate swaps – complex financial instruments previously targeted by the Australian Taxation Office for investigation, under suspicion they are being used to avoid paying Australian tax.
The swaps, which are lawful, are used to transform interest payments in one currency into another currency. But tax authorities around the world are concerned by their being used between arms of multinational companies to enter into deals at unrealistic, non-commercial rates, then using the swaps as a way to shift profits from high-tax to low-tax jurisdictions.
The Paradise Papers show that on 12 April 2013 two Bermuda-based arms of Glencore – Glencore Capital and Glencore Finance (Bermuda) – changed $25bn in Australian dollars to US dollars through Glencore Australia Investment Holdings.
Another Australian entity, Glencore Australia Finance, engaged in currency swaps with Bermuda-based Glencore Capital: for A$25m on 15 April 2013; and A$10m on 24 June.
Cross-currency interest rate swaps are not illegal and are often a legitimate commercial transaction between arms of a multinational company, but the ATO has said it is concerned the arrangements are being used – in particular by oil and gas companies – to avoid withholding tax.
In March last year, the ATO issued an alert about the practice. “Under these arrangements, companies use their related party financing arrangements to create an alleged need to swap currencies and periodical payments for questionable commercial reasons,” it said. “We are concerned that these arrangements achieve contrived thin capitalisation, withholding tax and transfer pricing outcomes.”
It also threatened to sink the currency swap deals in a submission to a Senate inquiry this year into corporate tax avoidance. It said it was “scrutinising a number of these deals” that “do not reflect commercially rational behaviour” and, it suspected, had been entered into to avoid tax.