international institutions fail to control multinationals 

report of a seminar by Prof. Ronen Palan at the African Studies Centre in Leiden, 27 September 2012

“Development studies without regards to tax havens are profoundly flawed”, Ronen Palan, Professor of International Political Economy at the City University in London, emphasized during his seminar at the Africa Studies Centre last September. As his presentation had shown, the figures involved in tax evasion completely dwarf those concerning aid money. Did Baker and his colleagues estimate the capital flight from developing countries to be about US$ 800 billion per year in 2005, more recent studies far exceed those numbers. In his 2012 report for the Tax Justice Network, former McKinsey & Co Chief Economist James Henry concludes that rather than developing countries being aid receivers, they are in fact net lenders to the tune of $10,1 to $13,1 trillion, i.e. over $ 10, He estimates the amount of unreported private financial wealth hidden in tax havens exceeds $21 trillion, the sum of the US & Japanese economies combined, or 18% of global wealth. That, he emphasises, is a conservative estimation. Even if modestly taxed at 30%, these secret reserves could solve many of the problems the world is facing right now.  

rather than developing countries being aid receivers, they are in fact net lenders to the tune of $10,1 to $13,1 trillion, i.e. over $ 10,

Though it is not easy to define a ’tax haven’, Palen indicates there are more than 70 tax havens in the world. These are countries with little or no income or corporate tax which tend to differentiate between residents and non-residents, or which have strong secrecy laws or easy incorporation laws, allowing for things like ‘shell’ or ‘mailbox’ companies, like the Netherlands. Though some clearly see their benefits, Palan explains traditionally tax havens served the purpose of tax avoidance and evasion by individuals and companies, and they are suspected as conduit for capital flight and money laundering. Together they store or channel roughly 50% of all the global stock of money, making them central to the functioning of the world economy.  

ineffective legislation 
Despite international legislation to register the identities of the actual people behind these financial structures, in their recent study Global Shell Games: testing money launderers’ and terrorist financiers’ access to shell companies Michael Findley, Daniel Nielson & Jason Sharman found that nearly half of the corporate service providers did not ask for proper identification when asked to create a shell company, potentially making such a company completely untraceable.  

Those who still believed in the regulating powers of international heavy weights like the OECD, the EU or the WTO, might feel a bit disappointed to hear that up to date none of these seem to be able to effectively address such practises. Apart from the fact that many countries only draw a thin line between legally avoiding to pay more tax than you should, and illegally avoiding to pay ones contributions, the companies involved are often powerful enough to exercise a certain influence. This does not only affect so-called ‘weak states’ where corruption is known to thrive, but also leading countries like the US, as former US president Bill Clinton found out when he tried to put oil trader Marc Rich behind bars.  

“I would say the rules are ineffective. In Dutch we say ‘a wax nose’; they pretend to do something they don’t do”, says Koos de Bruijn, coordinator of the Tax Justice Network in the Netherlands. He gives an example of the G20. “The G20 made it look as if they were serious about targeting tax havens by imposing exchange of information between states. By signing information exchange treaties amongst themselves (on request, not automatic), tax havens arranged that the OECD blacklist of tax havens is now empty.” But whilst there might be no more tax havens according to the G20 definition, Palan gives us figures of GDP per capita, ship registries, loans and Foreign Direct Investments which clearly suggest otherwise.  

eroding treasuries 
Clearly, tax evading structures created on this scale do not only erode the treasuries of developing countries, but also those of the developed home countries of the multinationals involved. As many Western economies increasingly struggle to get enough tax income from their diminishing group of middle-income taxpayers, they lose out on large sums of potential tax from international companies which escape their countries. Hence, countries with rapidly ageing populations are expected to have a strong interest to counter such moves, just like countries seeking jobs for their numerous youngsters do.  

Indeed, in his 2009 paper ‘the history of tax havens‘, Palan noted at the time the EU was one of the most vigorous fighters against tax evasion. Late 2012, Palan believes the Obama administration has some of the best plans around. After having pushed for the ‘Stop Tax Haven Abuse Act’, the democrats introduced the ‘CUT Loopholes Act’ earlier this year. In the US, these bills are primarily promoted on grounds of keeping jobs in America, rather than indirectly importing labour from cheaper locations abroad.  

in casu: Glencore, unknown world determinator 
Even if Obama’s bills will be implemented, they will not prevent the intended merger between the mining giants Glencore and Xstrata, which have long been known for their tax evading skills. Glencore has revealed it already controls more than half of the so-called ’third party market’ in copper and holds near dominance of the market in many other metals. Nevertheless, late this November, the EU approved the merger, provided the new company will partly step out of zinc. It will be the largest merger the mining sector ever witnessed, concentrating the market of essential commodities like zinc, copper, coal, nickel, lead, alumina & cobalt in the hands of a few, whilst aiming to grab a stiffer control over essentials oil and grains. According to Glencore’s own information, it is currently ‘one of the leading exporters of grain from Europe, the CIS and Australia’ and ‘among the world’s leading suppliers of sugar’.  

After the poor harvests in 2011, Glencore allegedly persuaded the Russian authorities to withhold their  anticipated exports of grain, allowing prices abroad to rise by a 15%. It is one of many stories illustrating the history of a company which did not manage to clear its name after the exposure of malpractices  started with its infamous founder Marc Rich, who made part of his fortune by illegally selling oil to Iran  during the boycott, just like his successor Glasenberg gained his name by illegally selling oil to the  boycotted Apartheidsregime in South Africa.  

Now that the stakeholders and the EU have approved the deal, ‘Glenstrata’ only needs to persuade the  Chinese and South African authorities, which are not expected to raise major objections. 

Not all agree such blessings should be given. “Until the major economies agree on a form of international oversight, market power at the global scene is there for the taking”, the Financial Times concluded its editorial ‘Cry bloody merger‘, “That is excellent for investors in Xstrata and Glencore. It is bad for citizens of both resource-rich and resource-dependent countries.” 

Exactly how bad it could be for citizens, is shown in the Zambian Kankoyo compound, just near to the Mopani mines in Mufulira, in which the company currently holds as 73 % share. As sulphuric acid from the plant is exhaled in fumes and seeps into the ground water, local doctors complain of babies who develop respiratory diseases within days after birth and parents who die of cancer. Vegetables don’t grow here, making inhabitants dependent on the market, with salaries which don’t allow them to send their children to school, to get medicines when they need it or to replace the remains of the metal roofing sheets which have been rusted away in the acid rains. For those down in the shafts, it is hard to understand why they cannot get better payments and living conditions when the price of copper seem to rise every day.  

When asked in 2007, Mopani pointed out it was working on some local projects preventing malaria and providing something for the retired. It had gotten subsidy from the European Investment Bank to put a sulphuric acid capturing filter on its chimney. However, significant structural adjustments remained unseen, and after the filter was installed, the emissions only seemed to get worse. Lacking means to monitor the mine properly, the Zambian authorities seemed unable to make a significant change or protect the wellbeing of its people.  

Under the contract it had signed when taking over the mine, Mopani hardly owed Zambia any taxes and did not have to worry much about the human and environmental effects of its operations. In 2008, these contracts were nullified to make space for a new Mining Act that would allow Zambia to increase its benefits from the mines and the rising copper prices on the world market. Corporate tax was raised, a ‘windfall’ tax on production and prices was introduced and companies were no longer allowed to deduct as many costs from their profits. However, in ‘A fool’s paradise: Zambia’s mining tax regime‘ the Centre for Trade Policy & Development establishes that many companies simply refused to pay, claiming they did not hit the profitability thresholds the legislation had defined. In 2009, many of the new regulations were undone. After a short peak in 2008, Zambia’s mining revenues decreased again.  

transfer pricing 
Palan had already warned us that the extractive industry is notorious for using ’transfer pricing’ techniques: exporting your product from the country where it was produced at a low price, into a tax haven where the price is lifted to a level at which it can be sold all over the world. This explains how Glencore can make a ‘loss’ in Zambia for the same product on which it makes a huge profit in Switzerland, where it hardly has to pay any tax over its profits. On paper the copper is moved from Zambia, to Switzerland, to the consumer – physically it moves straight from Zambia to where it is needed.  

Though the Swiss ‘shell’ company might have very few or no employees at all, this is where the money is made. It does come in handy that Glencore, controlling the majority of copper and a large part of the chain from mine to end consumer, can determine the price at which it buys and sells from without having to be afraid of too much competition. ‘In 2008 Christian Aid estimated the annual cost of such corporate transfer mispricing to developing countries, in terms of lost tax revenues, at $160 billion per year’, Palan specifies, ‘but Henry concludes that there is simply no way right now to estimate how large it is.’ The numbers involved are amongst the world’s best kept secrets, until we come to a system in which tax information is shared between countries. Till then, to reveal what goes around, we need a lot more research.

EU approval: 

In a press release of November 22 2012, the European Commission stated that “The Commission’s  investigation found that the proposed transaction was unlikely to raise competition concerns as regards the production or supply of: zinc concentrate; thermal coal and coking coal; copper and copper  concentrate; lead and lead concentrate; nickel and nickel intermediates; cobalt and cobalt  intermediates; ferrochrome; and other “non-core” products (gold, molybdenum, platinum, palladium,  sulphuric acid, vanadium, ferrovanadium, and silver).”  This despite the fact that “The substantive assessment of the merger has presented a number of  challenging issues: (a) Glencore’s trading and production business covers all steps in the commodities  value chain i.e. mining, off-take agreements, freight, refining and smelting, metal warehousing,  financing services and its hedging and trading activities on commodities exchanges such as the  London Metal Exchange (“LME”); (b) the merger brings together an integrated trader/producer  (Glencore) with a producer active at the mining and refining level (Xstrata) and has thus vertical and  horizontal effects in many different product markets; (c) the existing minority shareholding relationship  between the parties.”

Read More:

The history of tax havens‘, Ronen Palan

Global Shell Games: testing money launderers’ and terrorist financiers’  access to shell companies‘, Michael Findley, Daniel Nielson & Jason Sharman 2012 

Stop Tax Haven Abuse Act‘  

CUT Loopholes Act

A fool’s paradise: Zambia’s mining tax regime’, Centre for Trade Policy and Development Zambia 2010

The politics of reforming Zambia’s mining tax regime‘, Resource Insight No. 8, John Lungu 2009 

Brussels set to clear Glencore-Xstrata‘, Financial Times, November 21 2012 

Cry bloody merger, editorial, Financial Times, November 21 2012 

Europian Commission press release ‘Mergers: Commission approves Glencore’s acquisition of Xstrata, subject to conditions‘ 

Glencore trading empire unveiled, April 14, 2011 7:34 pm