Wednesday, April 13, 2011

Zambian tax cheating complaint filed at OECD

A coalition of NGOs has filed a complaint to the Organisation for Economic Cooperation and Development against Zug-based Glencore International AG and Canadian mining company First Quantum Minerals for violation of the OECD's guidelines for multinational enterprises.

The jist of the complaint lies with what are described as "financial and accounting manipulations" performed by a jointly owned operating subsidiary in Zambia called Mopani Copper Mines plc which stands accused of manipulating prices for tax evasion purposes.

According the joint report issued by the NGO coalition the abuses, which came to light as a result of an audit carried out by accountants Grant Thornton and Econ Pöyry, include overstating operating costs (a classic favourite in the world of extractives), understating production volumes and price manipulations in Glencore's favour:

"Among the anomalies revealed by the report, an unexplained increase in operating costs in 2007 (+ $380 million), stunningly low reported volumes of extracted cobalt when compared to similar mining companies operating in the region, and manipulations of copper selling prices in favor of Glencore which constitute a violation of OECD's "arm's length" principle. The result of those various processes was to lower by several hundreds of millions dollars MCM's net income for the 2003-2008 period, hereby substantially lightening the company's tax burden. "

As the NGOs note, these actions are all the more egregious when one considers that Zambia already offers an extraordinarily generous tax regime for foreign mining companies:

"Those actions are all the more deplorable when one considers that the Mopani consortium operates in an already attractive fiscal environment, one highly favorable to foreign investment, and that Mopani also enjoys the effects of a 2000 development agreement with Zambia that provides massive financial and tax exemptions."

Aficionados of tax havenry will be interested to note that Mopani, which is established under Zambian law, is owned by British Virgin Island-based Carlisla Investment Corporation, the latter being jointly owned by Bermuda-based Glencore Finance Limited (wholly owned by Glencore International in Switzerland) and BVI registered Skyblue Enterprise Incorporated (wholly owned by First Quantum). The detailed ownership structure is charted on page 11 of this report.

We will watch the progress of this complaint with great interest. The OECD is already under considerable pressure - not least from TJN - to demonstrate the effectiveness of its transfer pricing guidelines. Having failed to include a recommendation for a country-by-country reporting standard in their latest 2010 guidelines, which would at the very least provide an indication of where profits are being shifted to offshore subsidiaries and therefore trigger investigation, the OECD needs to demonstrate that the guidelines have teeth.

You can download the full report and a copy of the original audit here.


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