Glencore buying Rio Tinto could burn hole in Hockey’s pocket

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Glencore has proposed a ‘merger of equals’ with Rio that would catapult the Swiss company past BHP into the status of world’s biggest mining house. Photo: Rob Homer

A Glencore merger with Rio Tinto would be damaging for Australia and ought to be, and very likely will be, knocked on the head by the Foreign Investment Review Board.

Billions of dollars in tax payments are on the line, not to mention job losses and the spectre of this country ceding control over a large chunk of its natural resources to a secretive group of commodity traders ultimately run out of Switzerland.

People ask, what are the synergies in this mega-merger? The synergies are jobs and tax. Both will go. Were it to pass, in national interest terms this would be the most damaging deal in Australian corporate history.

Together, Rio and BHP account for one quarter of corporate income tax receipts in Australia. Australia’s tax base is suffering serious erosion, budgets are under pressure. The prospect of the Treasurer approving a Glencore takeover of Rio therefore are surely close to nil.

Glencore has proposed a “merger of equals” with Rio that would catapult the Swiss company past BHP into the status of world’s biggest mining house. Rio Tinto however has paid $US15.8 billion in income taxes over the past three years; the vast bulk of it, $13.31 billion, in Australia.

In contrast Glencore, Australia’s biggest coal company, admits to having paid just $400 million across all its operations over the past three years.

Fairfax Media has been in a long-running dispute with Glencore Australia over its Australian corporate income tax and the company has not answered detailed questions put to it over its tax affairs. In light of the literally hundreds of corporate entities under the Swiss umbrella it is difficult to establish exactly how much corporate income tax Glencore pays in Australia.

Suffice to say that for a business that in its entirety in this country has recorded revenues in excess of $10 billion a year, even some $400 million in income tax over three years constitutes a paltry sum.

Responding to some general questions for this story, spokesman Francis de Rosa told Fairfax Media that Glencore was “proud of our contribution” to Australia.

“Our overall contribution to Australia is more than just our tax and royalties contribution … not just the direct employment contribution but the contribution to the businesses which we operate.

“We meet all of our tax and financial reporting obligations here in Australia. Tax payments had fallen since the mining boom in line with falling profits.”

An analysis of Glencore’s coal operations in these pages earlier this year appeared to reveal Glencore Coal Investments Australia, whose ultimate parent company is domiciled in Switzerland, paid just $15 million in income tax over the past three years as commodity prices have slid. Last year it seems it actually recorded tax back of $29 million.

If correct, the $15 million in overall tax payments in coal was struck on an asset base of $10 billion, cashflows of $4.5 billion and total sales of $15.5 billion. The tax bill across Glencore remember is $400 million over the same three years. Stand that up against Rio’s $13 billion in total tax payments across its operations in that period and then put yourself in a Treasurer’s shoes.

Bear in mind that for Glencore this is just coal; its operations also encompass nickel, zinc, copper and grains (the Viterra grains business).

Glencore has disputed the basis of our analysis, claiming that as income tax is paid on profits rather than income, pre-tax profit is a more accurate basis for evaluating how much tax is paid.

Due however to the enormity of its related party transactions – among them $3.4 billion in loans to Australian coal operations from offshore entities – we believe income is a more reliable guide or proxy to how much Glencore should be paying.

These related party transactions can (and often do) have the effect of substantially lowering profits in Australia – a high tax jurisdiction compared with Switzerland and Singapore – and therefore taxes too.

Besides overall related party debts of $3.85 billion in coal alone, and gearing of 48 per cent, the interest expense of Glencore Coal Investments Australia’s foreign associates over the past three years stands at $759 million.

Related party coal sales as a proportion of total sales over the past three years has jumped from 16 per cent to 46 per cent, meaning Glencore now sells almost half its coal to itself.

The company says that the holding company for Glencore Coal Investments Australia, a vehicle called AZSA Holdings Pty Ltd, provides a better picture of how much the coal operations have paid in income tax. Even with expert advice, Fairfax has been unable to reconcile the AZSA accounts with GCIA. Glencore has ceased providing consolidated accounts for AZSA.

For that and other reasons (none of the published accounts are general purpose financial statements, with detailed notes) it is difficult to provide any more relevant information than the figures above.

In a recent interview with The Australian Financial Review‘s Chanticleer column, Rio Tinto chairman Jan du Plessis called for reform of the global tax system to end the “abusive” tax minimisation by multinationals.

He made special mention of the penchant of technology companies to exploit the advantages of “highly artificial tax regimes”. “The challenge of deciding how to tax multinationals is one of the big issues of our time – it is extremely important,” he said.

“Too many multinationals get away with murder and I think it absolutely has to be addressed. Not just in the resources industry but across all industries.”

Du Plessis made no mention of Glencore but the Swiss commodities giant may have been “front-of-mind” as Glencore chief executive Ivan Glasenberg is expected to make a second attempt to force a merger with Rio. Analysts said Glasenberg has been trying to win the support of Rio’s largest shareholder, Chinese giant ­Chinalco, by pledging to offload key assets Oyu Tolgoi (reputed to be Mongolia’s second biggest taxpayer) and Simandou.

Under UK takeover laws, Glencore can’t move again until April but it is a fair call to assume that when Glasenberg is pitching a synergies case to Rio shareholders he would be very mindful of Australia’s 30 per cent corporate tax rate and the “synergies” that could be gained if Rio didn’t have to stump up all that money to the Australian government.