Commodity giants' Singapore trading hubs under fire in tax probes

SINGAPORE (Reuters) - The Singapore trading hubs of the world's largest commodity companies are coming under scrutiny from the governments of some resource-producing countries who say they suspect they are using units in the Southeast Asian financial centre to avoid tax.

Some of the world's largest oil, mining and soft commodity companies book billions of dollars of revenue in the tiny island state every year, where tax rates can be very low, which is perfectly legal unless they deliberately underprice group transactions so as to shift profit there from units in other countries.

The companies deny any improper transfer pricing and say they are in Singapore to be closer to Asian clients, to local expertise and trade routes, as the region accounts for a growing share of their business.

The world's two largest miners, BHP Billiton and Rio Tinto, between them booked close to US$50 billion (S$68.41 billion) in revenue in Singapore in 2013, according to documents from the country's corporate registry, and posted a combined net profit of more than US$2 billion.

They mostly conduct trading operations there, a high-volume, low-margin business that involves buying up commodities from their global operations and selling them on to clients. They also look after logistics and risk management.

The companies say their Singaporean operations were not set up to cut tax but to serve their clients better.

Australia and Indonesia's tax authorities say they are investigating whether arrangements like these simply shift profits away from where the commodities are extracted.

Most jurisdictions require such arrangements to have a commercial purpose beyond saving tax, and the group transactions should be conducted at arms-length pricing.

Australia and Indonesia both rely heavily on mining exports and count global miners among their biggest taxpayers.

Australia's tax office has said it is conducting audits of 15 marketing hubs in Singapore and Switzerland that it says it expects will raise an extra US$1 billion.

It has not identified the companies involved, although BHP and Rio told an Australian Senate hearing on Friday that their Singapore units were being audited.

"Quite clearly, we are in dispute with a number of taxpayers," Australian Taxation Office Commissioner Chris Jordan told a Senate hearing on Wednesday.

Indonesia's tax office head, Sigit Priadi Pramudito, told Reuters recently that the transfer pricing arrangements of commodity companies were a particular concern, but he did not identify specific companies.

"Say a company sells with a cheap price to Singapore, and then sells from Singapore to the world, where would the profit be? In Singapore, right? And where's the money? In Singapore, right? What does Indonesia get? Nothing," he said.

Resource-producing countries do typically raise taxes on resource extraction through royalties, said Harvey Koenig, tax partner at KPMG in Singapore. But he added "there are still various concerns from producer countries that a major part of the profits is not being retained in those countries," without commenting on any specific company or investigation.

TRADING PLACES

Singapore has long been a global hub for oil trading, complementing its big refining industry and operational centres for a number of oil majors, but in recent years, miners and other commodity firms have also moved to the Southeast Asian island.

In 2012, BHP shut its marketing office in the Netherlands and consolidated all its metal trading operations in Singapore. It says it employs around 400 people there.

It operates much of its marketing operations in Singapore through the branch of an entity set up in the Swiss town of Baar - BHP Billiton Marketing AG.

In the 2013-14 financial year, the branch had revenue of US$38.6 billion, a profit of US$1 billion and a tax rate of zero, according to accounts filed in Singapore. The accounts of the branch's Swiss parent are not publicly available.

BHP said it pays income tax in Australia on a "substantial portion of the revenue" that the hub earns.

"BHP Billiton is the largest taxpayer in Australia and takes its tax obligations very seriously," it said.

Rio told a Senate hearing in Australia on Friday that the work it undertakes in Singapore could not be sensibly undertaken elsewhere. "Singapore is seen as a neutral location between buyer and seller," Rio's Australia managing director Phil Edmands told the Senate panel.

The companies benefit from being located near a growing community of commodity traders, with the likes of Trafigura, Gunvor, Cargill and Vitol all basing trading hubs there.

Under Singapore's Global Trader Programme, companies can get a concessionary tax rate as low as 5 percent if they conduct a substantial enough volume of business, base high-ranking staff on the island and make use of the country's financial services sector.

Larger companies can privately negotiate an even lower rate.

Rio said it receives a 5 percent tax rate in Singapore, while BHP declined to say what incentives it receives.

Singapore's Ministry of Finance said there were many business reasons for commodity companies to operate in Singapore, including its "developed network of shipping and logistics players, financiers and legal practitioners", while "tax incentives are given to companies with substantive economic activities that will significantly add value to our economy".