The Attraction of Tax Breaks: Switzerland Grows into Global Commodities Hub

By Alexander Jung and

Switzerland has quietly developed into the global center of commodities trading. Critics say the industry's business practices in countries such as Congo and Zambia are immoral, and that it puts profits before people.

Ivan Glasenberg usually wakes up at 5 a.m., goes jogging or swimming and then goes to the office, not returning home until late in the evening. The taxes he pays make up two-thirds of total tax revenues in his town. His angular villa on a side street, with its brown coat of paint, blends well with its surroundings in Rüschlikon, an idyllic, picture-postcard little town on Lake Zurich. Glasenberg, CEO of the commodities giant Glencore, is actually a pleasant neighbor.

He is not the town's only wealthy resident. Rüschlikon, which has 5,200 inhabitants, is also home to a number of executives, bankers and even a Greek ship owner. But the Glencore CEO multiplied his assets last year through the initial public offering of his company, of which he owns 16 percent. As a result, Glasenberg paid the equivalent of €290 million ($361 million) in taxes to the town and the surrounding canton.

After receiving this enormous windfall from its new resident, who was born in South Africa, Rüschlikon was able to reduce its already low income tax rate by several percentage points. But not all residents are happy about the decrease. "While we think about what to do with the money, people in other places are dying a miserable death," says village pastor Josip Kneževi bluntly.

Kneževi, a native Croat with a gray ponytail, is the proud owner of a red BMW R80 motorcycle and doesn't really have any objection to a little prosperity. Still he signed the "Solidarity Rüschlikon" initiative aimed at preventing the massive tax reductions in the town. Instead he advocated using tax revenue to create a sort of solidarity supplement for development aid. Kneževi calls Glencore's business dealings "immoral" and says that the town shouldn't simply accept a portion of the profits.

"All great cultures reached a point at which they became perverse and then collapsed," the theologian says darkly. He isn't just talking about the little town of Rüschlikon.

Sanctuary for Kleptocrats and Tax Evaders

Ironically Switzerland, a country with few natural resources to speak of, has grown into one of the most important centers for the global commodities industry in recent years. In Switzerland, companies encounter optimal tax conditions, sympathetic officials and an army of lawyers and bankers who specialize in the needs of the deep-pocketed industry.

Companies like Glencore now process 15 to 25 percent of the global trade in ore, copper, oil and agricultural products from their headquarters in Switzerland. Net revenues in the industry have increased by a factor of 15 between 1998 and 2010.

Proponents see the new booming sector as a replacement of sorts for the banking industry, which hasn't been flourishing for some time, but critics are worried about their country's already damaged reputation. "For decades, our image was that of a worldwide sanctuary for kleptocrats and tax evaders. Now we are in the process of cleaning that up, and already we are pursuing the next dubious business model," says criminal law professor Marc Pieth, chairman of the Working Group on Bribery in International Business Transactions at the Organization for Economic Cooperation and Development (OECD).

Glencore, one of the world's largest trading companies of its type, is headquartered only a few kilometers from Rüschlikon, in a town called Baar, which prides itself on being "one of the lowest-tax municipalities in Switzerland." From his office there, CEO Glasenberg runs a corporate empire, active in 40 countries, with a large network of subsidiaries and partnerships around the world. In 2010, the company controlled about 60 percent of the international zinc trade, 50 percent of the accessible copper and 45 percent of the lead market. In 2011, Glencore's had profits of $4.3 billion, with annual sales increasing from $21 billion in 1998 to $186 billion.

Glasenberg wants the company to continuing growing. He is currently working on a merger with mine operator Xstrata, which has its headquarters not far from his office. If the plan succeeds, the resulting entity will be a giant with a market value of $80 billion, making it more valuable than Goldman Sachs or Volkswagen.

Despite its massive wealth companies like Glencore are still relatively unknown, because the industry is more secretive than almost any other.

As Safe as Disneyland

Largely unnoticed by the world public, Geneva, the sophisticated metropolis in the French-speaking part of Switzerland, has become one of the most important global trading centers for wheat, coffee, sugar and cotton. The city has even replaced London as the most important hub for the worldwide crude oil business.

About every third barrel (159 liters) of crude oil sold anywhere in the world passes through the books of one of the trading companies headquartered in Geneva. The two most important companies are Vitol and Trafigura. Their employees work in the kinds of unadorned office buildings found throughout the Canton of Zug. Together, the two Geneva-based companies achieved sales of about $400 billion in 2011, which is roughly equal to the gross domestic product of Austria.

In principle, the traders act like logistics companies, moving the commodity from its production location to where it is needed. To that end, they maintain port terminals, warehouses and charter tankers that they direct across the world's oceans, making it a cost-intensive business.

Vitol, for example, has more than 200 ships in operation in the world's oceans at all times. At the current oil price of about $100 a barrel, just one of these supertankers, which can transport about 2 million barrels, ties up close to $200 million.

Lenders like BNP Paribas, Crédit Agricole and Credit Suisse, which specialize in this type of financing, maintain special commodities teams in their Geneva offices. They are joined by members of other professional groups: lawyers, insurers, ship owners, shippers, merchandise inspectors and a large number of consultants. Switzerland has great infrastructure, says Glencore CEO Glasenberg, who points out that his adopted country is also "as safe as Disneyland."

Favorable Tax Laws

The country has another decisive advantage for companies: favorable tax laws. Most commodities traders in Switzerland call themselves "mixed companies," which do more than 80 percent of their actual business abroad and, as a result, only pay taxes on a portion of profits. All told, the tax burden ranges from about 10 to 13 percent, depending on the canton, say officials with a major accounting firm. In Germany, the treasury demands almost three times as much.

Swiss companies usually have dozens of subsidiaries around the world, which they can use to combine the advantages of idyllic Switzerland with those in tax havens like Bermuda and the Netherlands Antilles, says Andreas Missbach, a tax expert with Berne Declaration, a Swiss non-governmental organization.

Missbach is one of the authors of the book "Commodities: Switzerland's Most Dangerous Business" (available here as a free download), which is currently causing a stir in his country. The results of painstaking research all over the world, on issues like the working conditions of workers in Congolese mines and on cotton plantations in Uzbekistan, have triggered a heated debate over whether and how Switzerland can monitor the booming industry.

"Companies like Glencore push profits and costs back and forth within their corporate group, to places where they pay the lowest taxes possible," says Missbach. "Of course, this comes at the expense of poor countries."

Development Aid or Exploitation

Glencore operates large portions of its business in countries that are highly corrupt or have authoritarian regimes, like Equatorial Guinea, Kazakhstan and Congo. But for CEO Glasenberg, the company's involvement in countries like these more closely resembles development aid than exploitation. "In Congo we have built football stadiums, bridges, hospitals in addition to investing billions of dollars in our mining business," he says. "We are doing good things in those countries."

But there is little recognition for these efforts. On the contrary, criminal law experts like Pieth are sharply critical of the industry. "Corruption is almost unavoidable in countries like Congo," he says. The Catholic development organization Fastenopfer accuses Glencore of buying copper for its furnaces in Congo, where children scrape the metal out of the dirt with their bare hands. Berne Declaration accuses Glencore of using a subsidiary to understate the profits from a copper mine in Zambia.

Glencore vehemently denies such accusations and issues lengthy statements in its defense. It claims its tax payments in Zambia, where it invested a lot of money and created thousands of jobs, were calculated correctly, and that the company does not profit from child labor. According to CEO Glasenberg, the company has even developed social and environmental standards that are applicable worldwide and are often stricter than local laws.

The former professional race walker with thinning, dark brown hair and a defiant gaze, is appearing in public more frequently to polish the image of his industry, amid growing calls for stricter regulation of him and his counterparts in the industry. The European Union is emphatically fighting the generous tax benefits for "mixed companies."

A number of legal scholars advocate the idea of taking action in Switzerland against possible crimes committed by commodities companies abroad. Until now, this has only been possible with serious crimes like sexual offences that Swiss citizens commit abroad.

Whether all the uproar will actually lead to new laws remains questionable. In Rüschlikon, the efforts of industry critics initially failed. The municipal assembly rejected Solidarity Rüschlikon's idea of a solidarity surcharge for development.

Village Pastor Kneževi still looks distressed today when he talks about that day in December. The "power of money" prevailed once again, he says.

Translated from the German by Christopher Sultan

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