“An international commodity trading company is a distinct, specialized entity set up to centrally manage trading activities for specific commodities in the oil and gas and mining industries,” said André Boekhoudt, Global Head of KPMG’s Energy and Natural Resources Tax Practice. “With one or a few of these specialized entities, a corporate group can unify its global trading and marketing activities. That way, they can better manage and meet customer demand while improving their profit margins at the same time.”
Strategically, commercially and logistically, the benefits of international trading structures for global commodity trading are clear. The most important of these benefits are:
- Dynamic supply chain management. Centralizing trading and marketing activities in one or a few locations allows companies to consolidate sources of supply so they can better manage and meet customer demand.
- 24-hour trading. With multiple trading companies in various time zones across the globe, the group of companies can boost its margins with non-stop trading as the world’s exchanges open and close.
- Logistical efficiency. The ability to mix and match supplies from multiple sources also allows for greater supply chain stability, which can translate into higher trading margins. By making it easier to swap freight, companies can reduce their high haulage and control costs and improve logistics.
From North America and Europe to the Middle East and Asia, a number of locations around the world have emerged as vibrant centers for this activity. Preferred locations have investment-friendly government policies, strategic proximity to markets, and good financial services infrastructures.
“The most popular locations have actively sought to create the right conditions for commodity trading operations to thrive,” said Mr. Boekhoudt. “Switzerland and Singapore, for example, have actively courted this activity by setting fiscal policies and incentives that complement their existing positive attributes for international businesses. We expect that the number of international trading companies setting up shop in these countries will continue to rise.”
Other countries that are home to substantial numbers of these structures include the UK (London), the US (Houston), Canada (Calgary), the Netherlands and Hong Kong. These locations are historical destinations of choice due to of their proximity to European, North American or Asian markets or production sources. The UK and Canada are also attractive due to their critical mass of local expertise in these sectors and opportunities to raise capital.
“Each of these locations has a lot of momentum behind them, and currently established trading companies may have no compelling business reason to migrate elsewhere,” said Mr. Boekhoudt. “But unless these countries become more proactive in creating a more attractive environment, they may not attract substantial new trading operations in the future as other countries take specific action to attract these businesses.”
Another set of countries could emerge as international trading hubs in the future, but only if they can improve in key areas, such as political stability, physical and financial infrastructure, and business-friendly tax and commercial policies. Dubai, Barbados and Brazil are among these countries.
But wherever they are located, international trading companies face a world of risks. Given their complex supply chains and the scope of their activities, commodity trading companies must manage their way through an intricate web of cross-border income tax, value added tax (VAT) and customs issues. They must also be ready to defend their transactions and structures against growing aggression and heightened scrutiny on the part of some tax authorities.
According to KPMG’s report, the trend to greater centralization of commodity trading will likely to continue, and companies that take up this model with a sound structure that addresses tax and business risk stand to reap substantial benefits.
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