- Industry: Energy & Natural Resources
- Type: Business and industry issue, White paper
- Date: 10/10/2012
The advantages of centralized trading are numerous, and many locations in the world have arisen as important focus points for this activity.
What are the advantages of commodity trading companies?
- 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.
- By managing global trading from a central location, a trading company is positioned to sell product into whatever market will fetch the top profit margin. These companies are well positioned to match supplies from multiple extraction points with the needs of customers in multiple markets.
- Even more efficiencies can be gained by setting up multiple trading companies in various time zones across the globe, allowing the group of companies to boost its margins with non-stop trading 24 hours a day.
- 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 swapping freight, companies can reduce their high haulage and control costs and improve logistics.
- In addition to supply chain trading, many commodity trading companies are taking on other types of transactions, ranging from proprietary trading to asset optimization, derivative market-making, arbitrage, and dynamic hedging of asset portfolios.
What factors should drive decisions over potential locations?
- Deciding where to locate an international trading company is a tactical and marketing decision. Tax costs are just one of a host of factors that companies need to consider.
- Preferred locations have investment-friendly government policies, strategic proximity to markets, and good financial services infrastructures.
- Countries that actively seek to provide this mix can gain substantial economic spin-off benefits from the activities of these entities. By doing so, for example, Switzerland and Singapore have succeeded in becoming two of the world’s most popular destinations for international commodity trading activity.
- Other countries that are home to substantial numbers of these structures include the United Kingdom (London), the United States (Houston), Canada (Calgary), the Netherlands and Hong Kong. Brazil, Barbados and Dubai could emerge as destinations of choice in the future.
What income tax issues can arise?
- Like any global business, international trading companies and their parents need to manage a host of direct and indirect tax matters. If these entities are located in a jurisdiction that is different than the source of production, tax authorities will often take a closer look to determine:
- whether the trading company’s activities and functions added value to the business
- whether it is reasonable for the operations to compensate that entity.
- As a first line of attack, many tax authorities around the globe would seek to challenge international trading companies under anti-avoidance rules based on a lack of business substance.
- Tax authorities may challenge transactions with international trading companies on the basis of their transfer prices.
- Other income tax issues can involve:
- exit charges on moving functions and risks from one jurisdiction to another
- the possibility that the trading activities may inadvertently create a taxable presence in a country, for income or indirect taxes, or both
- the potential that a tax authority will seek to deny treaty benefits based on its position regarding beneficial ownership of the trading company’s income
- the impact of differences in the accounting and tax treatment of certain items.
- To guard against income tax challenges, a thorough tax risk exposure analysis should be conducted to anticipate and address all possible questions and alternative arguments so you can make sure all your bases are covered.
What indirect tax issues can arise?
- International trading companies tend to focus on income taxes and neglect the potentially high but less visible costs of other taxes. Nevertheless, these companies are likely to face more scrutiny of their indirect tax compliance and more aggressive audit activity.
- Issues often arise due to differences among various VAT/GST systems. Differences between European VAT systems are often overlooked. In countries like China and Korea, VAT systems are relatively new and quite different from European systems, heightening the risk of compliance errors and missteps.
- The largest commodity trading companies have global VAT management strategies and large indirect tax teams to manage their global VAT obligations and ensure appropriate processes are in place.
- With their dynamic supply chains, international commodity companies are also exposed to customs risk. International trading companies can optimize their customs costs by avoiding unnecessary customs charges and by taking part in simplified customs procedures and programs.
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An overview on what makes a good location for international commodity trading & highlights specific policies of today’s most used global locations.