With predictable consequences.
Last year, Glencore UK\’s derivative trading with other parts of the group totalled $383bn (£267bn), more than twice the yearly budget of the National Health Service. The practice resulted in a $122.8m loss for the London-based business, effectively docking that amount from UK profits and transferring it to the main group based in the low-tax Swiss canton of Zug.
Richard Murphy, of Tax Research UK, said: \”Glencore is insuring itself with itself. If I insure my house for fire with myself and it burns down, I\’ve got to pay myself for the house which has burnt down. That\’s what Glencore is doing, and the consequences are that the risk is never leaving Glencore; it\’s still inside the group. That\’s $383bn worth of trades that, on the face of it, make no sense whatsoever. We don\’t know, but it is highly likely that the motivation is not genuine insurance and it looks like a significant amount of tax planning takes place within this trading function.\”
It\’s entirely standard that when an organisation becomes large enough it becomes self-insuring.
I have no idea at all how WalMart insures itself so let us take them as a theoretical example.
If you\’ve one shop on which your entire livelihood depends then it makes sense for you to insure that building with an outside insurer. They take the risk, not you, of a low probability but high expense event.
They, of course, are insuring many such singly owned shops and can do the risk spreading of collecting all the premiums and paying out on the few fires.
Excellent, risk is spread and everyone is happier.
Now, move to being WalMart. You\’ve got umpty bazillion shops right around the world. You shuffling the fire risk off onto an outside insurer doesn\’t really make any sense. You\’ve already got a geographically spread risk, you\’ve already got enough stores that one burning down isn\’t a low risk but high cost event. You\’re probably actually at the point where one or another of them burning down is a certainty in any one year. Why let someone else wax fat off the investment earnings from the premiums?
Sure, you want all of the individual stores and units to act as if there is insurance, but risk to the organisation overall should perhaps be kept inhouse. So, you have an inhouse insurance subsidiary. Note that I\’ve no idea whether WalMart does: but I know that many oil companies do.
And this is what Glencore is doing. Self-insuring because they\’re a large enough organisation to do that.
Oh, and guess what? There\’s another reason the Murph is wrong as well.
In 2010, Glencore UK made a profit $186.5m on insuring itself with its parent,
They are actually insuring themselves too. This year\’s numbers are just part of the swings and roundabouts of such insurance.