Commodity trading – what is Switzerland hiding?

Note to tax officials around the world: if you want more tax revenue, take a closer look at Switzerland, where a massive commodity trading sector may be fuelling illicit (untaxed) financial flows worth billions of dollars each year.

Better known for its picturesque mountains, Switzerland has by far and away the world’s largest commodity trading sector, now accounting for more than a third of the world’s trade in oil and grain, half of the global trade in coffee and sugar, and nearly two thirds of the trade in metals and minerals.

Commodity traders play a critical role in matching supply and demand around the world, generating jobs and revenue in the process.

But Swiss-based traders may be engaging in tax evasion, through an illegal practice called trade mispricing, according to a report last month by the Center for Global Development (CGD).

Indeed, Swiss-based trade mispricing may account for illicit financial outflows from developing countries worth as much as US$120 billion per year, the report Estimating Illicit Flows of Capital via Trade Mispricing, says.

Note to tax officials in the OECD: Even if you are not interested in the fate of developing countries, you may be interested to know that Swiss-based commodity trading may also account for illicit (untaxed) financial flows into OECD countries worth as much as US$575 billion per year, according to the report.

Here’s how trade mispricing works. A seller (in Zambia, say) sells a commodity (copper, for example) to a buyer in Switzerland. Between them, they deliberately under-declare the price of the copper (and therefore the total value of the trade) in order to pay less tax. This false declaration on import or export values is called trade mispricing. It is illegal and it accounts for an estimated 80 percent of the world’s illicit financial flows.

Indeed, these illicit financial flows may have cost Sub-Saharan Africa as much as 5.7 percent of its GDP over a ten-year period, preventing millions of people from accessing better services such as health and education.

Chaired by former UN Secretary-General Kofi Annan, the Africa Progress Panel showed in a recent report that natural resources are a key source of illicit financial outflows from Africa. And this helps to explain why so many resource-rich African countries have struggled to convert natural resource wealth into human development.

Switzerland’s possible role in this global phenomenon is compounded by Swiss financial secrecy, which extends to its commodity trading sector too.

This secrecy is especially true for Switzerland’s transit trade, whereby Swiss-based traders organise transport from one country to another, without the commodities actually entering Switzerland.

Accounting for the majority of Switzerland’s commodity trade, this transit trade is both enormous and secretive. Between 2001 and 2011, Swiss receipts from its transit trade increased by a factor of fifteen, the researchers say. And since then, transit trade has replaced the financial services of Swiss banks as the country’s leading services export, they add.

And yet Swiss secrecy means we know very little about it. Indeed, the lack of detailed transit trade data means the researchers are unable definitively to confirm (or reject) their trade mispricing hypothesis, resulting in a wide range of estimates from US$8 billion up to US$120 billion.

“Switzerland’s dominance of commodity trading, combined with the financial secrecy it offers, may create a significant risk to appropriate pricing in international trade,” the report says.

“The scale of even our most conservative estimates suggest that the phenomenon should concern policy makers in Switzerland and internationally,” it adds.

Launching a review of its commodities sector in March 2013, the Swiss government notes the strategic importance of commodities, reputational issues, and the related challenges of corruption, human rights, and environmental protection. A progress report is due at the end of next month.

Switzerland has already made efforts to open up its banking. And it certainly faces stiff competition from states such as Dubai and Singapore to host the big commodity traders. But with its reputation already taking a hit,
Switzerland must help open up the secretive commodity trade or face ever-increasing external pressure.

“An important first step would be a Swiss commitment to meet international norms of trade transparency,” the report says.

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