Legal Aspects of International Trade and Enterprise Global Energy

Question: Discuss about theLegal Aspects of International Trade and Enterprise for Global Energy. Answer: Company Profile Glencore plc, Global Energy Commodity Resources, is a multinational Anglo- Swiss company, newly formed in May 2013 through a merger of Glencore and Xstrata, and is headquartered in Baar, Switzerland. Originally, Glencore was formed in 1974 by Marc Rich while Xstrata was founded in 1926 as an infrastructure and electricity project company. The company has significant interests in mining industry business and majorly deals with mining and processing of metals and other minerals, oils, natural gas, coal, crude oil and Agricultural products. Glencore plc has operations in over 50 countries across the world among them, Australia and has workforce of over 154,000 employees globally. In Australia, the company is headquartered in Sydney and has a workforce of over 16,000 employees, quite a significant figure compared to total global number of employees in the company. Australia, being endowed with many natural resources such as coal, nickel, oil and zinc, has provided a great opportunity to Glencore plc to invest in mining and processing of the natural resource in the country. The company has been in business in Australia for last 20 years and has grown to be one of the major employers in Australia. Currently, the company has 3% market of world oil consumption and it is the world 4th largest commodity trader in the world with annual revenue of over 300 billion USD in the year 2015 and a net income of over 10 billion USD in the same financial year under review. The company has had to undergone some business changes in Australia such as when it decided to close down its underground coal mining in Queensland Australia by the year 2015. The company has also undergone strategic diversification by focusing more on items or commodities that are used in daily basis such plastic and cutlery. The current Glencore plc CEO is Mr. Ivan Glasenberg, who steers the company towards continuous achievement of organizational objectives as well as business strategy. ("Home - Home | Glencor e Australia", 2017) Regulations Affecting Glencore Plc Business in Australia Corporate Tax One of the regulations affecting Glencore plcs business in Australia is the 30% corporate tax imposed by the Australian authorities to corporates in Australia. Glencore having deep operations in the country is too facing this and its required to remit 30% of its earnings to the government as corporate tax. This affects the business operations of Glencore because it eats into its margin of profit. Once the margin of profit has been reduced the company will be unable to finance future expansions as the mining business is quite capital intensive. The 70% earnings remaining after deducting the corporate tax levy, is what the company will need to share with the investors or the shareholders of Glencore and the remaining little amount to be used for expansion. Thus 30% corporate tax in Australia is not competitive compared to other better economies like United Kingdom which corporate tax is at 19% and Switzerland at an average of 24%. Therefore, it is a challenging business environment to Glencore plc to operate under such tax regime and maintain desired level of growth, if it does no have tax credits and financially strong subsidiaries across the world to fund its rapid growth and expansion plans. Huge corporate tax also affects the prices of the commodities manufactured or processed by Glencore plc. All the business as well the profits is always footed by the consumer of the product. Thus Glencore is forced to increase the prices of its commodities in the market thereby affecting their competitiveness, which in turn may lead to low sales and low revenue collection and profit for the company. With this rate of corporate tax the Glencore may face challenges in attracting and retaining best talents due to low pay necessitated by harsh tax regime. Best talents help the company to grow faster because best talents usually make best decisions for the company thus allowing it to grow with less unforeseen challenges. (Dagwell, Wines, Lambert, Psaros, 2012) Australian Diverted Profits Tax Llaw This law on tax, recently enacted has some punitive measures that will affect the multinational companies including Glencore plc. The law requires that upon preliminary assessment and the outcome is a suspicion of diverted profit then, the multinational company in question will need to make tax payment at 40% penalty rate irrespective of whether the assessment is correct or not. Further to this, if there is an assessment of diverted income then the appeal process has been extended to 12 months, all this time the government is holding the company funds paid in terms of tax at penalty rate, limiting growth and expansion plans for the company. The law has also restricted admissible evidence to counter assessment verdict of diverted income. This change in the law affects Glencore plc in that it slows the company plans for growth and expansion. The question of whether an income is a diverted income or not, is a matter of interpretation of business process, Glencore being a multinational c ompany has resources across the world these resources can be put together to for the purposes of generation of profit or income. The company will then, based on its assessment, determine which subsidiary takes which amount of profit according to how the resources were used. This assessment can totally change in the eyes of the government official when determining whether the company diverted profits or not and consequently leading to Glencore plc paying tax at 40% penalty rate awaiting 12-month appeal process. This further eats into the profits realized by the company affecting its growth and development plans. (Drebler, Overesch, 2012) Treaties and Conventions Kyoto Protocol Kyoto protocol is an international climate treaty developed by United Nations Framework convention on climate change. The treaty holds that state parties to the agreement commits to reduces greenhouse house gas Carbon (iv) oxide emission to the environment by a certain agreed percentage of the previous level of emission, based on the fact that global warming which leads to desertification and raising ocean water levels among other effects are caused by human made carbon (iv) oxide emissions. Glencore being a mining and processing industry player is affected by this treaty in a number of ways, after Australia became full member of the Kyoto protocol agreement in 2008. To be able to implement Kyoto protocol Glencore will be required to reduce use of coal power or carbon based power such as fuel in its industries. (Massai, 2014) This means that the company will need to invest in clean energy production such as wind power and solar systems to power its machines instead of using fuel whic h emits the CO2 or carbon (iv) oxide gas. This therefore meant that Glencore had to phase out machines that largely depended on fuel to new technologies and innovations that will lead to reduced greenhouse gas emission. Not all the countries in the world ratified the treaty like Australia did. Most countries in Latin America and Africa are yet ratify or even follow through the implementation of the ratified treaty. Mining industries in these nations are not therefore required to invest in new technologies that do not necessarily translate to higher profits but majorly aimed at reducing the greenhouse gases, not affecting the cost of production. Australian government follows through implementation of the signed treaties, and Kyoto protocol being one of them necessitated that Glencore plc invest extra amount of capital to comply with the protocol, a scenario which leads to increased cost of production. Mining and processing industries operating in non-member states of Kyoto protocol d id not need to invest in new technologies aimed at reducing the greenhouse gas emission to the environment thus their cost of production is lower compared to Glencore. (Massai, 2014) This then, lead to reduced profit margin for Glencore plc or increased market rates for Glencore plcs products and reduced competitive edge in the market, which led to low or poor sales. The market forces are always at play and customers purchasing the products are not known to be considerate of treaties under which the product was processed or manufactured such as UNs Kyoto protocol, all which is important to the market is the price and quality of the product. Thus in view of this market force, Glencore products faced stiff competition in market from companies operating in non-Kyoto compliant states such as those in Latin America. The protocol also requires that member states contribute funds to try and reverse the damages to the environment caused by the greenhouse gases already emitted to the environ ment. The Australian government being the implementer of the treaty collects funds from Australian industries affected by the treaty such Gelncore plc to fund these projects carried out by the UN, thus further increasing cost of production. (Massai, 2014) Free Trade Agreements FTAs Australian government has signed various free trade agreements or what is commonly known as FTAs with a number of countries such as China, Japan and United states. These international treaties effectively open up the market for more competition with major aim being having more commodities at the stores shelves and at a lower rates. The treaties do not lay more emphasis on promoting and shielding local industries from harsh oversees competition. Countries like China are very industrialized with many innovations such that many factors of production have low rates owing to the stiff competition in the country coupled with large population that makes economies of scale a reality in Chinese market. Therefore, Industries in China are able to produce with significantly low cost of production compared to other industries in other countries such as Australia, but leverage on huge market thus making small profit margins but with considerably high volume of sales. Glencore plc being a player in Australias Agricultural sector has interest in handling, processing and marketing agricultural products such Sugar, cotton, vegetable oils and biodiesel among other products. The signed free trade agreements between Australia and China, Japan and USA did not include some agricultural products such Sugar. This effectively means as much Chinese, Japanese and USA markets are not open to sugar from Australia on free trade. Thus any sugar commodity exported to these markets from Australia attracts huge duty and tax levies which make them uncompetitive in those markets. Export market is one of the Glencore plc strategic market expansion plan and when free trade agreements are signed with different countries and excludes some Agricultural products, Glencore is forced to look for agricultural-products market elsewhere missing out on big economies markets like USA and China. To put this into perspective, Chinese market has over 1.4 billion people which hypothetically majority of them consum e sugar and in USA the market has over 330 million people, while Japan market has in excess of 128 million people. Therefore, an FTA excluding Australian sugar from these markets effectively locks out the commodity form a market of about 1.45 billion people out of 7 billion world population. It is also important to note that three markets have fairly larger purchasing power than majority of the remaining markets. The narrowed market for Glcncore sugar meant that the product is only majorly available in Australian local market but not much in oversees market. 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