Analysis: How rich oil firms are using a secretive court to fight capital gains tax in developing world

By George Turner from Finance Uncovered.

At a little known but powerful international court of arbitration, so secretive that senior officials decline to disclose even the dates of hearings, a new case has been filed that will pitch a mighty US oil major from Houston, Texas, against one of the world’s last Communist-run countries.

On the face of it, this battle between ConocoPhillips and the Socialist Republic of Vietnam is as dry as it gets. Hardly anyone has yet heard of it.

But the result could mark a significant shift in the way huge multinationals fight off the threat of taxes from desperate revenue authorities in developing countries.

For ConocoPhillips is using the not-so-glamourous Bilateral Investment Treaty Mechanism of the UN to launch a pre-emptive legal strike against Vietnam’s intention to levy an estimated $179m capital gains tax charge on oil fields sold by one of its UK subsidiaries.

Capital gains: A new frontier

Think of any of the major tax avoidance scandals that have dominated headlines in the last ten years: Google, Facebook, Apple, Nike, all have focused on profit shifting, the art of moving money out of profitable markets and into tax havens as a means of avoiding corporate income tax.

Most commonly, profit shifting happens when companies move revenues abroad, for example by billing their customers from an offshore company, or by invoicing a local business for fees and costs from an offshore company.

However, there is another important form of tax avoidance which multinationals frequently abuse but which has received little attention from the media: avoiding tax on capital gains.

Over the next few years, as more countries claim their resources have been bought and sold by foreigners tax free, this issue is likely to become a new frontier in the anti-tax avoidance campaign.

A capital gain is where a company or an individual sells an asset and makes a profit on that sale due to an increase in value of the asset being sold. Think of selling a house. The money you make by the virtue of your house increasing in value is your capital gain.

When it comes to major multinational mergers and acquisitions the capital gains can be enormous, and tax can easily be avoided if deals are structured offshore.

Capital gains tax: Made in Vietnam?

In 2012, a UK subsidiary of ConocoPhillips sold two other UK companies it owned, ConocoPhillips Gama Limited, and ConocoPhillips Cuu Long. It sold them to a UK company owned by Perenco, the Anglo-French oil firm. Perenco is also a party to the arbitration.

The only assets held by ConocoPhillips Gama and Cuu Long were Conoco’s oil interests in Vietnam.

ConocoPhillipsAccording to accounts filed at UK Companies House, ConocoPhillips sold the companies for $1.3bn making a profit of $896m. Buried in the detail of those accounts, a small note states that the company paid no taxes on that capital gain.

Why? Because Britain operates a loophole known as a “substantial shareholder exemption”. This means that profits on the sale of shares in subsidiary companies are not subject to capital gains tax in the UK.

But although the UK may choose not to levy any capital gains tax, that has not prevented Vietnam’s policymakers from trying to do so.

Under the terms of the UK-Vietnam tax treaty, Vietnam has the right to tax any capital gains made by UK companies that originate in Vietnam. If the profits on the deal were subject to the standard corporation tax rate in Vietnam, then ConocoPhillips could have to cough up an estimated $179m to the Vietnamese government.

So the question therefore becomes, what and where is the source of the profits?

If you are ConocoPhillips, the value is all in the shares, and the profit should be located in the UK. When we asked the company about the deal a spokesman said: “The sale was between two UK incorporated and resident entities with no taxable presence in Vietnam. The target companies are also UK companies. As a result, no taxes were owed on the sale in Vietnam.”

The Vietnamese government takes a different view, claiming the profits really arise out of the transfer of the oil assets. As these were located in Vietnam, it says that’s where they should be taxed.

Indeed, Vietnam has signalled its intention to tax the transaction – and that has alarmed not only the US oil giant, but also in all likelihood other similarly powerful corporations.

The potential precedent for multinationals

If Vietnam is successful, there could be profound implications for other developing countries, which have often seen Western companies make huge profits on their investments, only to walk away with them tax-free.

It is an issue that has concerned policymakers at the highest levels of the United Nations and the Organisation for Economic Cooperation and Development. In essence, the argument is: if multinationals make fortunes from a poorer country’s resources, then surely the host should have the right to levy the appropriate tax on the gains.

But ConocoPhillips is holding firm, telling Finance Uncovered that it would “pursue all available legal remedies to challenge any attempt by Vietnam to tax the transaction”.

And that is exactly what the company is doing with this new legal move: it wants to stop the threat in its tracks.

ConocoPhillips and Perenco have quietly filed a petition in the secretive investment tribunal, requesting it orders Vietnam not to levy the tax.

Unusually, the case is being brought under the UK-Vietnam Bilateral Investment Treaty, which is subject to an arbitration process run by a little known corner of the United Nations System, The United Nations Commission on International Trade Law.

The use of the Bilateral Investment Treaty Mechanism is itself controversial. Such disputes are expensive, opaque and are not usually used to settle tax disputes.

Cavinder BullNeither ConocoPhillips nor Cavinder Bull (pictured, left), a senior Singaporean barrister and chairman of the arbitration panel looking into the case, would disclose the location, or the dates, of the hearings.

And this case is thought to be the first to look at the issue of capital gains tax. If it goes ahead, that itself could act as a deterrent to developing countries trying to levy taxes because such battles cost fortunes in legal fees – about $5m a case, on average.

Michael Lennard is the Chief of the UN International Tax Cooperation Section who is currently on sabbatical as a visitor at the Oxford University Centre for Business Taxation. He has negotiated many tax and investment agreements, and speaking in a personal capacity he told Finance Uncovered: “The proceedings are held in secret, with expensive Western law firms often having to be hired to deal with arcane procedures.

“Most of the potential arbitrators in tax-related cases are not tax experts or else are tax advisers to corporations, with insufficient experienced and non-partisan arbitrators from the developing world (such as academics), not enough women and not enough younger experts.

“As a result it is extremely difficult for developing country governments to secure the expertise they need to defend these cases.”

For many, this reeks of injustice: big multinationals using the sledgehammer of a secretive and prohibitively expensive court to deprive developing countries of the revenue they feel is theirs.

Jayati Ghosh, a renowned professor of economics at Jawaharlal Nehru University in New Delhi, said: “Developing countries’ experience with the outcomes of such cases does not inspire optimism, as it is well known that the panels tend to be more investor friendly and generally support the claims of firms over the rights of governments or even the human rights of their citizens.”

Perenco declined to comment.

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Russia Decries Renewed Arms Race

Russia has decried Donald Trump’s withdrawal from a nuclear arms deescalation deal in a move that experts have called the ‘most severe crisis in nuclear arms control since the 1980s’ — as the U.S. president confirms the US will leave the 1987 Intermediate-Range Nuclear Forces Treaty (INF) agreement, citing “Russian non-compliance”.

Malcolm Chalmers, the deputy director general of the Royal United Services Institute stated that “If the INF treaty collapses, and with the New Start treaty on strategic arms due to expire in 2021, the world could be left without any limits on the nuclear arsenals of nuclear states for the first time since 1972.”

Wiping out the “entire transnational elite”.

Russia must develop the capability to destroy the US in a single swift blow if it wants to persuade the Americans to end the nuclear arms race and return to the negotiating table, military expert Konstantin Sivkov said.

In order to curb the aggression from the West, Moscow shouldn’t compete with Washington in number of nukes, Sivkov wrote in a new article.

If “areas with critically dangerous geophysical conditions in the US (like the Yellowstone Supervolcano or the San Andreas Fault)” are targeted by those warheads, “such an attack guarantees the destruction of the US as a state and the entire transnational elite,”

On Monday, US President Donald Trump warned Russia and China that Washington intends to build up its nuclear arsenal until “people come to their senses.”

The president said: “Unless Russia comes to us and China comes to us and they all come to us and they say, ‘Let’s all of us get smart and let’s none of us develop those weapons,’ but if Russia’s doing it and if China’s doing it and we’re adhering to the agreement, that’s unacceptable. So we have a tremendous amount of money to play with with our military.”

A dream of “single global superpower”.

Russian state news agencies on Saturday cited a foreign ministry source as saying Washington’s move to pull out of the treaty is motivated by a dream of a single global superpower.

“The main motive is a dream of a unipolar world. Will it come true? No,” a foreign ministry source told Ria Novosti state news agency.

Washington “has approached this step over the course of many years by deliberately and step-by-step destroying the basis for the agreement,” the official said, quoted by Russia’s three main news agencies.

Venezuela: Economic Warfare Brings Nation To Its Knees

Featured article from Mint Press News.

Which is mightier; the pen or the sword? In the case of the recent upheaval in Venezuela, the pen is the obvious answer.

The bankers fight using the pen — the pen that signs the paperwork to impose the sanctions that incur mass starvation, dissolve order, hike prices, and bring nations to their knees — Venezuela is in the crosshairs this time.

Last year, U.S. President Donald Trump signed a determination that singled out Venezuela for failing to adhere to counternarcotics obligations. The accusation came – perhaps not so coincidentally – on the same day that Venezuela declared it would no longer participate in the U.S.’ petrodollar trade system.

Venezuelan President Nicolás Maduro made his position clear, he had stated earlier in that month that the country would look to “free” itself from the dollar within a week’s time, following the U.S.’ sanctions against the embattled nation.

The decision is similar to that once made by former Iraqi leader Saddam Hussein, who dropped the dollar in favor of the euro a few years prior to the 2003 U.S. invasion of Iraq, we all know how that ended.

International markets thus far have failed to noticeably react to the policy shift, despite the threat it presents to the petrodollar system. The system, created in the 1970s, calls for OPEC nations to sell their oil in dollars in order to create artificial demand for the U.S. currency, a fiat currency based on thin air — held together by force.

Venezuela, home to the world’s largest oil reserves, is likely to exert some effect on the demand for dollars through its new policy, though the extent of the potential damage remains unclear. What is clear is that it means enough for the U.S. to declare a financial soft war in retaliation.

Millions of Venezuelans have seen their living conditions vastly improved through the Bolivarian process which shifted the focus away from compliance to the Western Banking Cartel.

The problems plaguing the Venezuelan economy are not due to some inherent fault in socialism, but to artificially low oil prices and sabotage by forces hostile to the revolution.

Starting in 2014, the Kingdom of Saudi Arabia flooded the market with cheap oil. This is not a mere business decision, but a calculated move coordinated with U.S. and Israeli foreign policy goals. Despite not just losing money, but even falling deep into debt, the Saudi monarchy continues to expand its oil production apparatus. The result has been driving the price of oil down from $110 per barrel, to $28 in the early months of this year. The goal is to weaken these opponents of Wall Street, London, and Tel Aviv, whose economies are centered around oil and natural gas exports.

Venezuela is one of those countries. Saudi efforts to drive down oil prices have drastically reduced Venezuela’s state budget and led to enormous consequences for the Venezuelan economy.

At the same time, private food processing and importing corporations launched a coordinated campaign of sabotage. This, coupled with the weakening of a vitally important state sector of the economy, has resulted in inflation and food shortages. The artificially low oil prices have left the Venezuelan state cash-starved, prompting a crisis in the funding of the social programs that were key to strengthening the United Socialist Party.

Corruption is a big problem in Venezuela and many third-world countries. This was true prior to the Bolivarian process, as well as after Hugo Chavez launched his massive economic reforms. In situations of extreme poverty, people learn to take care of each other. People who work in government are almost expected to use their position to take care of their friends and family. Corruption is a big problem under any system, but it is much easier to tolerate in conditions of greater abundance. The problem has been magnified in Venezuela due to the drop in state revenue caused by the low oil prices and sabotage from food importers.

Venezuelans told of how the privatizations mandated by the International Monetary Fund made life in Venezuela almost unlivable during the 1990s. Garbage wouldn’t be collected. Electricity would go off for weeks. Haido Ortega, a member of a local governing body in Venezuela, said: “Under previous governments we had to burn tires and go on strike just to get electricity, have the streets fixed, or get any investment.”

Chavez took office on a platform advocating a path between capitalism and socialism. He restructured the government-owned oil company so that the profits would go into the Venezuelan state, not the pockets of Wall Street corporations. With the proceeds of Venezuela’s oil exports, Chavez funded a huge apparatus of social programs.

After defeating an attempted coup against him in 2002, Chavez announced the goal of bringing Venezuela toward “21st Century Socialism.” Chavez quoted Marx and Lenin in his many TV addresses to the country, and mobilized the country around the goal of creating a prosperous, non-capitalist society.

In 1998, Venezuela had only 12 public universities, today it has 32. Cuban doctors were brought to Venezuela to provide free health care in community clinics. The government provides cooking and heating gas to low-income neighborhoods, and it’s launched a literacy campaign for uneducated adults.

During the George W. Bush administration, oil prices were the highest they had ever been. The destruction of Iraq, sanctions on Iran and Russia, strikes and turmoil in Nigeria — these events created a shortage on the international markets, driving prices up.

Big oil revenues enabled Chavez and the United Socialist Party to bring millions of Venezuelans out of poverty. Between 1995 and 2009, poverty and unemployment in Venezuela were both cut in half.

After the death of Chavez, Nicolas Maduro has continued the Bolivarian program. “Housing Missions” have been built across the country, providing low-income families in Venezuela with places to live. The Venezuelan government reports that over 1 million modern apartment buildings had been constructed by the end of 2015.

The problems currently facing Venezuela started in 2014. The already growing abundance of oil due to hydraulic fracturing, or fracking, was compounded by Saudi Arabia flooding the markets with cheap oil. The result: massive price drops. Despite facing a domestic fiscal crisis, Saudi Arabia continues to expand its oil production apparatus.

The price of oil remains low, as negotiations among OPEC states are taking place in the hopes that prices can be driven back up. While American media insists the low oil prices are just the natural cycle of the market at work, it’s rather convenient for U.S. foreign policy. Russia, Venezuela, Ecuador, and the Islamic Republic of Iran all have economies centered around state-owned oil companies and oil exports, and each of these countries has suffered the sting of low oil prices.

The leftist president of Brazil, Dilma Rousseff, has already been deposed due to scandal surrounding Petrobras, the state-owned oil company which is experiencing economic problems due to the falling price of oil. Although much of Brazil’s oil is for domestic consumption, it has been revealed that those who deposed her coordinated with the CIA and other forces in Washington and Wall Street, utilizing the economic fallout of low oil prices to bring down the Brazilian president.

The son of President Ronald Reagan has argued that Obama intentionally drove down oil prices not just to weaken the Venezuelan economy, but also to tamper the influence of Russia and Iran, Trump has continued this foreign policy.

Writing for Townhall in 2014, Michael Reagan bragged that his father did the same thing to hurt the Soviet Union during the 1980s:

“Since selling oil was the source of the Kremlin’s wealth, my father got the Saudis to flood the market with cheap oil.

Lower oil prices devalued the ruble, causing the USSR to go bankrupt, which led to perestroika and Mikhail Gorbachev and the collapse of the Soviet Empire.”

Read more here.