Figure 1: Revenue and profits by region (BASF Report, 2016: 91)
BASF is one of the largest chemical companies in the world and has annual revenues of 60 billion euro. The corporation makes just under 5.3 billion euro in profit and pays out approximately 1.1 billion euro in taxes2 and 2.6 billion euro in dividends.3 This makes BASF one of Germany’s and the world’s largest taxpayers and most profitable companies. A share price increase of 7,000 euro, plus dividends worth 2,500 euro, means that anyone who bought 100 shares from BASF 10 years ago (when they were valued at around 2,000 euro) would now make a profit of 9,500 euro.4 In contrast, subcontracted miners in South Africa earned a daily wage of between 13 and 14 euro5 – they would have to work for almost three years (nearly 700 days) to earn 9,500 euro. A study commissioned by the Greens–European Free Alliance in the European Parliament shows that BASF used tax loopholes to save approximately 923 million euro during the five-year period between 2010 and 2014; this amounts to just under 200 million euro in taxes every year. The loopholes the corporation employs are clear from its publicly available financial statements.
BASF has 359 production sites in over 80 countries and 114,000 employees. Its publicly listed parent company, BASF SE, with its headquarters in Ludwigshafen in Germany, owns just under 600 companies throughout the world. South Africa is both a production site and a major source of the platinum used in the catalysts the corporation produces. BASF has nine subsidiaries and associates in South Africa, four of which are listed in its consolidated financial statements. Catalyst production is part of the company’s largest business segment (‘functional materials and solutions’, amounting to 33 per cent) and accounts for approximately one-tenth of the corporation’s annual revenues (6 billion euro). The company buys platinum valued at about one-tenth of this price (600 million euro). BASF’s UK subsidiary, BASF Metals Limited, which manages BASF’s platinum trading, is one of the largest platinum traders on the London Metal Exchange.
BASF’s tax and corporate structure: What we know, what we think, and what we can only guess
Every year, BASF publishes countless reports describing its economic situation; some are aimed at investors, others are provided to the tax authorities. The most important report for investors is the Financial Statements and Management Report published by the corporation’s parent company, BASF SE. This report sets out the corporation’s consolidated financial statement and its profits, which also determine the dividends that are paid out to shareholders, and, once BASF has offset internal transactions with its subsidiaries, the corporation’s tax liability. The consolidated financial statement also lists BASF’s 294 major subsidiaries and associates. In addition to its annual report, BASF prepares reports for its individual subsidiaries, some of which are publicly available (for example, those published in the Netherlands, Belgium, the UK and Germany) whereas others (such as those from South Africa and Switzerland) are not. Sometimes, these reports enable conclusions to be drawn about the business relations that BASF has with its individual subsidiaries. However, even if the corporation were to publish all of these reports, the figures they provide would not be directly comparable with those set out in the financial statements as various adjustments are made for consolidation. BASF files separate tax returns for its subsidiaries in each of the countries in which they operate. The regulations that apply in each case, such as when profits have to be posted, the expenses that are deductible and the way in which investments are valued, differ from country to country and thus also from the regulations that apply to the BASF’s consolidated financial statement. Combined with the fact that tax disputes may take many years to resolve and because tax returns may face future legal challenges, these issues mean that the figures provided by BASF in its publicly available financial statements are of limited value. Importantly, tax returns almost always remain confidential.
Where BASF earns its money
According to BASF’s 2016 annual report, almost 50 per cent of its 114,000 members of staff are employed in Germany. Despite this, the companies that BASF has registered in Germany generated a ‘mere’ 30 per cent of its sales and 25 per cent of its operating profits; sales to German customers constituted ‘just’ 13 per cent of total sales. At first glance, this probably means that German employees, in particular the 35,000 employees at its corporate headquarters, take on tasks such as administration or research for subsidiaries located in other countries and that German subsidiaries export their products abroad. The regulations on segment reporting mean that – apart from the details that it provides in its annual report – BASF does not have to publish any further information about its staff, the breakdown of its revenues or the profits it makes throughout the world.
If the figures that BASF posts on sales are compared with the profits it reports from the various regions in which it operates, the rest of Europe appears to be highly profitable, particularly when compared with Germany and North America. In fact, the figures seem to suggest that although BASF only generated 17 per cent of its revenues in the rest of Europe, these locations were responsible for 33 per cent of its operating profits. Moreover, as only 15 per cent of BASF’s employees work in the rest of Europe, these figures imply that the company’s staff there are far more productive than those in Germany and North America. However, this situation could also be due to various operational differences – for example, if the oil and gas business were to be stronger in some regions than in others (80 per cent of the company’s revenue in this sector is generated in Europe) or if it employs a different relation between revenue and profit than its other fields of business. However, it could also be caused by profit shifting.
Figure 1: Revenue and profits by region (BASF Report, 2016: 91)
BASF can use internal transactions and the transfer prices it sets to shift both its revenue and the profits it makes from one country to another – preferably, of course, to a country where it is taxed as low as possible. When a BASF subsidiary in the Netherlands, for example, provides a credit to a subsidiary in the US, it can charge interest on the loan. This interest is then deducted from any profit made by the US subsidiary and added to that made by the Dutch subsidiary. (Figure 4 provides further examples of how such internal transactions work.)6
Although the table does not provide any separate data for BASF’s South African subsidiaries, these are probably not particularly significant. Unlike Germany, the South American, African and Middle Eastern regions generate more revenue from local customers than can be accounted for by BASF’s subsidiaries in these regions. On the one hand, this could just mean that they import more than they export. However, it could also mean that BASF is transferring goods between its subsidiaries or internally charging them for services, trademarks and other intangible assets.
Figure 2: Profits and revenue according to the subsidiary’s or customer’s location (BASF Report, 2016: 90)
Like all companies, BASF has to pay taxes in the country in which its economic activities take place. Therefore, it has to pay property taxes where it owns factories, payroll taxes where it employs people and sales taxes either in the country in which it sells a product or where its consumers are located. Importantly, the corporation only partially discloses information about these taxes in its annual report.7 Instead, the report – as well as the international debate on profit shifting – focuses on income tax; in Germany this applies to business and corporation tax. According to BASF’s 2016 report, the corporation’s tax bill amounted to 1.654 billion euro. After deducting deferred taxes and taxes due at a future date (mainly due to pension provisions), in 2016 BASF was required to pay 1.140 billion euro in taxes (21.1 per cent of its profits). About one-third of its tax liability was payable to Germany (589 million euro) with two-thirds going to other countries (1.184 billion euro).
As the corporation does not provide a more detailed breakdown of its tax liability, the details of the way in which its taxes are distributed between Germany and other countries are of limited significance. However, if its extraordinary expenditure (deductions, interest) is distributed evenly across the regions, the company paid a tax rate of 29.8 per cent in Germany and 20.2 per cent in the other countries in which it operates.
| Million Euro | 2016 | 2015 |
| Current tax expense | 1.654 | 1.610 |
| Corporate income tax, solidarity surcharge and trade taxes (Germany) | 598 | 514 |
| Foreign income tax | 1.184 | 1.231 |
| Taxes for prior years | (119) | (135) |
| Deferred tax expense (+) / income (-) | (514) | (363) |
| From changes in temporary differences | ( 473) | ( 314) |
| From changes in tax loss carryforwards / unused tax credits | (43) | ( 59) |
| From changes in the tax rate | ( 6) | 7 |
| From valuation allowances on deferred tax assets | 8 | 3 |
| Income taxes | 1.140 | 1.247 |
| Other taxes as well as sales and consumption taxes | 272 | 302 |
| Tax expense | 1.412 | 1.549 |
Figure 3: Tax expenditure (BASF Report, 2016, Appendix, n.11)
How BASF reduces its tax liability
‘BASF attaches great importance to strict compliance with tax laws throughout the world [...]. Taxes are a cost factor and have an impact on business decisions. In the interests of its shareholders, BASF seeks to reduce this cost within the framework offered by current tax legislation.’8
According to Toxic Tax Deals, a report drawn up by the Greens–European Free Alliance in the European Parliament, BASF managed to save at least 923 million euro in taxes between 2010 and 2014. This amounts to 10 per cent of the corporation’s total tax liability during this period. The report demonstrates that BASF used a variety of mechanisms and country-specific tax laws to reduce the tax it was required to pay, and that these schemes generally involve profits being shifted from high-tax countries (such as France and the US) to low-tax countries or those with special rules for foreign profits (such as Switzerland and Puerto Rico). This is often done by charging subsidiaries in low-tax intermediates (the Netherlands, Belgium or Malta) for services, such as loans, the use of patents or trademark rights and administrative services. The taxes that this enables BASF to avoid can then either be reinvested or paid out as dividends.
| Path of transaction | Type of transaction | Savings (in million euro)9 |
| from France | A subsidiary producing in France makes very little profit (0.41% of its revenues). | 37.7 |
| to Puerto Rico | Thanks to various exemptions, BASF effectively pays just 2.4% tax on profits in Puerto Rico. | 163.3 |
| to Switzerland | Profits in the Zurich office of BASF Agro BV (the Netherlands) and other subsidiaries in Zug (Switzerland) benefit from lower foreign tax rates (of between 5% and 8%). | 255.2 |
| via the Netherlands | BASF’s Dutch holding company receives almost 6 billion euro in tax-free dividends from its foreign subsidiaries. If this money had been transferred to Germany, it would have faced a minimum 5% tax rate. A Belgian subsidiary provides a loan to a subsidiary in the US. In the US, interest payments for ‘hybrid loans’ are tax-deductible; they are then converted into tax-free dividends in the Netherlands. The tax rate on research expenditure and patents is only 5% instead of the usual 25%. Profit reduction due to write-down on investments in subsidiaries of 288.5 million euro. |
73.3 177.9 72.1 |
| via Belgium | Income of 618 million euro in corporate loans of 15.39 billion euro is almost tax-free in Belgium thanks to a special rule. An agreement existed with the Belgian tax authorities on surplus profits. The European Commission has since deemed this agreement to be illegal state aid. |
202 46 |
| via Malta | A tax rebate is provided to a Malta-based German company for income as interest. | ? |
| Total | 923 million euro |
Figure 4: An overview of the tax loopholes used by BASF and documented by Toxic Tax Deals
In most cases, the tax savings listed in the report are based on a comparison of the average BASF tax rate paid in the years concerned (26.5 %) and are therefore only approximate.
Toxic Tax Deals uses publicly available data from trade balances (notably from BASF’s Dutch subsidiaries) to illustrate a whole range of ways in which BASF could be shifting its profits. These are summarised in Figure 4. The report explains the advantages of using a Dutch holding company by demonstrating how BASF Nederland BV can shift profits around the world. Profit shifting ensures that profits are subject only to marginal levels of taxation, and, if a company’s income has been taxed elsewhere, it can be transferred back to the EU almost tax-free. BASF Nederland B.V. has at least 56 direct and indirect subsidiaries in 13 countries around the world, including South Africa and BASF Metals GmbH in Switzerland.
During the five-year period covered by the report, these companies transferred almost 6 billion euro in dividends to the Netherlands. As these dividends – in theory at least – should have been taxed in the country from which they were transferred, they are tax-exempt in the Netherlands. In practice, however, these funds would have either been taxed at a very low tax rate or not at all. If they had been transferred to Germany, a flat-rate tax would have been imposed on at least 5 per cent of the dividends. This clearly demonstrates that BASF can save taxes by transferring its profits to its Dutch subsidiary. Importantly, the company’s 2016 consolidated financial statement reports that its subsidiaries made retained profits of just under 9 billion euro – BASF either paid no tax on these profits or will simply reinvest them for an unspecified period. Be this as it may, the lack of data means that it is impossible to determine whether, and the extent to which, this situation came about through profit shifting.
In another example, the report compares the profit margins of three interconnected agrochemical corporations: a subsidiary with three factories in France; a branch of a Dutch subsidiary with a factory in Puerto Rico; and a Dutch management company with 39 employees and its headquarters in Switzerland. Whereas the French subsidiary made a profit of just 0.41 per cent and therefore paid very little tax, BASF’s subsidiary in Puerto Rico – a country in which BASF enjoys generous tax exemptions – made 39.9 per cent profit. Furthermore, BASF’s subsidiary in Switzerland, which mainly trades with other subsidiaries (including the French subsidiary), still recorded 14.2 per cent profit. It is highly doubtful that these differences are due to Swiss diligence or the country’s inspiring alpine panorama, or even the better climate in Puerto Rico. Instead, it is far more likely that these discrepancies are due to internal profit shifting. Until 2017, BASF Metals GmbH, which handles the corporation’s platinum trading, was also based in Switzerland, and the corporation’s annual report states that it made 25 million euro in profits between 2010 and 2013.10
All of the examples and figures presented above are based on publicly available trade balances (and particularly those provided by BASF’s Dutch subsidiaries). Unfortunately, this means that they are only rough estimates and based on speculation. In response to Toxic Tax Deals, BASF stated: ‘The report appears to be very detailed regarding the alleged structures, but it is not always accurate.’ Moreover, BASF stressed ‘the sovereignty of individual countries to encourage investment through tax incentives’. Although the company’s documented approach uses existing laws and loopholes and interprets them in a specific manner, this need not necessarily imply that BASF’s conduct is illegal. The very nature of tax loopholes means that they are neither legal nor illegal until they have been contested by a tax authority and a court has issued a binding judgment about them. Nevertheless, this has already occurred in one of the cases documented by the report: a Belgian law of 2004 that permitted companies to transfer ‘excess profits’ from foreign companies to Belgium was declared illegal by the European Commission in 2016. However, the European Court of Justice has been dealing with this case since the beginning of 2017 and has yet to make a final judgment.11 Nevertheless, once it does, BASF’s argument that everything is ‘completely legal’ may be on shaky ground.
How platinum is exported from South Africa throughout the world
South Africa is the world’s largest producer of platinum, the majority of which is used to produce catalysts. In 2016, almost 280 tonnes of platinum were produced worldwide, including 66 tonnes from recycling and 213 tonnes from mining (the majority of which – 70 per cent or 150 tonnes – is mined in South Africa). Nearly half of South Africa’s total production (42 per cent or 116 tonnes) was used to produce catalysts with the rest mainly required for jewellery (33 per cent) and other industrial products (24 per cent).12 The chain between miners in South Africa and car buyers in Germany involves a whole series of actors and mechanisms that ensure that profits are more likely to remain in Germany than South Africa. According to BASF, most of the platinum used for catalysts ends up in Europe.
Figure 6: Revenue from catalysts by region (BASF Report, 2016: 78)
Most of the platinum in South Africa is mined by a small number of large companies. Lonmin, the owner of the mine in Marikana, owns the third-largest platinum reserves after Amplats and Implats.13 However, much of its reserves are located in the traditional mining zones close to Rustenburg, where the mines are older, deeper, more labour-intensive and, therefore, more expensive. After several years of very high profits, Lonmin began making losses in 2010 due to the sharp fall in world market prices and the rising costs of wages, security and development. Whereas back in the boom year of 2002, Lonmin’s annual report stated that 12 per cent of the company’s income was spent on wages, 17 per cent on taxes and 56 per cent went to shareholders. In 2015 80 per cent was spent on wages, 0.3 per cent on taxes while shareholders received no dividends at all.14 The sharp drop in prices was probably caused by oversupply due to a lack of coordination between producers and the increasing availability of recycled platinum. Recycling chains and dealers also have an impact on price.
Organisations such as Global Financial Integrity (GFI) continue to stress that capital is being illegally shifted from poorer producer countries to richer countries with large international capital markets. GFI argues that companies are declaring the wrong quantities and prices at customs and estimate that this applies to between 4 per cent and 11 per cent of global trade volume;15 this results in annual losses of up to 20 billion euro. GFI’s estimate is based on discrepancies in trade data – in other words, between the levels of exports reported by South Africa and the levels of South African imports declared by the country’s trading partners. Moreover, a comparison of data from the UN Comtrade database16 on platinum demonstrates that both the volume of platinum that is recorded as having been exported and its value are far below the actual volume and the price of what is being imported. The data from Switzerland and Britain are particularly worth emphasising as these countries report that they receive far fewer imports than South Africa states that it exports to them.
Figure 7: Platinum exports from South Africa (data from UN Comtrade)
Owing to numerous problems with this data,17 a detailed interpretation is beyond the scope of this chapter.
What role does BASF Metals play?
Although BASF obtains some of its platinum from Lonmin, it provides no information about the exact extent of the companies’ business relations. Until 1 September 2017, BASF’s platinum trade was conducted by BASF Metals GmbH in Switzerland; it is now the responsibility of BASF Metals Limited in London,18 a subsidiary of BASF Catalysts UK Holding Limited, which, in turn, is a subsidiary of BASF Nederland BV.
In 2016, BASF Metals Limited had a total of 27 employees trading in precious metals (including platinum) yet made a profit of 24 million euro and paid 4.8 million euro in taxes. BASF Metals Limited is one of the largest platinum traders on the London Metal Exchange (LME) and, together with the three banks Goldman Sachs, HSBC and Standard Bank and, more recently, Johnson Matthey (a further catalyst manufacturer), fixes the price for the physical trading of platinum twice a day.19 In a 2014 indictment, BASF, among other companies, was accused of price manipulation by a jewellery producer.20
A range of additional data would be needed before a conclusion could be made about how BASF distributes its profits from the platinum trade and its subsequent catalyst production throughout the world. The same applies to the distribution of BASF’s social insurance contributions in the form of taxes on the huge profits it makes. However, the available data certainly indicate that the corporation’s profits from the platinum trade and its taxes are being unfairly distributed.
A number of small changes could be made to improve this situation. The European Union could oblige BASF to disclose the revenues and profits the corporation makes and the taxes it pays in the countries in which it operates. This would make it easier for the public and for tax authorities to assess whether BASF really is involved in profit shifting. Thanks to the OECD 2015 initiative on profit shifting (BEPS) and its implementation via the EU anti-tax avoidance directive,21 most of the world’s major corporations have had to share this data with certain tax authorities since 2016 – this also applies to South Africa. However, this data is still inaccessible to most other tax authorities in Africa and developing countries. This issue could be resolved by publishing country-by-country reports, and this would also increase the pressure on tax authorities to take action. Some companies – including EU banks and mining companies – already have to publish their reports, and a directive adopted by the European Parliament in 2017 aims to extend this obligation to all companies with revenues of more than 750 million euro.22
South Africa could ensure that companies operating in its territory publish their accounts in the country, and could also strengthen tax and customs controls while continuing to work for a full-fledged UN committee on taxation.23 Furthermore, South Africa has yet to join the global Extractive Industries Transparency Initiative (EITI) (see the chapter by Michael Reckordt) doing so would provide more transparency in the mining sector.
Finally, BASF could end the lobbying it undertakes against existing tax legislation and, instead, call for improvements to be made to corporate taxation, such as by supporting the EU’s proposed common consolidated corporate tax base. Finally, there are no legal frameworks that prevent BASF from providing increased transparency in its annual reports and opting for a more serious level of corporate responsibility. This also applies to its supply chain, its many public statements and the measures it already implements.
1 Piel, E. (1974) Multinationale Konzerne und internationale Gewerkschaftsbewegung, Schriftenreihe der Otto-Brenner-Stiftung, vol. 2, Frankfurt/Main p. 48.
2 Taxes payable in 2016, excluding deferred taxes (100 million euro) and deferred tax income (514 million euro).
3 BASF’s shares are mainly owned by German private investors (29%) and German institutional investors such as banks and funds (11%) as well as institutional investors from the US (18%), Britain and Ireland (11%) and the rest of Europe (17%).
4 www.finanzen.net/dividende/BASF
5 According to Lonmin’s 2016 annual report, permanent underground workers earn between 20 and 22 euro whereas subcontractors (and their number is increasing) earn between 13 and 14 euro. See p. 312 (for payslips from a temporary worker at Lonmin from February 2016).
6 International regulations do not specifically stipulate how revenues and profits should be delineated. BASF initially used operating profit excluding special items until its second quarter and has since switched to earnings after special items (but before taxes and interest). However, this does not constitute a particularly large overall change. Figure 1 is also available as an Excel table from www.bericht.basf.com/2016/de/konzernlagebericht/regionenbericht.html.
7 109 million euro for property taxes and 163 million euro for sales, consumption and other taxes.
8 BASF’s response to Marc Auerbach, Toxic Tax Deals: When BASF’s Tax Structure Is More about Style than Substance (The Greens–EFA Group, 2016), www.greens-efa.eu/legacy/fileadmin/dam/Documents/Studies/Taxation/ToxicTaxDealsVF2.pdf
9 In most cases, the tax savings listed in the report are based on a comparison of the average BASF tax rate paid in the years concerned (26.5%) and are therefore only approximate.
10 Since 2014, BASF no longer publishes the profits made by its individual subsidiaries as part of its consolidated financial statement.
11 See http://curia.europa.eu/juris/case Celio International v Commission can be found by searching for case number T-832/16
12 See www.platinuminvestment.com/supply-and-demand/platinum-quarterly/.
13 See www.fes-southafrica.org/fileadmin/user_upload/documents/SWOP_BREAKFAST_PAPERS_2.pdf, p.10.
14 BASF Report 2016, p. 35.
15 See, for example, www.gfintegrity.org/report/illicit-financial-flows-to-and-from-developing-countries-2005-2014/.
16 See www.comtrade.un.org/data. Data refer to product codes 711011 (platinum, unwrought or in powder form) and 711019 (platinum, semi-manufactured).
17 For an overview, see www.cgdev.org/sites/default/files/trade-misinvoicing-developing-countries.pdf/.
18 BASF Media Release, 19 October 2016, www.basf.com/documents/ch/20161019-BASFMetals-PI-DE-final.pdf
19 www.lme.com/metals/precious-metals/platinum/.
20 Case reference: 1:14-cv-09391-GHW, www.law360.com/cases/547e094848511a63b6000003
21 Directive 2016/1164 of 12 July 2016, www.eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016L1164&from=EN.
22 Co-decision procedure COD 2016/0107: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52016PC0198&from=EN
23 See www.un.org/esa/ffd/wp-content/uploads/2017/04/ICTM2017_Presentation_SouthAfrica.pdf.
Pay slip of a worker from October 2016 who is employed indirectly by Lonmin via a temporary employment agency. The wage amounts to the equivalent of approx. 220 euro; health and pension insurance as well as social benefits are not included. For a long time, workers, trade unions, scientists and activists have argued that temporary workers do the same work as Lonmin employees but receive less than half of the regular wage.
