By Hugh Bronstein and Jonathan Saul
(Reuters) - Hamburg's tax office is examining the German activities of U.S. agricultural merchant Archer Daniels Midland over a five-year period in what the company called a routine audit, although sources said ADM could face unforeseen liabilities.
Two sources familiar with the matter said the audit had been complicated by the departure of several senior trading officials from ADM's German operations in previous years, of whom some had been made redundant through restructuring.
Due to a resulting lack of staff with the experience needed to field the authorities' questions, ADM could have to pay more tax on billions of dollars of turnover, they added.
"This should have been a routine tax enquiry. The problem is they don’t have the people with the institutional memory necessary to answer the questions being asked by the tax authorities," one of the sources said.
Chicago-based ADM, which buys, stores and ships crops and byproducts, is one of the world's biggest grain merchants.
Since 2014 the group has stepped up efforts to restructure European operations and focus more on its European headquarters in Rolle, Switzerland, scaling down its previously more prominent German HQ in Hamburg, the sources said.
Around 200 staff – estimated to account for half of the German office - had left the company in recent years, they said.
Both sources said the audit included the use of futures and options by the German office in emissions, coal and electricity markets as well as its grains and freight desks.
The first source added that the probe also included derivatives trades on the Chicago Board of Trade that were undertaken by ADM's German office.
"Usually it is no problem squaring the hedges with the exposure of the physical trades. That squaring is normally done at the end of each trading day. For an audit you need the people involved in those trades to be there to explain," the source said.
"But the traders and managers and back office people who could explain that relationship are no longer there. There is a tremendous amount of turnover that has to be explained."
ADM's revenue from its German office reached $6.4 billion in 2010, $6.2 billion in 2011, $9.6 billion in 2012, $10 billion in 2013, $7.1 billion in 2014 and then dropped sharply to $3.4 billion in 2015, $2.3 billion in 2016 and $2.1 billion in 2017, ADM annual filings showed.
Data for 2010 and 2011 covered the financial years ending June 30. The revenue data for 2012 to 2017 was for the years ending Dec. 31. ADM was meant to have paid a standard corporate tax rate of 25 percent in the five-year period, but both sources said it had paid low taxes as a result of carrying forward trading losses and writing off other costs against tax.
"The taxable result could be higher if the hedges made through the futures markets cannot be shown to relate to physical trades," the source said.
"If that relationship cannot be proven, then losses incurred on the futures market may not be tax-deductible."
Both sources said it was unclear at this stage how much additional tax - if any - ADM could face.
A spokesman for the Hamburg city government’s finance department said no information on the case would be released as this area was covered by Germany’s tax confidentiality laws.
ADM said in a statement the Hamburg tax office for large enterprises was conducting "a routine tax audit of ADM’s businesses in Germany for the (financial year) period 2010 through 2014".
"This is a normal audit procedure in Germany, in which corporate tax audits are conducted in intervals of four to five years. ADM is thoroughly fulfilling all requests of the audit, and, to date, no conclusions have been drawn."
ADM added that the audit was "not specific to certain areas of our business". Both sources said there was no indication of impropriety or market manipulation, nor was the tax authority looking into any such activity.
The audit is focusing on any potential underreporting of tax "and the period includes the Toepfer and Wild Flavors acquisitions", the second source said.
ADM took an 80 percent stake in German trading house Alfred C. Toepfer International in 2002 and bought the rest of the company in 2014. Also in 2014, it acquired Swiss-German natural ingredients company Wild Flavors.
DOWNSIZING
Germany accounted for 10.4 percent of ADM's revenue in 2010, 7.7 percent in 2011, 10.6 percent in 2012, and 11.2 percent in 2013, then it dropped to 8.8 percent in 2014, 5.1 percent in 2015, 3.8 percent in 2016 and 3.4 percent in 2017, according to annual reports.
"Hamburg has basically been downsized from a global corporate headquarters to a country office and a lot of the traders did not go to Switzerland," said a former ADM trader familiar with the Hamburg office, referring to the restructuring.
"There would be great difficulty in answering questions about trades five to ten years ago as so many people have left, both front office and back office. I think that would make it difficult even to answer routine tax inquiries."
Chinese food commodities group COFCO's trading division COFCO International has also seen staff upheavals in the past year with the loss of experienced senior traders who were part of Nidera, which COFCO acquired in 2014.
ADM is one of a quartet of merchants alongside Bunge, Cargill and Louis Dreyfus - nicknamed the ABCDs after their initials - that has dominated trade in agricultural goods for decades.
ADM has been trying to invest in lucrative areas such as natural flavorings and food ingredients to boost earnings in volatile commodity markets and raise margins, hit by low prices.
A source familiar with the matter told Reuters in January that ADM had proposed a takeover of Bunge, which could set up a bidding war with Swiss-based rival Glencore (LON:GLEN) Plc.