Sweet Nothing!

Windhoek ‑ A hard-hitting report by charity group ActionAid has once again exposed how multinationals flagrantly exploit taxation loopholes in the poor countries in which they generate the bulk of their wealth.
The siphoned profits – amounting to billions of US dollars annually – find their way to tax havens and sister companies overseas.
The siphoning takes place across a range of sectors, particularly agriculture/agribusiness and mining.
And in this, governments are complicit as they offer the generous capital allowances and tax relief schemes that see multinationals earn billions while the majority ordinary Africans live on less than US$2 a day.
Associated British Foods (ABF), a giant of the London Stock Exchange, is one firm under the spotlight for wide-ranging tax evasion in Zambia, where the firm has interests in sugar production and processing.
The British food processing multinational is the parent company of Illovo Sugar Ltd South Africa, through which it owns Illovo Sugar Malawi, Zambia Sugar, Illovo Sugar Ireland and Illovo Project Services domiciled in Mauritius, a tax haven.
While the ActionAid report focuses solely on ABF’s Zambian operation, it points to tax evasion within the entire Southern African region where Illovo Sugar has a network of subsidiaries.
In Zambia, the government estimates that it loses US$2 billion annually from the mining sector alone through transfer pricing, mostly in copper.
The report brings to the fore the extent to which successive African governments have lavished overly generous tax concessions on multinationals in return for promises of investments and lowly paying jobs for citizens.
Governments have given multinationals carte blanche to shift profits from Africa to overseas destinations through tax breaks, and tax treaties between governments and former colonisers.
Analysts have also lamented the “utter ineptitude” of agencies charged with monitoring tax compliance and revenue collection.

> Sugar, not so sweet

ActionAid’s report, “Sweet Nothings: The Human Cost of a British Sugar Giant Avoiding Taxes in Southern Africa”, strengthens the existing body of evidence on the insensitive behaviour of multinationals, which through transfer pricing and other mechanisms, rob Africa of billions of US dollars annually.
This they do under the watch of African governments.
ActionAid’s report focuses on a single multinational which ‑ through a complex network of transactions involving sister companies in Ireland, Mauritius, Jersey and The Netherlands ‑ has prejudiced Zambia of millions in revenue.
The practice has become common with African leaders playing the role of willing victims.
As the ActionAid report reveals, the culprits are known, and many African governments ‑ including Zambia – are fully aware of how profits are spirited out of the country to the detriment of national development.
“ActionAid’s investigation found that ABF’s Zambian subsidiary uses an array of transactions that have seen over a third of the company’s pre-tax profits ‑ over US$13.8 million a year – paid out of Zambia into and via haven sister companies in Ireland, Mauritius and the Netherlands.
“Some of these transactions reduce Zambia Sugar’s taxable profits, while the structure of others avoids the Zambian taxes ordinarily levied on such foreign companies,” ActionAid says.
Zambia applies a 35 percent corporate tax rate on all companies operating in the country but ActionAid found out that ABF has paid on average a miniscule US$90 000 a year, less than 0.5 percent of its US$123m pre-tax profits since 2007.
Between 2008 and 2010, ABF reportedly made no corporate income tax payment at all.
ActionAid report compares the glaring poverty in the town of Mazabuka in southern Zambia – where ABF’s subsidiary operates – and the profits the company reaps.
Zambia Sugar accounts for nine-tenths of all sugar produced in the country, with exports heading to Europe and other destinations.

 
> Labyrinth of Subsidiaries

The Zambian operation grosses revenue of around US$200 million annually, netting a healthy profit of US$18m on average a year.
But before the Zambian tax man gets to the money, the company uses a maze of transactions to shrink its tax bill and siphon money out of the country, ActionAid’s investigation reveals.
ActionAid alleges that large payments are made to sister companies in tax havens and these are deducted as expenses in Zambia, shrinking the company’s taxable profits.
The interest paid to foreign banks financing the company’s expansion is avoided by routing those overseas payments through the labyrinth of sister companies.
And the company is allegedly doing this after Zambia’s government granted Zambia Sugar generous tax breaks after the firm argued that it had invested heavily in a processing plant in Mazabuka.
Money flows from Zambia and South Africa to Illovo Sugar Ireland for “purchases and management services”.
From 2007, Zambia Sugar has paid its Irish sister company US$47.6m, including US$2.6m a year for management services and – since 2006 – an additional US$6.5m in “secondment fees”.
Zambia charges 20 percent on management fees and this ABF has smartly avoided by channelling payments via Ireland, which Zambia has a bilateral treaty with.
While a third of payments from Zambia Sugar are destined to its Irish sister company, ActionAid says the company has no physical presence in Ireland and the management is said to be based in South Africa.
Another question mark is how the company has based its group marketing services in Mauritius, where firms are taxed at three percent.
ActionAid asks why the marketing cannot be done in Zambia.
Further, just like the Ireland subsidiary, the marketing arm in Mauritius has no real staffing: the entire operation is run by one person.
Zambia has a tax treaty with Mauritius, which ActionAid says makes it difficult for authorities in Lusaka to tax income such as commission fees paid to that country.
Last year Zambia Sugar borrowed US$70m from two commercial banks to finance its expansion.
The loan is in Zambian currency (Kwacha) and secured on Zambia Sugar’s estates and assets in Mazabuka. The loan is repaid via a Lusaka branch of Citibank Zambia.
“But on paper the loan has been sent on an 8 000km dog-leg via Ireland, with the banks actually lending the money to the now familiar Illovo Sugar Ireland, which then makes an identical matching loan to its sister company, Zambia Sugar,” ActionAid says.
“Why would a loan to expand a sugar factory in southern Zambia actually be made to a company registered in a Dublin office block over 8 000km away?” the charity group queries.
> The Multinational’s Response

ABF has responded to ActionAid saying: “Interest on loans to Zambia Sugar from such banks would have been subject to Zambian withholding tax.
“The banks would therefore have increased their interest charge to compensate for this.”
Zambia is said to have lost US$3m through a strategy known as “dog-legging” the loan via Ireland.
An intricate ownership structure of Zambia Sugar, spread over intermediate companies in Mauritius, Ireland, Netherlands and Jersey, enables the actual owner, ABF to spirit profits out of Zambia in a perfectly legal way.
While on paper, Zambia Sugar is owned by Illovo Group, which in turn is owned by ABF, the company’s ownership was transferred to a holding company in The Netherlands, Illovo Sugar Cooperatief UA, through the Ireland office.
The sale was tax free as it was Illovo Ireland which bought its own Zambian subsidiary, later selling to the Dutch company.
This means that Zambia Sugar’s owners are a Dutch co-operative (cooperatief). The owners of the Dutch cooperatief, in this case companies in Mauritius and Jersey, are classed as members rather than shareholders so the income they receive is not classified as a taxable dividend.
“Profits shifted into the cooperatief automatically become owned by its members (in this case Illovo companies in Mauritius and Jersey). Using this loophole in Dutch tax law, profits received by a cooperatief may leave the Netherlands tax-free.”
Using this structure, Zambia can only charge five percent tax as opposed to 20 percent on cash leaving the country. ABF argues that this structure means it pays more tax globally, but not in Zambia.
Once the money reaches the ABF in the UK it is exempted from tax.
ActionAid lays part of the blame on the Zambian government, which it says lacks of mechanisms to enforce tax compliance.
The Zambian Development Agency is responsible for granting tax breaks, without consulting tax authorities.
“As a result of these transactions, we estimate that since 2007 some US$17 million of Zambian tax has been foregone … and we estimate that the bill of lost tax revenues is over US$27 million,” ActionAid asserts.
ActionAid recommends that Zambia should renegotiate its bilateral tax treaties to plug loopholes that multinationals use to “treaty shop” and shift profits to other jurisdictions.

February 2013
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