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Zambia/Global: The Price of Tax Avoidance
AfricaFocus Bulletin
Feb 15 2013 (130215)
(Reposted from sources cited below)
Editor's Note
"From 2008 to 2010, an agricultural labourer employed by
the company has paid more income tax in absolute terms
than the company whose US$200 million revenues have
benefitted from her labour. And even when Zambia Sugar
has been paying some corporate income tax in Zambia, as
in 2011 and 2012, it has still paid 20 times less income
tax, relative to its income, than the tax paid by its own
agricultural workers." - ActionAid, in new report on tax
avoidance by Associated British Foods group in Zambia.
In the latest U.S. presidential campaign, voters were
regularly reminded that the top 1% pay less than their
fair share of taxes, with chief executives often paying
lower rates than the secretaries. Globally, taking into account
funds siphoned into "tax havens," the disparities become
far greater, not least for African countries.
As documented in a bulletin last November from the
Association of Concerned Africa Scholars on "Africa's
Capital Losses: What Can Be Done?" http://concernedafricascholars.org/bulletin/issue87/;
excerpts at http://www.africafocus.org/docs12/cap1211a.php), illicit
capital flows drain funds from the public in both rich
and poor countries.
The new ActionAid report, of which the executive summary
is included in this AfricaFocus Bulletin, spells out some
of the ways this is done, based on extensive
investigations of the Associated British Foods sugar
operations in Zambia.
Also included in this Bulletin is the announcement of a
new initiative by two U.S. Senators to curb tax
avoidance, entitled the Cut Unjustified Tax Loopholes
Act. By cutting tax haven abuses, the press release
notes, the bill could save U.S. taxpayers some $200
billion over ten years.
For previous AfricaFocus Bulletin on illicit capital
flows and related issues, visit http://www.africafocus.org/debtexp.php
For previous AfricaFocus Bulletins on Zambia, visit
http://www.africafocus.org/country/zambia.php
++++++++++++++++++++++end editor's note+++++++++++++++++
Sweet Nothings: the human cost of a British sugar giant
avoiding taxes in Southern Africa
ActionAid
http://www.actionaid.org.uk/102017/tax_justice_campaign.html
Executive summary
Taxes pay teachers. Taxes train nurses. Taxes
maintain roads, deliver medicine, provide clean
water. This is as true in the developing world as
it is in the developed world. Tax is the most
important, sustainable and predictable source
of public finance for almost all countries.
If countries are to eradicate poverty and hunger, then
they will need to do so by increasing their own public
finances �ndash; principally through tax revenues. This should
be possible. Growth in the global economy is now
occurring predominantly in developing countries. Yet
incomes, education, child mortality and nutrition have
failed to catch up in some of the fastest-booming
economies. Funding continues to fall short for the public
health services and agricultural assistance that can help
reduce the burden of hunger; for the teachers, classrooms
and schoolbooks that can help give the next generation a
future free from poverty. Why?
This report explores one clear reason. In both developed
and developing countries, the tax revenues needed to
cover the ongoing costs of decent public services are
being undermined by the ability of some of the wealthiest
taxpayers �ndash; including many multinational companies �ndash; to
effectively opt out of the corporate tax system through a
combination of ingenious (and lawful) tax haven
transactions, and huge tax concessions awarded by
governments themselves.
To see how, and with what consequences, this report
examines the tax practices of one of the world's largest
food multinationals, the Associated British Foods (ABF)
group, in one of the most impoverished places in which it
operates. ABF produces staple brands like Silver Spoon
sugar, Kingsmill bread, Ryvita and Patak's, and also owns
clothing chain Primark. We look particularly at the
activities of ABF's Zambian subsidiary, Zambia Sugar Plc.
The southern African country of Zambia demonstrates
clearly the paradox of continuing hunger amidst plenty.
Despite Zambia "graduating" last year from a low-income
to a lower-middle-income country, poverty levels have
stagnated, with the proportion of rural Zambians living
in poverty increasing to nearly 90% since 2001. Zambia is
an exporter of foodstuffs, including sugar; yet 45% of
Zambian children are undernourished to the point of being
stunted.
The argument of this report is simple: poverty and hunger
cannot be ended if developing countries cannot raise
revenues to provide for the needs of their own citizens.
A key part of this equation is stopping corporate tax
avoidance and questionable corporate tax breaks, which
together deny critical revenues to some of the world's
poorest countries. The case of ABF's sugar operations in
Zambia exemplifies a problem stretching across Africa and
beyond: how countries both rich and poor are struggling
to tax globally mobile profits and capital, and as a
result are haemorrhaging tax revenues that might
otherwise be available for the fight against poverty.
What we found
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 �ndash; over
US$13.8 million (Zambian Kwacha 62 billion) a year �ndash; paid
out of Zambia, into and via tax 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 payments themselves.
Thanks to this financial engineering, we estimate that
Zambia has lost tax revenues of some US$17.7 million
(ZK78 billion) since 2007, when ABF took over the Illovo
sugar group.
To put this figure in perspective:
- In a country where over a third of child deaths are
related to undernutrition, we estimate that the taxhaven
transactions of just this one British
headquartered food multinational has deprived the
Zambian public purse of a sum over 14 times larger
than the UK aid provided to Zambia to combat hunger
and food insecurity in the same period.
- Add in the effect of special tax breaks received by
Zambia Sugar �ndash; which we estimate will in future years
reduce the company's tax bill by at least US$3.6 million
a year and rising �ndash; and the foregone tax revenues in a
single year could likely cover the entire cost of the
interventions needed to tackle child malnourishment in
Zambia.
- We estimate that the amount of tax the Zambian
government currently foregoes through the company's
tax haven transactions is enough to put an extra child
in primary school every 12 minutes.
While the main corporate tax rate in Zambia is 35%, since
2007 ABF's Zambian subsidiary has, overall, paid less
than 0.5% of its US$123 million pre-tax profits in
corporate income tax �ndash; averaging under ZK450 million
(US$90,000) a year. The company took the government to
court to win a special retrospective tax break in 2007
and received a large refund of tax paid in earlier years.
Between 2008 and 2010, Zambia Sugar made no corporate
income tax payments at all.
Associated British Foods told us that this tiny tax bill
is the result of capital allowances that companies in
Zambia are entitled to claim against their taxable
profits: in the case of its Zambian subsidiary, resulting
from spending on a recentexpansion of its Zambian sugar
mill, now the largest in Africa. Certainly generous
capital allowances �ndash; the subject of current Zambian
government scrutiny �ndash; may significantly reduce the
company's tax liability. But we have also identified four
strategies that have significantly reduced Zambia Sugar's
taxable profits to begin with, and that have avoided
separate Zambian taxes on the company's financing and
dividends:
- Mystery management: Zambia Sugar has paid out
large 'purchasing and management' fees to an Irish
sister company �ndash; a company that seems to have no
physical presence in Ireland.9 Every year since 2006,
this company's audited Irish accounts have also
repeatedly stated that the company has no employees,
while providing Zambia Sugar with nearly US$2.6
million worth of management services each year,
though ABF has subsequently claimed that the
"company employs some 20 individuals, the notes to
the company's accounts failed to reflect this". We also
examine similar payments for 'export agency' services
to a sister subsidiary company registered in Mauritius
that has no employees permanently there, according to
other Mauritius-based Illovo staff.
- A Dublin dog-leg: Large loans from South African and
US commercial banks, borrowed to finance the recent
expansion of the company's estate and sugar mill in
southern Zambia, have been 'dog-legged' through
Ireland �ndash; despite being borrowed in Zambian currency
and repaid via a bank account held by the Irish
company at a bank branch in downtown Lusaka. This
arrangement �ndash; sometimes described as 'treaty
shopping' �ndash; takes advantage of a particularly unfair tax
treaty between Zambia and Ireland, which prevents the
Zambian government from charging any of the tax that
would normally be levied on the interest payments
made on these loans.
- Order a tax-free takeaway: Zambia Sugar is able to
send profits back to its parent company, Illovo Sugar
Ltd, nearly tax-free by re-shuffling the ownership of the
company through a string of Irish, Mauritian and Dutch
holding companies, taking advantage of tax treaty
loopholes and tax haven regimes to cancel tax on its
dividend payments.
As well as these ingenious tax haven transactions, since
2007 the company has been able to enjoy its own special
low tax regime within Zambia itself, exploiting two
separate tax breaks originally intended respectively for
domestic Zambian farmers and big foreign investors.
- First, taking the Zambian Revenue Authority to court in
2007, the company successfully won the right to
reclassify all of its revenues as 'farming income' �ndash;
despite three-quarters of its income and profits in fact
deriving from industrial sugar manufacture, partly from
sugarcane purchased from independent cane-growers.
This has allowed the company to reduce its tax rate
from the 35% paid by most Zambian businesses to just
15%. As well as low taxes for the foreseeable future,
Zambia Sugar also received a US$6.3 million (ZK24.6
billion) rebate for previous years. In 2012 the Zambian
government reduced this 'farming' tax rate further to
just 10%, a reduction that in future years will push
Zambia Sugar's tax rate below some of the rates its
sister companies enjoy in tax havens.
- Second, since 2011 the company has been granted an
additional tax break to offset the costs of an expanded
factory, under a special Zambian tax regime intended
to attract new foreign investment. The precise terms of
this tax break remain confidential, despite a Zambian
law requiring the government to make information
about investment incentives granted to big companies
to be publicly accessible. Despite the company already
booking record profits since its expansion, Zambia
Sugar can use this second tax break to keep its tax bill
low for years to come.
Plain vanilla business practice
We do not allege that any of the companies in this report
have done anything illegal. Indeed, sadly their tax
practices are not even particularly unusual. A growing
litany of examples from Europe and North America suggest
that the arrangements we describe here are simply 'plain
vanilla' business practice for many multinationals,
thanks to loopholes in prevailing international tax rules
coupled with tax competition in developing countries �ndash; an
international 'race to the bottom' to attract foreign
investors with huge tax breaks.
Tax avoidance is less widely documented in the developing
world than in the developed, but the findings of this
report and ActionAid's previous investigation of Africa's
biggest brewer, the UK-headquartered SABMiller, suggest
that it is no less prevalent. Indeed there is evidence
that the developing countries which can least afford it
may be haemorrhaging more of their corporate tax revenues
than countries like the UK.
In many places, multinational companies and their
advisers are beginning to regard paying corporate taxes
as optional. When John Whiting, head of the UK Treasury's
Office of Tax Simplification and policy director of the
UK's Chartered Institute of Taxation �ndash; the UK trade body
of tax advisers �ndash; was asked recently why many large
multinationals were not paying corporate tax, he replied:
"In many ways corporation tax is a bit of a bonus."
For ordinary taxpayers, of course, paying tax is far from
optional or a "bonus". Ordinary people have no choice but
to pay the business taxes collected directly from their
shops and small businesses, the income tax deducted from
their payslips, and the VAT included in the price of the
goods they buy. This includes the workers who produce
and sell multinational companies' products. While the ABF
group's African sugar operations have shrunk their own
tax bill through ingenious tax haven transactions, and
have been granted even further tax breaks, their workers
in Zambia have continued to pay their taxes on their
wages.
From 2008 to 2010, an agricultural labourer employed by
the company has paid more income tax in absolute terms
than the company whose US$200 million revenues have
benefitted from her labour. And even when Zambia Sugar
has been paying some corporate income tax in Zambia, as
in 2011 and 2012, it has still paid 20 times less income
tax, relative to its income, than the tax paid by its own
agricultural workers; and 90 times less than the tax paid
by the small traders who sell Zambia Sugar's products to
consumers.
This report traces the international money trail to find
out how this tax injustice has happened. We look at what
it means for those struggling with undernourished
families, overcrowded schools and underfunded health
services on
the doorstep of Zambia Sugar's vast Mazabuka estate.
Where else?
Beyond Zambia, the ABF group also has sugar mills and
plantations in Mozambique, Malawi, Tanzania, South Africa
and Swaziland. So far ActionAid has only been able to
access the accounts of the Malawian, Zambian and South
African companies, as these are publicly listed
companies. The other subsidiaries' tax behaviour remains
closed to public scrutiny. Unless ABF publishes the
accounts of the rest of the Illovo Group companies,
including in Mauritius and other tax havens, we cannot
know whether other African countries are getting a fair
tax deal from their sugar industries.
What can be done?
There is now emerging international consensus that
something must be done to stop corporate tax avoidance.
UK Prime Minister David Cameron has promised
international action, saying that, "it's not right if you
have businesses [who] instead of paying some taxes
somewhere are paying no taxes anywhere".
He has pledged that when the UK hosts the G8 summit in
June 2013, "this G8 will seek to maintain the momentum
generated by the G20 on information exchange and the
strengthening of international tax standards. We will
look to go further including, for example, on tax havens
by improving the quality and quantity of tax information
exchange. And we will work with developing countries to
help them improve their ability to collect the tax that
is due to them too." Likewise Zambian finance minister
Alexander Chikwanda has promised to toughen Zambian
laws to prevent companies shifting profits into tax
havens,and a comprehensive review of Zambia's
"proliferation of inefficient tax incentives" during
2013.17
This report shows how tackling the problem will require
both national and international action across three
fronts: companies' ingenious financial engineering, weak
international tax rules, and governments' deliberate tax
policies. While the group of companies detailed in this
report have taken (lawful) advantage of loopholes in
international tax laws, they have also benefited from tax
breaks deliberately written into countries' tax codes,
responsibility for which ultimately lies with
governments.
- Responsible companies must make paying their fair
share of corporate tax a core part of their
responsibilities to the countries where they make their
profits.
- Governments must close loopholes in national tax
codes and tax treaties that allow the kinds of tax haven
transactions outlined in this report. Donor and
developed country governments have a particular
responsibility to ensure that their own tax regimes and
tax treaties do not make it easier for corporate profits
to be siphoned out of developing countries.
- Governments must not give away vital revenues
through corporate tax breaks without evidence of real
benefits to their citizens in terms of new jobs, economic
opportunities and public revenues.\
- Finally, international action is needed to end the
secrecy and abusive tax regimes of tax havens around
the world.
Responsible companies; stronger tax authorities; better
tax laws; and, critically, public action and scrutiny �ndash;
all have a part to play in protecting the revenues that
Zambia and many other countries need to resource their
own futures.
FACT Coalition: Close Offshore Tax Loopholes, Save
Taxpayers Nearly $200 billion
Senator Carl Levin (D-MI) and Senator Sheldon Whitehouse
(D-RI) Introduce CUT Loopholes Act
February 11, 2012
http://www.gfintegrity.org/content/view/596/70/
E.J. Fagan, +1 202 293 0740 x227
Washington DC �ndash; In the midst of a Congressional and White
House showdown over the impending sequestration, and
growing calls for corporate tax reform, Senator Carl
Levin (D-MI) and Senator Sheldon Whitehouse (D-RI) put
forth the Cut Unjustified Tax Loopholes Act (S. 268, CUT
Loopholes Act). This bill, which closes loopholes and
strengthens enforcement measures against offshore tax
haven abuse, could raise nearly $200 billion over ten
years.
While large multi-national corporations are making record
profits, many of them take advantage of a tax code
riddled with loopholes that helps them winnow their tax
bills down significantly. In fact, thirty Fortune 500
companies paid no federal income taxes in 2008-2010 while
collectively earning almost $160 billion in profits,
according to financial data analyzed byCitizens for Tax
Justice. Offshore tax abuses cost the U.S. Treasury an
estimated $150 billion per year in lost revenues.
The Financial Accountability and Corporate Transparency
(FACT) coalition, which actively works on the issues of
offshore tax haven abuse and anonymous corporations,
supports S.268 due to key provisions such as:
- Ensuring that companies, which are managed and
controlled in the United States, are unable to claim
foreign status in order to avoid taxes
- Closing loopholes that let high tech, pharmaceutical
and other companies license the patents for their
products to sham shell companies in tax havens so they
can book their profits there and avoid taxes; and
- Requiring full and honest reporting from companies to
determine if they're booking profits to places where they
are doing legitimate business, versus a P.O. Box tax
haven subsidiary with no employees.
"Offshore tax loopholes hurt domestic businesses, large
and small, as well as individual taxpayers who must
shoulder the extra tax burden through higher taxes and
and endure massive cuts to public services," said Nicole
Tichon, Executive Director of Tax Justice Network USA and
a co-founder of the FACT Coalition.
Eric LeCompte, Jubilee USA Network's Executive Director,
stated, "Every year, some of the most profitable
corporations use a long list of loopholes to avoid paying
taxes. With the sequester right around the corner, the
CUT Loopholes Act will cut the loopholes and generate
billions of dollars to avoid the next cliff. Further,
this legislation sends a global message that corporate
tax dodging should not be tolerated in any corner of the
world."
"Illicit financial flows are a major facilitator of
poverty, crime, and corruption in both developed and
developing countries. Tax haven secrecy drains nearly $1
trillion from developing countries each year. This is
money that could have been spent on health care,
education, and infrastructure in the world's poorest
countries while simultaneously shoring up budget deficits
in Europe and the United States. The CUT Loopholes Act
would be a tremendous step forward in curtailing these
damaging illicit financial flows," said Raymond Baker,
director of Global Financial Integrity, a Washington DCbased
research and advocacy organization.
It is also clear that there is broad support among
American voters for closing offshore tax loopholes to
deal with budget problems.
In a December 2012 national poll* conducted by the
Mellman Group and commissioned by Friends of the Earth
U.S, American voters said that an overwhelmingly
majority, 75%, favor closing offshore tax havens as a way
of addressing our national budget problems. Support for
this proposal was high across party and ideological
lines, as well as gender, race, educational background,
and region.
Respondents were asked: "To help solve our budget
problems, do you favor or oppose closing loopholes that
allow corporations to declare profits in foreign
countries that have a lower tax rate?" Fully threequarters
of voters favored the proposal with nearly twothirds
favoring it strongly.
The FACT coalition has made several reports, resources
and survey results available supporting the case that
corporate loopholes are raiding the U.S. Treasury,
hurting small businesses, hurting developing countries
and are kept in place by hefty campaign contributions and
lobbying.
###
Contact
E.J Fagan
New Media and Advocacy Coordinator
Global Financial Integrity
[email protected]
1.202.293.0740 ext. 227
Nicole Tichon
Executive Director
Tax Justice Network USA
[email protected]
202-758-9552
Jennifer Tong
Communications Director
Jubilee USA Network
[email protected]
(m) (320) 241-7082
Additional links available at
http://www.gfintegrity.org/content/view/596/70/
AfricaFocus Bulletin is an independent electronic
publication providing reposted commentary and analysis on
African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by
William Minter.
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