Questions Lonmin must answer
NEWS ANALYSIS: Why did the mining company move millions of rands in revenue to no-tax Bermuda?
Could Lonmin have afforded to pay the wages the Marikana mineworkers demanded in 2012 before 34 of them were gunned down by police?
This question is among the core issues that evidence leaders at the Farlam commission tried to unpack last month when they cross-examined the company’s former operations chief Mahomed Seedat.
At the commission’s final hearings, Seedat was asked to explain how and why Lonmin had shuffled huge amounts of money within its global structure, moving funds away from the South African mines – which employ its workforce – and into far-flung branches.
He was forced to disclose the secret details of how Lonmin had channeled hundreds of millions of rands to a subsidiary in tax-free Bermuda, and more millions were moved to the British parent company through its South African branch.
Also revealed was how, during the cash-crunch years before the 2012 wage strikes, Lonmin handed $46-million to its black economic empowerment partner, a company controlled by ANC deputy president Cyril Ramaphosa’s Shanduka Group.
Shanduka has claimed it did not benefit from the payments, even though it owns half the entity.
The fallout continued this week. As the Mail & Guardian went to print, a detailed report on Lonmin finances was due to be released by the Alternative Information and Development Centre (AIDC), a labour advocacy group.
Last week Lonmin interdicted the AIDC in an attempt to squash the report, but this week the organisation said it would go ahead, having made small edits. In a letter to the AIDC on Tuesday, Lonmin lawyer Tim Fletcher said the company would not take action but would “reserve our clients’ rights”.
Using figures and details that emerged at the commission, the AIDC report concluded that had Lonmin mines not paid about R400-million a year in management and marketing fees to other companies in the group, it could have afforded the 2012 wage demands. AmaBhungane has seen an embargoed draft.
Lonmin did not respond to this allegation in answers to amaBhungane questions last month, but it issued a statement on Thursday saying the AIDC’s claims were “misleading and false”. (The full statement is available here)
It is the latest in a series of statements in which the company has tried to contain the fallout, but has left key questions unanswered.
Part of its problem is that the conversation takes place in the midst of a global pushback against aggressive (though not always unlawful) corporate tax avoidance and transfer pricing.
Transfer pricing explained
“Transfer pricing” describes the prices subsidiaries of a large corporation set to transact with each other.
Judge Dennis Davis, who was appointed last year by former finance minister Pravin Gordhan to chair a tax review committee to study tax avoidance and other issues, spoke to amaBhungane recently: “We are trying to ascertain to what extent there’s a haemorrhaging of our tax base through a range of techniques that companies adopt to siphon off profits into tax havens or into low tax jurisdictions and therefore pay very little tax in South Africa.”
“Significant billions” were flowing from South Africa in this way, Davis added.
In a press statement last week, Lonmin made public a version of all of the answers it had provided to amaBhungane’s questions on its tax affairs. It said these “clearly demonstrate that Lonmin tax affairs during the period in question were entirely legal and in no way unusual”.
But it was never claimed that Lonmin had done anything illegal or unusual. An important distinction must be made: tax “avoidance” can be legal, but is increasingly thought to be morally wrong, while tax “evasion” refers to illegal dodges.
Aggressive tax avoidance is normal among multinational companies – hence the profusion of tax haven jurisdictions in places like Mauritius and Bermuda, where Lonmin former marketing arm resides.
In a recent news report, senior South African Revenue Service official Sunita Manik said: “The issue with transfer pricing is that it is not outright illegal, though increasingly a lot of it is becoming morally reprehensible.”
Ramaphosa himself came out against corporate tax avoidance in a recent address to MPs.
In a South African context, Davis said: “If [the companies] go to Mauritius, for example, which is well known as the route which is being used for reducing tax, then you can be reasonably confident that a level of tax avoidance or worse is taking place.”
A similar logic could be applied to Lonmin’s Bermudan subsidiary. But in response to amaBhungane’s questions and articles, Lonmin has denied there was a tax benefit, because the Bermuda company was taxed in the United Kingdom, it said.
Lonmin has paid no tax in the UK since 2000, attributing it to “losses brought forward”. This brings up the main question Lonmin did not to answer: Why, if not to avoid tax, did Lonmin send two percent of its revenue to Bermuda for many years?
Lonmin’s Bermudan subsidiary is called Western Metal Sales (WMS). Prior to the Farlam commission, the company publicly referred to it just once, in a 2002 report that stated that WMS “markets” the platinum produced by Lonmin mines.
While the audited financial reports of Western Platinum, Lonmin’s primary producing subsidiary, show the Bermuda payments continued until 2012, the company later said this was a “clear error” in the accounts.
Explaining this to amaBhungane, it said Lonmin moved its marketing staff from London to South Africa after 2007. With that, it said, the marketing fees were diverted from Bermuda to Lonmin Management Services (LMS), the South African branch of the UK company, which is apparently taxed in South Africa.
AmaBhungane’s calculations suggest that about $170-million (R1.8-billion today) might have been paid to Bermuda by the South African mines between 2002 and 2008.
Among the questions that Lonmin did not answer was whether the Bermuda company kept an office with staff who marketed Lonmin’s platinum. AmaBhungane’s investigations suggest there may be no staff there, and in a letter to the M&G, Lonmin said WMS was “registered in Bermuda and operating out of London”.
If the Bermuda company’s marketing staff were based in London, not Bermuda, it is hard to imagine what commercial purpose the offshore location served, if not to reduce the tax burden.
From 2008 to 2012, Lonmin’s South African mines paid over R1-billion in sales commissions to LMS, according to figures before the commission.
Putting the tax issue aside, the AIDC has argued in its report that when Lonmin moved money away from the mines and into other parts of the group, it reduced the mines’ capacity to pay wage increases. It accused Lonmin of “wage evasion”.
The AIDC’s argument would be redundant if Lonmin could show that these fees were for the rendering of a legitimate service that was fairly priced. Two serious questions emerge, however.
Lonmin has told amaBhungane in three separate instances that the South African mine, Western Platinum Limited, markets its own metals – and no one else. If Western Platinum did its own marketing, why did it pay marketing fees to a different part of the group?
Answering this, Lonmin backtracked, telling amaBhungane that WMS in Bermuda and later LMS did the marketing, not Western Platinum. It attributed this to “confusion”.
But this contradictory explanation seems to go to the heart of the issue. It suggests that Lonmin itself might be “confused” about the functional boundary between one subsidiary that does marketing and another that mines metal.
If so, this might place into question the commercial rationale for the marketing fees.
Meanwhile, Lonmin disclosed in its 2013 annual report that 92% of its revenues are drawn from platinum sales to just two key customers. This raises the question: How big a workload can there possibly be for the marketing division?
A second serious question that emerges is: Are the marketing fees fairly priced?
Lonmin provided documents to the Farlam commission showing how much the marketing function costs. In 2011, for example, it cost LMS just R17-million, while it received a marketing fee of R280-million – suggesting an enormous profit margin. Asked to justify this, Lonmin did not answer.
The AIDC’s report also interrogates a “management fee” paid by Western Platinum to LMS. From 2007 to 2012, this amounted to a further R1.4-billion that was channelled away from the South African mines.
In its report, the AIDC argues in detail that these management fees are exorbitant in relation to LMS’s labour costs. In 2011, for example, it claims that LMS’s employees cost the company R70-million, versus a management fee income of R194-million.
Asked to respond, Lonmin said: “Lonmin has done transfer pricing studies that confirm that our fee margin is at the bottom range of the margin interval.”
* Got a tip-off for us about this story? Click here.
The M&G Centre for Investigative Journalism (amaBhungane) produced this story. All views are ours. See www.amabhungane.co.za for our stories, activities and funding sources.