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Zambia loses out to tax dodging

This is according to a report by Action Aid.

The non-governmental organisation's latest report, Sweet Nothings: The Human Cost of a British Sugar Giant Avoiding Taxes in Southern Africa, claims that Zambia Sugar plc, a company in the Illovo Sugar group, which was bought in 2007 by Associated British Foods, uses tax-haven sister companies in Ireland, Mauritius and the Netherlands to minimise tax payments. But this is denied by Illovo Sugar and Associated British Foods.

Illovo Sugar sent a statement to the Mail & Guardian this week in which it "denies emphatically" that it is engaged in anything "illegal, immoral or in any way designed to reduce the tax rightly payable to the Zambian government".

The report alleges that more than $13.8-million a year, or one third of Zambia Sugar's pre-tax profit, has been paid out to the sister companies. But Action Aid states several times that Associated British Foods is doing nothing unlawful.

In the current economic climate, however, there is a heightened focus on the impact that multinationals are having in the world, and tax avoidance or aggressive tax policies have come under greater scrutiny. Vodafone, Boots, Barclays and Starbucks have all come under scrutiny recently in the United Kingdom and in the United States both Google and General Electric have been the subject of similar investigations.

Tax revenues
"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, including many multinational companies, 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," the Action Aid report states.

"We estimate that the tax-haven 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."

The report says that Zambia Sugar paid an effective tax rate of 0.5%, when Zambia has a corporate tax rate of 35%.

"From 2008 to 2010, an agricultural labourer employed by the company has paid more income tax in absolute terms than the company whose $200-million revenues have benefited 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."

The report queries the large purchase and management fees paid to the alleged tax-haven sister companies and the structuring of a loan to expand Illovo's largest sugar mill in Zambia, arguing that the structure takes advantage of the "unfair" tax treaty between Zambia and Ireland, which prevents the Zambian government from charging tax on the interest payments of the loan.

Action Aid alleges that money is being siphoned back to sister companies in Ireland, Mauritius and the Netherlands to prevent paying tax on its dividend payments.

Hefty annual fees
"Since Illovo took over Zambia Sugar in 2001, the Zambian company has also paid separate, hefty annual fees for 'purchases and management services' to a fellow subsidiary, Illovo Sugar Ireland, registered 8 000km away in an office block in Dublin," says the report.

"Since 2007, Zambia Sugar has paid this Irish sister company over $47.6-million, including nearly $2.6-million a year for management services; and, since at least 2009, an additional $6.5-million received by the Irish company as 'secondment fees'."

Associated British Foods insists that this offshore Irish company is used to contract experts for Zambia Sugar because "third-party service providers would not have been willing to contract directly with Zambia Sugar due to possible financial or political risk and, if they had contracted directly, the cost to Zambia Sugar would have been substantially higher".

The company insists that the transactions through Ireland are not "tax motivated" because "tax rules require profits declared in Ireland … to be included in the Illovo South Africa tax return where they are subject to tax at 28%".

The report says: "Indeed, [Illovo Sugar's] entire tax liabilities in 2011-2012 were only $308 000, just 4% of the $7-million fees paid by Zambia Sugar alone in that year to just two subsidiaries (in Ireland and Mauritius) whose profits Illovo claims are rolled up in their South African tax bill at 28%."

"It seems clear, therefore, that very little tax is being paid by the Illovo group either in Zambia or in South Africa on these large streams of cross-border income."

The report also details Action Aid's attempts to track down the Irish sister company.

"When Action Aid telephoned Illovo Sugar Ireland's registered address — an office block in Dublin's International Financial Services Centre — the telephone operator had never heard of the company," says the report. "Nor had the receptionist when Action Aid visited the building in person. "Instead, the office block houses an entirely separate company services provider, which services many different companies.

"One of their staff members, responsible for filing documents relating to Illovo Sugar Ireland, told us unequivocally that the 'management side of it would be based in South Africa'," says the report.

"When asked to answer some due diligence questions relating to the company, she confirmed that Illovo Sugar Ireland had no staff physically based in Ireland, that 'there would be some staff that Illovo Sugar Ireland have seconded to the plant in Zambia', and referred us to the financial director of the South African ­par­ent company in Durban."

The report also raises the fact that Illovo Sugar is present in other African countries such as Mozambique, Malawi, Tanzania and Swaziland and queries whether these countries are getting a "fair tax deal".

"Unless Associated British Foods 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," the report states.

In its statement, Illovo Sugar says: "In Zambia itself, Illovo invested R1.6-billion to double the size of the sugar mill, so creating Africa's largest sugar mill that will benefit the nation for many years to come. "We have responded in a transparent and detailed manner to Action Aid and, despite this, they have produced a report written in inflammatory language that is designed to mislead. Illovo believes that Action Aid's work on the ground in many countries is laudable. However, this report is inaccurate and misleading.

"With limited detail, Action Aid has attempted to use Zambia Sugar's tax affairs to gain publicity at the expense of accuracy."

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Lloyd Gedye
Lloyd Gedye
Lloyd Gedye is a freelance journalist and one of the founders of The Con.

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