Analysis: MTN’s Dubai revenues
MTN does not run a cellphone system in Dubai. Yet its subsidiary, MTN Dubai employs around 115 people who provide services to the MTN group. MTN told us that these include group procurement, group finance, legal services, human resources and other corporate functions.
MTN also told us that 45% of the billions of rand in management fees its subsidiaries send offshore are for services performed in Dubai.
The price paid for these services is a key question that tax authorities have to grapple with under transfer pricing rules.
International tax rules treat all companies as if they are independent entities, even if they are part of the same group.
Tax authorities, therefore, have to determine whether the prices group companies pay each other are fair and “at arm’s length”.
This means that they should be comparable to prices that would be paid if the company was buying in services from an external provider.
If a company overcharges its revenue-producing companies for its services, that means that the company may be loading costs,which are tax-deductible, onto companies where it operates. In this way taxable profits could be reduced.
We have no evidence that MTN acts in this way. But as we reveal today, certain African tax authorities have queried the size of its management fees.
One tool that campaigners say will be helpful in establishing whether companies play fast and loose with the tax system is to look at company reporting on a country-by-country basis.
If a company makes huge revenues in a country where it has few employees but there is a low tax rate, it could suggest that there may be some profit-shifting taking place.
The Organisation for Economic Cooperation and Development (OECD) has recommended country-by-country reporting is one of the recommendations it has proposed as part of its base-erosion and profit-shifting reform package.
Currently companies only report their profits on a global consolidated basis. Our investigation ran into this problem, as MTN refused to disclose how much revenue it makes in Mauritius or Dubai.
However, by piecing together various documents we have been able to draw some conclusions about MTN’s revenues on a country-by-country basis.
We discovered that in 2013 the company set aside R758-million in fees from MTN Nigeria to pay to MTN Dubai – although this was reversed after pushback from the Nigerian government – and R783.5-million from MTN Ghana. The combined total is R1.5-billion.
Divide that by the number of employees MTN has in Dubai and each person accounts for R13.4-million in revenue.
Bear in mind that the fees come from just two of MTN’s many subsidiary companies.
MTN has confirmed that all the management fees collected from its operations outside South Africa and Swaziland are routed either through Mauritius or Dubai, so the figure is likely to be larger.
If we compare this to the average revenue per employee in other countries, we see that employees in Dubai generate substantially more income than in the rest of the company — other than in Nigeria.
In South Africa the company generates R5.5-million per worker; in Côte d’Ivoire R6.3-million; R5.7-million in Ghana; and R3.4-million in Uganda.
In Nigeria the company generates R14-million per employee, showing just how profitable the operation is there.
The difference between Nigeria and Dubai is that the Dubai operation is internal to MTN. It only sells its services to other MTN companies, whereas Nigeria receives money from its customers.
Of course, as MTN does not operate any cellphones in Dubai, it will also have significantly lower costs than other MTN companies, as it does not need to pay for shops or the infrastructure needed to run a cellphone company.
The picture is of a substantial amount of value being shifted from countries where MTN operates to Dubai, an emirate where the company enjoys a 0% tax rate.
There is no suggestion that MTN is doing anything unlawful with its Dubai operation. The high revenues the company books in Dubai may be a consequence of the company moving highly valued services there. It does not necessarily mean that MTN Dubai is overpricing its services to the rest of the group.
However, the fact that the company has chosen to locate its shared services in Dubai highlights the difficulties revenue authorities have in taxing multinationals, which can easily move operations around the world, playing different countries off against each another.
It also shows the difficulty facing tax authorities, which have to make judgments about the prices companies such as MTN Dubai are charging other MTN companies.
Because MTN Dubai only sells to other MTN companies, there is no market price, and authorities have to work out what the correct market price might be.
Some of the services MTN subsidiaries “buys” from Dubai would not normally be bought in – for example, procurement. For this reason there are few, if any real world comparables to look at.