How the Dutch rapped Naspers over the knuckles for tax, while its BEE scheme flopped

Ishmael Pelela is one of the farm workers from Bloemhof, North West, that took their hard earned money and invested it at the Media 24, BEE investment scheme. (Oupa Nkosi, M&G)

Ishmael Pelela is one of the farm workers from Bloemhof, North West, that took their hard earned money and invested it at the Media 24, BEE investment scheme. (Oupa Nkosi, M&G)

Ismael Belela stomps on the ground so that his shoe leaves an imprint in the red earth.

“Hier waar ek trap, my seun moet nie in dieselfde plek trap nie [Here where I step, my son must not step in the same place],” he says. He points to a sack of mealies. “We have thousands of them. We lift them on our shoulders, sack for sack.”

Make no mistake, he is proud of the work he does on this cattle and maize farm in the North West province. But the work is heavy, and he wants better for his children. He is 34 years old, his son six. So Belela still has a few years to save for an education. Naspers was a big part of that plan.

Belela is a reader of Beeld, one of the flagship newspapers of Media24, a South African subsidiary of Naspers that houses the assets on which the group was initially built. In 2006 Media24 launched an empowerment scheme named Welkom Yizani that offered Media24 shares, then valued at R50 each, to qualifying black buyers for R10 upfront. The remainder of the purchase price was underwritten by Naspers.

Belela had a clear sense of the value of the offer. He read Media24 titles religiously, as did everyone he knew. He saw the large companies advertising in those newspapers. He promptly told Jasper van Zyl, the sheep and maize farmer he works for.

Van Zyl was also taken by the scheme, and loaned Belela and a group of fellow employees a hefty sum of money – they are loath to disclose the exact amount in light of the general poverty of their neighbours – to buy the shares. That loan, which was interest-free and only due to be repaid when the workers cashed in their shares, was in itself a sort of reparation for apartheid.

“I said to them: ‘This is how the system is supposed to work, to make sure your families have the opportunities you never had’,” Van Zyl recounts. “I said: ‘White people did wrong by your fathers, but now things will change’.”

Welkom Yizani launched in a blaze of publicity; Belela read in Beeld that he was now rubbing shoulders with fellow shareholders like singer Yvonne Chaka Chaka and rugby hero Breyton Paulse.

Then things went quiet. Belela and his fellow workers were not concerned. The scheme was dependent on a five-year lock-in, during which the shares could neither be traded nor used as security for a loan, and they had been prepared to wait as their investment grew to the point where they could buy houses and cars – and pay for their children’s education – with the proceeds.

They were in for a rude awakening.

By late afternoon the brand-new offices around Taurus Avenue in the Dutch town of Hoofddorp, just outside Amsterdam, are emptying out. The red-and-black brick Naspers office offers up a man in a lumberjack shirt, then two women in their 30s who talk to one another in English as they head for the train station. The satellite dish on top of the building illustrates how far this one-time mouthpiece of the apartheid government has travelled to become a globe-straddling multinational.

Back when newspapers still produced profits, Naspers invested in technology companies, notably internet outfits in emerging markets. In 2001 it bought shares in Chinese internet company Tencent, known for its WeChat app and Weibo microblogging site, the Chinese equivalents of WhatsApp and Twitter. Later it bought into Mail.Ru, which owns social networks VKontakte and Odnoklassniki, the Russian equivalents of Facebook and LinkedIn. Naspers’s interests in e-commerce now stretch through India and the Middle East.

All these businesses are nominally run from a headquarters in Cape Town, but its “aggressive expansion strategy” is run out of Hoofddorp.

The historical impetus for offices in the Netherlands, for a company founded on Afrikaans media, is clear. But as recent legal trouble with the Dutch tax authorities shows, the choice of European headquarters may have more to do with that country’s tax rules.

In professional circles it is known simply as the Mauritius case – and in those circles it is well-known indeed.

Anonymised court judgments (tax matters are handled in strict confidence in the Netherlands) tell the story. Some 10 years ago, Naspers raised $1-billion to fund investments in five online companies. Once investors coughed up, the money was forwarded, as an interest-free loan, to a subsidiary in Mauritius. The Mauritius company, in turn, loaned the money to a Naspers company domiciled in the Netherlands – this time, with interest due.

In the Netherlands the interest paid on that loan is a tax-deductable business expense, reducing the profits from which the state claims its due. Mauritius, a tax haven, claims no tax from the company registered there. It is a classic example of a tax system mismatch ripe for exploitation, says tax economist Ruud de Smit of Erasmus University in Rotterdam, one of very few experts in the field who does no work for law or accounting firms.

“International companies can easily use these tax differences to reduce their worldwide tax on profits,” he says.

For Naspers, that translated to a €13-million benefit in Mauritius – a benefit that accrued to a company on the island that paid no tax on the profits made in Europe.

When the Dutch tax service balked at the deduction, Naspers went to court to demand it. The country’s supreme court ruled against the company. There had been good business logic behind routing the money through Mauritius, Naspers argued. Not so, the court said; the reason had simply been to avoid tax.

Naspers initially seemed set to fight the judgment but later withdrew, to the probable dismay of some of its peer companies.

“Tax experts see this as a pretty harsh judgment,” says De Smit. “The judge actually says that a multinational company providing all kinds of internal loans seeking to deduct the interest from tax must be able to prove business reasons. The reason for these kinds of financial flows within multinational companies is almost always tax.”

The Dutch ministry of finance refused to discuss the matter in the media on the grounds of confidentiality. Naspers did not respond to several requests for comment.

Media24 HQ
A statue of explorer Bartolomeu Dias outside the offices of the Media24 Ltd media group, operated by Naspers Ltd, at the company’s headquarters in Cape Town. (Graeme Williams/Bloomberg)

The Netherlands is a rewarding destination for South African companies expanding across the world. Out of the 20 largest companies listed on the JSE, 14 have registered one or more subsidiaries in the Netherlands. In total, these companies account for 249 entries at the country’s chamber of commerce. They have interests in mining, beer, real estate, healthcare and media. And they are in the Netherlands, evidence suggests, because of tax.

The case of New Europe Property Investments is illustrative. This company, largely owned by South Africans, invests in real estate projects in Eastern Europe out of an Amsterdam office. The money invested comes from offices in the Isle of Man, a British tax haven. In the past few years, the island-based company loaned more than €1-billion to the Dutch company, which in turn loans it to subsidiaries in Eastern Europe, which build shopping centres. The Dutch company receives regular interest payments from Eastern Europe, which it pays back to the Isle of Man – alongside “royalties”, which leave no profits to speak of in the Netherlands.

Annual reports show that this routing of money sees between €60-million and €70-million, drawing a tax rate of 0.6%. Without the detour through the Netherlands, that money would likely have been taxed at between 10% and 20%.

The company says its structure is legal and avoids double taxation.

The tax break on interest payments is often called one of the Netherlands’s three taxation crown jewels. Royalty payments are the second: headquarter your intellectual property in the Netherlands, then make your subsidiary in, say, England, pay for the use of that intellectual property, and profit appears out of thin air.

The third jewel is the participation exemption, which prevents profits already taxed elsewhere from being taxed again. South Africa is among the many countries with which the Netherlands has a treaty to avoid double taxation.

“Multinational corporations see taxes as an expense, not as a contribution,” explains tax consultant Jeroen van der Linden. He used to work for such companies but now runs his own consultancy in Amsterdam, where he and four employees advise medium-sized companies on tax matters.

Van der Linden believes that some tax advisers “sail sharply to the wind”, but also wants to highlight the other side of the story. “People think that tax advisers sit in back rooms all day to come up with interesting tax structures. But what it is mainly about is not paying the same tax twice.”

In recent years, however, the tax industry has seen a raging debate about structures that have become so good at avoiding double taxation that they avoid tax altogether. Often, if not always, the mechanisms for doing so are exactly in compliance with the rules – but exactly opposite to what the rules are intended to achieve.

The resulting window dressing can be amusing. In Amsterdam, Dutch website 925 reported, an office with a house plant is enough to satisfy tax inspectors that a company really has operations in the city. A company that wishes to provide a decent working environment – with a plant in it – is clearly not just registered for tax purposes.

On a Friday afternoon, towards the end of the summer holiday, there is little activity in this corner of the business park around the Sloterdijk station in Amsterdam. A number of buildings with tall pillars, white stucco walls and narrow windows crowd around a small green park. In a tree, a robin noisily defends its territory.

If you go into one of those buildings and ask to talk to someone from BHP Billiton, you’ll be causing trouble for the receptionist. She is not allowed to talk to journalists, she says.

As an additional problem, the company has a total employee count of one person, the annual report of the Dutch office of BHP Billiton says.

The receptionist actually serves Citco, one of nearly 300 trust offices found in the Netherlands. These are a vital cog in the machinery that moves money for everyone from members of rock band U2 to retail chain Walmart. For a fee they provide a postal address, and perhaps a manager, that gives you a Dutch presence and hence access to its tax system.

South African companies make extensive use of the Dutch trust industry, according to figures from the Dutch Central Bank, requested as part of this investigation. In recent years, an average of €20-billion a year has arrived at Dutch letterbox companies directly from South African companies. That is not counting money that may flow from South Africa by way of a third country.

In this one building in Sloterdijk, data from the Netherlands Chamber of Commerce shows, about a thousand companies are located, from oil producers to supermarket chains and investment holding companies. BHP Billiton, the largest mining company in the world, is just one of the multitude crammed inside.

BHP traces its history back to 1851, when three Dutchmen found tin on Billiton, an island in the elbow of Sumatra.

In 2015 an Australian senate committee that investigated tax evasion said BHP had made use of a different island in what accounts refer to as the “Singapore Sling”, named for a popular drink made with gin and cherry liqueur.

It worked like this: BHP established a marketing department in Singapore. The marketing department bought tens of billions of dollars in resources from BHP mines all over the world, which it then sold in Asia. All that copper, iron and coal never really touched ground in Singapore, yet the markup charged to end customers was booked in Singapore, with its low tax rate.

BHP is a master of transfer pricing, the flow of goods and services between the different subsidiaries of companies that, the European Parliament estimates, accounts for 70% of diverted taxes. Many rules exist around it, but enforcement is a nightmare.

Take an Apple laptop as an example. Are you paying for the parts manufactured in China, or the Apple logo that comes from Cupertino in California? What, exactly, is that logo worth? Because that can determine how much profit is booked where – and at what tax rate.

Annual accounts for BHP in the Netherlands show that its money comes not from Singapore, but by way of a cash dividend paid by a subsidiary in Switzerland. On flows amounting to $1.1-billion in 2014, the company paid tax of 0.04%.

BHP would say only that it has marketing activities in the Netherlands. 


Koos Bekker, billionaire and chairman of Naspers Ltd, Africa’s biggest company. (Halden Krog/Bloomberg)

“You never lose with Koos,” they say about Naspers’s legendary former chief executive, Koos Bekker, whose well-timed investment took his company global. For Naspers shareholders that has been true: the share price broke so many records that any comparison between its value in the 1990s and now is nonsensical.

Equally difficult to deal with is its corporate structure, both in South Africa and abroad. In the Netherlands we found a maze of companies, all making a loss. All are connected by ownership, investments or loans. All trace back to a holding company in Hong Kong. We submitted the structure to several experts in the field of corporate structures. None could make sense of it, or come up with a hypothesis on what purpose it serves.

That may come as consolation to Ismael Belela, who lives in a reality far removed from the one in which corporate profits fly around the world to “optimise” taxation and dividends swell as a result.

In 2009 he had a hard lesson in company structures. “We were expecting to hear how much our shares were worth. Instead, they told us we must wait for two more years,” says Belela of the experience.

The empowerment scheme was dramatically under water, with the unlisted Media24 shares considered worth closer to R20 than the R50 they were sold at via Welkom Yizani. The expected dividends had not materialised due to what management described as “recessionary conditions”. With the media industry in turmoil worldwide, there was little prospect for an immediate turnaround.

Naspers responded by writing off the R330-million in accrued debt the scheme owed it but also extending by two years the lock-in on the shares, preventing the shareholders from cashing in at a loss.

“I had to tell the others they couldn’t get their money yet,” said Belela. “They were angry at me, but I told them some of the debt was going away and we would have more money in the end.”

His prognostication was disastrously wrong. When in late 2013 Welkom Yizani launched an over-the-counter trading system for its shares, to restrict the owners to selling to other qualifying black people, the price per share almost immediately fell to R9.50. It remained stubbornly at about R10 for the next two years.

“We would phone them to say we want to sell our shares, we would phone them for six days and then they would pick up the phone and we would say: ‘How much are our shares worth?’ And they would say R10. Always R10,” says Belela.

At the same time, the group watched the share price of Naspers hit stratospheric heights as its investments in the likes of Tencent in China paid off handsomely.

In the 10 years up to the middle of 2016, the Naspers share price had grown by some 1 565%. By mid-2016 Welkom Yizani shares had finally shown an increase of some 45% in value, after Naspers forgave another R400-million in debt the scheme owed it in March.

But it was too little, too late. An investment of R1 000 in Welkom Yizani at the beginning of the scheme was worth R1 450 by mid-2016, and would have paid out some R230 in dividends. The same R1 000 invested in risk-free, no-fee government savings bonds at a guaranteed interest rate would have repaid R2 533.

Had that R1 000 been invested in Naspers directly, with no empowerment discount or special funding, it would have been worth R16 656, not counting the dividends the handful of shares would have paid.

Belela watched Naspers grow in value more than 10 times while his investment barely moved the needle, with a growing sense of disillusionment.

“I buy into a company, and that company is now worth many times what it was before. But you tell me the part I bought into, sorry, that part is not making money. Do I start to think I was taken advantage of, to make some political problem go away for them? A little bit.”

Jasper Van Zyl has retired since the workers bought into the scheme, leaving his son-in-law, Johan Botha, in charge of the farm. Johan is also not impressed with the way Naspers structures its business.

“I’m left trying to explain what happened with the investment,” says Botha. “It’s hard to explain it in terms other than this: yes, white people took advantage of you again – just this time they pretended they were doing you a favour.”

Naspers this week said it had operations in more than 130 countries and its corporate structure reflected this. “We are completely transparent and compliant regarding our corporate structures which are set out in our annual reports and statutory filings.”

In response to questions on Welkom Yizani, Naspers rejected any suggestion that it served as window dressing, pointing to a track record of “some of the most successful BEE schemes in the media industry, empowering thousands of people”.

The Media24 empowerment vehicle may not have been as successful as some of those, it conceded. “However, one has to accept that its share price is determined by willing buyers and sellers on the Welkom Yizani trading platform and that valuations are negatively affected by weaker industry prospects.”

  This article is a collaboration between the Mail & Guardian and De Groene Amsterdammer, made possible by the Connecting Continents pilot project of Journalismfund.eu and crowdfunding through Yournalism

Read Media24’s right of reply HERE

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