Campaign blog

Later this year, the world’s most powerful countries will debate proposals for wholesale reform of the international corporate tax system. After several years of campaigning from ActionAid and many other organisations, they have finally agreed to take seriously the problem of so-called "Base Erosion and Profit Shifting" – an elaborate term for corporate tax avoidance. UK chancellor George Osborne has called on reforms to end the kinds of tax activities allegedly undertaken by high-profile names like Starbucks, Google and Amazon.

So what should countries be considering as they sit down to rewrite the international tax rules? Much of the public outrage around multinationals’ tax affairs has focussed on allegations of shifting profits into tax havens. Such 'profit-shifting' was also the main focus of ActionAid’s 2010 report on the tax practices of brewing giant SABMiller, Calling Time.

But profit-shifting isn’t the only mischief generated by weak international tax rules and ingenious financial engineering. 'Sweet Nothings', our new report on the Zambian tax affairs of British multinational Associated British Foods (ABF), also examines a different technique: routing cross-border payments via particular jurisdictions (often tax havens) to take advantage of loopholes amongst thousands of bilateral tax treaties.

In ABF’s case, we found that hefty management fees, and interest payments on foreign bank loans to ABF’s Zambian sugar operation, Zambia Sugar, are being routed through a special subsidiary registered in Dublin, called Illovo Sugar Ireland.

Why? Our investigation found that in reality Illovo Sugar Ireland appears to have no real office or activities in Ireland itself (indeed, when ActionAid  visited Illovo Sugar Ireland’s listed address on the Dublin waterfront, the receptionist had never heard of the company). Management services are apparently being provided from South Africa and elsewhere. And the interest on the bank loans is going back to the UK branches of the banks that originally lent the money.

Ordinarily Zambia, like many other countries, withholds a 20% tax on such management fees and interest income (or 10% in the case of payments to the UK). Almost uniquely, however, a tax treaty signed back in 1971 between Zambia and Ireland denies Zambia any right to tax such payments. So the trick of ‘dog-legging’  Zambia Sugar’s payments via Ireland – at least on paper - has seen Zambia lose millions of dollars of cross-border taxes.

The same is true of Zambia Sugar’s profits when they are distributed back to its South African parent company as dividends. We found that these dividends are routed via a string of Mauritian and Dutch holding companies, including through a special hybrid company form called a ‘Cooperatief’.  Thanks to an unbalanced tax treaty with the Netherlands, and loopholes in Dutch tax law governing Cooperatiefs, this arrangement avoids the majority of Zambian withholding taxes, despite the dividends not being taxed in the Netherlands either.

ABF themselves told us that the normal Zambian withholding taxes would have been due on Zambia Sugar’s interest payments were they not routed via Ireland, while denying any wrongdoing. Here’s how it works:

In theory, of course, tax agreements between Ireland and Zambia shouldn’t apply to South African managers, or UK banks. Routing transactions through such ‘conduit companies’ is a procedure commonly called ‘treaty shopping’. It’s not about shifting profits, but about avoiding taxes on cross-border income. While it’s not unlawful, the OECD calls it “abuse”, and has proposed a range of measures to stop it – most of which are absent from the outdated Ireland-Zambia and Netherlands-Zambia tax treaties.

Taxing payments of interest, dividends, fees and royalties is an important way for developing countries (and the UK) to get a fair share of the revenues from such cross-border income. Zambia, indeed, earmarks some of this tax specifically for government development programmes – helping to fund Zambia’s own fight against poverty. Some developing countries have started to renegotiate or even cancel loophole-ridden tax treaties where they are suffering ‘treaty shopping’ abuse: Indonesia cancelled its tax treaty with Mauritius for this reason, and Mongolia did the same with the Netherlands last December.

As our Zambian colleagues said in the press last week, we think Ireland should likewise offer Zambia a better tax deal, and close the loopholes in its 40-year-old tax treaty. Ironically, Zambia is one of Ireland’s nine ‘development partners’ and a major recipient of Irish overseas aid. Yet we estimate that since 2007 this single company’s transactions via Ireland may have deprived the Zambian government of revenues equivalent to one in every 14 Euros of Irish development aid to Zambia.

And while ABF have issued strong denials of profit-shifting, they’ve sadly been silent on the ‘treaty shopping’ that constitutes the majority of the tax avoidance identified in our report.

This isn’t just an important factual point. When Ireland, the UK and other OECD countries meet later this year to re-write the rules of corporate taxation, their agenda needs to look beyond profit-shifting and transfer pricing – the main target so far of public outrage over multinational tax avoidance. It needs to tackle a range of other tools in the tax avoidance toolbox too.

Individual countries, including Ireland, need to close loopholes in their outdated tax treaties. And the international standards governing the rights to tax cross-border income should close such loopholes everywhere, for good. 

It’s a sad truth that when conflict and disasters strike, their impact is shouldered by the poorest and most marginalised, and as 70% of the world’s poorest people are female, it is women and girls that are most affected.

In the Pakistan floods in 2012 85% of the people displaced were women and children. In many of the areas affected by the Asian Tsunami in 2004, women were up to three times more likely to die than men.

Following disasters, resources become scarcer and there is usually a general breakdown in the ability of the state to keep law and order. Women, who had less to begin with and have to struggle to compete for a share of available resources, also face increases in rates of sexual and gender based violence. In temporary camps in Haiti, women already traumatised by their experiences in the earthquake were forced to endure further trauma as a result of increases in rapes and sexual assaults.

A few weeks ago I had the chance to meet and talk with a group of women involved in an agricultural collective run by ActionAid in Liberia, a country still reeling from the effects of a long and brutal civil war. The women told stories of fleeing the fighting and returning to find their homes destroyed and their fields ruined. They also told of the violence they and other women in their villages were forced to endure at the hands of militia, many of whom were boys and men they already knew and had grown up with as neighbours in their communities. The difficulties they have faced in rebuilding their lives are unimaginable but their strength and dignity were what impressed me most.

The disproportionate impact of disasters and emergencies on women and girls is starting to be recognised by donors and humanitarian actors. For ActionAid, this has meant a commitment to prioritise the needs of women and children in our response work, which in practical terms has ranged from providing safe spaces in the immediate aftermath to supporting women to secure the resources they are entitled to, such as through government compensation schemes.

It’s a priority for our advocacy work as well, which has long had a particular focus on violence against women and girls. We’re working to raise the issue up the international agenda through forums such as this year’s UN Commission on the Status of Women in March and through our work with governments in over 40 countries.

Much of the suffering that follows disasters and emergencies is actually man-made; neither inevitable or acceptable. By working before disasters happen to raise the status of women and girls, ensure their rights are respected in their communities and build their power, resilience and ability to withstand shocks, we can dramatically reduce the depth and duration of the effects of disasters and build a fairer and more prosperous future.

A crucial part of tackling hunger is about meeting our promises on aid. This year the UK government could be the only country in the G8 to meet its 40-year UN commitment to give 0.7% of our national income in aid. This is money that literally saves lives every day, strengthens governments and builds up civil society. That’s why it’s essential the Chancellor uses his 2013 Budget announcement to confirm that we will meet this promise. If all developed countries met their existing aid pledges tomorrow we could easily meet half the investment needed to end hunger and malnutrition.

We must tackle the causes of hunger head on, by changing the systems and policies that keep people poor, but aid can help support progress in providing solutions. As I heard during my recent trip to Liberia, aid can be used to strengthen women’s rights to own land and to increase the level of support for women trying to eke a living from small farms. It can also be used to build up basic public services such as education and healthcare, and to improve local infrastructure such as access to water.

With the economic recession in the UK spending money on aid has come under greater scrutiny, but we know that real aid – aid that is spent on the right things, spent in ways and on things that are prioritised by recipients, and is predictable – does work. The UK has made enormous strides since the early 2000 to strengthen the quality of its aid. It is a world leader in delivering real aid.

Real aid helps reduce dependency on aid in the long term, as has been demonstrated in many developing countries. A country is aid dependent when it cannot perform many of the core functions of government, such as delivering basic public services like schools and clinics, without foreign aid. An ActionAid report published in 2011 shows that since 2000 aid-dependency in low income countries has fallen very sharply over the last decade or so. This means that other revenue streams including tax are now more substantial compared to aid. Importantly, it means that these governments are now more likely to be in the driving seat, and more likely to be held to account by their citizens. Aid has in many cases helped that process along, for example by building up domestic tax collection systems and by strengthening public oversight.

Globally, aid has contributed to reducing by 10,000 the number of children who die needlessly every day. Even when poor countries are no longer dependent on aid, aid is important to ensure poverty and inequality are tackled. To make sure therefore that aid continues for the foreseeable future, the Government should live up to its promise to enshrine the 0.7% target in law. That will ensure the UK sustains aid levels for the next few years and allows recipient countries to plan accordingly.

There can be enough food for everyone IF G8 governments, in addition to tackling the structural causes of poverty, keep their aid promises.

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