ActionAid is pleased that our Sweet Nothings report on tax avoidance and tax breaks in Zambia has generated coverage and debate in Europe and in Africa. It’s through detailed debate of this kind that we hope a fairer tax deal for countries like Zambia and for multinational investors will ultimately be reached.
Associated British Foods (ABF) has also responded to ActionAid’s research, which showed that financial engineering by ABF subsidiaries has cost Zambia an estimated US$27 million since 2007.
Associated British Foods has issued strong denials. But many of these simply mischaracterise the key evidence and the arguments ActionAid are making. These denials do nothing to change the findings of our research, which demonstrates the numerous techniques the company uses to ensure it pays very little tax in Zambia. The human impact of tax avoidance on this scale in Zambia is undeniable.
Business can be a force for good in developing countries, but its impact is undermined when it does not pay its fair share of taxes.
ActionAid’s response to Associated British Foods statements:
Lack of transparency?
Associated British Foods claims that ActionAid has published “a highly inflammatory account of the company’s tax position that is incomplete at best and factually wrong in places. Illovo has engaged openly with ActionAid to set out the correct position”. ActionAid has made every effort to engage Associated British Foods while undertaking this research.
We first wrote to the company in October last year, requesting detailed information covering all areas of our report, which ABF declined to disclose. We attempted to arrange meetings with the company in Zambia, but were turned down. We were due to meet in the UK, but this meeting was cancelled by Associated British Foods the day beforehand.
Finally, ActionAid put all our findings to the company in writing, and engaged in several rounds of correspondence for which we are grateful for the company’s engagement, and which resulted in several changes to our report. To allow readers to judge for themselves whether we have engaged responsibly with Associated British Foods, we have published this full correspondence on our website, and have also incorporated its main arguments fully into our report itself.
Treaty shopping ignored
In its statements, Associated British Foods has described our report as being about ‘profit-shifting’ to avoid corporate income tax. However our report focusses substantially on ‘treaty shopping’ and the use of conduit entities in tax havens to avoid withholding taxes, on which Associated British Foods has been silent.
We calculate that withholding tax losses alone amount to $10.4m since 2007, and are independent of any corporate income tax liabilities. They include significant withholding tax losses on the large loan ‘dog legged’ via Ireland, and the routing of dividends paid back to Zambia Sugar’s South African parent via a Netherlands/Mauritius structure. Likewise the large management fees paid to Ireland – recorded as taxable income there despite the company having no presence in Ireland – not only reduce taxable profits, but also undeniably prevent any withholding taxes that Zambia would ordinarily levy on management fee payments to non-residents (a tax whose revenues are specifically dedicated to development programmes in Zambia).
The Ireland-Zambia tax treaty also prevents Zambia from levying the normal 15-20% tax on interest income arising in Zambia and paid to non-residents, while the Netherlands-Zambia tax treaty combined with the Netherlands structure cancels two-thirds of the Zambian withholding taxes on dividends.
Impact of payments to Ireland and Mauritius
Associated British Foods claims that “the payments [to Ireland and Mauritius] are for export services, third party contractors, and expatriate personnel in Zambia.” But the company fails to mention management service fees of at least $10.8 million paid to its Irish company alone. ABF claims “the payments are charged at cost”, yet this seems to be contradicted by its Irish company’s own accounts, which shows that it booked 26% profit in Ireland on these management fees – despite appearing to have no presence in Ireland itself.
Associated British Foods statement also says “there are no royalty payments, no franchise agreements.” ActionAid has not said that there were any royalty payments or franchise agreements, but has pointed to “management fees” to Ireland and “export agency commission” payments to Mauritius.
Associated British Foods states that “ActionAid’s report alleges that Zambia Sugar pays fees to other parts of the Illovo group in order to reduce tax. This is absolutely not true.” While ABF deny the motivation for the payments, it ignores their actual effect, which is to reduce Zambia Sugar’s tax payments in Zambia.
Capital allowances: not the whole story
The company’s principal explanation for its low tax contributions in Zambia is capital allowances it has been able to claim on the expansion of its sugar mill and plantation. We clearly acknowledge at the beginning of our report (page 2) that “generous capital allowances — the subject of current Zambian government scrutiny — may significantly reduce the company’s tax liability.” We do not include these capital allowances in our estimates of Zambian tax lost.
However, ABF’s claim that the capital allowances are the only reason for its subsidiary’s low tax payments in Zambia does not hold water. First, withholding taxes has nothing to do with corporate profits: avoiding them is unaffected by capital allowances written down against profits.
Equally, the large payments the company makes to Ireland and Mauritius will also have an impact on the company’s overall corporation tax liabilities regardless of other allowances. The capital allowance is a fixed sum, which the company will run down progressively as it makes profits. The more that profits in Zambia are reduced by tax haven payments in the first place, the longer the capital allowance will last. The existence of capital allowances neither reduces nor increases any benefit to Zambia Sugar from the tax haven payments.
Tax breaks and rates
Associated British Foods also has nothing to say about the tax break Zambia Sugar gained in 2007 after taking the Zambian government to court. This tax break is intended to support domestic farmers in Zambia, and has seen the company’s tax rate tumble from 35% to 10%.
The company claims “there is no tax advantage in moving profits from Zambia where the tax rate is 10%, to other group companies where the income would ultimately be taxed in South Africa at 28% due to specific South African tax rules.” First, payments to Ireland have been taking place for over a decade, for most of which Zambia Sugar’s profits were taxed at 35%. More seriously, the company’s most recent set of South African accounts show plainly that its entire South African tax liabilities in 2011/12 were only $308,000 — just 4% of the $7 million in fees Zambia Sugar paid out to Ireland and Mauritius alone. The South African company paid just 0.6% of profits in South Africa in the last financial year.
Developing countries’ revenue losses due to tax avoidance and special tax breaks are a much broader problem than just one company. But our research has nonetheless generated clear evidence that the tax behaviour of Associated British Foods’ subsidiaries has been depriving Zambia of significant tax revenues, which needs to be brought to the attention of the public and policy makers.
We believe that all taxpayers, including the Associated British Foods group, should pay a fair share of tax in Zambia. More importantly, governments in both the developing and the developed world need to change the international rules that make corporate taxes an optional extra for many multinationals.
Five questions Associated British Foods needs to answer:
We have attempted to answer every objection that Associated British Foods has made about our report – predominantly in the report itself. We have been glad to do so: it’s absolutely right that findings like ours are subjected to the most rigorous scrutiny. We would now like the company to answer the following questions, to which it has yet to respond.
1. How can ABF justify booking 26% profits in low-tax Ireland on management fees paid out to a company that appears to have no presence or staff in Ireland? If this isn’t for tax purposes, what is it for?
2. How have its Irish accounts been approved by its board — and cleared by its auditors — for seven years in a row, when these accounts, by ABF’s own admission, appear to have forgotten that the company had any employees?
3. How can ABF claim it needed to move Zambia Sugar’s export sales operations to Mauritius in 2010/11 because “Zambia lacked the capability to manage [them]”, when the Mauritian company ostensibly doing the export sales has no employees in Mauritius at all, while Zambia Sugar has 3000-6000 staff?
4. How can ABF justify taking the Zambian government to court to get a tax break by presenting Africa’s largest industrial sugar factory as nothing but a domestic farmer?
5. Why is ABF keeping secret the details of the additional special ‘investment certificate’ tax incentive granted by the government to Zambia Sugar – especially when the investment certificates the government awards to companies, which details the conditions and incentives granted to the company, should be a public document?