By Mutale Kapekele
‘The mines do not pay enough tax. Multinationals are
hemorrhaging money from the economy.’ Those are comments we hear every day.
It is true that ‘common’ Zambians pay more in tax than some
of the big organizations. This is mainly due what the world has come to know as
illicit financial flows.
By definition, illicit financial flows, in economics, refers
to a form of illegal capital flight and occurs when money is illegally earned,
transferred, or spent. This money is intended to disappear from any record in
the country of origin, and earnings on the stock of illicit financial flows
outside of a country generally do not return to the country of origin.
According to a new report from an African Union and Economic
Commission for Africa panel chaired by former South African President Thabo
Mbeki, more than US$50 billion is estimated to leave the African continent due
to corporate tax evasion, corruption, and criminality.
The outflow dwarfs the amount of official development
assistance entering the continent. The problem is coupled by aggressive profit
shifting tactics utilized by multinational corporations to avoid taxes in the
resource rich countries where they operate.
And according to the Global Financial Integrity (GFI) research,
US$991.2 billion was funneled out of developing and emerging economies through
crime, corruption and tax evasion in 2012 alone.
In Zambia, reports by ActionAid published in 2011 and 2013
examined the tax practices of two of the world’s largest food and beverages
multinationals. The results left bitter tastes in the mouths of many Zambians.
ActionAid zoomed in on Zambia Sugar, a subsidiary of the
Associated British Foods (ABF) group, which produces staple brands like Silver
Spoon sugar, Kingsmill bread, Ryvita and Patak’s, and also owns clothing chain
Primark.
ActionAid’s investigation found that ABF’s Zambian
subsidiary used an array of transactions that have seen over a third of the
company’s pre-tax profits – over US$13.8million (Zambian Kwacha 62 billion) a
year – paid out of Zambia, into and via tax haven sister companies in Ireland,
Mauritius and the Netherlands.
“Some of these transactions reduce Zambia Sugar’s taxable
profits, while the structure of others avoids the Zambian taxes ordinarily
levied on treaty between Zambia and Ireland, which prevents the Zambian
government from charging any of the tax that would normally be levied on the
interest payments made on these loans. Order a tax-free takeaway: Zambia Sugar
is able to send profits back to its parent company, Illovo Sugar Ltd, nearly
tax-free by re-shuffling the ownership of the company through a string of
Irish, Mauritian and Dutch holding companies, taking advantage of tax treaty
loopholes and tax haven regimes to cancel tax on its dividend payments.”
A similar report produced two years earlier, revealed how
SABMiller, the world’s second largest beer producer, whose brands include
Grolsch, Peroni and Miller, and African beers Castle and Stone Lager, was
siphoning profits out of Zambia and other developing countries and parking them
offshore.
SABMiller’s companies in Zambia include National Breweries,
the producers of Shake Shake and the Zambian Breweries, the brand owners of
Mosi Larger among other products.
The two institutions rejected ActionAid's interpretation of
their business structures and denied that involvement in aggressive tax
planning in any part of their operations.
According to the Global Financial Intelligence, despite
growing awareness, developing countries lose more money through illicit
financial flows (IFF) than they gain through aid and foreign direct investment.
GFI reports that IFFs are continuing to grow at an alarming rate of 9.4 percent
a year.
Raymond Baker, GFI says IFFs continue to grow because it
remains so easy to do. “We have not turned the tide on the ease with which
money can be shifted out of developing countries.”
There are lots of ways to get money out of a country undetected
but the easiest is through trade misinvoicing, which is the overpricing of
imports and the underpricing of exports – and accounts for “77 percent of all
illicit financial flows.”
“Suppose you live in Cameroon,” says Baker, “and want to get
money out. As an importer, you ask your supplier abroad to increase the price
by 20 percent and invoice you for 120 percent. When you pay, that extra 20
percent is put into an account for you.”
The practice works in exactly the same way for exports: an
exporter sells a product for less than it’s worth (50 percent) so that the
balance of its true value (the remaining 50 percent) is paid into a foreign
private account instead.
As these flows by their very nature are intended to be kept
secret, GFI combs through balance of payments data that governments submit
every year with the International Monetary Fund. They also look for gaps in
trade statistics: “If Cameroon says it exported US$100m to France but France
says it imported $300m, then exports have been underpriced by US$200m,”
explains Baker.
Advising its clients on how to avoid transfer pricing audits
by the Zambia Revenue Authority, the accounting firm PricewaterhouseCoopers
(PWC) gave three examples of business practices which were likely to be
questioned.
These included procurement of management and financial
services from related parties (companies in the same global group) and also
buying goods from related companies.
On management services PWC advised companies to watch out if
their “management services were provided from a low tax jurisdiction such as Mauritius
or Bermuda. PWC also advised that the ZRA raises a red flag on “loss making
companies, management fees based on turnover of the local company, or a
fully-fledged local operation that does not warrant provision of management
services, lack of evidentiary support of provision of management services and
lack of evidence of benefit derived by the local company from such services.”
On procurement of goods, PWC advised that ZRA pounced on
companies whose goods recorded “loss gross margins as compared to industry
averages, purchase of goods from low tax jurisdictions, loss making or bulk of
cost of sales made up of related party purchases. The other red flag mentioned
was the “absence of evidence of the arrangements between the vendor and
purchaser such as written agreements and transfer pricing documentation.”
For financial assistance, PWC advised companies to avoid
“thinly capitalizing local companies, contracting related part high interest
loans rates as compared to the market, financial assistance provided from a low
tax jurisdiction and high guarantee fees as compared to the market.” The other
advice point was “absence of evidence of the arrangements and transfer pricing
documentation.
“Where your company has cross border transactions with
related parties, it is highly recommended that you begin the process of
compiling transfer pricing documentation in preparation for audits by the ZRA,”
advised PWC.
From the advice provided by PWC, it is clear that there are
legal loopholes that can be employed to avoid ZRA audits. The same is true when
it comes to avoiding tax.
Avoiding tax using legal provisions is not a crime in Zambia
but the practice is immoral and deprives the country of the much needed
resources for economic growth.
Zambia is not the only affected country as IFFs have a
global face. This is a complex issue that will take a long time to end and
everyone should stand up to those involved.
