I try to use this blog to stimulate debate, rather than just pumping out propaganda. I particularly enjoyed the debates that the Starbucks case provoked, with Ben Saunders‘ investigation involving more twists than The Killing.
But today I’m quite annoyed, so this is probably a slightly more partisan post than normal. Day 2 of the Associated British Foods versus ActionAid story has been the “ABF denies” stories, which is natural. But what has annoyed me is that ABF’s statements are so selective and misleading, and that the journalists who’ve written them up don’t seem to have examined them critically at all. I was especially surprised by the piece in Tax Journal, because I’d expect the industry press to scrutinise both sides’ claims extensively.
In most cases, ABF either mischaracterises ActionAid’s argument, or makes points it already made in the correspondence [pdf] between the two organisations, and which are addressed directly in the report [pdf]. This is why it’s so frustrating to see the ABF line appearing as the last word in these stories.
So, below I’ve been through all the new ABF statements I’ve found since the ActionAid report was published, and explained why I don’t think they discredit the original report. I believe this is known in the blogosphere as “fisking“.
I really welcome other people’s comments and scrutiny. The value of these case studies is in expanding everyone’s understanding of the challenges that developing countries face in taxing multinational companies.
John Bason, finance director at ABF, said: “The reason that no corporate tax is paid in Zambia for the last couple of years is because of our £150m investment building the biggest sugar mill in the country. There are capital allowances available on that, in the same way similar reliefs are available to investors in most countries, including the UK.” Mr Bason said the capital allowances would continue for up to another five years, at which point the company would return to paying Zambia’s 10pc rate of corporation tax.
Whether or not Zambia Sugar receives capital allowances is utterly irrelevant to ActionAid’s argument. 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, the longer it will last. ActionAid’s report is quite clear about this. [Edit: Maya Forstater in the comments thinks the report is not so clear, and she’s right that the capital allowances seem to be responsible for the zero tax payments mentioned in the report and communications. I’m saying here that ActionAid’s estimates of tax lost by the Zambian government are unaffected by the capital allowances].
He added it was “absolutely not true” that Zambia Sugar was funnelling a third of its pre-tax profits to sister companies in tax havens. Payments were made to Ireland and Mauritius in return for the services of “real people, doing real jobs”, he said. Ireland employed around 20 people – not “none” as ABF company accounts had wrongly disclosed.
It is quite possible that there are real people doing real jobs in return for these payments, but they are not located in the tax-friendly countries to which the payments are made. This is the point that ABF needs to defend.
ActionAid’s report provides ample evidence that neither the Irish nor Mauritian company receiving payments from Zambia sugar has a substantive economic presence in those countries. For example, a staff member at the company service provider that files the Irish company’s accounts, and whose office is its registered address, told ActionAid that “the management side of it would be based in South Africa.” Similarly, Illovo Group’s only (part time) employee in Mauritius referred ActionAid straight on to the company’s South African office.
And no payments went to the Netherlands, as Action Aid claims, he said. “The Netherlands is a holding company to Zambia so dividends go there and dividends come out after pre-tax profit,” he said. “We’ve been wronged.”
ActionAid’s report does not suggest anything different. It is precisely the use of a Dutch holding company that avoids withholding taxes amounting to 10% of all the profits repatriated by ABF from Zambia Sugar. This amounts to a denial of an allegation that ActionAid never made.
But John Bason, ABF’s chief financial officer, said of the money paid to Ireland, €4m was for expatriate salaries in Zambia and the £2m to Mauritius was for export services which Zambia lacked the capability to manage. ABF’s share of the dividend, €4m, is paid through a Dutch holding company.
This is precisely what the Sweet Nothings report says. Bason has nothing to say about the rest of the payments to Ireland, for unspecified management services provided by a company with no staff in Ireland, nor does he explain how a company in Mauritius which also has no staff would have the “capability to manage” £2m worth of exports.
The amounts paid were at cost, he said. “I’ve looked really closely at this, and the payments made by the sugar business are all for services provided and it is at cost,” Mr Bason said. “I cannot see any evidence of mark up or anything like that.”
ActionAid says it’s easy to spot in the Irish accounts, and it’s an average of 26% over the years examined.
In Zambia itself, Illovo invested R1.6bn (£150m) to double the size of the sugar mill and improve productivity…As a direct consequence of this investment in a sustainable business, capital allowances and tax incentives were available to the company as they are to other investors…African governments should be as free as any other to attract investors.
ABF positions itself as the defender of the Zambian government’s right to give it tax incentives. Yet of the two tax incentives from which Zambia sugar benefits:
- It only obtained the first – which reduces its overall tax rate from 35% to 10% – by taking the government to court. It was an incentive designed to encourage the growth in local agriculture, not to benefit Africa’s largest sugar factory.
- The second remains secret, a practice that Zambia’s new government has vowed to end. Neither the Zambian Development Agency nor ABF were willing to share the terms of this discretionary tax incentive with ActionAid. If ABF thinks negotiating such an incentive is something to be proud of, why not disclose it?
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.
Note that what ABF denies is the motivation for the payments, not the factual matter of their effect, which is to reduce Zambia Sugar’s tax payments in Zambia.
These payments are made in return for the services of real people, doing real jobs, adding real value in Zambia and have nothing to do with tax planning… The payments are for export services, third party contractors, and expatriate personnel in Zambia…The payments simply reflect the reality of the group’s operations.
Whose reality? As noted above, there are no real people doing real jobs for ABF in Ireland or Mauritius. Had the payments been made to South Africa, from where it appears these companies are really managed, they would have incurred a withholding tax of 20%. By making them to Ireland and Mauritius, the company avoids this entirely. “Nothing to do with tax planning,” really?
Furthermore, ABF’s aggressive tone towards ActionAid is hard to reconcile with its admission that the Irish company’s accounts have been riddled with significant errors for years.
There are no royalty payments, no franchise agreements.
Correct, but then ActionAid never said that there were.
The payments are charged at cost, and there is no artificial reduction in profit in Zambia sugar as a result.
Even if this argument, which isn’t substantiated, were true [Edit: just to be clear, the 26% profit margin in Ireland is strong evidence against this “payments are charged at cost” argument, and I can’t understand why journalists don’t seem to have put this to ABF] it ignores the avoidance of withholding taxes, which are not dependent on profits. ActionAid contends that the use of Irish, Mauritius and Dutch companies, none of which have any local presence in those countries, is beneficial because of the advantageous terms of Zambia’s double taxation treaties with these countries. I can’t find anything in ABF’s press statements mentioning withholding taxes.
Moreover, the ActionAid assertions are clearly illogical. 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. If it were engaged in this activity, this has to be an example of spectacularly unsuccessful tax planning where profits are shifted into higher tax regimes.
Well now, at first sight this does sound like it presents some problems for ActionAid, but ABF brought it up in earlier correspondence, and ActionAid offers a rebuttal in the report.
First, the Zambian tax rate isn’t 10%, it’s 35%, which Zambia Sugar also paid until its court case forced the government to grant it a tax incentive. Most of the structures identified by ActionAid predate this restructuring.
Second, this line of argument – which can only be verified using confidential information that only ABF and the South African Revenue Service have – seems to be a partial reflection of the Illovo Group’s tax position: for the last few years, the entire tax liability of the Zambia Sugar’s South African parent company has been less than the 28% that ABF implies “would ultimately be” (not “is”) paid on the profits of these tax haven companies in South Africa.
Illovo believes that ActionAid’s work on the ground in many countries is laudable. However, this report is clearly designed with political campaigning in mind. It is inaccurate and misleading. As such, it demeans ActionAid and undermines the trust that should help NGOs and business to work together to bring swifter economic and social prosperity to communities in Africa.
ABF had ample time to inform ActionAid of factual inaccuracies, and indeed a number of corrections to the report were made on the basis of information the company supplied. Its public responses to the Sweet Nothings report don’t outline factual inaccuracies, they try to portray some of the facts uncovered by ActionAid in a different light, while obscuring others. It is ABF which, if anything, is guilty of misleading.