How Zambia Is Losing $3 Billion a Year from Corporate Tax Dodging

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How Zambia is losing $3 billion a year from corporate tax dodging War on Want fights against the root causes of poverty and human rights violation, as part of the worldwide movement for global justice. We do this by: • working in partnership with grassroots social movements, trade unions and workers’ organisations to empower people to fight for their rights • running hard-hitting popular campaigns against the root causes of poverty and human rights violation • mobilising support and building alliances for political action in support of human rights, especially workers’ rights • raising public awareness of the root causes of poverty, inequality and injustice, and empowering people to take action for change

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This report has been produced with the assistance of the European Union – DCI-NSAED/2011/247. The contents of this publication are the sole responsibility of War on Want and can in no way be taken to reflect the views of the European Union. Preface 01

Zambia, one of the poorest countries Translating Zambia’s natural wealth into in the world, is haemorrhaging wealth revenues for the Zambian people requires that could support vital public services equitable tax policies to ensure the and anti-poverty programmes, as a government receives a fair proportion result of tax dodging by multinational of the earnings from mining. Although the mining companies. The new research copper mines are producing ever larger in this report calculates that a amounts of copper, many companies are staggering sum – up to $3 billion a paying no corporate income tax because year – is lost by the people of Zambia they are declaring no profits. The country is to tax avoidance and tax evasion by being drained of resources by the ability of multinationals. Overly generous tax multinational companies to avoid paying tax, incentives provided to companies by sometimes facilitated by the global structure the Zambian government have also of tax havens. played a role. Attempts by the Zambian government to reform their tax system War on Want has long been committed have met opposition from powerful to the fight for tax justice, as a means of mining companies and international guaranteeing an equitable distribution organisations supported by Northern of the revenues from natural resources countries where the multinationals and of providing democratic control over concerned are based. national finances. We have run a three-year programme with trade union partners across The revenue lost is a truly enormous sum Europe, funded by the European Union, to in a country where 74% of the population highlight the social and economic costs of live on less than $1.25 a day and six million tax dodging by multinational corporations, people – 43% of the population – are and to demonstrate the need for a radical undernourished. transformation in tax policies so as to end the scandal of tax dodging once and for Zambia is, on the face of it, extremely wealthy. all. We present this report as one further For many years the largest producer of indication of the damage done to the poorest copper in Africa, and the seventh largest countries by corporate tax dodging, and we in the world, Zambia achieved record encourage all readers to join the campaign production (over 800,000 tonnes per year) for tax justice in all countries, whether spurred by growth in demand for metals in in the global North or South. Asia. There are many foreign copper mining companies operating in the country, with the largest including Glencore (a Swiss- based company listed on the London Stock Exchange), British-Indian company Vedanta and Canadian companies First Quantum and John Hilary African Barrick Gold. Executive Director 02 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging Contents 2. 1.

7. 6. 5. 4. 3. Copper Mine,Zambia Executive Summary 2.1 Corporate taxavoidance Zambia: revenuesfrommining 2.2 2.3 Conclusions &recommendations Clamping downontaxavoidance Zambia’s lostrevenues Tax incentives Tax evasion Glencore Vedanta Associated BritishFoods

06 04 03 03 07

16 14 18 13 10 21 12 © Gary John Norman / Panos / Norman John Gary © Executive Summary 03

Zambia has abundant natural and education. Recovering Zambia’s lost tax resources – including minerals and revenues could nearly double spending on agriculture – yet gains little tax revenue schools and health care. from the extraction of its resources, leading to lost opportunities to invest Public outcry over lost tax revenue led to in public services such as education government attempts in 2014 to address and health which are essential in how mining companies in particular avoided tackling poverty. tax. These attempts to reform the tax system were powerfully opposed by mining This report reveals how multinationals are corporations. They threatened to cut able to dodge paying their fair share of tax. thousands of jobs and billions of dollars of In 2012 it was calculated that the amount investment. The IMF also expressed concern avoided by companies in Zambia was around at the impact of the measures and the $2 billion a year – representing 10% of impact of lower global commodity prices on Zambia’s GDP. Looking at three companies government revenues. This pressure all had with operations in Zambia: Glencore, an effect and the government rolled back Vedanta, and Associated British Foods, the on the proposed new measures. report examines the details of such tax avoidance including use of complex corporate Looking forward, Zambia continues to face structures and mispricing. All these companies enormous challenges in addressing the are based in the UK or are listed on the $3 billion shortfall, yet without international London Stock Exchange. support its position is weak.

The report also describes other ways in War on Want calls on Northern which Zambia loses out on tax revenue, governments, including the UK, to address the including illegal tax evasion by companies ways in which the international tax system based in Zambia which adds a further $264 they support undermines Zambia’s ability to million; and $752 million lost in tax incentives raise a fair share of tax from multinationals agreed by the government. operating in Zambia.

One aspect of tax avoidance is the lack The UK government should: of access by government officials to • Close down tax havens information on company operations, • Ensure UK tax rules do not allow production and pricing. Combating tax companies to avoid tax in developing dodging strategies will require adequate countries government capacity and expertise which • Support the establishment of a UN body to currently does not exist. The report describes lead the re-writing of global tax rules a total of $3 billion being lost to the Zambian • Launch an investigation into UK exchequer - money which could be spent multinationals’ corporate tax practices on essential public services such as health in Zambia. 04 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging 1 corporation taxandtheroyalty rateand brought inby thegovernment thatincreased significantly: thiswasduetotaxchanges In 2011, government revenues rose Pay As You Earn(PAYE)). mining companiesintheform of payments madeby employees ofthe of just$633million(excluding the but earnedrevenues from mining produced $5.7billionworth ofcopper are shown intable 1. In2010, Zambia Industries Transparency Initiative (EITI), in arecent for report theExtractive The latestdetailedfigures, contained taxes tothegovernment. amount ofcopper, have beenpaying few companies, whileproducing alarge years have highlightedhow mining media andacademicreports inrecent little from mining. A stringofNGO, Zambia isnotoriousfor earningvery minerals.usgs.gov/minerals/pubs/commodity/copper/. Exchangerateused: ZK4.86/$asusedintheEITI report. year 2011, 2014, February Annex 8; USGeologicalSurvey MineralsInformation: Copper, 2012report, http:// Sources: Moore Stephens, Zambia Extractive Industries Transparency Initiative(ZEITI): for the Reconciliationreport Zambia: revenuesfrommining 1

windfall taxes, royalties and VAT onimports. the government. The taxes paidwere mainly paid atotalofonly $310millionintaxes to produced copperworth$4.28billionbut Excluding Kansanshi, theotherfive companies owned by Vedanta, paidonly atoken amount. no corporationtaxatall, whileanother, by Glencore and African Barrick Gold–paid (20%). Oftheotherfive mines, two – owned Quantum (80%)andtheZambiangovernment Kansanshi MiningPlc, jointly owned by First from miningcamefrom justonecompany: 2011, over halfofallgovernment revenues much higher. The EITIreportshows thatin greater thanbefore, they shouldhave been Although government revenues in2011 were worth $7.23billion. from mining, basedoncopperproduction government earned$1.35billioninrevenues windfall tax. Thus in2011, theZambian introduced avariableprofit taxanda 05

Sources: Moore Stephens, Zambia Extractive Industries Transparency Initiative (ZEITI): Reconciliation report for the year 2011, February 2014, Annex 8; US Geological Survey Minerals Information: Copper, 2012 report, http:// minerals.usgs.gov/minerals/pubs/commodity/copper/. This is the average price on the London Metal Exchange for 2011. Exchange rate used ZK4.86/$ as used in the EITI report. © Epsos.de 06 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging 2 law thatwillcriminalisefalsereporting.” tax avoidance. We’re lookingatdeveloping a losses. Mostofitisduetotransfer pricingor some genuine, somenot, are always making “The otherminesfor onereason oranother, in Lusaka, adding: positive earnings, Sampatoldreporters mining operationswere actually declaring 10% ofZambia’s GDP. Only oneortwo biggest culprit. This figure amountstoalmost identified asthe with theminingindustry was losing$2billionayear intaxavoidance, announcementthatZambia extraordinary Finance MinisterMilesSampamadethe In November 2012, Zambia’s Deputy reason iscorporatetaxavoidance. taxes thanthey should, butonemajor mining companiesare paying lower There are variousreasons why copper Corporate taxavoidance In 2012,Zambiawaslosing$2billionayearthroughtaxavoidance 2 reduce taxableincome. market rates, inorder toinflatecostsand subsidiaries atinterest rateshigherthan parent companieswere loaningmoney to other wasthat, according toSampasome by themselves, tominimisetaxes. The pricesdetermined each otheratartificial ofthesamecompany tradewith parts pricing –thewidespread practicewhereby two methods. Onewasthrough transfer were avoiding paying taxby meansof Sampa notedthatcompanies Associated BritishFoods. companies: Glencore, Vedanta and been madeagainstthree high-profile concerning taxavoidance have recently under-reporting ofproduction. Allegations including over-reporting ofcostsand with avarietyofways toavoid paying tax, In Zambia, companiesare presented 3

Glencore’s headquarters in Baar, Switzerland. Glencore is a public company, listed in London and Hong Kong, registered in Jersey 07 iStock © thamerpic

that is home to Zambia’s copper’s industry.7 2.1 Glencore Mopani employs around 20,000 people and Mining giant Glencore, which is based in is majority owned by Glencore, with other Switzerland, registered in Jersey and listed stakes held by Canadian mining company on the London Stock Exchange, is one of First Quantum and by the Zambian the world’s largest extractive companies, government, which holds a 10% stake. and a producer and marketer of over 90 commodities worldwide.4 Glencore has become one of the most criticised companies in the world for tax The Guardian has reported analysts in the City avoidance, among other issues, and its of London to be ‘astonished’ to learn that Zambia operations are no exception.8 In Glencore controls 60% of the world’s traded 2011, a report written by accountants Grant zinc market and 50% of copper.5 Glencore Thornton and consulting firm Econ Pöyry, had revenues of $233 billion which was commissioned by the Zambia in 20136 almost 10 times greater than Revenue Authority, was leaked in Zambia. Zambia’s GDP. The report, an audit of Mopani Copper Mines, contained a number of explosive findings, In Zambia, Glencore manages Mopani Copper notably that Mopani’s operations included tax Mines, which consists of four underground planning strategies “equal to moving taxable copper and cobalt mines, a concentrator and revenue out of the country”. It alleged that a cobalt plant in the town of Kitwe and an there had been an inexplicable increase in underground mine, concentrator, smelter and Mopani’s declared costs between 2006 and refinery in the town of Mufulira; both in the 2008, and inconsistencies in the production Copperbelt area of north-central Zambia volumes declared. 08 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging Source: Progress Africa 2013, Panel Report p.49 audit atevery stage”. alleged thatMopanihad “resisted thepilot mining operation”. In addition, theaudit the truenature ofthecosts the Mopani cost structure cannotbetrustedtorepresent regime. The auditconcludedthat “the Mopani advantage ofSwitzerland’s ultra-low tax was thensoldon, allowing Glencore totake with thefirm’s UKsubsidiary. Themetal Glencore inSwitzerlandunderadealstruck lowsold copperatartificially pricesto Rather, theauditsuggestedthatMopani disclosed” by notbeingatarm’s length. were “not inaccordance withtheagreement that itssalesofcoppertorelated parties was engagingintransfer pricingactivitiesand In addition, theauditallegedthatGlencore Structure ofMopanicopper mine which itwasleaked. This draftreport question thereasons for themannerin conclusions ofthisdraftreportandwe in theauditreport, saying: “We refute the Glencore responded totheallegations GLENCORE INTERNATIONAL AGGLENCORE (ZUG, SWITZERLAND) GLENCORE FINANCE (BERMUDA) 100% 9

81.2% CARLISA INVESTMENTS CARLISA (VIRGIN ISLANDS) SKYBLUE ENTERPRISEINCORPORATED FIRST QUANTUM MINERALSLTD. MOPANI COPPERMINE (MCM) 90% 18.8% (VIRGIN ISLAND) agreed todisagree. simply concludingthatthetwo setsofparties Yet theOECD’s finalrulingwasinconclusive, Mopani isheightenedby thefactthat The riskoftaxavoidance inthecaseof Guidelines for MultinationalEnterprises. activities were violatingtheOECD’s against Mopani, claimingthatGlencore’s Cooperation andDevelopment (OECD) complaint totheOrganisationfor Economic attention. In2011, five NGOsfileda Zambia, aswell asconsiderableinternational The leaked reportcausedastormin agreed prices. an arm’s-length basisandatinternationally and thatalltransactionswere conductedat in risingfuelandlabourcostsover theperiod, claimed thattheauditorshadfailedtofactor analysis andassumptions.” is basedonbroad andflawed statistical contains factualerrors and inaccuracies. It (CANADA) 100% (ZAMBIAN STATE OWNED COMPANY) 11

10% 13

10 ZCCM Glencore also 12

mine’s ownership structure is mainly located in secrecy jurisdictions. Mopani is 90% owned by a company registered in the British Virgin The role of the European Islands, which in turn is majority owned by Investment Bank Glencore Finance, registered in Bermuda. The European Investment Bank (EIB), which is owned by EU member states, is also War on Want’s analysis of Mopani’s annual implicated in Glencore’s alleged tax avoidance. financial reports raises serious concerns as to whether the mine is declaring accurate In 2005, the EIB loaned Mopani $50 million sales prices for its copper production. In for the renovation of a smelter to reduce the five years 2007-11, for example, Mopani’s sulphur dioxide emissions. After the 2011 annual reports suggest that it produced audit report was made public, the EIB $4.3 billion worth of copper. Using copper launched an investigation into Mopani. But prices given by the US Geological Survey, in July 2014, the EIB announced that it however, this production would have been would not make public the findings of its worth $6.8 billion – a difference of $2.5 investigation.18 It argues that since Glencore billion. The discrepancy may be accounted for has repaid its loan “and that these matters by Mopani’s ‘third party tolling’, i.e. supplying concern MCM/Glencore’s relations with the other parties with its copper production, Zambian authorities, the Bank has not taken meaning that its own sales figures are any further view on this and considers this reduced. This requires further investigation case as closed”.19 by Zambian authorities, given the possibility of mining companies’ under-reporting sales in order to reduce their taxable income. Swiss-based commodity traders such as Glencore are the subject of particular As noted above (see page 5), Mopani scrutiny when it comes to tax avoidance produced 101,000 tonnes of copper in because of the role Switzerland plays in global 2011,14 when average copper prices on the commodity trade. ‘Swissploitation’ highlighted London market were $8.813 per tonne;15 this Swiss role and the mystery of where thus its production was worth around Zambia’s copper exports actually go, and at $890 million before costs. Yet Mopani paid the what price. Research undertaken in 2013 government just ZK 374 million ($77 million) showed that in previous years up to half of in taxes overall, which included no corporate Zambia’s copper exports had been destined income tax at all, and ZK 140 million for Switzerland, according to Zambian ($28.8 million) in royalties.16 Glencore customs, but according to Swiss import data, stated in 2012 that Mopani had paid most never arrived. In addition, exports of $425.1 million in taxes and royalties to copper from Switzerland have much higher Zambia since Glencore bought its 73.1% declared prices than those from Zambia. If stake in the operation in 2000.17 Zambia had secured the same price for its copper exports as Switzerland in 2008, for example, the value would have been nearly six times higher, adding £11.4 billion to Zambia’s GDP. 20 The suggestion is that ‘Swissploitation’ is resulting in countries losing billions as a result of the way that commodities are priced. 10 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging at labouroffices inKitwe, Zambia. against theirunfair pay andlackofcontracts non-unionised Konkola workers protested the Konkola mine. At thesame time, 400 people poisonedby waterpollutionnear incompensationto by theZambiancourts Vedanta topay afineof$2millionserved High CommissioninLondoncalledon operates. In2014, protesters attheZambian and thegenerous taxtermsunderwhichit company’s environmental andlabourimpacts, target ofinternationalcampaignsover the the Konkola operation, haslongbeenthe in theworld. of thelargesthigh-gradecopperore-bodies Copper Mines, Zambia’s largestandone copper minesinZambia, notably Konkola head officeinMumbai, India–managesthree Vedanta –registered inLondonwitha 2.2 Vedanta Sign totheKonkola CopperMineownedby Vedanta 21 Vedanta, andspecifically 22 which wasnotatarms’length”. metal soldtoarelated company in amanner such away astoresult inanunderpricingof by KCM[Konkola] toFujairahGold…in Lawyers arguedthat “copper wasbeingsold terms andabsolutely atarm’s length.” doneby KCM arecopper exports atmarket spokesman denied the allegations, saying: “All from Konkola andthushideitsprofits. Fujairah Gold, tobuyunder-valued copper had allegedly used aDubai-basedsubsidiary, ofJusticeCourt thatheard how Vedanta an arbitrationhearingintheLondonHigh subsidiaries inDubai”. by under-pricing andsellingit through prices is cheatingonitscopperexports Resources-owned Konkola CopperMines newspaper inZambiareportedthat “Vedanta through transfer mispricing. ThePost Vedanta isalsoaccusedoftaxdodging 23 refersThe article to 25 A Konkola A 26 24

Vedanta’s corporate structure includes addition to Konkola) generated $1.7 billion numerous subsidiaries in secrecy jurisdictions; in revenues and an operating profit of its Annual Report for 2014 lists 29 $221 million in 2011/12.29 subsidiaries in the tax havens of Mauritius, the Netherlands, British Virgin Islands and Jersey.27 In May 2014, a video posted on the internet caused further controversy for Vedanta, One might think that Vedanta hardly needs apparently showing Anil Agarwal, Vedanta’s to engage in tax avoidance, given that it has founder and chairman, mocking the Zambian been granted such generous fiscal terms by government for selling Konkola for the the Zambian government. The secret mining knock-down price of $25 million; the mine’s agreement negotiated with Vedanta after it asking price at the time was $400 million. took over Konkola from Anglo American in The video also shows Agarwal saying that 2000 gave it a 0.6% fixed royalty rate along the mine brings in profits of $500 million a with the ability to offset 100% of capital year, a figure that does not exactly square expenditures against tax and to carry forward with Vedanta’s annual report stating that the losses.28 These generous tax terms mean that company made a loss of $6.3 million in the Vedanta pays very little corporate income year ending March 2013. The media reported tax, as noted above. While Vedanta paid only that the Zambia Revenue Authority was ZK 54,000 ($11,111) in corporation tax in investigating to establish whether these 2011, its Annual Report states that its Zambia claims as to profits were at variance with operations (which include two mines in profits declared.30

Protester at the Zambia High Commission, London © Demotix / Dave Evans © Demotix / Dave 12 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging • using avarietyoftaxavoidance techniques: The research found thatthe ABF group was the Netherlands. tax havens includingIreland, Mauritiusand third ofpre-tax profits –outofZambia into siphon $83.7million($13ayear) –a in Zambia. Rather, ithadfound legal ways to nocorporationtax million butpaidvirtually Zambia Sugar, hadgeneratedprofits of$123 investigation, revealed that ABF’s subsidiary, a detailedreport, theresult ofa12-month alleging taxavoidance inZambia. In2013, Primark, hasalsobeenthesubjectofresearch the owner ofSilver Spoonsugar, Ryvitaand company Associated BritishFoods (ABF), that are accusedoftaxavoidance. British It isnotonly miningcompaniesinZambia 2.3 Associated BritishFoods accounts statingithasnoemployees. for ‘management fees’, despitethecompany it hadpaiditsIrisharmover $47.6million Since ABF bought outZambiaSugarin2007, Sugarcane farmer, Zambia each year. the UKgives Zambiainaidfor education tax havens is10timeslargerthan theamount 48,000 children inschool. The revenue lostto and specialtaxbreaks, enoughmoney toput of thecompany’s taxavoidance schemes lostaround $27millionasaresultservices The report estimatedthat Zambianpublic • • • taxes asaresult. $7.4 millionincorporateandwithholding but inany caseZambialostan estimated The company says thiswasanerror, $7.4 millionsince2007. dividends inZambiaby anestimated reduced thewithholdingtaxitpays on Netherlands andMauritius, thecompany between thetaxhavens ofIreland, the By shufflingthe ownership ofZambiaSugar in withholdingtaxes. This costZambiaanestimated$3million Zambian taxontheinterest charges. paper wasrouted through Ireland toavoid out abankloanof$70million, whichon In November 2007ZambiaSugartook 31 ABF deniedtheallegations. 32

2010 – an average of $880 million a year.34 “The big global mining If this money were taxed at the prevailing corporation tax rate of 30%, Zambia would companies are robbing increase its revenues by around $264 million a year. These illicit outflows are in addition to the opportunities for the the $2 billion outflows from corporate tax 35 countries to advance.” avoidance noted by the government. Dev Kar, Economist Of the $8.8 billion figure, $4.9 billion is at Global Financial Integrity.33 attributed to trade misinvoicing, a process that deliberately misreports the value of In addition to legal methods of tax avoidance, a commercial transaction on an invoice Zambia is losing more revenues from illegal submitted to customs. This form of trade- tax evasion. US-based organisation Global based money laundering is the largest Financial Integrity, which has pioneered component of illicit financial outflows recent research into illicit financial flows, measured by Global Financial Integrity. estimates that $8.8 billion left Zambia from Some $786 billion left the countries of the proceeds of crime, corruption and tax the global South in 2011 as a result of evasion in the 10 years between 2001 and such trade misinvoicing.36

Global financial services are at the heart of largescale corruption in Zambia © Flickr Lars Ploughman 14 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging 4 of taxincentives todomesticand foreign The Zambiangovernment offers anarray are anothercauseofZambia’s lostrevenues. companies, especially intheminingsector, Tax incentives given by thegovernment to “ Tax incentives October 2012 Finance Minister Alexander Chikwanda, for ourpeople” employment opportunities into creationofdecent has nottranslated region butthisgenerosity the mostgenerousin regime remainsoneof Our currenttaxincentive CEO EmmanualMutati President BandaandMopaniCopperMines(Glencore) 37

corporate incometaxfrom 30%to25%, early 2000s, thegovernment typically reduced In individualminingagreements signedinthe declaring taxlosses. many miningcompaniesare consistently special taxdeals. This isamajorreason why thus allminingcompanieshave beengiven the government for additional incentives”; $10 millionare “entitled tonegotiation with In addition, allcompaniesinvesting over mining equipment. tax, andarebatedutiesfor certain onimport forwardcarry lossesandoffsetthemagainst production capital expenditure, theabilityto reductions onminingequipmentandpro- companies are entitledto100%capital trucks andspecialisedmotorvehicles. Mining materials, capital goods, including machinery five years, dutiesonraw alongwithnoimport Zones pay notaxes onprofits for thefirst over $500,000intheMultiFacilityEconomic companies. For example, companiesinvesting © Flickr/ photosmith2011 Flickr/ © Zambeef, one of Zambia’s largest agribusiness, benefits from secret tax incentives. 15 © Flickr/ BBC World Service World © Flickr/ BBC

lowered copper royalty rates from • In 2011, for example, Zambeef declared a 3% to 0.6%, and sealed these through profit before tax of $10.6 million, on which 10-year tax stability clauses.38 For example, it actually paid tax of only $244,000 – a rate Canadian company African Barrick Gold, of 2.3%, compared to the standard rate for which manages the Lumwana copper mine, agribusiness of 15%.42 Deducted from the signed a mining agreement in 2005 providing tax charge was around $2.5 million in a 10 year ‘stability period’ for these capital and depreciation allowances.43 corporate income tax and royalty • Similarly, in 2010, Zambeef made a profit concessions in a deal which also enables before tax of $3.3 million, yet company it to defer payment of various customs accounts record income recovered and excise duties.39 (not paid) of $401,000.44

An example of a non-mining company In 2010, tax incentives on VAT and excise that appears to benefit from tax incentives duty were given to Varun Beverages Ltd, is Zambeef, one of the largest agribusinesses part of Indian company RKJ Group, which in Zambia. The company had revenues manufactures and markets Pepsi brand of $255 million in 201240 by producing, beverages in Zambia.45 The incentives processing and retailing meat, dairy were reportedly worth ZK 15 billion products, eggs, oils and bread.41 Details ($1.8 million).46 Yet they were withdrawn of the tax incentives given to Zambeef by the following government and a are not publicly available, but the Commission of Enquiry into the Zambia company’s low tax payments are likely Revenue Authority found in 2011 that the explained by its ability to write off against tax concessions given to the company on tax large capital expenditures and VAT and excise were ‘illegal’ since they were depreciation allowances: outside the legislation and constitution.47 16 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging 5 taxes andareduction intaxincentives would tax administration, theintroduction ofnew combination ofimprovements inZambia’s Fund(IMF)notedthata Monetary Previous analysis by theInternational in taxincentives. evasion andanunspecified amount avoidance, $264millionintax around $2billionincorporatetax that Zambiaisevery year losing This reporthassofarnoted Zambia’s lostrevenues Tax evasion $264 million introduction ofnew taxes reduction intaxincentives and Improvements intaxadministration, $752 million Zambia’s annualrevenuelosses still bearound $3billion. overall figure for annual revenue losses would revenues lostthrough taxevasion. Butthe administration couldreduce theamountof figures; for example, improvements intax There may besomedouble-countinginthese below.in thechart million ayear. an increase inrevenues ofaround $752 revenues by 4%ofGDP. together increase Zambiangovernment 49 These figures are combined

TOTAL LOSS $3.02 billion 48 This would mean tax avoidance $2 billion Corporate

Public health services are essential in the fight against TB

17 © FLiba Taylor / Panos Taylor © FLiba

The loss of $3 billion is equivalent to nearly collections could play a significant role in half of Zambia’s entire annual government promoting social development in Zambia. budget of ZK 32.2 billion ($5.9 billion) in 2013. It is also equivalent to nearly twice Whilst there is much the Zambian Zambia’s combined spending on health government can do to address this revenue and education (of ZK 9.26 billion, or $1.69 gap, the following chapter demonstrates the billion).50 Thus recovering Zambia’s lost tax resistance and obstacles it faces when trying revenues could nearly double spending on to ensure multinationals that operate in its schools and health care. country pay a fair amount of tax.

The last decade has seen sustained economic growth in Zambia, but this has been accompanied by rising inequality and continuing poor public services.51 Thus plugging the huge gap in Zambia’s revenue 18 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging 6 volatile pricesfor theirproducts, can Fourth, miningcompanies, whichface to reduce thesubsidiary’s taxableprofits. atahighinterest rateinordera subsidiary incentive for acompany to lendfunds determining taxableincome. This creates an which canbedeductedfrom profits when relates tointerest payments ondebt, A third corporatetaxavoidance strategy four key taxavoidance strategies. doing so. Officialsfaceproblems with Zambian authoritiestostopthem different strategies. The key isfor the tax inZambiacanuseanumber of Companies seekingtoavoid paying Clamping downontaxavoidance base canbetransferred. companies andelementsofthepotentialtax is oftencarried out by separateorassociated mining, where some refining and/orsmelting value chaininvolved inlarge-scalecopper complicatedby theoftencomplex further mine andthetaxauthority. The process is requires closecooperationbetween the and oftheprocessing technology, andthus oftheareaof thegeology beingmined production, whichrequires anunderstanding is tocheckthequalityandcontentofall the mineral. A problem for thegovernment the volume ofproduction orthegradeof its market value. Minescanunder-report authority thattheirproduction islessthan values, whereby minesreporttothetax The secondisby under-reporting production away from thehightaxjurisdiction. at arelatively highprice, transferring income jurisdiction tooneinahighertax from anoperatingunitinalowservices tax overall taxpayments by sellinggoods and countries. Companiescanreduce their between different operatingunitsindifferent dominated by multinational companiestrading is of thefactthatglobalminingindustry The firstistransfer pricingabuse, inlight 53 52

much return theminingcompaniesmake”. that “it isnotpossibletodeterminehow what thecostsofproduction really are and the miningcompaniesthemselves, knows Revenue Authority, notesthatnoone, except former senioreconomistattheZambia currently doesnotexist. David Manley, a adequate government capacity, which Combating thesepoliciesclearly requires a lower taxrate. facing and togaininanothersubsidiary facingahightaxrate money inasubsidiary firms candeliberately tradeinorder tolose shift incomeoutofhightaxjurisdictions: business activitybutcanalsobeusedto a fallinthecopperprice, isalegitimate ‘hedging’, whichactsasaninsuranceagainst price for theiroutputinthefuture. This futures andoptions)toguaranteeaspecific purchase derivative contracts(similarto companies. operations orproduction ofthemining noinformationstate withvirtually onthe and manageperceptions leave theZambian byefforts miningcompaniestohidedata Vedanta notesthatlackofresources and A recent analysis by thecampaigngroup Foil to clampdown ontaxavoidance. In2012, it has repeatedly given signalsofitsintention Over thepastseveral years thegovernment fiscal choices. of capacity stops beingaconstraintonits it willtake sometimebefore Zambia’s lack established. However, asManley notes, and theZambiaRevenue Authority was between theIMF, theNorwegian government 2011, for example, acooperative programme donors toincrease Zambia’s taxcapacity –in with companies. There from issomesupport tax designsduringthecourseofnegotiations and accountsbutalsotopropose different not only tomonitorthemines’production Greater isneeded capacity andexpertise 55 56 54

announced reductions in capital allowances to 20% for open pit mines and 8% for for mining companies.57 2013 saw it announce underground mines. a forensic audit of Vedanta’s Konkola operation in response to exposure of Anil International mining firms reacted strongly, Anarwal’s comments on YouTube.58 It also saying the changes would threaten 12,000 introduced a new law that allows the Bank jobs and stop capital investment in mining. of Zambia to regulate and monitor foreign However, some of the scaling back of planned exchange flows in a bid to curb tax avoidance. investments they threatened may well have However, it is unclear how effective this will been due to the falling price of copper which be in monitoring and clamping down on led global mining companies to plan to cut multinationals’ tax avoidance.59 It was also back an estimated $20 billion of investment mooted that the mining regime might be mainly focused on Africa.61 amended to enable the government to raise taxes again and implement a 35% minimum The disagreement over tax rates took place ownership threshold for state shareholding against a backdrop of a dispute between in mining projects.60 mining companies and the Zambia Revenue Authority over VAT, where mining companies In late 2014, the Zambian government, faced claimed they were owed $600 million in VAT with a downturn in copper prices, attempted refunds; the Zambian government claimed again to address the way in which mining the mining companies have been unable to companies pay taxes. In January 2015 it provide the necessary documentation to abandoned corporate tax rates, claiming support their claims. With the companies they were illusory as only two companies protesting the proposed changes to the had been paying them, and tripled royalties mining taxes, the government faced enormous © Flickr / IF Campaign 20 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging Campaigners highlighttheroleoftaxhavens underminingthetaxbaseofdevelopingcountries global copperpricesallimpactingonZambian operations, delaying investments, andlower With miningcompaniessuspending 50% oftaxableprofit. deduction oflossesfor miningoperationsto for miningoperationsandseekingtolimitthe level of30%; avariableprofit taxofupto15% underground mines; acorporateincometax 20% to9%for opencastand8%to6%for 1 July 2015returning tolower royalty rates: regime. The changeswere rolled backfrom in March tolookatrevisions tothenew tax the electionhesetupatechnicalcommittee something welcomed by theIMF. Following said hewould lookagainatthetaxes, presidential candidatefor therulingparty, 2015, facingpressure, EdgarLungu, the During theelectioncampaigninJanuary before thebudgetinlate2014. changes. Glencore suspendeditsoperations pressure tobackdown over itsproposed them todoit. those presiding over taxhavens –toallow of governments around theworld –especially dodging globally dependsonthewillingness The abilityofcompaniestogetaway withtax to prevent them. andforeignindustry donorscanbringtobear government matchesthepressure themining to whichthepoliticalwillofZambian of taxes from miningdependsonthedegree a taxregime whichcanrecoup afairer share As theseattemptsdemonstrate, introducing 2015. February refunds tominingcompaniesdatingfrom rules for VAT refundstopay andstarted VAT mining companiesandrelaxed documentation The Zambiangovernment alsogave into the return toincometaxbasedmeasures. involvement oftheIMF. The IMFsupported a budgetdeficit, raisingtheconcernand government revenues, thegovernment faced 7Conclusions & recommendations 21

“Zambia has the natural resource wealth to dig (literally and figuratively) its way out of poverty, but only if the West acts at the same time. Zambia can’t do this alone. The extra money could be siphoned off to the offshore bank accounts of corrupt public officials, or companies could find new ways to legally pretend that their profits were made elsewhere...

The global shadow financial system – a network of secrecy laws, tax havens, shell corporations, and banks like HSBC without real money laundering controls – facilitates both illicit financial flows and pernicious corporate tax avoidance. We need to break this system down. We can start by reforming international customs and trade protocols to detect and curtail trade misinvoicing and requiring the country-by-country reporting of sales, profits and taxes paid by multinational companies.” Sarah Freitas, EconoGlobal Financial Integrity62

The extraction of wealth from Zambia is developing countries must have an equal truly a scandal. Yet whilst significant pressure seat at the table. from mining companies, and international organisations such as the IMF can be brought For Northern governments’ actions to be to bear on southern countries such as credible, they must stop supporting rules that Zambia, there is little policy space available enable multinationals, based or listed in their for Zambia to address the issue unilaterally. countries, to avoid tax wherever they operate, As well as being faced with these pressures, such as the continuing existence of tax havens. current attempts to write the global rules Multinationals must be held to account for needed for tax are taking place through their tax dodging and southern countries the OECD, a rich nation’s club. For fair should be able to participate as equals in the international tax rules to be established, development of international tax rules.

The UK Government must: • Close down tax havens • Support the establishment • Ensure UK tax rules do not of a UN body to lead the re- allow companies to writing of global tax rules avoid tax in developing • Launch an investigation into countries UK multinationals’ corporate tax practices in Zambia. 22 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging 1 Notes 11 10 9 8 7 6 5 4 3 2 justice/glencore-tax-dodging-in-zambia, clickonthelink 2011,Plc, available at–http://www.actionaid.org.uk/tax- commodity/copper/ Copper, 2012report, http://minerals.usgs.gov/minerals/pubs/ $8,818 in2011. Information: Minerals USGeologicalSurvey on theLondonMetalExchangewas$7,533in2010and $1.55 billionin2011. pertonneofcopper The averge price 2011 andtotaltaxreceiptsof$789millionin2010 762,521 tonnesofcopperin2010and819,574 2014, p.11.February gives totalproductionof This report Iniaitive (ZEITI): for theyear 2011, Reconciliationreport Moore Stephens, ZambiaExtractive Industries Transparency rn Thornton, Grant profit-to-switzerland/ uk/Blog/2012/10/01/glencores-derivatives-the-way-to-get- Switzerland?, 1October2012, http://www.taxresearch.org. Murphy, ‘Glencore’s derivatives: theway togetprofit to reducetaxes payable by itsUKoperation. SeeRichard taken outwithitsown contracts parentcompany insurance UK taxbillby tens ofmillionspoundsby usingcomplex Glencore has, for example, alsobeenaccusedofcuttingits 2014 12 August http://www.glencore.com/global-operations/, accessed Glencore, copper-tax-allegations?INTCMP=ILCNETTXT3487 theguardian.com /business/2011/apr/17/glencore-denies- mine tax’, The Observer, 17 2011,April http://www. Jamie Doward, ‘Glencore deniesallegationsover copper 2014 12 August http://www.glencore.com/who-we-are/, accessed avoidance-led-by-miners-costs-2-billion-a-year.html bloomberg.com/news/2012-11-25/zambia-says-tax- Costs $2Billiona Year’, 25November 2012, http://www. Matthew Hill, ‘Zambia Says Tax Avoidance Ledby Miners html#axzz2Sn93XJkR ft.com/cms/s/0/93b47d9a-b196-11e2-b324-00144feabdc0. tax losses’, Financial Times, 30 2013,April http://www. avoidance-led-by-miners-costs-2-billion-a-year.html; ‘Zambia’s bloomberg.com/news/2012-11-25/zambia-says-tax- Costs $2Billiona Year’, 25November 2012, http://www. Matthew Hill, ‘Zambia Says Tax Avoidance Ledby Miners cmintdev/130/130we18.htm www.publications.parliament.uk/pa/cm201213/cmselect/ Development Committee,International 2012,April http:// See alsoGlencoreevidencetotheUK Parliament’s copper-tax-allegations?INTCMP=ILCNETTXT3487. theguardian.com/ business/2011/apr/17/glencore-denies- mine tax’, The Observer, 17 2011,April http://www. Jamie Doward, ‘Glencore deniesallegations over copper payments-zambia?INTCMP=ILCNETTXT3487 com/global-development/2011/apr/15/mining-firm-tax- Zambia’, Guardian, 15 2011,April http://www.theguardian. Liz Ford, underfire ‘Mining firm over tax payments in , p.6, 2013,p.6, Annual Report Pilot –MopaniCopperMines Audit Report 17 16 15 14 13 12 25 24 23 22 21 20 19 18 Glencore, 2012, Annual Report p.47 http://oecdwatch.org/cases/Case_208 February 2014, p.79 February Iniaitive (ZEITI): for theyear 2011, Reconciliationreport Moore Stephens, ZambiaExtractive Industries Transparency employees; itincludestaxes paidby thecompany itself. This amountexcludesPAYE paidby thecompany and L’Entraide Missionaire, bothinCanada inSwitzerland,Declaration and Mining Watch Canada Development inZambia, inFrance, Sherpa Berne The five NGOs were Centre for Trade Policy and avoidance-probe.html article-2688103/Vedantas-copper-sales-spark-Zambian-tax- 10 July 2014, http://www.thisismoney.co.uk/money/markets/ Vedanta’s Zambiantaxavoidance coppersalesspark probe’, creditors’ becauseitisintrouble. RobDavies, ‘Mining giant toputassets istrying debt-laden firm ‘beyond thereachof U&M questionedKCM’s financesinabidtoshow thatthe with KCMover a£23millionsettlementitsays itisowed. locked inafierce contractor dispute Brazilian-owned The claimhasbeenmadeby U&MMiningZambia, a loan-for-the-mopani-copper-project-zambia.htm infocentre/press/news/all/update-on-the-status-of-the-eib- Copper Project, Zambia’, 25July 2014, http://www.eib.org/ ‘Update onthestatusofEIBloanfor theMopani cmintdev/130/130we18.htm publications.parliament.uk/pa/cm201213/cmselect/ Development Committee, 2012,April http://www. Glencore evidencetotheUKParliament’s International 2014, p.79 February Iniaitive (ZEITI): for theyear 2011, Reconciliationreport Moore Stephens, ZambiaExtractive Industries Transparency probe.html Vedantas-copper-sales-spark-Zambian-tax-avoidance- www.thisismoney.co.uk/money/markets/article-2688103/ Zambiantaxavoidancespark probe’, 10July 2014, http:// Cited inRobDavies, ‘Mining giant Vedanta’s coppersales The Post, 4 July 2014 Mwala Kalaluka, ‘KCM cheatingoncopperexports’, -and-taxes/ zambia-high-commission-demand-kcm-publish-profits http://www.foilvedanta.org/uncategorized/protests-at- aspx, accessed12 August 2014 http://www.vedantaresources.com/our-operations/copper. The Swissroleinthecommoditytrade, May 2013 secrecy, May 2010, p.23 andChristian Aid, Swiss-Ploitation?: Aid, Christian secrecy-Glencore-report.html article-2714970/European-Investment-Bank-accused- http://www.thisismoney.co.uk/money/markets/ Blowing the Whistle: Time’s upfor financial 23

26 Cited in Rob Davies, ‘Mining giant Vedanta’s copper sales 41 ‘What We Do’, http://www.zambeefplc.com/zambeefplc/ spark Zambian tax avoidance probe’, 10 July 2014, http:// what-we-do/ www.thisismoney.co.uk/money/markets/article-2688103/ Vedantas-copper-sales-spark-Zambian-tax-avoidance- 42 Zambia Development Agency, Agriculture, Livestock and probe.html Fisheries: Sector Profile 2011, p.19, http://www.zda.org.zm/ content/agriculture 27 Vedanta, Annual Report 2014, pp.186-9, http://www. vedantaresources.com/investor-relations/results-and-reports/ 43 Zambeef, Annual Report 2011, p.73ff annual-interim-reports.aspx 44 Zambeef, Annual Report 2011, p.73ff 28 http://www.leejones.tk/mwz/KCM2004.pdf Accessed 02 March 2015 45 http://www.rkjgroup.com/about.php

29 Vedanta, Annual Report 2013, pp.42, 133, 46 http://www.lusakatimes.com/2012/01/28/varun-beverages- http://www.vedantaresources.com/investor-relations/results- ready-starts-processing-k15-billion-payment-deferred-tax/ and-reports/annual-interim-reports.aspx?year =2012-13#focusData 47 http://www.scribd.com/doc/79497855/43/Tax- Concession-Varun 30 ‘Zambia: Zambians slam Indian mining investor for mocking government’, 18 May 2014, http://www.africanmanager.com/ 48 IMF, Zambia: Staff Report for the 2012 Article IV Consultation site_eng/detail_article.php?art_id=21978 – Debt Sustainability Analysis, p.4, www.imf.org. http://www. imf.org/external/pubs/ft/scr/2012/cr12200.pdf 31 ‘ActionAid exposes tax avoidance by Associated British Food Group in Zambia’, 14 February 2013, 49 The IMF gives a total GDP figure of $18.8 billion in 2011. http://www.actionaid.org.uk/news-and-views/actionaid- IMF, Zambia: Staff Report for the 2012 Article IV Consultation – exposes-tax-avoidance-by-associated-british-food- Debt Sustainability Analysis, p.4, www.imf.org. group-in-zambia 50 Republic of Zambia, Ministry of Finance, Citizen’s Budget 32 ABF, ‘Media statement on ActionAid report’, 10 February 2013, p.14, www.eaz.org.mw http://www.mofnp.gov.zm/ 2013, http://www.abf.co.uk/media/news/2013/media_ jdownloads/National%20Budgets/Citizen%20Budgets/2013_ statement_on_actionaid_report. For ActionAid and ABF citizens_budget.pdf material on the case, see also http://businesshumanrights. org/en/documents/actionaid-report-into-tax-avoidance-by- 51 On inequality, see Christian Aid, Africa Rising?: Inequalities and associated-british-foods-in-zambia the essential role of fair taxation, February 2014, p.18

33 Kaiko Namusa, ‘State to probe siphoned K40trn’, Times 52 See David Manley, A Guide to Mining Taxation in Zambia, of Zambia, 20 December 2012, available at: http:// Zambia Institute for Policy Analysis and Research, June 2013, www.minesandcommunities.org/article.php?a=12069 pp.27-8

34 Sarah Freitas, Global Financial Integrity, 13 December 2012, 53 Olav Lunstol et al, ‘Low Government Revenue from the http://www.financialtransparency.org/2012/12/13/what- Mining Sector in Zambia and Tanzania: Fiscal design, technical billions-in-illicit-and-licit-capital-flight-means-for-the-people- capacity or political will?’, ICTD Working Paper 9, April of-zambia/ 2013, p.33

35 Sarah Freitas, Global Financial Integrity, 13 December 2012, 54 David Manley, ‘Caught in a Trap: Zambia’s mineral tax http://www.financialtransparency.org/2012/12/13/what- reforms’, ICTD Working Paper 5, September 2012, p.23 billions-in-illicit-and-licit-capital-flight-means-for-the-people- of-zambia/ 55 Foil Vedanta, Copper Colonialism: British miner Vedanta KCM and the copper loot of Zambia, January 2014, p.5 36 ‘Trade misinvoicing’, http://www.gfintegrity.org/issue/trade- misinvoicing/ 56 David Manley, ‘Caught in a Trap: Zambia’s mineral tax reforms’, ICTD Working Paper 5, September 2012, p.34 37 Budget Speech, 12 October 2012, p.17, para 141 available at https://www.zra.org.zm 57 Matthew Hill, ‘Zambia Tax Paid by Glencore, Vedanta to Rise as Projects End’, 19 December 2012, http://www. 38 Some agreements are here: http://minewatchzambia. bloomberg.com/news/2012-12-18/zambian-tax-paid-by- blogspot.co.uk/ glencore-vedanta-may-triple-as-projects-end.html

39 http://barrick.q4cdn.com/3d6d2112-1eb9-45d9-8cd8- 58 ‘Vedanta Resources Come Under Scrutiny of 00c0457f82bb.pdf? Zambian Tax Authority’ Global Mining Jun 11, 2014 http://www.miningglobal.com/miningsites/821/ 40 Zambeef, Annual Report 2012, p.46, http://www.zambeefplc. Vedanta-Resources-Come-Under-Scrutiny-of-Zambian com/annual_reports/ -Tax-Authority 24 Extracting minerals, extracting wealth How zambia is losing $3 billion a year from corporate tax dodging 60 59 62 61 trim-20-billion-spending-this-year com/news/articles/2015-02-09/africa-hardest-hit-as-miners- 2015’ 2015http://www.bloomberg. Bloomberg, 9February HardestHitasMiners ‘Africa Trim $20BillionSpendin still-rampant-in-zambia-action-aid/ com/2013/05/06/tax-avoidance-by-multinational-companies- Zambia-Action Aid’, 6May 201, http://www.lusakatimes. ‘Tax avoidance by in multinational companiesstillrampant people-of-zambia/ what-billions-in-illicit-and-licit-capital-flight-means-for-the- 2012, http://www.financialtransparency.org/2012/12/13/ Freitas,Sarah GlobalFinancialIntegrity, 13December medium=email&utm_campaign=digest 15641/?utm_source=digest-en-mining-130429&utm_ zambia-corners-mining-companies-to-stop-tax-evasion- stop taxevasion’, 29 2013,April http://www.mining.com/ Cecilia Jamasmie, miningcompaniesto ‘Zambia corners

Published: October 2015 Cover picture: Hagai Sichone, of Konkola Copper Mines PLC, works underground in Nchanga mine in Written and researched by Cingola, Zambia. © Reuters Mark Curtis Design by www.wave.coop War on Want 44-48 Shepherdess Walk Printed on recycled paper London N1 7JP United Kingdom This report has been produced with the assistance of the European Union – DCI-NSAED/2011/247. Tel: +44 (0)20 7324 5040 Fax: +44 (0)20 7324 5041 The contents of this publication are the sole Email: [email protected] responsibility of War on Want and can in no way be taken to reflect the views of the European Union. @waronwant

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