Sweet Nothings the Human Cost of a British Sugar Giant Avoiding Taxes in Southern Africa Contents
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Sweet nothings The human cost of a British sugar giant avoiding taxes in southern Africa Contents Executive summary 1 Introduction 5 A global food giant: Associated British Foods, the Illovo group and Zambia Sugar Plc 8 Mazabuka: the sweetest town in Zambia? 11 Going, going, gone… Four ways Zambia Sugar shrinks its tax bill 14 The bill 33 Conclusion 36 Glossary 39 References 41 February 2013 Written and researched by Mike Lewis. With assistance and additional research from Richard Brooks, Pamela Chisanga, Martin Hearson, Chris Jordan, Kryticous Nshindano, Asha Tharoor and Paul Wu. 1 Sweet nothings: the human cost of a British sugar giant avoiding taxes in southern Africa Executive summary Taxes pay teachers. Taxes train nurses. Taxes sugar, Kingsmill bread, Ryvita and Patak’s, and also owns such foreign payments themselves. Thanks to this financial maintain roads, deliver medicine, provide clean clothing chain Primark. We look particularly at the activities engineering, we estimate that Zambia has lost tax revenues water. This is as true in the developing world as of ABF’s Zambian subsidiary, Zambia Sugar Plc. of some US$17.7 million (ZK78 billion) since 2007, when it is in the developed world. Tax is the most ABF took over the Illovo sugar group. important, sustainable and predictable source The southern African country of Zambia demonstrates clearly the paradox of continuing hunger amidst plenty. To put this figure in perspective: of public finance for almost all countries. Despite Zambia “graduating” last year from a low-income • In a country where over a third of child deaths are to a lower-middle-income country, poverty levels have related to undernutrition,5 we estimate that the tax- If countries are to eradicate poverty and hunger, then they stagnated, with the proportion of rural Zambians living in haven transactions of just this one British will need to do so by increasing their own public finances 2 poverty increasing to nearly 90% since 2001. Zambia is an headquartered food multinational has deprived the – principally through tax revenues. This should be possible. exporter of foodstuffs, including sugar; yet 45% of Zambian Zambian public purse of a sum over 14 times larger Growth in the global economy is now occurring 3 children are undernourished to the point of being stunted. than the UK aid provided to Zambia to combat hunger predominantly in developing countries. Yet incomes, and food insecurity in the same period.6 education, child mortality and nutrition have failed to The argument of this report is simple: poverty and hunger 1 • Add in the effect of special tax breaks received by catch up in some of the fastest-booming economies. cannot be ended if developing countries cannot raise Zambia Sugar – which we estimate will in future years Funding continues to fall short for the public health services revenues to provide for the needs of their own citizens. and agricultural assistance that can help reduce the burden reduce the company’s tax bill by at least US$3.6 million a year and rising – and the foregone tax revenues in a of hunger; for the teachers, classrooms and schoolbooks A key part of this equation is stopping corporate tax single year could likely cover the entire cost of the that can help give the next generation a future free from avoidance and questionable corporate tax breaks, which interventions needed to tackle child malnourishment in poverty. Why? together deny critical revenues to some of the world’s Zambia.7 poorest countries. The case of ABF’s sugar operations in This report explores one clear reason. In both developed Zambia exemplifies a problem stretching across Africa and • We estimate that the amount of tax the Zambian and developing countries, the tax revenues needed to cover beyond: how countries both rich and poor are struggling to government currently foregoes through the company’s the ongoing costs of decent public services are being tax globally mobile profits and capital, and as a result are tax haven transactions is enough to put an extra child 8 undermined by the ability of some of the wealthiest haemorrhaging tax revenues that might otherwise be in primary school every 12 minutes. taxpayers – including many multinational companies – to available for the fight against poverty. effectively opt out of the corporate tax system through a While the main corporate tax rate in Zambia is 35%, since combination of ingenious (and lawful) tax haven What we found 2007 ABF’s Zambian subsidiary has, overall, paid less than transactions, and huge tax concessions awarded by ActionAid’s investigation found that ABF’s Zambian 0.5% of its US$123 million pre-tax profits in corporate governments themselves. subsidiary uses an array of transactions that have seen over income tax – averaging under ZK450 million (US$90,000) a third of the company’s pre-tax profits – over US$13.8 a year. The company took the government to court to win To see how, and with what consequences, this report million (Zambian Kwacha 62 billion) a year – paid out of a special retrospective tax break in 2007 and received a examines the tax practices of one of the world’s largest Zambia, into and via tax haven sister companies in Ireland, large refund of tax paid in earlier years. Between 2008 and food multinationals, the Associated British Foods (ABF) Mauritius and the Netherlands.4 Some of these transactions 2010, Zambia Sugar made no corporate income tax group, in one of the most impoverished places in which it reduce Zambia Sugar’s taxable profits, while the structure payments at all. operates. ABF produces staple brands like Silver Spoon of others avoids the Zambian taxes ordinarily levied on 2 Sweet nothings: the human cost of a British sugar giant avoiding taxes in southern Africa From 2008 to 2010, an agricultural labourer employed by the company has paid more income tax in absolute terms than the company whose US$200 million revenues have benefitted from her labour. Executive summary Associated British Foods told us that this tiny tax bill is the treaty between Zambia and Ireland, which prevents the factory, under a special Zambian tax regime intended result of capital allowances that companies in Zambia are Zambian government from charging any of the tax that to attract new foreign investment. The precise terms of entitled to claim against their taxable profits: in the case of would normally be levied on the interest payments this tax break remain confidential, despite a Zambian its Zambian subsidiary, resulting from spending on a recent made on these loans. law requiring the government to make information expansion of its Zambian sugar mill, now the largest in • Order a tax-free takeaway: Zambia Sugar is able to about investment incentives granted to big companies Africa. Certainly generous capital allowances – the subject send profits back to its parent company, Illovo Sugar to be publicly accessible. Despite the company already of current Zambian government scrutiny – may significantly Ltd, nearly tax-free by re-shuffling the ownership of the booking record profits since its expansion, Zambia reduce the company’s tax liability. But we have also company through a string of Irish, Mauritian and Dutch Sugar can use this second tax break to keep its tax bill identified four strategies that have significantly reduced holding companies, taking advantage of tax treaty low for years to come. Zambia Sugar’s taxable profits to begin with, and that have loopholes and tax haven regimes to cancel tax on its avoided separate Zambian taxes on the company’s dividend payments. Plain vanilla business practice financing and dividends: We do not allege that any of the companies in this report • Mystery management: Zambia Sugar has paid out As well as these ingenious tax haven transactions, since have done anything illegal. Indeed, sadly their tax practices large ‘purchasing and management’ fees to an Irish 2007 the company has been able to enjoy its own special are not even particularly unusual. A growing litany of sister company – a company that seems to have no low tax regime within Zambia itself, exploiting two examples from Europe and North America suggest that the physical presence in Ireland.9 Every year since 2006, separate tax breaks originally intended respectively for arrangements we describe here are simply ‘plain vanilla’ this company’s audited Irish accounts have also domestic Zambian farmers and big foreign investors. business practice for many multinationals, thanks to loopholes in prevailing international tax rules coupled with repeatedly stated that the company has no employees, • First, taking the Zambian Revenue Authority to court in tax competition in developing countries – an international while providing Zambia Sugar with nearly US$2.6 2007, the company successfully won the right to ‘race to the bottom’ to attract foreign investors with huge million worth of management services each year, reclassify all of its revenues as ‘farming income’ – tax breaks. though ABF has subsequently claimed that the despite three-quarters of its income and profits in fact “company employs some 20 individuals, the notes to deriving from industrial sugar manufacture, partly from 10 Tax avoidance is less widely documented in the developing the company’s accounts failed to reflect this”. We also sugarcane purchased from independent cane-growers. examine similar payments for ‘export agency’ services world than in the developed, but the findings of this report and ActionAid’s previous investigation of Africa’s biggest to a sister subsidiary company registered in Mauritius This has allowed the company to reduce its tax rate brewer, the UK-headquartered SABMiller, suggest that it is that has no employees permanently there, according to from the 35% paid by most Zambian businesses to just no less prevalent.12 Indeed there is evidence that the other Mauritius-based Illovo staff.