CAPE TOWN: Illovo Sugar, which has been included on the JSE’s Socially Responsible Investment Index for six years, has denied that it employs complicated and sophisticated means to avoid paying tax at its sugar operations in Zambia.
According to UK-based NGO ActionAid, Zambia Sugar paid less than 0.5% of its $123m pre-tax profits in corporate tax between 2007 and 2012. Illovo is a subsidiary of Associated British Foods (ABF) which owns 51.5% of the sugar producer.
While Zambia Sugar benefits from extensive tax breaks the government uses to attract foreign direct investment, ActionAid alleges that the company also exploits a variety of other loopholes to reduce its tax bill.
Some of these transactions reduce Zambia Sugar’s taxable profits, while the structure of others avoids the Zambian taxes ordinarily levied on such foreign payments themselves. “Thanks to this financial engineering, we estimate that Zambia has lost tax revenues of some $17.7m (R137m) since 2007, when ABF took over the Illovo sugar group,” the ActionAid report says.
There is no suggestion that Zambia Sugar has broken the law. Tax avoidance such as this is standard practice for many multinationals and it’s perfectly legal. The question is whether the company’s actions are ethically acceptable in a country whose efforts to eradicate poverty and hunger are largely dependent on corporate tax revenues.
Illovo CEO Graham Clark is incensed by the allegations. “ActionAid do good work around Africa. But in this case they have gone off on a misguided and inaccurate attack and resisted our efforts to correct their allegations.”
While the subject of tax can become emotional, the law is pretty clear on it. “There is no equity about tax,” says Le Roux Roelofse, tax director at Deloitte. “You pay what the law requires you to pay. Whether it is equitable or not is not for the courts to decide.”
For most companies tax is a cost centre, and like any other cost centre they try to manage it as best they can. But there is a growing awareness of the ‘common good’, he says. “Companies are being asked whether they are paying their fair share. If they are making use of the resources of a country then questions are being asked about their obligation to pay tax in that country.”
According to Clark ActionAid has selected a period during which time Illovo undertook a R1.6bn expansion in Zambia. “We were motivated by a variety of incentives offered and concluded an investment promotion and protection agreement with the government. There is nothing racy here.”
He said the company claimed capital allowances which were in keeping with the agreement. “These built up to the point where we accumulated more allowances than we had taxable profit.”
ActionAid is only looking at corporate tax, which is too narrow, Clark adds. “We have succeeded in increasing the economic footprint of sugar in Zambia. We are a different business to what we were prior to expansion. Now production is exported outside of Zambia, earning the government foreign exchange and diversifying the economy away from mining.”
Illovo and its parent are not alone in these types of accusations. Two years ago ActionAid accused SABMiller of similar practices. At the time its Accra Brewery controlled more than 30% of Ghana’s beer market, yet it was remarkably unprofitable. Between 2007 and 2010, Ghanaians poured £63.3m into Accra Breweries’ coffers, but it made pre-tax loss of £3.07m.
Since then SABMiller has bought out minorities in Accra Breweries and delisted it – and invested substantially in its facilities there. But being unlisted makes analysis of tax payments more difficult.
“Monitoring tax payments becomes very complex when multinationals operate in a borderless world and where tax havens like the Caymans or Mauritius are trying to attract a different kind of foreign direct investment,” Roelofse says.
There are multiple ways to divert pre tax profits off-shore. All are legitimate. A subsidiary company might have to pay its parent license fees for a brand or intellectual property but this would be via a sister company registered in a tax friendly location. Similarly subsidiaries are regularly charged ‘management service’ fees. Again these are routed via sister companies in tax havens. Alternatively the parent company may make a loan to a subsidiary. The loan is bigger than most sensible banks would permit, meaning that the company becomes ‘thinly capitalised’. Interest costs on these loans may wipe out a company’s tax liability each year.
Clark does not deny making use of subsidiary companies in Ireland, the Netherlands and Mauritius but says this is not to siphon monies out of the country. Mauritius, for instance, provides cost effective financing and marketing services. Ireland is simply a conduit to reimburse expat salaries, ‘at cost with no mark-ups’; Mauritius is a cheap and efficient financial services hub and the company in the Netherlands receives nothing more than dividends in return for finance provided to the Zambian operation.
“These are not sweetheart deals in tax havens,” Clark says.
It is not just the governments of developing countries that are concerned that they might be losing out on tax revenues. Late last year US coffee giant Starbucks sought to deflect a consumer boycott and increased tax scrutiny in the UK by voluntarily increasing the amount it pays. It had paid the UK government corporate taxes of just £8.6m in 14 years – and none in the last three.
Currently Starbucks pays a ‘royalty fee’ to a sister company in Holland for the right to use the Starbucks brand and recipe, allowing it to benefit from the country’s tax regime. This legal accounting tactic helped Starbucks sidestep an estimated £5m corporation tax bill last year, the UK’s Daily Mail reported.
Anger is growing in the UK, which has positioned itself as a tax friendly country, at the low levels of tax paid by Google, Amazon and other international corporations.
“The morals in society are changing and it’s driven by public sentiment,” says Roelofse. “It is both a philosophical debate and a pragmatic one: governments around the world are constrained – they need the tax resources. There is no question that this will become a bigger issue.”