Associated British Foods has claimed that an ActionAid report alleging that the group is ‘dodging its tax bill’ in Zambia, one of the world’s poorest countries, is ‘clearly designed with political campaigning in mind’.
‘We are not siphoning off profits from Zambia,’ the group’s tax director Robin Booth told Tax Journal today.
A statement posted on the group’s website yesterday said the report was 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.’
The report received extensive coverage in The Observer yesterday under the headline ‘British sugar giant caught in global tax scandal’.
Private Eye journalist Richard Brooks said Zambia Sugar ‘deploys the familiar techniques of making tax-deductible payments to related companies in distant locations’. The ‘rules of the game’ compel tax authorities to respect the payment of interest, royalties and fees between companies within the same multinational group, Brooks added, ‘even when the recipients are based in tax havens and the arrangements have little purpose beyond tax reduction’.
Chris Jordan, tax justice campaign manager at ActionAid, told Tax Journal: ‘We think that Associated British Foods should pay a fair share of tax in Zambia, but more importantly, government should change the international rules that make corporation tax an optional extra for many multinationals.’
But Associated British Foods (ABF) has hit back, pointing out that its substantial investment in Zambia had attracted capital allowances and arguing that African governments ‘should be as free as any other to attract investors’. Payments were made between group companies in return for ‘the services of real people, doing real jobs’.
Zambia Sugar
ABF, a FTSE 100 company, owns the Silver Spoon sugar brand and other household names including Twinings, Ovaltine and Primark.
ActionAid's report focused on Zambia Sugar, which is owned by ABF’s South African subsidiary Illovo Sugar. A 12-month investigation had found that since 2007 Zambia Sugar ‘has generated profits of $123m, but admits to paying “virtually no corporate tax” in Zambia’.
Zambia Sugar ‘found legal ways to siphon over US$83.7m (US$13m a year) – a third of pre-tax profits – out of Zambia into tax havens including Ireland, Mauritius and the Netherlands’, ActionAid claimed in a press release.
‘Zambian public services have lost an estimated US$27m as a result of the company’s tax avoidance schemes and special tax breaks which is enough money to put 48,000 children in school. The revenues lost to tax havens [are] 10 times bigger than the amount the UK gives Zambia in aid for education each year.’
ActionAid’s report said: ‘[ABF] told us that this tiny tax bill is the result of capital allowances that companies in Zambia are entitled to claim against their taxable profits: in the case of its Zambian subsidiary, resulting from spending on a recent expansion of its Zambian sugar mill, now the largest in Africa.
‘Certainly generous capital allowances – the subject of current Zambian government scrutiny – may significantly reduce the company’s tax liability. But we have also identified four strategies that have significantly reduced Zambia Sugar’s taxable profits to begin with …’
However, Illovo Sugar denied engaging in aggressive tax planning. ‘In fact, the group has an open and transparent relationship with all the tax authorities in the jurisdictions in which it operates,’ it said.
‘For the year ending 31 March 2012, the Illovo group’s effective tax rate was 30.3%. The group has paid R1.3bn (£120m) in taxes over the last five years and collected another R1.9bn (£180m) in employment and sales taxes.’
‘Strategies’
ActionAid described the four ‘strategies’ as ‘mystery management’, ‘a Dublin dog-leg’, ‘tax-free takeaway’ and ‘get your own tax haven’.
‘Mystery management’ was a reference to annual fees paid to a fellow subsidiary, Illovo Sugar Ireland, for ‘purchases and management services’. ‘Get your own tax haven’ was ActionAid’s assessment of Zambia’s ‘investment-friendly tax regime’, which had ‘granted tax breaks to multinational companies that have essentially cancelled their Zambian tax bills for years on end, without checks that they are even delivering the promised business activities and investments in return’.
‘Publicity at the expense of accuracy’
Illovo Sugar claimed that ActionAid had ‘attempted to use Zambia Sugar’s tax affairs to gain publicity at the expense of accuracy’. The company denied ‘emphatically’ that it was engaged in ‘anything illegal, immoral or in any way designed to reduce the tax rightly payable to the Zambian government’.
It said: ‘In Zambia … Illovo invested R1.6bn (£150m) to double the size of the sugar mill and improve productivity – gains that will benefit the nation for many years to come. The mill and related activities provide employment for more than 5,000 people. 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 …
‘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. 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. There are no royalty payments, no franchise agreements. The payments are for export services, third party contractors, and expatriate personnel in Zambia. The payments are charged at cost, and there is no artificial reduction in profit in Zambia Sugar as a result. The payments simply reflect the reality of the group’s operations.
‘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.’
Correspondence
ActionAid published 30 pages of correspondence with ABF and Illovo Sugar, including detailed explanations of transactions between group companies. A strongly-worded defence of payments made to companies in Ireland and Mauritius was made in a letter dated 30 January from Illovo Sugar’s finance director Mohammed Abdool-Samad.
He wrote: ‘You focus on payments … to other parts of the Illovo group, including management charges and commission fees, and conclude that these are tax motivated. This is simply not true. These payments have nothing to do with tax planning and your assertions are clearly totally illogical.’
Abdool-Samad had told ActionAid in a letter dated 18 January that Illovo Sugar Ireland ‘provides real services’. The board meets regularly in Dublin, he said. Notes to the accounts had failed to reflect that the company ‘employs some 20 individuals’.
The Irish company facilitates ‘various services required by Zambia Sugar including the provision of senior management, engineers and agronomists …. In 2008 to 2010 the costs increased due to the R1.6bn expansion project due to services provided by third party service providers. Many of these third party service providers would not have been willing to contract directly to Zambia Sugar due to possible financial or political risk and, if they had contracted directly, the cost to Zambia Sugar would have been substantially higher.’
Today’s Financial Times quoted ABF finance director John Bason as saying: ‘I’ve looked really closely at this, and the payments made by the sugar business [to fellow subsidiaries] are all for services provided and it is at cost. I cannot see any evidence of mark up or anything like that.’
On 30 January Abdool-Samad said the Irish company made a small profit after deduction of payments to the service providers. Any ‘small residual profit’ that was taxed at a lower rate in Ireland was ‘also taxed in South Africa at 28% under [controlled foreign companies] rules’.
Associated British Foods has claimed that an ActionAid report alleging that the group is ‘dodging its tax bill’ in Zambia, one of the world’s poorest countries, is ‘clearly designed with political campaigning in mind’.
‘We are not siphoning off profits from Zambia,’ the group’s tax director Robin Booth told Tax Journal today.
A statement posted on the group’s website yesterday said the report was 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.’
The report received extensive coverage in The Observer yesterday under the headline ‘British sugar giant caught in global tax scandal’.
Private Eye journalist Richard Brooks said Zambia Sugar ‘deploys the familiar techniques of making tax-deductible payments to related companies in distant locations’. The ‘rules of the game’ compel tax authorities to respect the payment of interest, royalties and fees between companies within the same multinational group, Brooks added, ‘even when the recipients are based in tax havens and the arrangements have little purpose beyond tax reduction’.
Chris Jordan, tax justice campaign manager at ActionAid, told Tax Journal: ‘We think that Associated British Foods should pay a fair share of tax in Zambia, but more importantly, government should change the international rules that make corporation tax an optional extra for many multinationals.’
But Associated British Foods (ABF) has hit back, pointing out that its substantial investment in Zambia had attracted capital allowances and arguing that African governments ‘should be as free as any other to attract investors’. Payments were made between group companies in return for ‘the services of real people, doing real jobs’.
Zambia Sugar
ABF, a FTSE 100 company, owns the Silver Spoon sugar brand and other household names including Twinings, Ovaltine and Primark.
ActionAid's report focused on Zambia Sugar, which is owned by ABF’s South African subsidiary Illovo Sugar. A 12-month investigation had found that since 2007 Zambia Sugar ‘has generated profits of $123m, but admits to paying “virtually no corporate tax” in Zambia’.
Zambia Sugar ‘found legal ways to siphon over US$83.7m (US$13m a year) – a third of pre-tax profits – out of Zambia into tax havens including Ireland, Mauritius and the Netherlands’, ActionAid claimed in a press release.
‘Zambian public services have lost an estimated US$27m as a result of the company’s tax avoidance schemes and special tax breaks which is enough money to put 48,000 children in school. The revenues lost to tax havens [are] 10 times bigger than the amount the UK gives Zambia in aid for education each year.’
ActionAid’s report said: ‘[ABF] told us that this tiny tax bill is the result of capital allowances that companies in Zambia are entitled to claim against their taxable profits: in the case of its Zambian subsidiary, resulting from spending on a recent expansion of its Zambian sugar mill, now the largest in Africa.
‘Certainly generous capital allowances – the subject of current Zambian government scrutiny – may significantly reduce the company’s tax liability. But we have also identified four strategies that have significantly reduced Zambia Sugar’s taxable profits to begin with …’
However, Illovo Sugar denied engaging in aggressive tax planning. ‘In fact, the group has an open and transparent relationship with all the tax authorities in the jurisdictions in which it operates,’ it said.
‘For the year ending 31 March 2012, the Illovo group’s effective tax rate was 30.3%. The group has paid R1.3bn (£120m) in taxes over the last five years and collected another R1.9bn (£180m) in employment and sales taxes.’
‘Strategies’
ActionAid described the four ‘strategies’ as ‘mystery management’, ‘a Dublin dog-leg’, ‘tax-free takeaway’ and ‘get your own tax haven’.
‘Mystery management’ was a reference to annual fees paid to a fellow subsidiary, Illovo Sugar Ireland, for ‘purchases and management services’. ‘Get your own tax haven’ was ActionAid’s assessment of Zambia’s ‘investment-friendly tax regime’, which had ‘granted tax breaks to multinational companies that have essentially cancelled their Zambian tax bills for years on end, without checks that they are even delivering the promised business activities and investments in return’.
‘Publicity at the expense of accuracy’
Illovo Sugar claimed that ActionAid had ‘attempted to use Zambia Sugar’s tax affairs to gain publicity at the expense of accuracy’. The company denied ‘emphatically’ that it was engaged in ‘anything illegal, immoral or in any way designed to reduce the tax rightly payable to the Zambian government’.
It said: ‘In Zambia … Illovo invested R1.6bn (£150m) to double the size of the sugar mill and improve productivity – gains that will benefit the nation for many years to come. The mill and related activities provide employment for more than 5,000 people. 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 …
‘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. 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. There are no royalty payments, no franchise agreements. The payments are for export services, third party contractors, and expatriate personnel in Zambia. The payments are charged at cost, and there is no artificial reduction in profit in Zambia Sugar as a result. The payments simply reflect the reality of the group’s operations.
‘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.’
Correspondence
ActionAid published 30 pages of correspondence with ABF and Illovo Sugar, including detailed explanations of transactions between group companies. A strongly-worded defence of payments made to companies in Ireland and Mauritius was made in a letter dated 30 January from Illovo Sugar’s finance director Mohammed Abdool-Samad.
He wrote: ‘You focus on payments … to other parts of the Illovo group, including management charges and commission fees, and conclude that these are tax motivated. This is simply not true. These payments have nothing to do with tax planning and your assertions are clearly totally illogical.’
Abdool-Samad had told ActionAid in a letter dated 18 January that Illovo Sugar Ireland ‘provides real services’. The board meets regularly in Dublin, he said. Notes to the accounts had failed to reflect that the company ‘employs some 20 individuals’.
The Irish company facilitates ‘various services required by Zambia Sugar including the provision of senior management, engineers and agronomists …. In 2008 to 2010 the costs increased due to the R1.6bn expansion project due to services provided by third party service providers. Many of these third party service providers would not have been willing to contract directly to Zambia Sugar due to possible financial or political risk and, if they had contracted directly, the cost to Zambia Sugar would have been substantially higher.’
Today’s Financial Times quoted ABF finance director John Bason as saying: ‘I’ve looked really closely at this, and the payments made by the sugar business [to fellow subsidiaries] are all for services provided and it is at cost. I cannot see any evidence of mark up or anything like that.’
On 30 January Abdool-Samad said the Irish company made a small profit after deduction of payments to the service providers. Any ‘small residual profit’ that was taxed at a lower rate in Ireland was ‘also taxed in South Africa at 28% under [controlled foreign companies] rules’.
