Multinational Enterprises tax avoidance and evasion

The major culprits of illicit financial flows are Multinational Enterprises (MNEs) through the manipulation of trade transactions. Trade misinvoicing ( under valuing exports and overvaluing imports), transfer pricing, payments between parent companies and their subsidiaries, and profit-shifting mechanisms designed to conceal revenues are all common practices by companies seeking to maximise profits in the process undermining or negating the expected positive effect of foreign direct investment and aid.

According to the World bank, MNEs like the mines have tended to structure their businesses by consolidating high-value functions and related intangible assets in hubs that provide goods and services to their global operations. They locate them in low-tax jurisdictions or in jurisdictions allowing the establishment of preferentially taxed special purpose entities.

According to Stephen Yeboah, a Research Consultant at the African Natural Resources Centre of the African Development Bank (AfDB), Nigeria and Zambia are among the worst affected in terms of not benefiting from their resources in Africa.

“The practices of misinvoicing in Nigeria’s oil and Zambia’s copper exports and imports reflect the challenges that illicit financial flows present to Africa’s extractive sector. Between 1996 and 2014, under invoicing of oil exports from Nigeria to the United States was worth $69.7 billion. In Zambia, over the same period, a record of $28.9 billion of copper exports to Switzerland, which is more than half of all its copper exports, did not reflect in Switzerland’s import statistics,” he wrote in his research paper.

In 2012, the then Deputy Minister of Finance, Miles Sampa reported that Zambia had lost $2 billion dollars in tax evasion by Mining houses. Sampa said that only two mines claimed profits in that year and that “the other mines for one reason or another, some genuine, some not, are always making losses. Most of it is due to transfer pricing or tax avoidance.”

In their 2013 report on illicit financial flows (IFFs) from Africa, Global Financial Integrity and the African Development Bank said Zambia had lost approximately US$8.8 million in IFFs from 2001 to 2010.

The amount of money mining houses make from Zambia which is not apparent to the Government and Zambians was further confirmed in a video four years ago by Vendeta’s majority shareholder Anil Agarwal speaking in March 2014, where he revealed how he bought KCM for just $25 million. Speaking to the Jain International Trade Organisation (6) in Bangalore, India, March 22 – 23 2014, he is quoted as having boasted about his investment in KCM:

“It’s been 9 years [since we’ve owned the company], and since then every year it is giving us a minimum of 500 million dollar, plus 1 billion dollar, every year it has been continuously giving back.”
 
In July, 2017, the Zambia Financial Intelligence Centre reported that multinational mining companies were robbing Zambia an estimated $3 billion annually through tax evasion and illicit financial flows (IFF).

In its 2019 Budget, the Zambian government has made a number of proposed tax changes mainly affecting the Mining sector. Mining houses have threatened jobs cuts in thousands and to cut in future capital investments. The Government, on the other hand, through the Minister of Mines, Richard Musukwa, has reacted angrily. The Minister was quoted by the News Diggers Newspaper that, it will not tolerate the arm twisting and black mailing tactics of the mines.

“The schemes being postulated by mining houses are arm twisting tactics, something they cannot do in their home countries. But we will not allow situations where mining houses start dictating what type of taxes we should have! Imagine having a country where we have foreigners telling us how we should tax them? When they come here, they come under a guise of investors and enjoy a lot of concessions and tax holidays. In fact, at the time when they start making profits, most of them wind up operations they would have already made huge profits! So, what government would like to do with these tax measures is to ensure that we seek transfer pricing, tax avoidance, which have been perpetuated by these multinational companies,” Musukwa was quoted by News Diggers.

President Lungu, through his Spokesman, Amos Chanda, as reported by News Diggers, said that the threats of mass layoffs by mines have no merit.

“The government does not accept that mining companies that fully comply with Sales Tax in Australia, in the US, Canada would fail to comply with Sales tax in Zambia. The President does not see merit in the opposition to Sales tax as things stand. “Amos Chanda said.

According to Lusaka Times of 29th December, 2018, on arrival on the Copperbelt for the PF provincial Conference, President Lungu amplified on the issue by categorically saying government will not allow mine owners lay off workers with impunity.
 
Lusaka Times reported that, “President Lungu said he will a not allow mine workers lay off workers with impunity. Government will not be intimated by threats from mine owners’ to lay off workers. Investors in the Mining industry are reminded that mines and minerals are assets of the country which Zambians must benefit from through taxes to build roads, health centres, schools.”

It is clear that State House is not amused by Mining house’s tactics. President Lungu should not be taken for granted based on how he gave in to miners’ demands in the past. Although he does appear weak, slow and indecisive to his critics, he has demonstrated in the past that he can take tough and bold decisions as he did with the removal of electricity, farm subsidies and street venders, which affected ordinary Zambians who are his voters.

The indications from government are that the PF administration have reached a tipping point with regard to Multinationals and are throwing the kitchen sink at them. Mining houses are well advised that given all the allegations of tax avoidance, tax evasion, suspected illicit financial flows, their continued extortionary threats, they may just open a Pandora’s box, which will result in a Tanzanian’s Magufuli type mining reforms where they will be worse off. The Zambian government is under tremendous financial pressure of debt servicing and from the Zambian public who are overtaxed and hurting economically. It has its back on the wall.

On the other hand, Zambians on social media and other fora are in uproar about the greed of mining houses and are overwhelmingly in support of government 2019 budget tax measures .The influential Economic Association of Zambia- whose opinion the current administration respects and listens to- led by Dr. Lubinda Haabazoka, has come in support of government tax proposals and even made some draconian suggestions of nationalisation.

Zambians are of the view that they have been bearing the bulk of the country’s tax burden. They feel overtaxed with direct, indirect taxes and levies while at the same time subsidising the mines with power. It’s time the Mines paid their fair share of taxes.

The gripe among Zambians is that the Mining houses are treated like sacred cows in Zambia when their contribution to the ordinary Zambian, has had minimal impact based on a number of metrics including poverty alleviation. Mining Houses retrenched an estimated 15,000 miners when copper prices were low in 2015 but very few were rehired when prices soared to $7,000 and Zambians have been quiet. Mining houses have previously rejected over five different tax and other proposals to benefit Zambia by government such as: windfall tax, revision of VAT rule 18, increase of royalty tax to 8% and 20% for underground and Open pit respectively,7.5% on imports of copper concentrate tax, Statutory instruments 33 and 55(SI33 and 55) to monitor and stem illegal or illicit outflows.

And each time, the government has curved in 100% after threats of closure of mines or retrenchment. This has made government critics to conclude and accuse the Zambian government of being weak and compromised because other governments like Tanzania, DRC, South Africa have resisted the arm twisting and black mail tactics of mining houses in their countries.

Zambians are urging the government to stand its ground and not budge. There are some who are even suggesting the revocation mining licences if they retrench or do not comply; others are suggesting that Zambia should ask Chinese investors to take over as copper and cobalt mining’s future is bright with the car electric revolution on the horizon. Others are asking for nationalisation or increase of government stake in mines through ZCCM – IH so that Zambia benefits more from its resources.

The bottom line, Zambians argue, is that the country’s benefits from foreign direct investments especially the mines, has been minimal in terms of tax revenue, employment creation, foreign exchange earnings, forward and backward linkages, technology and skills transfer and community social benefits through Corporate Social responsibility. It is time that Zambia pressed a reset button regarding FDI by recalibrating its policies, incentives and generally revisits the current development model which is dysfunctional.

Natural resources smuggling
The other channel that Zambia is losing billions of dollars, which is currently being ignored, is the smuggling of the country’s natural resources. There is no doubt that there is illicit exploitation of natural resources such as gold, cobalt, uranium, timber, emeralds, diamonds , manganese and other precious metals and wildlife which is being exported abroad illegally. These activities are being carried out by criminal gangs and some big multinational companies, some who are involved in the exportation of “soil” as the  late President Michael Sata once put it. The question one would ask is: if Canada’s Barrick Gold’s subsidiary in Tanzania, Acacia Mining, was caught red handed with containers containing concentrates more than 10 times the amount they declared at the port of Dar-es- salaam, what could prevent multinationals in Zambia doing the same?

The recent revelation by the News diggers Newspaper that China imported 20 times more Mukula timber from Zambia than was declared gives credence to the assertion that there is so much revenue being lost through smuggling. (Source Afritax)