Action Aid has maintained that Zambia Sugar’s tax practices mean that Zambians are losing out on vital revenue that would otherwise be applied to meet basic social services.
This isn’t simply Action Aid’s interpretation: the evidence is clear to see in Zambia Sugar’s own published accounts, and the accounts of its related companies around the world. Anyone can look at the evidence for themselves.
Zambia Sugar uses an array of transactions which have reduced or cancelled Zambia’s share of cross-border interest income and profits distributed to its overseas parent company.
some have also shrunk the company’s taxable profits in Zambia.
From such transactions alone, Zambia has forgone taxes of around US$17.7 million since 2007 – entirely separately from any farming tax break or capital allowances.
On Zambia Sugar’s tax breaks: Action Aid is not saying that Zambia Sugar is not a Zambian domestic farmer and thus not eligible for the 10% ‘farming income’ tax rate: of course it is, being a Zambian company engaged partly in farming.
Our concern is that this10% ‘farming income’ rate is being applied to *all* of Zambia Sugar’s income, while the legislation says this special rate should cover “income received from farming” (Paragraph 9, Part II, of the Charging Schedule to the Income Tax Act), not all income – farming and non-farming - of businesses as a whole.
This is the basis on which prior to 2007 Zambia Sugar paid its taxes: the small portion of its income that derives, according to its own accounts, from sugar-cane farming was taxed at the lower rate, and the majority of their income - from industrial sugar production and domestic sales - was taxed at the usual 35% rate.
On this basis other Zambian agribusinesses have been denied the right to apply the lower rate to their non-farming income (for example, ZRA vs. Nanga Farms Ltd in the Revenue Appeals Tribunal, March-April 1999 (1999/RAT/38)).
Zambia Sugar’s own accounts clearly show that the government has lost tax revenues in 2007/8 and 2011/12 due to this change of tax rate on its profits. And in addition to this, the Zambian people are clearly losing other revenues because of:
Large, tax-deductible fees paid to related companies in Ireland and Mauritius which appear to have no staff or presence in those countries;
The avoidance of Zambia’s 20% tax on management fees and interest by routing payments via Ireland – despite these fees and interest ending up elsewhere, including the UK and South Africa.
This is particularly disappointing, because the government intends some of this 20% tax to be spent on development programmes;
The reduction of Zambian tax on dividends sent back to Zambia Sugar’s parent company in South Africa, by routing them through a special Netherlands corporate vehicle.
The aim of Action Aid’s report is not only to highlight problems with company behaviour or Zambian tax rules, but to highlight loopholes in the international tax system, including international tax treaties.
Zambia should urgently re-negotiate its bilateral tax treaty with Ireland to stop it being used by multinationals to ‘treaty-shop’ and shift profits artificially into other jurisdictions.
Zambia could do well to learn from countries that have renegotiated or even cancelled bilateral tax treaties in order to stop such ‘treaty shopping’ behaviour.
ndonesia cancelled its tax treaty with Mauritius in 2004 to stop such ‘treaty shopping’ by Indonesian companies; and Mongolia has just done the same thing with its tax treaty with the Netherlands in December 2012.
Countries like Indonesia have thus been able to safeguard their tax revenues without significantly deterring foreign direct investment, which is of course an important contributor to Zambia’s prosperity.
For the people of Zambia to judge whether they are losing money or not, ActionAid would like to call upon government to make public the agreements signed with Zambia Sugar Company providing further incentives.Further, government must avail the public information on any other commercial agriculture entities that enjoy the current special farming tax rate and to outline clearly what the benefits of such incentives have been to the Zambian public