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
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