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Africa: Tax Tricks, Mobile Phones, and Beer
AfricaFocus Bulletin
October 20, 2015 (151020)
(Reposted from sources cited below)
Editor's Note
"Despite MTN having its headquarters located in South Africa, 55% of
the "management and technical fee payments" flow to "MTN
International" (MTNI)--a company which has no staff and is located
in Mauritius. The remaining 45% was paid to MTN Dubai--a subsidiary
which the company says it renders international financial services
and shared services to MTN Group." - Quartz Africa, on new report by
amaBhungane and Finance Uncovered
The "Africa Rising" narrative is dubious as a gross
oversimplification of African reality. But it does point to at least
one important reality: the growth of consumer markets that are
attracting much international attention. Particularly notable are
two ubiquitous consumer goods, one old (beer), one new (mobile
phones), which are producing enormous profits. The question is where
do those profits go?
This AfricaFocus Bulletin contains several background documents
related to (1) the South African mobile company MTN and exposure of
its profit-shifting strategies in a new report, and (2) the giant
formerly South African beer company SABMiller (just being
purchased by a rival global giant Anheueser-Busch InBev). SABMiller
was featured in an ActionAid report in 2010, which is summarized
below. So, to understand the complexity of "Africa Rising," consider
these tax tricks the next time you are drinking beer and browsing on
your mobile phone.
For previous AfricaFocus Bulletins on tax evasion, illicit financial
flows, and related issues, visit http://www.africafocus.org/intro-iff.php
For previous AfricaFocus Bulletins on information and communication
technologies, visit http://www.africafocus.org/ictexp.php
++++++++++++++++++++++end editor's note+++++++++++++++++
Tax Tricks
South Africa's 'next president' is entangled in another corporate
tax dodging allegation--this time it's with MTN
Sibusiso Tshabalala
October 13, 2015 Quartz Africa
http://qz.com/522656/
For more detailed report, see http://amabhungane.co.za / direct URL:
http://tinyurl.com/od3s9fd
South Africa's deputy president Cyril Ramaphosa--long seen as the
most likely next successor to president Jacob Zuma--has seen his
name caught up in another corporate tax dodging allegation, this
time with Africa's largest mobile phone company MTN.
Last week Friday, amaBhungane, an investigative journalism
organization, and Finance Uncovered, a global network of
journalists, published a story alleging that Africa's largest mobile
network, MTN, was involved in shifting millions of dollars from its
subsidiary companies in Nigeria, Uganda, Côte d'Ivoire and Ghana to
companies in Dubai and Mauritius in order to avoid its tax
obligations. This all happened under Ramaphosa's watch, as he was
chairman of MTN's board of directors, between 2001 and 2013.
In September last year, South Africa's Mail and Guardian reported
that Lonmin--a mining company which Ramaphosa was a board member of
between 2010 and 2013--was involved in a scheme to move profits
generated from its platinum mining activities in South Africa to
Bermuda.
While Ramaphosa, one of South Africa's richest men, has taken a
strong public stance against tax avoidance as deputy president it
doesn't seem to be in tune with his former life as a captain of
industry. It is also causing a revision to the expectation that he
is next in line when Zuma's term ends in 2019.
According to the report, MTN subsidiary companies in Nigeria,
Uganda, Cote d'Ivoire and Ghana paid "management fees"--which
according to MTN cover for elements like back office support,
technology transfer (to subsidiary companies) and use of the MTN
brand.
While it is common for telecom companies to charge their
subsidiaries management fees--as MTN itself argues in a response to
a set of questions asked by the investigative team--the bone of
contention is whether the large sums of money flowed to "real
offices staffed with people doing actual work to earn the money" as
the investigative report states.
MTN's 'management fees'
The investigative team reports that despite MTN having its
headquarters located in South Africa, 55% of the "management and
technical fee payments" flow to "MTN International" (MTNI)--a
company which has no staff and is located in Mauritius. The
remaining 45% was paid to MTN Dubai--a subsidiary which the company
says it renders international financial services and shared services
to MTN Group.
Territories like Dubai and Mauritius are better known as "tax
havens"--many multinational companies stash their profits here using
complicated payment systems to subsidiaries. The lure of a low tax
rate, or a sometimes a zero-rate tax regime, is hard to resist: it
means multinationals can cut the cost of doing business without
paying tax in the country they're required to do so.
Chris Maroleng, MTN spokesman said the company has not been involved
in any tax avoidance scheme and that it had responded fully to the
investigative team's claims.
"We have been able to prove that we're tax compliant in all our
operational jurisdictions. We have not infringed any laws and we
have nothing to hide," said Maroleng. He added that MTN had been in
contact with the amaBhungane and Finance Uncovered team for a
"protracted period" and that the company had satisfied itself with
all of its responses.
The deputy president's office said it is referring all queries on
the matter to MTN.
Meanwhile, the Right 2 Know campaign, a South African organization
that advocates for freedom of expression and anti-corruption, has
played on a MTN ad-slogan from 2009 to signal their discontent. MTN
frequently used the South African slang word "ayoba" (loosely
translated as "cool") in their ads. Now R2K--is calling for the
investigations against--has spun the slogan back to the company and
Ramaphosa. Their version: "Tax dodging is not ayoba." (
http://www.r2k.org.za/2015/10/12/investigate-mtn-ramaphosa/)
Finance Uncovered Investigation: MTN's Mauritian Billions
Finance Uncovered, 09 Oct, 2015
http://www.financeuncovered.org/ - Direct URL:
http://tinyurl.com/qhklzpa
The Finance Uncovered global network of investigative reporters have
today published a cross-border investigation into South African
telecoms giant MTN exposing how billions of rand from its
subsidiaries in Ghana, Nigeria and Uganda have been shifted to a
shell company in the small island tax haven of Mauritius.
The two year investigation spanning five countries was published
today in South Africa's Mail and Guardian, the Ugandan Observer and
Ghana Business News.
The reporting team
Finance Uncovered is a global network of journalists from over 55
countries across the globe. This investigation was undertaken by
Craig Mckune of amaBhungane in South Africa, George Turner and Nick
Mathiason from Finance Uncovered in London, Francis Koktuse in
Ghana, Emmanuel Mayah in Nigeria and Jeff Mbanga in Uganda.
A report in Nigeria will follow shortly.
MTN's Offshore Payments
The reporting team discovered MTN revenue producing companies
operating in Ghana, Nigeria, Uganda and Cote d'Ivoire made
substantial payments to offshore companies in Dubai and Mauritius.
These payments were counted as a cost of business for the operating
companies, lowering their profits and potential tax bill.
The enormous sums were purportedly for management and technical
services performed on behalf of these companies, as well as royalty
payments for the use of the MTN brand. In Ghana, these payments
accounted for more than 9% of the turnover of the company.
African journalists in Ghana, Nigeria and Uganda working with
Finance Uncovered discovered that 55% of management and technical
fee payments are directed towards MTN International, a company based
in Mauritius. The Mauritius company has no staff and is little more
than a post box. The remaining 45% was routed to MTN Dubai, where
the company employs 115 staff who provide shared services to the
group.
MTN told reporters that MTN International remunerates companies in
South Africa for management services performed on behalf of the
company. They were unable to answer why the payments were made to
Mauritius first.
Company documents published by MTN said that money in MTN Mauritius
was used to repay external debts of the MTN group and dividends,
rather than pay for management services.
But after further questions were put to MTN, the company was forced
to admit that not all of the revenue was passed onto South Africa.
The company refused to disclose how much it kept in Mauritius.
The company said that MTNI is resident in South Africa for tax
purposes and the Mauritian entity gives no tax benefit to the
company.
MTN in Africa
Our revelations are particularly sensitive given the sheer size of
MTN. The South African listed firm is the largest cell phone company
in Africa with 227,503,000 subscribers worldwide. Almost one in four
mobile phones in Africa are part of the MTN network a total of 161m.
This means MTN is the largest company in many of the countries in
which it operates. It is also frequently one of the largest
taxpayers in African countries so they are particularly vulnerable
to profit shifting by the company.
Game over?
Our investigation has established that a number of African countries
have now challenged the offshore payments made by MTN. Authorities
in Nigeria and Ghana have frozen payments and the Ugandan
Authorities has placed a large tax bill on the company for
management fees paid over a 6 year period.
Ghana
Scancom, MTN's subsidiary in Ghana, paid 758m Cedi (Rand 3.7bn,
$401m) in management and technical fees to MTN Dubai between 2008
and 2013 equivalent to 9.64% of the company's revenue.
An agreement between the Ghanaian Investment Promotion Centre and
the company that allowed the management fees to be paid expired in
2013 and payments have been frozen. MTN is currently negotiating a
new agreement with GIPC.
Uganda
MTN Uganda paid 3% of turnover in management fees between 2003 and
2009 to MTNI in Mauritius. The Uganda Revenue Authority issued MTN
with a "notice of assessment" in 2011. This was for a number of tax
issues between 2003 and 2009, but a large portion was to do with a
dispute over management fees. The total tax bill from the URA was
R467m ($69m).
Nigeria
In 2013 the company disclosed that it had paid R2.5bn ($562m) in
fees to MTN Dubai between 2010 and 2013. The company made this
disclosure because the fee payments had been reversed following a
failure to come to a new agreement on management fees with Nigerian
regulators.
Despite these fees being paid to MTN Dubai, MTN confirmed to us that
these fees are then 'on-paid' to MTNI in Mauritius and that MTNI
Mauritius is the 'ultimate beneficiary' of the fees.
Cote d'Ivoire
MTN has confirmed to us that the company paid 12bn West African
Francs in 2012 and 14bn West African Francs (Rand 512.9m, $55.53m)
in 2013 in management fees to MTNI. The figure for 2013 is
equivalent to 5% of the revenue made by MTN in Cote d'Ivoire.
"Can We Beat Tax Avoiding Multinationals?"
Finance Uncovered, Oct. 18, 2015
[Brief excerpt. For full article visit
https://www.byline.com/column/39/article/499]
How the MTN case shows that OECD "solutions" for such tax evasion
will not work.
"Unfortunately the OECD proposals are unlikely to bring these
practices to an end, and could even make the whole process even less
transparent.
The OECD has embraced the arm’s-length concept and many of the
solutions it proposes are simply aimed at giving tax authorities
more and better tools to use in their transfer pricing
investigations. There will be better access to comparable data to
determine prices, bigger books of guidance for tax authorities, but
in the end tax authorities will continue to need to rely on complex
investigations and highly subjective analysis of the complicated
internal structures of multi-national companies."
"Calling Time: Why SABMiller should stop dodging taxes in Africa"
by ActionAid, November 2010, Updated 2012
Summary by Malik Stan Reaves written for AfricaFocus Bulletin and
US-Africa Network, Oct. 20, 2015
Full report available at http://www.actionaid.org.uk/tax-justice/calling-time-the-research
London-based SABMiller plc is the world's second largest beer
company making more than $3 billion a year in profits. The origins
of the company date back to the founding of South African Breweries
in 1895 and it owns several African breweries. Its many brands
include Coors Light, Miller Light, Keystone Light (#2, #4, and #12
in sales in the USA), Castle, Kilimanjaro, and Lion (in Africa), and
Grolsch (in Europe and global).
The company has some 65 tax havens, and this ActionAid report
estimated it has used them to reduce their tax bills by as much as
1/5 in Africa. For example, its Ghana operations generate about $45
million a year, yet SABMiller paid no taxes for the two years before
the report and only for one year in the prior four years.
ActionAid estimated loses to governments in Africa of as much as $30
million a year, "enough to put a quarter of a million children in
school."
To avoid paying taxes, SABMiller uses transfer pricing payments made
by its subsidiaries to sister companies in the corporation. "These
payments can reduce or even eliminate profits in one place at
a stroke of an accountant's pen; a kind of financial alchemy that
also shrinks the company's tax bill."
ActionAid examined the accounts of eight SABMiller subsidiary
companies in Ghana, Mozambique, Tanzania, South Africa, Zambia and
India, along with researching the tax systems in these countries.
ActionAid identified four "tax-dodging" techniques used in Africa.
Tax dodging or tax avoidance is seen by ActionAid as designed to
comply with the letter of the law though the practice is
irresponsible and unethical (whereas tax evasion breaks tax laws).
The report notes that there is no mention of tax in SABMiller's code
of business conduct and ethics.
The first is a loophole in Dutch tax law which allows SABMiller's
Dutch holding company for its African operations, Rotterdam-based
SABMiller International BV, to pay next to no tax on the royalties
they earn. "Six SABMiller companies in Africa paid this Dutch
company $37.5 million in royalties last year, according to their
most recent accounts. If the company's African operations that do
not publish accounts also make payments at the same rate, the total
can be expected to be $65 million. This corresponds to an estimated
tax loss to African countries of $15 million."
The second dodge involves millions in management fees paid yearly by
African subsidiaries to SABMiller companies in European tax havens,
mostly in Switzerland. Some fees are high enough to wipe out all
taxable profits.
In the third dodge, SABMiller subsidiary Mubex in Mauritius is used
by SABMiller breweries in other African countries as a purchasing
agent, even though the goods may not be produced in or even transit
through Mauritius. Mubex makes a profit, the amount of which is
unknown due to tax haven secrecy, and is taxed at 3% as against what
would be much higher rates in the countries where the beer is
actually produced.
In the fourth tax dodge, African breweries are able to borrow money
from Mubex, in Ghana's case seven times what's allowed in that
country, leading to interest costs that erase sizable amounts of tax
liability.
ActionAid calls on SABMiller to do three things:
- Take a responsible approach to tax. Stop using tax havens to
siphon profits out of Africa, for example by ending the huge
payments for lucrative brand rights and management services to
Switzerland and the Netherlands.
- Understand and disclose the impact of its tax planning. SABMiller
needs a tax code of conduct to explain how it applies its
sustainable development principles to its tax affairs. It should be
open and transparent about its use of tax havens and tax avoidance
techniques.
- Be more transparent about financial information. Make public the
accounts of each of its subsidiaries – especially for companies in
countries where accounts are kept secret – and provide a country-bycountry
snapshot of tax payments and other financial information.
It further lays out several recommendations for governments to shore
up their tax operations and policies.
Outcomes
In June 2011, a meeting of tax authorities from several African
countries, supported by the African Tax Administration Forum (ATAF),
considered the findings of the report. A multilateral tax treaty was
presented to ATAF's council meeting the following year which would
"allow African countries to work together to investigate the tax
affairs of multinational companies operating across the continent"
(page 3, para 3).
Other Actions:
"Over 10,000 people across the world have taken action, asking
SABMiller to adopt a more responsible approach to its tax affairs in
the developing world. The company has been questioned in media
interviews, by ActionAid at its Annual General Meeting, and by
students at Edinburgh University, who voted to ban the company's
beers from their student union."
"Schtop tax dodging" beer mats found their way to Australia, Sweden,
the Netherlands, Ghana, South Africa, Senegal and the United States."
ActionAid charcterized SABMiller's response to the outcry over its
practices as "a combination of denial and obfuscation," including
ownership moves resulting in reduced transparency and shifting
exposure in Mauritius, but "increased royalty payments and
management service fees paid into tax havens across the continent."
Given the "protests and occupations" in the 18 months since the
original publication of Calling Time, they noted that "corporate
attitudes towards tax have changed...increasingly aware of the
reputational issues… involved in governance around tax."
Note: The corporate malfeasance in this ActionAid report is
identified as tax avoidance rather than tax evasion. ActionAid is
thus not accusing SABMiller of breaking any laws but of being
unethical and irresponsible "in failing to acknowledge the impact of
its tax dodging on public revenues." The term "illicit financial
flows," not yet in wide use at the time of the ActionAid report, is
not a concept used in this report. To what extent some forms of
abusive transfer pricing may be illegal as well as illegitimate is a
still unresolved issue in the literature on the subject.
Beer & Mobile as Rising Retail Markets
"Anheuser-Busch InBev and SABMiller to Join," New York Times, Oct.
13, 2015
http://tinyurl.com/otmzfxt
"The research firm Euromonitor International estimated on Tuesday
that the combined Anheuser-Busch InBev-SABMiller would account for
29 percent of global beer sales, after selling assets to win
regulatory approval. It also would be more than three times as large
in terms of sales as its next closest competitor, the Dutch brewer
Heineken, according to Euromonitor."
"Bud-SAB tie-up hinges on a scramble for Africa," Reuters, Sept. 24,
2015
http://tinyurl.com/ngsavbz
"Africa is Budweiser's lost continent. For SABMiller, it is the
jewel in the crown. Where Anheuser-Busch InBev is basically absent,
Africa generated 28 percent of SAB’s revenue and 30 percent of its
EBITDA [Earnings Before Interest, Taxes, Depreciation and
Amortization] last year. That's the key to a potential offer by the Budweiser
brewer for its $89 billion rival."
"SAB and Castel, one of its partners, share around 55 percent of
Africa's 'formal' beer market."
"The Beerhemoth," The Economist, Oct. 17, 2015
http://tinyurl.com/pwwjula
"The battle lasted one tumultuous month. In September SABMiller, the
world's second-largest brewer, said it was the target of a takeover
by its bigger rival, AB InBev. There followed a volley of bids,
skirmishes in the press and tense private talks: between them, the
firms’ main shareholders include a big tobacco company, the dashing
scion of Colombia’s richest family and three Brazilian billionaires,
not to mention South Africa's public-investment fund. On October
13th, one day before a deadline mandated by British takeover rules
(SABMiller is listed in London), the companies announced a tentative
deal."
"The Mobile Economy: Sub-Saharan Africa 2015"
http://gsmamobileeconomy.com/ssafrica/
"The mobile industry in Sub-Saharan Africa continues to scale
rapidly, reaching 367 million subscribers in mid-2015. Migration to
higher speed networks and smartphones continues apace, with
mobile broadband connections set to increase from just over
20% of the connection base today to almost 60% by the end
of the decade. Falling device prices are encouraging the rapid
adoption of smartphones, with the region set to add more than
400 million new smartphone connections by 2020, by which
time the smartphone installed base will total over half a billion."
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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