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An Extractive Affair: New investigation shows how world’s poorest country is losing millions

June 23rd, 2015

Despite earning millions from economic activity in Malawi, one of the world’s poorest countries, a single Australian mining company managed to legally avoid paying taxes to the tune of US$43 million over a six year period.

That’s enough for almost 500,000 HIV/AIDS treatments.

According to ActionAid’s latest report “An Extractive Affair,” Malawi lost US$43 million in tax revenue from Paladin, an Australian mining company that was able to avoid millions in taxes by exploiting loopholes in international tax rules through complex corporate structures and secretive agreements.

Malawi, the world’s poorest country according to World Bank Indicators, is in critical need of funds for public services. The average life expectancy in Malawi is just 55 years and around 10% of its population lives with HIV/AIDS. Tax revenue is the most important and sustainable form of revenue to address such issues, yet due to current international tax rules, only a fraction of these funds are actually collected.

Capitalizing on minimal levels of transparency, Paladin negotiated a tax break in secret with the Malawian government in which they were exempt from paying certain taxes altogether. The deal included lowering the ‘royalty rate’ that Paladin pays for the right to extract uranium in Malawi. This rate was lowered from the normal 5% of sales to 1.5% of sales for the first three years. This tax break alone cost Malawi US$15.635 million.

Paladin also set up a subsidiary in the Netherlands, which had no employees, to avoid paying a withholding tax, a tax levied when a multinational company transfers money out of the country. They were able to avoid the withholding tax because of a treaty between Malawi and the Netherlands that exempted companies from the standard rate of 15%. This enabled Paladin to route money from Malawi to Australia via the Netherlands, depriving Malawi of more than US$27.5 million in the last six years.

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So despite earning millions from economic activity in Malawi, Paladin managed to legally avoid paying its fair share of taxes. ActionAid stresses that this is no isolated incident. The shadowy international tax system allows for such exploitation to occur on a continual basis, perpetuating systemic underdevelopment.

The report also offers insight on ways to stop this loss of critical funds via tax avoidance. The report emphasizes that tax incentives must be subject to parliamentary and public scrutiny before being signed. Additionally, all tax incentives should be thoroughly evaluated to determine if the incentives are actually beneficial to the Malawian people. Finally, rich and developing countries alike need to review their tax treaties and agree to the removal of provisions which prevent poorer countries from raising revenue in accordance with their domestic laws. In any case, developing countries must have a say in shaping the international tax structure if the current exploitative system is to be stopped.

For more information and to join the campaign against tax injustice visit taxpower.org.

Find the report here.

Written by David Duffeck

David is the Financial Transparency Coalition's summer intern. He has just graduated from the University of Missouri with a Bachelor of Arts in Political Science

Image used under Creative Commons License / Flickr User khym54

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