How a drinks company avoids tax in Africa

November 29th, 2010

Take a look at this story in the Guardian, and the associated ActionAid report. As The Guardian summarises it:

“The world’s second-largest beer company, SABMiller, is avoiding millions of pounds of tax in India and the African countries where it makes and sells beer by routing profits through a web of tax-haven subsidiaries, according to a report published by ActionAid today.”

ActionAid estimates it may have reduced its African corporation tax bill by as much as a fifth last year, depriving poorer countries of up to £20m (US$31m) in tax.

To start with, take a look at what is a minor detail, at least in the grander scheme of things:

“Marta Luttgrodt sells beer from her small stall in the shadow of Accra Brewery, SABMiller’s Ghanaian subsidiary in the capital city. . . . Luttgrodt sells beer from the factory for 90p a bottle and manages to make £220 profit a month. She pays fixed fees of £11 per month to the Accra authorities and a further £9 per quarter to the Ghana Revenue Authority.

And compare that to the income tax that the income taxes paid in Ghana: zero. As Martin Hearson of ActionAid said:

“The most shocking part of this story is not the huge amounts of tax avoided, but the fact that one woman selling beer outside SABMiller’s brewery in Ghana paid more income tax last year than the multi-million pound brewery.”

SABMiller has been using transfer pricing techniques to avoid tax in Ghana, not to mention in other countries. Luttgrot was amazed.

“I don’t believe it,” she said when told this. “We small businesses are suffering from the authorities – if we don’t pay, they come back with a padlock.”

An SAB spokesman said there were sound commercial reasons for structuring its business through tax havens, adding that “we dispute that we have avoided paying any tax.” However, the detail of ActionAid’s report makes it clear that the spokesman’s last sentence comes from the Philip Green school of tax avoidance: it all depends on what you mean by “avoid.” ActionAid’s report, drawing on the expertise of top UK tax expert Richard Brooks, shows SABMiller’s tax avoidance strategies in forensic detail.  It outlines four main transfer pricing strategies:

  • Dutch detour: The company holds its brands in the Netherlands. In one case, it’s brands such as Castle, Stone and Chibuku: venerable African beers, for sale to Africans in Africa. The Ghana subsidiary will pay royalties to these subsidiaries, where they pay minimal corporation taxes (and the same royalty payments can then be deducted against tax in Africa.)
  • Swiss sidestep: SABMiller’s African and Indian subsidiaries pay ‘management service fees’ to sister companies in European tax havens, mostly Switzerland, where effective tax rates are much lower. The head of the Ghana Revenue Authority told ActionAid that “management fees is an area that we know is being used widely [to avoid tax] . . . it’s difficult to verify the reasonableness of the management fee”.
  • Mauritius manoeuvre: A Mauritius subsidiary sees its trading profits taxed at 3% compared to 25% on its trading partner in Ghana.
  • Thin capitalisation: another transfer pricing scheme, where the African subsidiary borrows from the Mauritius subsidary, deducting its interest payments from the final tax bill, while the Mauritius subsidiary’s lending profits (derived from those same interest payments) are taxed minimally.

Now we should, at this point, say a couple of things in SABMiller’s defence. First, tax avoidance is not illegal. (That does not make it right, however: these cases involve money being shifted legally from African governments to capital owners, mostly in developed nations.) Next, as ActionAid put it:

“SABMiller isn’t a lone bad apple. Its tax avoidance practices are far from unusual, conforming to the model followed by multinational companies the world over.”

Indeed. This is a global scourge. Corporations focus narrowly on maximising profits for shareholders (usually wealthy ones,) enabling them to free-ride on the services paid for by others: the education, infrastructure, rule of law and many other things that enable them to make their profits. South Africa’s former Finance Minister Trevor Manuel called tax avoidance “a serious cancer eating into the fiscal base of many countries.” Furthermore, SABMiller also said:

“We follow all transfer pricing regulations within the countries in which we operate and the principles of the OECD guidelines.”

We don’t doubt it. As we’ve noted, nobody is accusing them of breaking the law. But the fact is that they have been using tax havens to drain desperately needed fiscal revenues from developing countries. They say they have worked within the rules. We would say that the rules are unfit for purpose. This particularly applies to things such as thin capitalisation – where the capital takes the form of intellectual property rights, the barn door is not just open, but the horse is living in a pampered stable in the Alps. This just demonstrates the ludicrousness of the transfer pricing rules, which do not work. The OECD, which created this framework and lobby to protect it – has a responsibility to change them. As Hearson notes:

“Tax authorities in developing countries are fighting hard to stop tax dodging but the reality is they are locked in a David and Goliath-style battle with multinational companies. International standards governing the taxation of big business are stacked against them.”

They are indeed – and read more about it on our transfer pricing page. But there is something else. The Guardian reports this:

“SABMiller said its companies “pay a significant level of tax”, adding that in the year ended 31 March 2010, the group reported $2.93bn (£1.88bn) in pre-tax profit . “During the same period our total tax contribution remitted to governments – including corporate tax, excise tax, VAT and employee taxes – was just under $7bn, seven times that paid to shareholders,” the company said. “This amount is split between developed countries (23%) and developing countries (77%).”

This looks impressive, but it needs unpacking. SABMiller appears to be using a concept designed by PriceWaterhouseCoopers (PWC)  called the “Total Tax Contribution” whereby a firm rakes in every  tax it can conceivably say is associated with its business, and claims it for itself.

So it will claim, for example, Value Added Tax paid on its businesses, and employee taxes. But of course much of the VAT paid is paid by consumers, not by PWC; similarly, the employee taxes are borne by the employees, not the corporation.  The Total Tax Contribution approach is clever, and highly misleading, and we will most likely be seeing a lot more of it now that people are beginning to wake up to the issue of tax avoidance.

Bob McIntyre of Citizens for Tax Justice does an excellent job of looking at this Total Tax Contribution framework in The American Prospect. As he summarises it:

“PwC is trying to get corporations to pretend their tax bills are bigger than they really are, by counting not just their actual taxes, but also taxes they don’t pay, such as those paid by their customers, workers, suppliers, and so forth.”

McIntyre looks at how ExxonMobil used this formula to claim to have paid $99 billion in taxes on just $36 billion in profits. He also cites TJN’s Richard Murphy, who notes of PWC’s approach:

“This is bilge — to put it nicely.”

(Murphy has more to say on the Total Tax Contribution framework here, here and here.

Here is one of the big problems with tax, more generally. International tax is so complicated that when investigators publish excellent research on corporate tax avoidance schemes, it is relatively easy (as with the recent Vodafone story in the UK) for corporations and their supporters to publish their own re-interpretation of the same information, sowing confusion in the public mind. While it always makes sense to look at the other side of any argument, we should remember that corporations have an unusual amount of leeway in presenting facts in ways that show them in the best possible light.

Make no mistake: ActionAid has done some excellent and important work here.

Written by Nicholas Shaxson

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