Zambia Sugar’s sweet Irish tax deal

The receptionist in the spacious light-filled atrium of No 2, Grand Canal Square hasn’t heard of the company. He makes some calls. After about half an hour a telephone receptionist is roused from a corporate services firm based in the Daniel Libeskind-designed office block.

She confirms that, yes, the registered address for Illovo Sugar (Ireland) is here. But she isn’t familiar with any of its employees. A representative will make contact the following day, she says. No call is returned.

Some 8,000 miles away, on the outskirts of the town of Mazabuka in Zambia, is a large billboard. “Welcome to Mazabuka,” it says. “4km to the sweetest town in Zambia.”

The thousands of jobs created by Zambia Sugar in and around its sprawling sugar plantation in the Mazabuka district are hugely important to local livelihoods.

It is a growing business for its parent company, Associated British Foods (ABF), which also owns the Penneys clothing chain, as well as Jordan biscuits, Twinings tea and Ryvita, yielding millions of euro in profits annually.

But, amid the lush green cane fields surrounding Mazabuka, there are real problems. The availability of overstretched public services is sometimes, literally, a matter of life and death. There is one doctor for every 10,000 Zambians, compared with about one for every 300 people in Ireland.

Absolute poverty

Despite a growing economy the numbers living in absolute poverty have increased from about six million in the early 1990s to about eight million in 2010.

The local public services need cash from the government, and the state is reliant on almost 20 per cent of its income from corporation tax and taxes on money leaving the country.

Yet between 2007 and 2013 Zambia Sugar paid less than 0.5 per cent of its pretax profits in corporation tax. Between 2008 and 2010 it paid no corporation tax at all.

The company says as a direct result of its investment in Zambia since 2008, the availability of substantial capital allowances has led to “virtually no corporate tax being payable”.

It also benefits from other tax reliefs, including one for farmers which it won after taking the government to court in 2007.

But an investigation by ActionAid into the complex corporate structure around Zambia Sugar suggests offshore countries like Ireland play a key role in multinationals trimming their tax bills, using completely legal methods – and depriving the local economy of much-needed revenue to develop basic health and education services.

The claims are rejected by ABF, which says it is not seeking to avoid tax, and points out that direct taxes contribute to the local economy.

Company records show that a third of Zambia Sugar’s pre-tax profit – more than $13.8 million a year – has been paid out of Zambia via sister companies located in low-tax countries such as Ireland over recent years.

Illovo Sugar (Ireland) – based at No 2, Grand Canal Square – plays a central role in the management of the firm’s affairs. Each year, before the Zambian tax authorities can get to it, the company pays millions of euro in “purchasing and management” fees to the Irish-based firm although the company has no employees or activities based in Ireland.

But there is a significant attraction: Ireland’s tax treaty with Zambia. This allows the company to avoid paying withholding taxes on loan payments from Zambia into Ireland, and likewise on management and purchasing fees booked in Ireland.

This has resulted in relatively modest taxes in Ireland – just over €1 million in recent years. But the net result is that Zambia has lost out many times that in tax revenues since 2007, according to campaigners.

Ireland is just one stop in an elaborate corporate structure that includes other jurisdictions such as Mauritius. ABF has said that the fees to companies in Ireland and other offshore locations are rolled up into their tax liability at Illovo Sugar’s parent company in South Africa, where they are taxed at 28 per cent.

But accounts show that in 2011/12 the entire tax liability in South Africa was just over $300,000 – the equivalent of just 4 per cent of the $7 million fees paid by Zambia Sugar to Ireland and Mauritius in the same year.

The company says this is because the fees do not provide a taxable profit. It says its corporate structure means profits end up being hit with a higher tax rate globally than they would be if left in Zambia. Regardless of the motive, or the amount of tax paid elsewhere, Action Aid argues that the money does not end up benefiting Zambians.

The issues at play in the case of Zambia Sugar lie at the heart of a new front in the debate over Ireland’s low tax regime for multinationals: are we enabling large-scale tax avoidance which is undermining developing countries to develop sustainable economies?

Christian Aid estimates that developing countries lose €121 billion annually due to multinationals avoiding tax, far more than they receive in aid.

In times of shrinking aid budgets, tax is the most important source of income for developing countries, and it is the most obvious way to move beyond reliance on aid.

But uncovering the true scale of the activity and establishing whether corporate structures are aimed at tax avoidance or are necessary features of multinationals is difficult to answer.

No employees

In the case of Illovo Sugar Ireland, company records between 2007 and 2012 showed the company had no employees. When Action Aid started asking questions, the firm amended its accounts to say it employed 20 individuals who were not based in Ireland but “seconded abroad” to provide management expertise.

The complexity of the financial engineering goes on. To fund its expansion recently Zambia Sugar borrowed millions from two banks. The loan was in the Zambian currency kwacha and secured on company’s assets in Mazabuka, and repaid via a Lusaka branch of Citibank Zambia.

But on paper the loan was to the Irish subsidiary. The reason, ABF told ActionAid, was that interest on loans to Zambia Sugar from commercial banks would have been subject to [Zambian] withholding tax.

“The banks would, therefore, have increased their interest charge to compensate for this,” it said.

Finally there is the issue of how Zambia Sugar’s profits are sent back to its parent company.

Zambia Sugar’s immediate owner is a Dutch co-operative, which appeared to be owned by companies in Jersey and Mauritius. Income received here would not be classified as taxable.

Under this structure Zambia can apply only a 5 per cent tax on cash leaving its shores, a smaller rate than normal because of a tax treaty between the Netherlands and Zambia.

But ABF says if this money was paid directly to the sugar company’s parent firm in South Africa there would have been no tax to pay, demonstrating that the structure was not created to avoid tax.

Whatever the complex questions facing Zambia Sugar and ABF over allegations of tax avoidance, there is little doubt their activity has a positive effect locally. It employs more than 1,800 permanent and 3,500 seasonal employees in the region, who pay taxes on their wages. The company says that it is also involved in constructing housing, a local girls’ school and a road, and that it sponsors schools athletics and football clubs among other initiatives.

But the disparity in the treatment of the multinationals and local still rankles with many in the country.

George Weston, ABF’s chief executive, who earned almost €8 million last year in salary and bonuses, told business leaders at a seminar in 2012 that Zambia Sugar was an island of “relative” prosperity in a country where malnutrition was rife.

For Caroline Muchanga, a mother of three, who works at Nakambala Market – close to the sugar plant – the description rings hollow. She works seven days a week, almost 15 hours a day, and struggles to makes ends meet.

“The tax we usually pay is too high considering that the profit that we realise is very little. Our profits are never enough,” she says, as she pays a tax levy as well as rent for her stall.