The piece I wrote yesterday was intended to be mainly about codes of conduct but ended up being about the Action Aid story on ABF, judging by comments.
I have to say that I wasn’t talking specifics about the tax position at the time, I was using it as a topical example of a situation which there appears to be significant question marks and a code of conduct may have better focused resources. I’ve only read through the material once and some of commentary so these are still first impressions about the story:
One key problem I think there is with the ABF story is that there are a lot of questions about Zambian tax policy rather than international tax issues. Whilst of interest, these are Zambian domestic matters that are not necessarily exclusive to a large multinational.
For example, the loss of withholding tax relates to the double tax treaties that Zambia has agreed with Ireland and the Netherlands.
Withholding tax is always going to confuse the issue because it is essentially a timing issue, for an honest business anyway.
But what’s the purpose in levying a withholding tax on some jurisdictions rather than others?
If a withholding tax is the intended norm does the exemption for certain jurisdictions signify a reluctant quid pro quo which is now being abused? Or is it something that is seen as necessary to prevent abuse through certain jurisdictions?
If it’s the latter that receives a positive answer, does routing a payment through a particular jurisdiction achieve the policy aim? If the treaty provides one country with satisfactory safeguards, is a withholding tax considered desirable? Withholding taxes are often primarily used in combating evasion.
Ultimately, it really only matters if the withholding taxes would not be relieved in some way. If the Zambian business is profitable (presumably this will happen provided profits aren’t artificially extracted in some way) the withholding taxes would be offset against corporation tax.
Also the question of the applicable rate is a Zambian matter. If the outcome of the court case is seen as an undesirable outcome, why haven’t they tightened the law to prevent activities such as Illovo Sugar’s qualifying in part or in full? And why have they then reduced the preferential rate further without doing so?
These aren’t international issues but domestic policy issues which are within Zambia’s powers to address. That’s not to say that they aren’t an issue we can help with. But we need to look at what Zambian tax policies are trying to achieve.
If they are concerned with inward investment rather than revenue raising from this type of business, then how do we know that Illovo aren’t doing exactly what the Zambian government wants them to?
The quote that Chris Jordan offered me yesterday from a former Zambian finance minister suggests that they are more concerned with inward investment rather than the corporation tax revenue.
What this boils down to is that the only international angle relates to the costs incurred within the group. ABF say that these are at cost and if this is correct there isn’t any profit being shifted.
Further to this, if they are at cost is this an arms length transaction? Should they be higher?
The argument for this is that if the profit arises in Ireland and it is caught by South African CFC rules, South African corporation tax revenues (a higher rate than the farming rate in Zambia) are being mitigated.
An adjustment to correct that would ultimately reduce Zambian corporation tax further.
Rather inevitably, I’ve taken an interest in this now so I’ll probably correct or clarify any of these thoughts as I go along…