Charity insists that its research was independently reviewed before and after ‘full right-to-reply correspondence’ with Associated British Foods
A leading anti-poverty charity has been forced to defend a high profile report alleging that a Zambian subsidiary of Associated British Foods, a FTSE 100 company, has been paying ‘virtually no corporation tax’ in Zambia. ‘This has cost Zambia an estimated US$27m since 2007,’ ActionAid claimed on its website, where readers were invited to ‘tell Associated British Foods to stop tax dodging in Zambia’.
As Tax Journal reported last week, Associated British Foods (ABF) said ActionAid’s report, titled Sweet Nothings, was ‘clearly designed with political campaigning in mind’. The group’s tax director Robin Booth said: ‘We are not siphoning off profits from Zambia.’
A statement posted on the group’s website on 10 February said the charity’s report was inaccurate and misleading. However, ActionAid’s report appears to have been welcomed by the chancellor, George Osborne. On 10 February The Observer’s front page carried the headline: ‘British sugar giant caught in global tax scandal.’
Writing in The Observer on 17 February, Osborne said: ‘Last week, The Observer launched a debate over the specific problem of tax avoidance in developing [countries]. You are right to highlight this: often the poorer a nation is, the more it needs the tax revenues, but also the weaker its capacity to tackle tax avoidance.’
The Observer feature quoted Zambia's vice-president, Guy Scott, as saying that the key [to tackling tax avoidance in developing countries] was to know how much was being earned in Zambia and ‘then to find a reasonable estimate for the actual costs of offshore administration and management for firms so that his government could hold the multinationals to account’.
It added: ‘Tax avoidance has been a hot political potato in the country with the [Zambian] government estimating it loses around $2bn a year from it, and with the country's mining companies being the biggest culprits. Scott hopes the furore surrounding the issue will prompt some solutions.’
An ABF spokesman today repeated the company’s robust defence of payments made by Zambia Sugar to a fellow subsidiary in Ireland, and said ActionAid had ‘skated over’ the impact of capital allowances in drafting a press release.
During the past week two chartered tax advisers and an independent researcher on sustainable development have raised concerns over ActionAid’s claim that its evidence showed that the group ‘used a range of loopholes to avoid paying taxes, shifting profits into tax havens and getting huge tax breaks’.
Experts have told Tax Journal that campaigning charities would benefit from ‘unbiased’ advice freely given by tax professionals who are not connected to the tax justice movement.
However, Chris Jordan, tax justice campaign manager at ActionAid, told Tax Journal that the charity’s research on ABF was independently reviewed at two stages by a former HMRC transfer pricing official: ‘First, after we’d developed our initial analysis of the situation, largely based on the ABF accounts from Zambia, Ireland, South Africa, the Netherlands and the UK. Secondly, the report itself was reviewed following the full “right to reply” correspondence with the company,’ he said.
‘While there remains additional information that ABF refuses to disclose, which could shed further light on situation, we’re confident in the analysis and the fact that the Zambian people are losing significant revenues as a result of choices made by the company.’
Last week Maya Forstater, an independent researcher and writer on sustainable development, posted a series of questions and engaged in lengthy discussion with ActionAid campaign managers on the blog of Martin Hearson, the charity’s former tax justice campaign manager. Hearson is now a doctoral researcher at the London School of Economics and Political Science and continues to write on tax issues.
On Monday Forstater asked on her own blog: ‘How could there be such a fundamental disagreement between ABF and Action Aid, not just about whether what the company was doing was moral, but the actual fact of why they had paid so little tax in the first place?’
Responding on the blog, chartered tax adviser Andrew Jackson said there appeared to be three main factors contributing to a reduction in Zambia Sugar’s tax liabilities below ‘what might be expected’.
The first two factors were ‘Zambian domestic tax law, which allows 10% tax and accelerated capital allowances, [and] Zambian tax treaties, which allow payments to certain countries to be made without withholding tax’.
Jackson said: ‘I really do not like the characterisation of these things as “loopholes” … If a treaty provision has been explicitly agreed, or if a tax relief has been explicitly legislated, then it is simply not a loophole – it’s a doorway.’
Forstater said it had not been made sufficiently clear that ABF received significant capital allowances for investment in Zambia. But Mike Lewis, ActionAid’s tax justice policy adviser, pointed out that ActionAid’s calculation of tax lost did not include capital allowances. ‘We didn’t think it was fair to blame ABF for claiming general capital allowances available to all companies,’ he wrote.
However, a spokesman for ABF said today that ActionAid’s report, together with the press release alleging that ABF was ‘dodging its tax bill’ in Zambia, ‘downplays the importance of the capital allowances, and smears ABF as a result’.
Much of the online discussion has concerned payments made by Zambia Sugar to a fellow subsidiary company, Illovo Sugar Ireland. ActionAid claimed that the payment of annual fees to the Irish company for ‘purchases and management services’ represented ‘mystery management’ – one of four ‘strategies’ that had ‘significantly reduced’ Zambia Sugar’s taxable profits.
‘Since 2007, Zambia Sugar has paid this Irish sister company over $47.6m,’ the report said.
ABF said in correspondence published alongside the ActionAid report that Illovo Sugar Ireland provided ‘real services’. The company’s board met regularly in Dublin, and notes to the accounts had failed to reflect that the company employed ‘some 20 individuals’.
But on 13 February ActionAid published on its website five questions that ABF ‘needs to answer’, including: ‘How can ABF justify booking 26% profits in low-tax Ireland on management fees paid out to a company that appears to have no presence or staff in Ireland? If this isn't for tax purposes, what is it for?’
‘There is absolutely no mystery about this,’ the ABF spokesman told Tax Journal today. ‘We have repeatedly explained what the fees are for. They are for people of different nationalities who work across borders – basically, international people who work across territories when they are needed.’
It was ‘completely normal practice’ to bring in outside, international expertise to oversee and set up a major construction project, he said.
Robin Booth, group tax director at ABF, said today: ‘We do not know where ActionAid gets its [26%] number from. Profit before tax from the activities of this Irish company are immaterial, taxed in Ireland at a higher rate than Zambia and subject to South African [controlled foreign company] rules.’
In a letter to ActionAid dated 18 January, Illovo Sugar’s finance director Mohammed Abdool-Samad wrote: ‘Illovo Sugar Ireland facilitates various services required by Zambia Sugar including the provision of senior management, engineers and agronomists, all of whom have significant experience in the African sugar industry.’
He added: ‘In 2008 to 2010 the costs [of these services] increased due to the R1.6bn expansion project due to services provided by third party service providers. Many of these third party service providers would not have been willing to contract directly to Zambia Sugar due to possible financial or political risk and, if they had contracted directly, the cost to Zambia Sugar would have been substantially higher.’
The Financial Times last week quoted ABF finance director John Bason as saying: ‘I’ve looked really closely at [the payments to fellow subsidiaries], and the payments made by the sugar business are all for services provided and it is at cost. I cannot see any evidence of mark up or anything like that.’
Writing on Hearson’s blog, Lewis said ActionAid’s $27m estimate included withholding tax of $10.4m and corporate income tax of $16.6m ‘thanks to a combination of avoidance and special tax breaks’.
Forstater noted that ActionAid estimated that ‘these [payments] cost the Zambian exchequer $7.4m’. The question whether the management services in Ireland were real or not seemed ‘pretty central’, she said.
Hearson noted that ‘in the absence of certain evidence, [ActionAid has] chosen to use the upper bound of the possible [corporate income tax] loss in their working out …. That choice is open to question, but I hope it’s at least clearer now.’
ActionAid has stressed that it is not alleging that ABF group companies have broken any laws. But Lewis has insisted that ‘offshoring high-value services outside of Zambia deprives Zambia of tax revenues, whether those services are “kosher” or not’.
Lewis said: ‘Because we couldn’t find the substance of the management services provided for the management fees paid to Ireland, we’ve calculated that the whole as (sic) [corporate income tax] loss to Zambia … This is $7.4m.
‘But even if you ignore all the evidence we gathered about lack of substance, and assume that in fact these are all “kosher” management services provided from staff or contractors in South Africa and other countries, simply routed through Ireland, then this arrangement is still avoiding the usual Zambian [withholding tax] on management fees, which comes to $7.1m.’
The ActionAid report recommended: ‘Where paid-for services are being provided from tax havens, Zambia Sugar and ABF should aim ultimately to build the skills and expertise for those services in the countries where its main operations are located; and ensure that payments for them, at market prices, go directly to the company providing them.’
Ben Saunders, business manager at Tolley Tax – part of Tax Journal publisher LexisNexis – has suggested that ‘some sort of code of conduct’ might be appropriate for tax campaigners. ‘I don’t suggest that there aren’t ultimately good intentions underlying the activities, just that some objective standards might be good,’ he wrote on his personal blog.
Saunders said Bill Dodwell, head of tax policy at Deloitte, was right to criticise aspects of some tax campaigners’ work. Writing in last week’s Tax Journal, Dodwell said: ‘At a time where there is focus on professional ethics, one has to wonder whether there is now a need for an ethical code for campaigning charities.’
‘This is the first suggestion by any professional that tax campaigners might look at their conduct and it has been met with what I consider to be a disproportionate response,’ Saunders said. ActionAid and Christian Aid expressed disappointment at Dodwell’s remarks and provided lengthy statements to Tax Journal (reported last Friday) in their defence.
Forstater had raised some serious questions, Saunders said. He noted that ActionAid was now ‘devoting resources to defending themselves against claims of poor behaviour rather than raising awareness of the issues concerning developing countries’. But he recognised that by corresponding with the company ActionAid had allowed ‘both sides of the story to come out’.
Saunders added: ‘If ABF haven’t done anything wrong, ActionAid are damaging a business that is investing in Zambia. Please note the “ifs” – I’m talking hypothetically. I’m just saying that from a risk point of view there appears to be little value gained in running the report.’
Saunders suggested that tax campaigners ‘need technical advice and some sort of technical sign off’ to help them decide whether a report is reliable.
‘This ought to be somebody who is suitably qualified and experienced, has sufficient [professional indemnity cover] and provides a technical report and risk assessment to accompany any press release or report. Ideally it should be independent but that normally costs money,’ he said.
Mike Truman, editor of Taxation, told Tax Journal that while he would not suggest regulation of tax campaigning activity, campaigners would benefit from consulting professional tax advisers who are interested in the issues but independent of the tax justice movement.
‘Tax advisers should perhaps offer to lend more support to campaigners, in the form of proper, unbiased and independent advice. Groups would need to trust our professionalism in being objective,’ he said.
Charity insists that its research was independently reviewed before and after ‘full right-to-reply correspondence’ with Associated British Foods
A leading anti-poverty charity has been forced to defend a high profile report alleging that a Zambian subsidiary of Associated British Foods, a FTSE 100 company, has been paying ‘virtually no corporation tax’ in Zambia. ‘This has cost Zambia an estimated US$27m since 2007,’ ActionAid claimed on its website, where readers were invited to ‘tell Associated British Foods to stop tax dodging in Zambia’.
As Tax Journal reported last week, Associated British Foods (ABF) said ActionAid’s report, titled Sweet Nothings, was ‘clearly designed with political campaigning in mind’. The group’s tax director Robin Booth said: ‘We are not siphoning off profits from Zambia.’
A statement posted on the group’s website on 10 February said the charity’s report was inaccurate and misleading. However, ActionAid’s report appears to have been welcomed by the chancellor, George Osborne. On 10 February The Observer’s front page carried the headline: ‘British sugar giant caught in global tax scandal.’
Writing in The Observer on 17 February, Osborne said: ‘Last week, The Observer launched a debate over the specific problem of tax avoidance in developing [countries]. You are right to highlight this: often the poorer a nation is, the more it needs the tax revenues, but also the weaker its capacity to tackle tax avoidance.’
The Observer feature quoted Zambia's vice-president, Guy Scott, as saying that the key [to tackling tax avoidance in developing countries] was to know how much was being earned in Zambia and ‘then to find a reasonable estimate for the actual costs of offshore administration and management for firms so that his government could hold the multinationals to account’.
It added: ‘Tax avoidance has been a hot political potato in the country with the [Zambian] government estimating it loses around $2bn a year from it, and with the country's mining companies being the biggest culprits. Scott hopes the furore surrounding the issue will prompt some solutions.’
An ABF spokesman today repeated the company’s robust defence of payments made by Zambia Sugar to a fellow subsidiary in Ireland, and said ActionAid had ‘skated over’ the impact of capital allowances in drafting a press release.
During the past week two chartered tax advisers and an independent researcher on sustainable development have raised concerns over ActionAid’s claim that its evidence showed that the group ‘used a range of loopholes to avoid paying taxes, shifting profits into tax havens and getting huge tax breaks’.
Experts have told Tax Journal that campaigning charities would benefit from ‘unbiased’ advice freely given by tax professionals who are not connected to the tax justice movement.
However, Chris Jordan, tax justice campaign manager at ActionAid, told Tax Journal that the charity’s research on ABF was independently reviewed at two stages by a former HMRC transfer pricing official: ‘First, after we’d developed our initial analysis of the situation, largely based on the ABF accounts from Zambia, Ireland, South Africa, the Netherlands and the UK. Secondly, the report itself was reviewed following the full “right to reply” correspondence with the company,’ he said.
‘While there remains additional information that ABF refuses to disclose, which could shed further light on situation, we’re confident in the analysis and the fact that the Zambian people are losing significant revenues as a result of choices made by the company.’
Last week Maya Forstater, an independent researcher and writer on sustainable development, posted a series of questions and engaged in lengthy discussion with ActionAid campaign managers on the blog of Martin Hearson, the charity’s former tax justice campaign manager. Hearson is now a doctoral researcher at the London School of Economics and Political Science and continues to write on tax issues.
On Monday Forstater asked on her own blog: ‘How could there be such a fundamental disagreement between ABF and Action Aid, not just about whether what the company was doing was moral, but the actual fact of why they had paid so little tax in the first place?’
Responding on the blog, chartered tax adviser Andrew Jackson said there appeared to be three main factors contributing to a reduction in Zambia Sugar’s tax liabilities below ‘what might be expected’.
The first two factors were ‘Zambian domestic tax law, which allows 10% tax and accelerated capital allowances, [and] Zambian tax treaties, which allow payments to certain countries to be made without withholding tax’.
Jackson said: ‘I really do not like the characterisation of these things as “loopholes” … If a treaty provision has been explicitly agreed, or if a tax relief has been explicitly legislated, then it is simply not a loophole – it’s a doorway.’
Forstater said it had not been made sufficiently clear that ABF received significant capital allowances for investment in Zambia. But Mike Lewis, ActionAid’s tax justice policy adviser, pointed out that ActionAid’s calculation of tax lost did not include capital allowances. ‘We didn’t think it was fair to blame ABF for claiming general capital allowances available to all companies,’ he wrote.
However, a spokesman for ABF said today that ActionAid’s report, together with the press release alleging that ABF was ‘dodging its tax bill’ in Zambia, ‘downplays the importance of the capital allowances, and smears ABF as a result’.
Much of the online discussion has concerned payments made by Zambia Sugar to a fellow subsidiary company, Illovo Sugar Ireland. ActionAid claimed that the payment of annual fees to the Irish company for ‘purchases and management services’ represented ‘mystery management’ – one of four ‘strategies’ that had ‘significantly reduced’ Zambia Sugar’s taxable profits.
‘Since 2007, Zambia Sugar has paid this Irish sister company over $47.6m,’ the report said.
ABF said in correspondence published alongside the ActionAid report that Illovo Sugar Ireland provided ‘real services’. The company’s board met regularly in Dublin, and notes to the accounts had failed to reflect that the company employed ‘some 20 individuals’.
But on 13 February ActionAid published on its website five questions that ABF ‘needs to answer’, including: ‘How can ABF justify booking 26% profits in low-tax Ireland on management fees paid out to a company that appears to have no presence or staff in Ireland? If this isn't for tax purposes, what is it for?’
‘There is absolutely no mystery about this,’ the ABF spokesman told Tax Journal today. ‘We have repeatedly explained what the fees are for. They are for people of different nationalities who work across borders – basically, international people who work across territories when they are needed.’
It was ‘completely normal practice’ to bring in outside, international expertise to oversee and set up a major construction project, he said.
Robin Booth, group tax director at ABF, said today: ‘We do not know where ActionAid gets its [26%] number from. Profit before tax from the activities of this Irish company are immaterial, taxed in Ireland at a higher rate than Zambia and subject to South African [controlled foreign company] rules.’
In a letter to ActionAid dated 18 January, Illovo Sugar’s finance director Mohammed Abdool-Samad wrote: ‘Illovo Sugar Ireland facilitates various services required by Zambia Sugar including the provision of senior management, engineers and agronomists, all of whom have significant experience in the African sugar industry.’
He added: ‘In 2008 to 2010 the costs [of these services] increased due to the R1.6bn expansion project due to services provided by third party service providers. Many of these third party service providers would not have been willing to contract directly to Zambia Sugar due to possible financial or political risk and, if they had contracted directly, the cost to Zambia Sugar would have been substantially higher.’
The Financial Times last week quoted ABF finance director John Bason as saying: ‘I’ve looked really closely at [the payments to fellow subsidiaries], and the payments made by the sugar business are all for services provided and it is at cost. I cannot see any evidence of mark up or anything like that.’
Writing on Hearson’s blog, Lewis said ActionAid’s $27m estimate included withholding tax of $10.4m and corporate income tax of $16.6m ‘thanks to a combination of avoidance and special tax breaks’.
Forstater noted that ActionAid estimated that ‘these [payments] cost the Zambian exchequer $7.4m’. The question whether the management services in Ireland were real or not seemed ‘pretty central’, she said.
Hearson noted that ‘in the absence of certain evidence, [ActionAid has] chosen to use the upper bound of the possible [corporate income tax] loss in their working out …. That choice is open to question, but I hope it’s at least clearer now.’
ActionAid has stressed that it is not alleging that ABF group companies have broken any laws. But Lewis has insisted that ‘offshoring high-value services outside of Zambia deprives Zambia of tax revenues, whether those services are “kosher” or not’.
Lewis said: ‘Because we couldn’t find the substance of the management services provided for the management fees paid to Ireland, we’ve calculated that the whole as (sic) [corporate income tax] loss to Zambia … This is $7.4m.
‘But even if you ignore all the evidence we gathered about lack of substance, and assume that in fact these are all “kosher” management services provided from staff or contractors in South Africa and other countries, simply routed through Ireland, then this arrangement is still avoiding the usual Zambian [withholding tax] on management fees, which comes to $7.1m.’
The ActionAid report recommended: ‘Where paid-for services are being provided from tax havens, Zambia Sugar and ABF should aim ultimately to build the skills and expertise for those services in the countries where its main operations are located; and ensure that payments for them, at market prices, go directly to the company providing them.’
Ben Saunders, business manager at Tolley Tax – part of Tax Journal publisher LexisNexis – has suggested that ‘some sort of code of conduct’ might be appropriate for tax campaigners. ‘I don’t suggest that there aren’t ultimately good intentions underlying the activities, just that some objective standards might be good,’ he wrote on his personal blog.
Saunders said Bill Dodwell, head of tax policy at Deloitte, was right to criticise aspects of some tax campaigners’ work. Writing in last week’s Tax Journal, Dodwell said: ‘At a time where there is focus on professional ethics, one has to wonder whether there is now a need for an ethical code for campaigning charities.’
‘This is the first suggestion by any professional that tax campaigners might look at their conduct and it has been met with what I consider to be a disproportionate response,’ Saunders said. ActionAid and Christian Aid expressed disappointment at Dodwell’s remarks and provided lengthy statements to Tax Journal (reported last Friday) in their defence.
Forstater had raised some serious questions, Saunders said. He noted that ActionAid was now ‘devoting resources to defending themselves against claims of poor behaviour rather than raising awareness of the issues concerning developing countries’. But he recognised that by corresponding with the company ActionAid had allowed ‘both sides of the story to come out’.
Saunders added: ‘If ABF haven’t done anything wrong, ActionAid are damaging a business that is investing in Zambia. Please note the “ifs” – I’m talking hypothetically. I’m just saying that from a risk point of view there appears to be little value gained in running the report.’
Saunders suggested that tax campaigners ‘need technical advice and some sort of technical sign off’ to help them decide whether a report is reliable.
‘This ought to be somebody who is suitably qualified and experienced, has sufficient [professional indemnity cover] and provides a technical report and risk assessment to accompany any press release or report. Ideally it should be independent but that normally costs money,’ he said.
Mike Truman, editor of Taxation, told Tax Journal that while he would not suggest regulation of tax campaigning activity, campaigners would benefit from consulting professional tax advisers who are interested in the issues but independent of the tax justice movement.
‘Tax advisers should perhaps offer to lend more support to campaigners, in the form of proper, unbiased and independent advice. Groups would need to trust our professionalism in being objective,’ he said.
