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Africa: Tax Tricks, Mobile Phones, and Beer

AfricaFocus Bulletin
October 20, 2015 (151020)
(Reposted from sources cited below)

Editor's Note

"Despite MTN having its headquarters located in South Africa, 55% of the "management and technical fee payments" flow to "MTN International" (MTNI)--a company which has no staff and is located in Mauritius. The remaining 45% was paid to MTN Dubai--a subsidiary which the company says it renders international financial services and shared services to MTN Group." - Quartz Africa, on new report by amaBhungane and Finance Uncovered

The "Africa Rising" narrative is dubious as a gross oversimplification of African reality. But it does point to at least one important reality: the growth of consumer markets that are attracting much international attention. Particularly notable are two ubiquitous consumer goods, one old (beer), one new (mobile phones), which are producing enormous profits. The question is where do those profits go?

This AfricaFocus Bulletin contains several background documents related to (1) the South African mobile company MTN and exposure of its profit-shifting strategies in a new report, and (2) the giant formerly South African beer company SABMiller (just being purchased by a rival global giant Anheueser-Busch InBev). SABMiller was featured in an ActionAid report in 2010, which is summarized below. So, to understand the complexity of "Africa Rising," consider these tax tricks the next time you are drinking beer and browsing on your mobile phone.

For previous AfricaFocus Bulletins on tax evasion, illicit financial flows, and related issues, visit http://www.africafocus.org/intro-iff.php

For previous AfricaFocus Bulletins on information and communication technologies, visit http://www.africafocus.org/ictexp.php

++++++++++++++++++++++end editor's note+++++++++++++++++

Tax Tricks

South Africa's 'next president' is entangled in another corporate tax dodging allegation--this time it's with MTN

Sibusiso Tshabalala

October 13, 2015 Quartz Africa

http://qz.com/522656/

For more detailed report, see http://amabhungane.co.za / direct URL: http://tinyurl.com/od3s9fd

South Africa's deputy president Cyril Ramaphosa--long seen as the most likely next successor to president Jacob Zuma--has seen his name caught up in another corporate tax dodging allegation, this time with Africa's largest mobile phone company MTN.

Last week Friday, amaBhungane, an investigative journalism organization, and Finance Uncovered, a global network of journalists, published a story alleging that Africa's largest mobile network, MTN, was involved in shifting millions of dollars from its subsidiary companies in Nigeria, Uganda, Côte d'Ivoire and Ghana to companies in Dubai and Mauritius in order to avoid its tax obligations. This all happened under Ramaphosa's watch, as he was chairman of MTN's board of directors, between 2001 and 2013.

In September last year, South Africa's Mail and Guardian reported that Lonmin--a mining company which Ramaphosa was a board member of between 2010 and 2013--was involved in a scheme to move profits generated from its platinum mining activities in South Africa to Bermuda.

While Ramaphosa, one of South Africa's richest men, has taken a strong public stance against tax avoidance as deputy president it doesn't seem to be in tune with his former life as a captain of industry. It is also causing a revision to the expectation that he is next in line when Zuma's term ends in 2019.

According to the report, MTN subsidiary companies in Nigeria, Uganda, Cote d'Ivoire and Ghana paid "management fees"--which according to MTN cover for elements like back office support, technology transfer (to subsidiary companies) and use of the MTN brand.

While it is common for telecom companies to charge their subsidiaries management fees--as MTN itself argues in a response to a set of questions asked by the investigative team--the bone of contention is whether the large sums of money flowed to "real offices staffed with people doing actual work to earn the money" as the investigative report states.

MTN's 'management fees'

The investigative team reports that despite MTN having its headquarters located in South Africa, 55% of the "management and technical fee payments" flow to "MTN International" (MTNI)--a company which has no staff and is located in Mauritius. The remaining 45% was paid to MTN Dubai--a subsidiary which the company says it renders international financial services and shared services to MTN Group.

Territories like Dubai and Mauritius are better known as "tax havens"--many multinational companies stash their profits here using complicated payment systems to subsidiaries. The lure of a low tax rate, or a sometimes a zero-rate tax regime, is hard to resist: it means multinationals can cut the cost of doing business without paying tax in the country they're required to do so.

Chris Maroleng, MTN spokesman said the company has not been involved in any tax avoidance scheme and that it had responded fully to the investigative team's claims.

"We have been able to prove that we're tax compliant in all our operational jurisdictions. We have not infringed any laws and we have nothing to hide," said Maroleng. He added that MTN had been in contact with the amaBhungane and Finance Uncovered team for a "protracted period" and that the company had satisfied itself with all of its responses.

The deputy president's office said it is referring all queries on the matter to MTN.

Meanwhile, the Right 2 Know campaign, a South African organization that advocates for freedom of expression and anti-corruption, has played on a MTN ad-slogan from 2009 to signal their discontent. MTN frequently used the South African slang word "ayoba" (loosely translated as "cool") in their ads. Now R2K--is calling for the investigations against--has spun the slogan back to the company and Ramaphosa. Their version: "Tax dodging is not ayoba." ( http://www.r2k.org.za/2015/10/12/investigate-mtn-ramaphosa/)


Finance Uncovered Investigation: MTN's Mauritian Billions

Finance Uncovered, 09 Oct, 2015

http://www.financeuncovered.org/ - Direct URL: http://tinyurl.com/qhklzpa

The Finance Uncovered global network of investigative reporters have today published a cross-border investigation into South African telecoms giant MTN exposing how billions of rand from its subsidiaries in Ghana, Nigeria and Uganda have been shifted to a shell company in the small island tax haven of Mauritius.

The two year investigation spanning five countries was published today in South Africa's Mail and Guardian, the Ugandan Observer and Ghana Business News.

The reporting team

Finance Uncovered is a global network of journalists from over 55 countries across the globe. This investigation was undertaken by Craig Mckune of amaBhungane in South Africa, George Turner and Nick Mathiason from Finance Uncovered in London, Francis Koktuse in Ghana, Emmanuel Mayah in Nigeria and Jeff Mbanga in Uganda.

A report in Nigeria will follow shortly.

MTN's Offshore Payments

The reporting team discovered MTN revenue producing companies operating in Ghana, Nigeria, Uganda and Cote d'Ivoire made substantial payments to offshore companies in Dubai and Mauritius. These payments were counted as a cost of business for the operating companies, lowering their profits and potential tax bill.

The enormous sums were purportedly for management and technical services performed on behalf of these companies, as well as royalty payments for the use of the MTN brand. In Ghana, these payments accounted for more than 9% of the turnover of the company.

African journalists in Ghana, Nigeria and Uganda working with Finance Uncovered discovered that 55% of management and technical fee payments are directed towards MTN International, a company based in Mauritius. The Mauritius company has no staff and is little more than a post box. The remaining 45% was routed to MTN Dubai, where the company employs 115 staff who provide shared services to the group.

MTN told reporters that MTN International remunerates companies in South Africa for management services performed on behalf of the company. They were unable to answer why the payments were made to Mauritius first.

Company documents published by MTN said that money in MTN Mauritius was used to repay external debts of the MTN group and dividends, rather than pay for management services.

But after further questions were put to MTN, the company was forced to admit that not all of the revenue was passed onto South Africa. The company refused to disclose how much it kept in Mauritius.

The company said that MTNI is resident in South Africa for tax purposes and the Mauritian entity gives no tax benefit to the company.

MTN in Africa

Our revelations are particularly sensitive given the sheer size of MTN. The South African listed firm is the largest cell phone company in Africa with 227,503,000 subscribers worldwide. Almost one in four mobile phones in Africa are part of the MTN network a total of 161m.

This means MTN is the largest company in many of the countries in which it operates. It is also frequently one of the largest taxpayers in African countries so they are particularly vulnerable to profit shifting by the company.

Game over?

Our investigation has established that a number of African countries have now challenged the offshore payments made by MTN. Authorities in Nigeria and Ghana have frozen payments and the Ugandan Authorities has placed a large tax bill on the company for management fees paid over a 6 year period.

Ghana

Scancom, MTN's subsidiary in Ghana, paid 758m Cedi (Rand 3.7bn, $401m) in management and technical fees to MTN Dubai between 2008 and 2013 equivalent to 9.64% of the company's revenue.

An agreement between the Ghanaian Investment Promotion Centre and the company that allowed the management fees to be paid expired in 2013 and payments have been frozen. MTN is currently negotiating a new agreement with GIPC.

Uganda

MTN Uganda paid 3% of turnover in management fees between 2003 and 2009 to MTNI in Mauritius. The Uganda Revenue Authority issued MTN with a "notice of assessment" in 2011. This was for a number of tax issues between 2003 and 2009, but a large portion was to do with a dispute over management fees. The total tax bill from the URA was R467m ($69m).

Nigeria

In 2013 the company disclosed that it had paid R2.5bn ($562m) in fees to MTN Dubai between 2010 and 2013. The company made this disclosure because the fee payments had been reversed following a failure to come to a new agreement on management fees with Nigerian regulators.

Despite these fees being paid to MTN Dubai, MTN confirmed to us that these fees are then 'on-paid' to MTNI in Mauritius and that MTNI Mauritius is the 'ultimate beneficiary' of the fees.

Cote d'Ivoire

MTN has confirmed to us that the company paid 12bn West African Francs in 2012 and 14bn West African Francs (Rand 512.9m, $55.53m) in 2013 in management fees to MTNI. The figure for 2013 is equivalent to 5% of the revenue made by MTN in Cote d'Ivoire.


"Can We Beat Tax Avoiding Multinationals?"
Finance Uncovered, Oct. 18, 2015

[Brief excerpt. For full article visit
https://www.byline.com/column/39/article/499]

How the MTN case shows that OECD "solutions" for such tax evasion will not work.

"Unfortunately the OECD proposals are unlikely to bring these practices to an end, and could even make the whole process even less transparent.

The OECD has embraced the arm’s-length concept and many of the solutions it proposes are simply aimed at giving tax authorities more and better tools to use in their transfer pricing investigations. There will be better access to comparable data to determine prices, bigger books of guidance for tax authorities, but in the end tax authorities will continue to need to rely on complex investigations and highly subjective analysis of the complicated internal structures of multi-national companies."


"Calling Time: Why SABMiller should stop dodging taxes in Africa"

by ActionAid, November 2010, Updated 2012

Summary by Malik Stan Reaves written for AfricaFocus Bulletin and US-Africa Network, Oct. 20, 2015

Full report available at http://www.actionaid.org.uk/tax-justice/calling-time-the-research

London-based SABMiller plc is the world's second largest beer company making more than $3 billion a year in profits. The origins of the company date back to the founding of South African Breweries in 1895 and it owns several African breweries. Its many brands include Coors Light, Miller Light, Keystone Light (#2, #4, and #12 in sales in the USA), Castle, Kilimanjaro, and Lion (in Africa), and Grolsch (in Europe and global).

The company has some 65 tax havens, and this ActionAid report estimated it has used them to reduce their tax bills by as much as 1/5 in Africa. For example, its Ghana operations generate about $45 million a year, yet SABMiller paid no taxes for the two years before the report and only for one year in the prior four years.

ActionAid estimated loses to governments in Africa of as much as $30 million a year, "enough to put a quarter of a million children in school."

To avoid paying taxes, SABMiller uses transfer pricing payments made by its subsidiaries to sister companies in the corporation. "These payments can reduce or even eliminate profits in one place at a stroke of an accountant's pen; a kind of financial alchemy that also shrinks the company's tax bill."

ActionAid examined the accounts of eight SABMiller subsidiary companies in Ghana, Mozambique, Tanzania, South Africa, Zambia and India, along with researching the tax systems in these countries. ActionAid identified four "tax-dodging" techniques used in Africa. Tax dodging or tax avoidance is seen by ActionAid as designed to comply with the letter of the law though the practice is irresponsible and unethical (whereas tax evasion breaks tax laws). The report notes that there is no mention of tax in SABMiller's code of business conduct and ethics.

The first is a loophole in Dutch tax law which allows SABMiller's Dutch holding company for its African operations, Rotterdam-based SABMiller International BV, to pay next to no tax on the royalties they earn. "Six SABMiller companies in Africa paid this Dutch company $37.5 million in royalties last year, according to their most recent accounts. If the company's African operations that do not publish accounts also make payments at the same rate, the total can be expected to be $65 million. This corresponds to an estimated tax loss to African countries of $15 million."

The second dodge involves millions in management fees paid yearly by African subsidiaries to SABMiller companies in European tax havens, mostly in Switzerland. Some fees are high enough to wipe out all taxable profits.

In the third dodge, SABMiller subsidiary Mubex in Mauritius is used by SABMiller breweries in other African countries as a purchasing agent, even though the goods may not be produced in or even transit through Mauritius. Mubex makes a profit, the amount of which is unknown due to tax haven secrecy, and is taxed at 3% as against what would be much higher rates in the countries where the beer is actually produced.

In the fourth tax dodge, African breweries are able to borrow money from Mubex, in Ghana's case seven times what's allowed in that country, leading to interest costs that erase sizable amounts of tax liability.

ActionAid calls on SABMiller to do three things:

  1. Take a responsible approach to tax. Stop using tax havens to siphon profits out of Africa, for example by ending the huge payments for lucrative brand rights and management services to Switzerland and the Netherlands.
  2. Understand and disclose the impact of its tax planning. SABMiller needs a tax code of conduct to explain how it applies its sustainable development principles to its tax affairs. It should be open and transparent about its use of tax havens and tax avoidance techniques.
  3. Be more transparent about financial information. Make public the accounts of each of its subsidiaries – especially for companies in countries where accounts are kept secret – and provide a country-bycountry snapshot of tax payments and other financial information.

It further lays out several recommendations for governments to shore up their tax operations and policies.

Outcomes

In June 2011, a meeting of tax authorities from several African countries, supported by the African Tax Administration Forum (ATAF), considered the findings of the report. A multilateral tax treaty was presented to ATAF's council meeting the following year which would "allow African countries to work together to investigate the tax affairs of multinational companies operating across the continent" (page 3, para 3).

Other Actions:

"Over 10,000 people across the world have taken action, asking SABMiller to adopt a more responsible approach to its tax affairs in the developing world. The company has been questioned in media interviews, by ActionAid at its Annual General Meeting, and by students at Edinburgh University, who voted to ban the company's beers from their student union."

"Schtop tax dodging" beer mats found their way to Australia, Sweden, the Netherlands, Ghana, South Africa, Senegal and the United States."

ActionAid charcterized SABMiller's response to the outcry over its practices as "a combination of denial and obfuscation," including ownership moves resulting in reduced transparency and shifting exposure in Mauritius, but "increased royalty payments and management service fees paid into tax havens across the continent."

Given the "protests and occupations" in the 18 months since the original publication of Calling Time, they noted that "corporate attitudes towards tax have changed...increasingly aware of the reputational issues… involved in governance around tax."

Note: The corporate malfeasance in this ActionAid report is identified as tax avoidance rather than tax evasion. ActionAid is thus not accusing SABMiller of breaking any laws but of being unethical and irresponsible "in failing to acknowledge the impact of its tax dodging on public revenues." The term "illicit financial flows," not yet in wide use at the time of the ActionAid report, is not a concept used in this report. To what extent some forms of abusive transfer pricing may be illegal as well as illegitimate is a still unresolved issue in the literature on the subject.


Beer & Mobile as Rising Retail Markets

"Anheuser-Busch InBev and SABMiller to Join," New York Times, Oct. 13, 2015
http://tinyurl.com/otmzfxt

"The research firm Euromonitor International estimated on Tuesday that the combined Anheuser-Busch InBev-SABMiller would account for 29 percent of global beer sales, after selling assets to win regulatory approval. It also would be more than three times as large in terms of sales as its next closest competitor, the Dutch brewer Heineken, according to Euromonitor."

"Bud-SAB tie-up hinges on a scramble for Africa," Reuters, Sept. 24, 2015
http://tinyurl.com/ngsavbz

"Africa is Budweiser's lost continent. For SABMiller, it is the jewel in the crown. Where Anheuser-Busch InBev is basically absent, Africa generated 28 percent of SAB’s revenue and 30 percent of its EBITDA [Earnings Before Interest, Taxes, Depreciation and Amortization] last year. That's the key to a potential offer by the Budweiser brewer for its $89 billion rival."

"SAB and Castel, one of its partners, share around 55 percent of Africa's 'formal' beer market."

"The Beerhemoth," The Economist, Oct. 17, 2015
http://tinyurl.com/pwwjula

"The battle lasted one tumultuous month. In September SABMiller, the world's second-largest brewer, said it was the target of a takeover by its bigger rival, AB InBev. There followed a volley of bids, skirmishes in the press and tense private talks: between them, the firms’ main shareholders include a big tobacco company, the dashing scion of Colombia’s richest family and three Brazilian billionaires, not to mention South Africa's public-investment fund. On October 13th, one day before a deadline mandated by British takeover rules (SABMiller is listed in London), the companies announced a tentative deal."

"The Mobile Economy: Sub-Saharan Africa 2015"
http://gsmamobileeconomy.com/ssafrica/

"The mobile industry in Sub-Saharan Africa continues to scale rapidly, reaching 367 million subscribers in mid-2015. Migration to higher speed networks and smartphones continues apace, with mobile broadband connections set to increase from just over 20% of the connection base today to almost 60% by the end of the decade. Falling device prices are encouraging the rapid adoption of smartphones, with the region set to add more than 400 million new smartphone connections by 2020, by which time the smartphone installed base will total over half a billion."


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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