Associated British Foods versus ActionAid: a study in the tax avoidance debate

I was thrilled yesterday to see all the coverage of ActionAid’s report on Associated British Foods’ tax affairs in Zambia. I was involved in the early stages of the research, but a look at the full report shows that the course of the research took them a long way from our initial assumptions of what was going on. NGOs have been criticised, fairly I think, for focusing too much on transfer pricing; in the Zambia sugar study, it’s only one part of a bigger story.

There are three things in particular that make it especially interesting for me.

First, the biggest story in terms of sums of money is the tax incentive obtained by the company, under which it pays tax at 10%, rather than Zambia’s headline 35% rate. What makes this interesting is that the company had to take the Zambia Revenue Authority to court in order to be considered eligible. ActionAid maintains that the incentive is intended for profits on “farming income” and that most of Zambia Sugar’s income comes from sugar processing.

ABF counters [pdf]  – correctly – that this is a matter of the “rule of law”. But it’s certainly not the case that the company was simply complying with Zambia’s legal framework. Going to court was definitely a conscious choice and, while clearly not an example of tax avoidance, it most certainly is an example of a tax decision with ethical implications, and one that a company needs to be ready to defend publicly.

Second, much of the alleged avoidance is not about profit taxes but about withholding taxes. Goodness knows how Zambia ended up with a treaty that locks it into zero withholding taxes on all payments to Ireland (although the treaty predates the lowering of Ireland’s tax rate, so wouldn’t have been such a vulnerability at the time).

In the Telegraph, ABF’s John Bason says his company has been “wronged” because some of the payments picked out by ActionAid are plain old dividends, not transfer pricing transactions. But this misrepresents the argument in the ActionAid report, which is that the use of a Dutch cooperatief as a holding company (with a Mauritius intermediary) avoids Zambian withholding taxes, not corporation tax.

Third, the sheer volume of correspondence [pdf] between ActionAid and ABF shows how much work goes into a case study like this. ActionAid have cleverly marked up the last letter they received from ABF, so you can look at their comments in the PDF file. ActionAid corrects some parts of its analysis in response to the company, but in others it stands firm, and it’s hard to interpret some bits of what the company says as anything other than designed to mislead.

You can see this again in today’s follow-up stories in the Telegraph and Financial Times [£]. Some of the arguments used by Bason sound as if he hasn’t read ActionAid’s report. (Presumably because ABF have calculated that the average FT or Telegraph reader is unlikely to have done so!)

For example, in the FT, he says that, “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.” Yet ActionAid found that the Irish company receiving management fee payments was booking a profit margin of 26%. From the article, it sounds like he’s talking about the secondment fees to Ireland identified by ActionAid, while ignoring the management fees, which ActionAid was more concerned about. And again, no mention of withholding taxes at all.

In the Telegraph, Bason attributes the company’s low corporation tax payments to capital allowances resulting from its large investment in Zambia. This is acknowledged in the ActionAid report, and, as Bason must know, it doesn’t undermine ActionAid’s argument: if the Zambian company’s profits are deflated by transfer pricing payments, the capital allowances will last longer because there’s less profit to use them up.

As people pick over the debate between the two organisations, I hope they take the time to look into all the correspondence. One thing it makes one realise is quite how daunting it must be to be a tax inspector in a country like Zambia, auditing a multinational firm of ABF’s size. I imagine the letters they receive are a whole lot more intimidating…