Transparency hides Zambia’s lost billions

Published on Pambazuka News, par Khadija Sharife, June 23, 2011.

Mining corporations’ tax avoidance schemes cost African nations billions of dollars each year, says Khadija Sharife.

African nations such as Zambia are often seen as grossly corrupt. Yet it is corporate tax ‘avoidance’ on the part of mining companies that costs the nation hundreds of millions annually, while lining the pockets of middle-men in countries such as Switzerland. And the much-lauded Extractive Industry Transparency Initiative (EITI) may help – rather than hinder – this reality.

Zambia recently became the 26th country to publish the EITI report, disclosing payments from mining companies for the year 2008. The EITI standard is meant to ‘facilitate transparency’ by assessing net discrepencies between resource rents – royalties and taxes remitted by multinationals and received by governments. 

The primary intention of the EITI report, backed by many of the world’s major extractive or resource-seeking multinationals including Shell, Chevron, Vale, BHP Billiton, Anglo-American and others, is to eliminate corruption by shining a light on the flow of revenue. Describing companies as ‘complicit’ in corruption limited to the environments in which they are required to operate, the EITI system claims that reduced reputational risk is a tremendous upside for foreign investors and corporate entities.

ELIMINATING CORRUPTION:

Currently, Zambia is one of 24 EITI candidate countries, of which more than half are African, including Tanzania, Gabon, Cameroon, the Democratic Republic of the Congo, Chad, Mali, Mauritania, Sierra Leone, and Burkina Faso – among others. Already, five of 11 EITI ‘compliant’ nations are African, many of them surprising choices like Nigeria, Niger, and Liberia.

According to Clare Short, head of the EITI system and former British secretary of state for international development, a ministry created under then-Prime Minister Tony Blair – who announced the initiative in 2002 as a joint project of the UK and the World Bank – once a country joins EITI, all companies operating within the ‘host’ country must make full disclosures.

The logic goes that, so long as there is disclosure of cash payments within national boundaries, transparency will act as a natural sanction – diminishing the potential for, and realisation of, corruption.

It is a logic that appears to bank on political or ‘demand-side’ corruption, chiefly innate to the developing country’s character – with corporations simply ‘going along’ with the system – a kind of ‘when in Rome’ response.

But the EITI theory is vastly different from the reality and has more to do with corporate and ‘first world’ country supply-side corruption. Zambia’s first report, for instance, revealed that mining companies remitted $463 million in payments to the government in 2008. The EITI report claims ‘significant discrepencies’, noting a net total of ‘unresolved discrepencies’ of $66 million.

In that same year, much of Zambia’s exported copper, almost half of which was earmarked for Switzerland, never arrived at its destination – disappearing into thin air. Moreover, the pricing structure for Swiss copper – remarkably similar to Zambia’s exported copper – was six times higher than the funds Zambia received, facilitating a potential loss of some $11.4bn. This is especially interesting when taking into account that Zambia’s entire GDP for 2008 was $14.3bn.

GLENCORE’S LUCRATIVE POLICIES

This type of corporate corruption – known as transfer mispricing – made headlines recently when a leaked report authored by Grant Thornton at the request of the Zambia Revenue Agency (ZRA) unpacked how the lucrative Glencore-controlled Mopani Copper Mines (MCM) – a company which declared no profits – was cheating the country’s tax base of copper revenue.

The auditors disclosed that MCM tried ‘resisting the pilot audit at every stage’, rendering them unable to access crucial data in many instances. MCM’s chief executive, Emmanuel Mutati, claimed that the audit was not accurate, precisely because data was inaccurate. Yet Glencore, the world’s largest commodity trader, controlling 50 per cent of the global copper market, is confident that MCM will be ‘exonerated’.

In all probability, Glencore will be saying that transfer pricing is perfectly legal and central to trade. But the nature of ‘arms-length transfer pricing’ within the current deregulated global financial architecture, enables multinationals (conducting as much as 60 per cent of global trade within – rather than between – corporations) to ‘self-regulate’ pricing.

So, though pricing, in theory, is determined according to ‘market values’, in reality, the ‘corporate veil’ facilitates tremendous mispricing when subsidiaries of the same company trade with one another – the means through which Glencore allegedly purchased grade +1 copper well below market prices, with MCM allegedly preferring, all too often,the lowest price offered by a Glencore subsidiary, described by the audit as an act likely for buyers, not sellers, who would experience diminished profits.

Glencore International AG, based in Switzerland, the world’s leading secrecy jurisdiction, handpicked by Glencore founder and notorious commodity trader Marc Rich, further enables the company to take further advantage of little or no taxation.

Tax havens such as Switzerland are essential to resource-seeking corporations operating in Africa: more than 85 per cent of asset portfolios for sub-Saharan Africa passes through tax havens. In Zambia, MCM’s structure – like that of Vedanta and others – keenly utilises tax havens as vehicles for shell companies able to access legal and financial opacity tools including banking secrecy, thin capitalisation, little or no taxation, zero disclosure of company accounts, use of nominees, and, best of all, high-level client confidentiality, all of which is entirely legal.

MINING AND TAX HAVENS: … (full long text).

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