Zambia may have to consider further measures to boost revenue collection, says vice president

Zambia’s plans to make companies repatriate foreign currency export earnings back to Lusaka are part of an effort to crack down on tax avoidance, particularly in the mining sector, but they are not going to be enough, according to the country’s vice president Guy Scott.

“It’s a very difficult process recovering money that you are owed, when as a government you have no idea how much money is being transferred and for what,” Mr Scott tells This is Africa.

Not holding particularly high hopes for the new legislation, Mr Scott suggests that more extreme measures may be necessary in the push for tax compliance. One “interesting idea” being discussed within the Zambia Revenue Authority would be to estimate miners profits based on London Metal Exchange (LME) pricing and to submit pre-emptive tax assessments to those companies.

In layman’s terms that involves “us looking up the LME price, making an estimate of costs based on historical data, giving [investors] an allowance for their offshore funds, and assessing them,” Mr Scott explains. “The way we [would] deal with people who we think are cheating is to send them an assessment and let them defend themselves on the basis that they are guilty unless they prove themselves otherwise...

“That’s the kind of draconian management of taxes that we do not yet know about in Zambia - we are beginners - but I would certainly consider it as an option,” he says.

The PF has been struggling to implement stronger revenue collection measures since it came to power in 2011. The continent’s biggest copper producer is estimated to lose as much as $2bn annually through corporate tax avoidance, its Chamber of Mines has said.

Mr Scott points to alleged historical problems gathering from tax multinational miners: “Some of these companies have got form,” he says

In 2011, five NGOs filed a complaint to the OECD against Glencore International and First Quantum Minerals over accounting practices of the two companies’ Zambian subsidiary, Mopani Copper Mines. Glencore Xstrata vehemently denies that Mopani engaged in any tax avoidance, and argues its payments in Zambia are ramping up. The world’s largest commodity trader said in an April 2012 submission to a UK parliamentary committee that Mopani had paid $425.1m in taxes, royalties and other dues since privatisation in 2000. By December, that figure had risen to $555.3m. In 2011, it paid $104m.

These controversies aren’t limited to the copper sector. The vice president recently reported Zambia Sugar - the leading producer in Zambia, and a subsidiary of Illovo Sugar, which is owned by the London-listed Associated British Foods (ABF) - to the Zambia Competition Commission, over claims of tax evasion and price-fixing by the NGO ActionAid.

In February, the group published a report accusing ABF’s subsidiary of putting nearly $84m - or a third of its pre-tax profits - into tax havens. While the main corporate tax rate in Zambia is 35 percent, since 2007 Zambia Sugar has paid less than 0.5 percent of its $123m pre-tax profits in company income tax, the report said.

“We’ve had a problem with Zambia Sugar for a long time, with alleged overpricing. It’s getting its money’s worth out of Zambia by charging the consumers. And if it is hiding profits by transfer pricing then it is doing so to avoid making it perfectly obvious that it is overcharging,” Mr Scott argues.

ABF denies accusations of tax avoidance in the country. “There is no siphoning off of profit from Illovo in Zambia in any way”, says a spokesperson for the company, citing depreciation of and capital allowances.

Zambia’s most recent legislation, which falls under the Bank of Zambia Amendment Bill, will require companies to repatriate all foreign export earnings over $10,000, demanding that companies deposit funds in a commercial bank in Zambia within 60 days.

“The downside of this is that everybody thinks we are reintroducing exchange controls...Even imposing simple tax oversight regulations immediately impinged upon investor confidence,” Mr Scott laments.

“We are not reintroducing exchange controls. This just repatriates the money but then lets it free again - it is an accounting exercise. We want to be able to look in your bank account and see your money going in and see that the right amount is going to the tax man, and we don’t care what you do with the rest. But no one believes us.”

But as far as hopes for the legislation go, Mr Scott is not overly optimistic. “The Zambia Revenue Authority is nothing like the British Tax Authority, it’s just not capable of raising the money that it should,” he says. “[As] a little country sitting in the middle of Africa, trying by itself to sort a problem that the British government can’t sort out, our chances of making a big impact are low.”

Tax was top of the G8 agenda this week, with governments agreeing to demand that shell companies, which are often used to exploit tax loopholes, must identify their beneficial owners.

UK secretary of state for international development Justine Greening today began a tour of sub-Saharan Africa focused on using aid to boost tax collection and drive growth.