Amb. Emmanuel Mwamba

 

By Amb. Emmanuel Mwamba

The Supreme Court of Zambia has just delivered a fundamental and remarkable Judgement.

This is a case in which the Zambia Revenue Authority(ZRA) has been battling with Mopani Copper Mines and its Swiss parent company Glencoe since 2009.

Glencore PLC is a British multinational commodity trading and mining company with its headquarters based in Baar, Switzerland.

The Supreme Court has fined Mopani Copper Mines $13million!

The background is that the ZRA conducted an Audit of Mopani Copper Mines for the period 2006 – 2009, which revealed that the transactions between the company and its Swiss parent multinational, Glencore International AG(GIAG) violated the Arm’s Length Standards (ALS).

An arm’s length transaction refers to a business deal or transaction in which a buyer and seller act independently without one party influencing the other.

Chief Justice Ireen Mambilima sitting with Justice Nigel Mutuna and Justice Mumba Malila ruled that any tax authority would find serious misgivings on the lack of arm’s length on the revealed transactions between Mopani and Glencore.

The Court found Mopani liable of abusing transfer pricing and used it as a mechanism to avoid paying full taxes due to ZRA.

TRANSFER-PRICING

The core part of domestic revenue mobilization for any country
is taxation of its citizens and the private sector.

For Zambia, its mineral resources
present an unparalleled economic opportunity to increase domestic revenue through effective
taxation of the mining sector.

Despite the tremendous wealth inherent in this sector, Zambia has been struggling to obtain significant financial benefits through taxes from the sector.

This is due to various factors including the volatile mining tax regime policies but also the increasing tax-avoidance schemes perpetrated by mine houses that might appear legal but are aggressively aimed at reducing the amount of tax payable.

Multinationals increasingly abuse transfer pricing as a mechanism to avoid paying tax.

Developing economies are now increasingly
aware of these schemes especially the abuse of transfer pricing.

African governments are now
establishing robust legislative
and administrative frameworks
to deal with transfer pricing
issues.

For Zambia, curbing the abuse of transfer pricing, is a development financing issue, because without adequate tax revenues, our ability to mobilise domestic resources for development
is heavily hampered.

The sensitive challenge for Zambia has been to balance the need to protect its tax base while not seen to be discouraging or hampering foreign direct investment in the mining sector.

Zambia has joined many African countries that have begun to put in place, legal rules on the taxation of cross border transactions and the latest Supreme Court Judgement will go a long way in enhancing these measures.

It should be noted that this “arm’s length principle” as emphasised by the Supreme Court of Zambia is at the core of most global standards on controlling transfer pricing perpetrated by multinationals.

AFRICA LOSES $50BILLION A YEAR IN ILLICIT FINANCIAL FLOWS

Over the last 50 years, Africa is estimated to have lost in excess of $1 trillion in illicit financial flows (Kar and Cartwright-Smith 2010; Kar and Leblanc 2013).

This amount excludes capital flight. Capital flight is a large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls.

This process could entirely be legal or licit.

To resolve the crisis of illicit financial flows and outflows from Africa, the African Union and the United Nations Economic Commission for Africa tasked
the fourth Joint African Union Commission and United Nations Economic Commission
for Africa (AUC/ECA) Conference of African Ministers of Finance, Planning and Economic Development held in 2011to handle the matter.

The Conference established a High Level Panel on Illicit Financial Flows from Africa.

Illicit financial flows (IFFs) is defined as money that is illegally earned, transferred or
utilized.

These funds typically originate from three sources: commercial
tax evasion, trade mis-invoicing and the abuse of transfer pricing.

Other origins of illicit financial flows include criminal
activities such as the drug trade, human trafficking, illegal arms
dealing, and smuggling of contraband, illegal wildlife trade and bribery and theft by corrupt government officials.

The Panel headed by South Africa’s former president, Thabo Mbeki, established that Africa loses over $50 billion a year through tax avoidance and fraud schemes largely perpetrated by multinational corporations operating in Africa.

It became clear that Africa was a net-creditor to
the rest of the world, despite the regular inflow of official development
assistance.

The continent continues to suffer from a crisis of insufficient resources for development, largely caused by illicit financial flows.

The Report of the High Level Panel
on Illicit Financial Flows from Africa recommended that Africa must implement measures to radically reduce illicit capital outflows from Africa.

The Panel recognised that the goals of ending poverty in Africa, the goal to achieve Sustainable Development Goals(SDGs) aimed at reducing inequality within and among nations, and the hope to give practical effect to the fundamental objective of the right of all to development, was attainable if African governments and its partners curbed the illicit financial outflows.

Amb. Emmanuel Mwamba is Zambia’s Permanent Representative to the African Union and to the United Nations Economic Commission for Africa (ECA).

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