Former Botswana based Cadbury in tax avoidance controversy
Legislation in most of the world, including in Botswana, is not yet able to detect and regulate aggressive tax planning which uses low tax jurisdictions and havens to create illicit financial flows.
Controversial reports surfaced in December 2015 that owners of Cadbury, Mondelez International, a company which had its operations in Botswana in 2014, had not paid corporate tax in the United Kingdom in the same year, despite making £96.5m (P1, 6 Billion) in profits.
The reports suggest that the company, which folded its operations in Botswana in 2014 claiming decreasing demand, actually stopped paying tax in the UK since 2010.
The company reportedly used a “tax-efficient structure put in place” to erase their UK tax bills by using interest payments on an unsecured £8.2bn debt. The debt is listed as a bond on stock exchanges in the Channel Islands, a tax haven jurisdiction.
According to an investigation by a UK newspaper, Sunday Times, the interest payment then creates tax losses to offset profits elsewhere in the group, and are routed tax-free out of the UK using the “quoted Eurobond exemption” provided for such bonds.
On December 2014, Mondelez International, formerly known as Kraft Foods, closed its Botswana based gum producing firm which supplied the African market; leaving 134 disenfranchised employees in the lurch. The operations were then moved to Poland in line with a restructuring policy which resulted in closures of other factories in the UK and Kenya.
The Botswana plant produced Dentyne and Clorets gums, but closed down citing reduced demand for pellet gum in favour of slab gum. Chewing gum was one of the country’s largest manufactured exports in 2011, valued at P157 million and ranked as the 11th biggest export just after chilled beef exports.
At the time of the closure, the company, which produces 15 percent of the world’s confectionaries, said it would close down all of its subscale facilities and open five plants in yet to be disclosed locations by 2020. At the time Cadbury was acquired by Kraft in 2010- it had operations in 10 African countries and had confirmed investment of P150 million in Botswana.
At the time, economist Professor Roman Grynberg authored a research article which averred that “from the point of view of Botswana’s industrial policy and SACU, exports of chewing gum were rising rapidly and once the substantial investment by Kraft is completed the company expects to export P300 million-P400 million in chewing gum.”
Recent reports allege that Cadbury stopped paying taxes in 2010, the same year that the company management declared a healthy turnover of approximately P84 million, all of which was exported.
In its takeover Cadbury/Kraft was planning a highly automated production facility that would allow the company to produce three times the current level of output of chewing gum, Professor Grynberg had noted.
The company’s factories were spread around Southern Africa, with specialty chocolates made in Namibia, chewing gum in Botswana, bubble gum and candy in Swaziland and chocolate products in Port Elizabeth, South Africa where most of the jobs were.
The restructuring move has left only one factory in sub Saharan Africa, at South Africa’s Port Elizabeth plant which produces Lunch Bar, P.S, Endearmints and Cadbury chocolate tablets.
Asked if the factory was making losses in Botswana during its closure Navisha Bechan-Sewkuran Lead, Corporate & Government Affairs, Southern, Central and Eastern Africa denied any loss making and stated that the Botswana factory supplied products directly to its parent company Mondelez International and did not generate revenue directly from third parties. She however could not disclose how much the factory was making in Botswana. The company also did not highlight any operational losses in Botswana and it is not clear why they closed their operations in the country.
Legislation in most world countries, including Botswana, is not yet able to detect and regulate aggressive tax planning which uses low tax jurisdictions and havens to create illicit financial flows. This is despite this conduct depriving countries much needed development money which is often equal to or more than their education or healthcare budgets.
William Nkitseng, the General Manager of the High Tax Payers Unit of the Botswana Unified Revenue Services, recently told this publication that laws that deal with transfer pricing are yet to be made since the practice is a new phenomenon which the world has just woken up to. He however said that the Organisation for Economic Co-operation and Development (OECD) was very helpful in bringing BURS training requirements up to speed in addressing complex tax issues.
According to studies done and reported by international financial intelligence organ, Global Financial Integrity, Botswana has lost an average of P8,5 billion ($85,6 million) annually, between 2003 and 2012, with a notable spike in the ‘recession years’ of 2007, 2008 and 2009 where illicit financial outflows were observed.
The scale of the offshore industry’s dirty-money problem is hotly disputed. Economists at Global Financial Integrity reckon that developing countries alone suffered illicit financial outflow (Money that is illegally earned, transferred or used) of at least $5.9 trillion over the past decade.
In the context of Africa, the continent is losing over $60 billion annually from such illicit financial activities.
Transfer Pricing is when the price for goods and services are set between controlled or related legal entities within an enterprise, like when a subsidiary company sells goods to a parent company; the cost of those goods is the transfer price.
Money launderers, corrupt politicians, terrorists, arms traffickers, drug smugglers, and tax evaders, in moving their dirty money, all rely on company structures that allow them to hide their identity, and banks and other professionals willing to do business with them, both who are currently all-too available in some jurisdictions which have been called tax havens.
This allows these entities to charge each other unfair prices that reduce profits, which reduces the tax burden in the process. The illicit profits are kept offshore in the so called tax havens, which deny host countries billions of tax revenues.
The world is said to have between 50 and 60 active tax havens, mostly clustered in the Caribbean, parts of the United States such as Delaware and in Europe, South-East Asia, and the Indian and Pacific oceans. These tax havens are home to over 2 million paper companies, thousands of banks, funds, insurers and half of all registered ships of above 100 tonnes.