A leak of secret documents from Luxembourg reveals corporations avoiding paying tax, which can also mean less revenue for African treasuries
Confidential documents from PricewaterhouseCoopers leaked late last year revealed how about 350 companies around the world negotiated advantageous deals with the Luxembourg tax authorities. Africa Confidential has mined the data for the deals to find places where African exchequers may find themselves losing revenue. The agreements are legal but have attracted widespread criticism in Europe.
The cache of documents, uncovered by the International Consortium of Investigative Journalists (ICIJ), mainly concerns PwC’s correspondence with the companies and how Luxembourg, whose status as a tax haven is notorious, could help them. The often complex mechanisms have been challenged in Europe as unethical, although they are legal. Yet few finance ministries in Africa, Africa Confidential understands, are even now aware of the amounts that are not being paid in tax.
One of the measures PwC advised multinationals to take was to create a wholly-owned Luxembourg-based subsidiary which would hold the rights to intellectual property used by the rest of the group. The rest of the group would then pay licensing fees to the Luxembourg-based subsidiary which, by agreement with the authorities, would be granted tax relief of up to 80%.
One company which has exploited this mechanism is the Belgian brewery Union des Brasseries Africaines, set up in Congo-Kinshasa in the 1960s by the late Michel Relecom. In a letter dated 23 September 2009 to Marius Kohl of Luxembourg’s corporate tax office, PwC explains that two Unibra subsidiaries had sold rights to two brands of beer to a Luxembourg-based company called Skol Development Africa (SDA). The subsidiaries were Skol International Developments Limited (SID), which owns the Skol brand brewed by the Brasserie de Guinée-Conakry (Sobragui), and the Luxembourg-based Skol International Development Luxembourg (SIDL), which owns the Skol International Beer brand, brewed by the Kinshasa-based Brasseries du Congo. Bracongo now belongs to the French Groupe Castel. The licences for these brands for other African countries were sold to SDA for 30 years. Paying the fee to the ‘owner’ of the brand in Luxembourg is also an additional expenditure which would reduce the company’s tax exposure in the African country.
The nominal value of both licences is 5.28 million euros (US$6 mn.) and their commercial value is estimated at €9 mn. However, the revenue which could flow to SDA could be much higher since Unibra’s plans are to sell them to 25 countries. Skol is currently available in Burundi, Comoros, Congo-Brazzaville, Kenya, Madagascar and Uganda. It also has its own breweries in Rwanda (Skol Brewery Limited) and Ethiopia (Zebidar Share Company).
A second tax avoidance mechanism simply involved the companies becoming incorporated in Luxembourg. In 2010, Luxembourg concluded an agreement with several companies of the Socfin (Société financière) agribusiness group, which was founded during the reign of Belgian King Leopold II by the late Belgian businessman Adrien Hallet. The companies chose Luxembourg as their base and made an agreement under which their dividends were subject to a modest 15% withholding tax, a lower figure than those in force where their farms are located (20% in Congo-K and Indonesia, 18% in Côte d’Ivoire).
Socfin’s Luxembourg-based companies would also benefit from a net wealth tax exemption. One of the companies incorporated in Luxembourg is the Socfinaf empire, in which the French Groupe Bolloré is minority shareholder. Socfinaf currently owns 85% of the palm-oil producer Socfin Agricultural Company Sierra Leone and 66% of Nigeria‘s Okomu Oil Palm Company, which produced 29,940 tonnes of oil and 8,380t. of rubber in 2012.
Socfinaf also controls 100% of the Liberian Agricultural Company’s LAC Rubber, which produced 14,950t. in 2012; 73% of the Société des caoutchoucs de Grand Béréby (SOGB) in Côte d’Ivoire (36,660t. of rubber and 30,800t. of palm oil in 2012) and 70% of another Ivorian company, Sud Comoé Caoutchouc (SCC), which produced 12,600t. of rubber in 2012. Socfinaf also holds 67% of the Cameroonian companies Société camerounaise de palmeraies (Socapalm) and Société africaine forestière et agricole du Cameroun (Safacam), which produced respectively 72,370t. and 11,160t. of palm oil in 2012.
Altogether, Socfin subsidiaries in Africa and Indonesia produced 123,660t. of rubber and 380,770t. of palm oil in 2012. The combined turnover of its main African subsidiaries reached €271 mn. in 2013. The list also includes the 100%-owned Plantations Socfinaf Ghana Ltd. (PSG) and Socfin-Brabanta (Congo-Kinshasa). Socfin also holds 88% of Agripalma in São Tomé e Príncipe and 5% of Red Lands Roses (Kenya).
PwC admitted that the deal was opaque, writing to the Luxembourg authorities: ‘Given that it is practically difficult to determine subsidiary by subsidiary the amount of undisclosed gains at the time of the conversion and to track the flow of dividends, a global approach should apply.’ The combined damage to African tax revenue is difficult to estimate but it is likely there is one since the tax that was once being paid to an African treasury is now being paid to the Grand Duchy of Luxembourg, and less of it.
A third mechanism involves cross-border lending within a group of companies. Companies registered in Luxembourg are exempt from tax on income from interest. Multinationals were thus able to structure their operations in such a way that profits from other countries could flow into Luxembourg as interest.
One example of this type of arrangement is an increase of the share capital through public offering in a subsidiary of Egypt’s giant Orascom group, Orascom Telecoms Holding (OTH), by its main shareholder, Italian-based Weather Investments (WI, now renamed Wind Investment). At the time of the transaction, this was owned by the family of Egyptian billionaire Naguib Onsi Sawiris, and controlled by the Russian telecommunications giant VimpelCom since 2011 (AC Vol 54 No 25, Vote on constitution nears). PwC suggested to Luxembourg that OTH grant to certain holders the right to subscribe for ordinary shares of OTH issued under the form of Global Depository Receipts (GDRs). Before carrying out the public offering, OTH was obliged to pay consent fees to first-generation shareholders to permit the transaction. GDRs have been attracting regulatory attention recently.
Accordingly, WI transferred €235 mn. in December 2009 to its Luxembourg subsidiary Weather Capital SARL, in the form of a ‘profit participating loan’, a financial instrument in which a loan is repaid through a proportion of profits earned by an enterprise. Weather Capital in turn transferred $355 mn. on 28 January 2010 to a new subsidiary, Weather Capital SP1 SA, via an interest-free subordinated loan. This company then lent $225 mn. to OTH. In such ways, corporate revenue or profits become redefined as loans or interest payments, which attract far less tax in most jurisdictions, Luxembourg’s being the most attractive in the European Union.
The founder of Moroccan private jet charter firm Dalia Air, Hind el Achchabi, used the Luxembourg-based Eurohold SA to acquire three Brazilian Embraer jets for $100 mn. in 2010. PwC negotiuated a tax agreement to allow Eurohold to purchase the aircraft and resell them to Dalia Air while another Luxembourg subsidiary obtained a loan to finance the operation from an unknown Moroccan bank. Under Luxembourg law, Eurohold could deduct the interest paid by Dalia.
Development experts and investigative journalists contacted by AC consider that the tax rulings which the ICIJ has uncovered are only the tip of the iceberg. Indeed, it’s more than likely, they said, that other major audit firms, such as Deloitte Touche Tohmatsu, KPMG and EY have negotiated similar deals with the Grand Duchy’s tax authorities. The true scale of financial flows through Luxembourg is therefore likely to be much greater.