Public officers entrusted to negotiate foreign investment deals with multinational companies are letting down Malawians as the country is understandably losing out through tax avoidance by these companies while paying pittance in loyalties.
A case study by Action Aid has exposed it all in the way Paladin Africa beat government at its own game in the Kayerekera Uranium Mine development agreement.
Lack of negotiating skills, knowledge of mining technicalities and tax avoidance tricks used by multinational companies have cost the country at least US$43 million within the six-year operating period by Paladin.
This happened, among others, through a trick the company used to create a ‘briefcase’ company in Netherlands, a country known to be a tax haven and was in a double taxation treaty with Malawi between 2009 and 2014. The company suspended operations in the same year the two countries treaty expired.
Paladin is said to have been transferring money to Netherlands en-route to Australia without paying any taxes and also paid management fees to the Netherlands subsidiary for providing technical services to Kayerekera yet there were no such services since that company never existed practically but on paper.
“Between 2009 and 2014, Paladin Africa paid management fees of US$134.5 million to Paladin Netherlands BV- a company which has no staff. Paladin Netherlands BV in turn paid an almost identical sum of money as management fees back to the parent company in Australia- Paladin Energy limited,” said the Action Aid report titled ‘An Extractive Affair’.
If this amount was transferred directly to Australia, a company that has no such treaty with Malawi government would have charged 15 percent withholding tax.
The report further says Paladin Africa Limited is financed by a very high proportion of debt at 80 percent as compared to equity at 20 percent hence thinly capitalised, yet the loans are from other Paladin companies and this is against Reserve Bank of Malawi regulations whose acceptable debt equity ratio is not in excess of 66.6 percent.
By allowing Paladin Africa’s thin capitalisation on Kayerekera, the company has been allowed to transfer US$48 million in interest payment to the Netherlands based sister company, another trick the company used to outsmart government.
However, Paladin Africa Managing Director, Greg Walker said through an email response that Malawi would not have benefited hundreds of millions of US dollars without the mining investment, adding that in fact, the country’s loyalty rate of 5 percent is the highest in Sadc and one of the highest in Africa at an average of 3 percent.
In a letter that he said was a response to Action Aid UK during the research, Walker said it is unfair to suggest that the negotiating team from government, that included Keith Hammond from the UK Ministry of Finance throughout the period of negotiation, was incapable.
“If the project had not proceeded, revenue loss to the government would have been US$10,479,717, which is the total amount paid in royalties by Paladin to the Government in the period from 01 April 2009 to 30 April 2015. The Government would also have foregone some US$38,170,424 in payroll tax, withholding tax and non-residence tax during this period,” said Walker in the letter forwarded to us.
On the establishment of Paladin subsidiary in Netherlands, he said that country was preferred for a variety of reasons, including being in the same time zone as Malawi (both GMT +2), its proximity to key European and North America energy markets and customers and its favourable legal, fiscal and immigration regimes.
“The Netherlands is a commonly chosen location for entities carrying out the broad ‘holding and financing’ role that (the subsidiary) was established to carry on,” said Walker, who claimed Action Aid did not invite the company during the report launch.
He further explained in the letter that the transfer of the shares in Paladin Africa to Paladin Netherlands BV has not occurred to date for a variety of commercial, corporate and regulatory reasons unrelated to tax, “however the intended transfer of the shares in Paladin Africa was another key consideration in establishing PNBV in 2007 (as part of its international holding company role).”
Walker explained that as part of the development of the Project, Paladin Africa also entered into a management services agreement (MSA) with Paladin Netherlands BV, to help expertise to procure services globally on behalf of Paladin Africa from the most appropriate service providers whenever there was need.
An attempt to get comments from the Ministry of Finance failed as Spokesperson Nations Msowoya said he would call back after the issue was introduced to him for the Ministry’s comment.