The latest report from the Washington-based Global Financial Integrity places Zambia’s losses at billions of dollars through the infamous transfer pricing the UK-based Guardian recently wrote about.
Sarah Freitas, an economist at the Washington-based organisation shows through a study that Zambia lost about US$8.8 billion between 2001 and 2010 due to multi-national companies, mostly mines, cheating their way out of remitting proper taxes, according to the Global Financial Integrity report.
The report, which does not look at Zambia alone, describes illicit financial flows from developing countries as the proceeds of crime, corruption and tax evasion which keep eluding countries such as Zambia.
Illicit financial flows are a type of capital flight and have been a persistent plague on the developing world for some time now.
Our research finds that US$8.8 billion left Zambia in illicit financial flows between 2001 and 2010. Of that, US$4.9 billion can be attributed to trade misinvoicing, which is a type of trade fraud used by commercial importers and exporters around the world such as mining companies.
This is a very serious problem for Zambia even up to now, says the report.
Zambia’s gross domestic product (GDP) was US$19.2 billion in 2011. Its per capita GDP was US$1,413 while government collected a total of US$4.3 billion in revenue only.
“It [Zambia] can’t afford to be hemorrhaging illicit capital in such staggering amounts,” the report states.
In previous reports, the Washington-based organisation has proven that illicit financial flows drive the underground economy.
This means that as criminals and tax evaders such as mining companies avoid law enforcement and move their money overseas, it becomes easier for them to operate in Zambia quite cheaply.
The underground economy becomes bigger, which makes it even more difficult for the Zambian government to collect taxes. This in turn drives illicit financial flows further, completing the vicious feedback loop as Zambians starve despite being mineral-rich.
These illicit outflows come on top of tremendous outflows from legal corporate tax avoidance. US$2 billion is lost yearly to tax avoidance by multi-national corporations operating in Zambia, according to the Washington-based organisation citing Deputy Minister of Finance Miles Sampa.
Most of this tax avoidance is due to abusive transfer pricing - which is a type of quasi-legal trade misinvoicing - in the mining sector.
According to Mr Sampa, of all the major multi-nationals that export record amounts of copper and other metals out of Zambia, just “one or two” officially recorded a profit, and therefore pay no corporate tax.
Mr Sampa discusses a new law to close corporate tax avoidance loopholes and perhaps raise an estimated US$1.5 billion per year as Zambia tries to cut its losses.
Mr Sampa in an interview with the Washington-based organisation asks, “How many hospitals can that build? How many roads can that help us develop?”
The type of tax avoidance that Mr Sampa is referring to cannot be easily picked up because the activity is not explicitly illicit and because it occurs between two branches of a multi-national corporation, and therefore is not reflected in the International Monetary Fund direction of trade statistics used to calculate illicit financial flows.
Tax revenue loss from capital flight means less to spend on not only education and transportation infrastructure, but also on health, providing clean water and generally building up society.
It means more money has to be borrowed from abroad and it strains aid budgets. If Zambia were to collect an extra US$2 billion per year in revenue from curtailing both illicit financial flows and legal tax avoidance, it could increase government’s budget by 46 percent.
But on top of the tax revenue lost, Zambians need Zambian wealth to stay in Zambia, says the report.
When a mining company moves money out of the country instead of paying corporate tax on earnings, it drains much-needed capital from the economy. Money that stays in the country will provide a compounding boost to the Zambian economy every single year, as it will be invested in the private sector.
Zambia has the natural resource wealth to dig - literally and figuratively - its way out of poverty, but only if the West acts at the same time. Zambia cannot do this alone, adds the report.
The extra money could be siphoned off to the offshore bank accounts of corrupt public officials, or companies could find new ways to legally pretend that their profits were made elsewhere.
In Zambia, a constantly referred to case is that of the Glencore-owned Mopani Copper Mines that was accused of understating its profits while overstating its costs, an accusation its former chief executive officer Emmanuel Mutati denied during a BBC interview.
Others that have been placed on the spot for ‘avoiding’ tax are SABMiller-owned Zambian Breweries that have also denied the charge from Action Aid, a non-governmental organisation.
In September, President Sata announced measures to curb capital flight by receipting all mineral exports through the Bank of Zambia but up to now the step has remained on ice as the country continues to lose money it cannot afford to. - Global Financial IntegritY.
Sarah Freitas, an economist at the Washington-based organisation shows through a study that Zambia lost about US$8.8 billion between 2001 and 2010 due to multi-national companies, mostly mines, cheating their way out of remitting proper taxes, according to the Global Financial Integrity report.
The report, which does not look at Zambia alone, describes illicit financial flows from developing countries as the proceeds of crime, corruption and tax evasion which keep eluding countries such as Zambia.
Illicit financial flows are a type of capital flight and have been a persistent plague on the developing world for some time now.
Our research finds that US$8.8 billion left Zambia in illicit financial flows between 2001 and 2010. Of that, US$4.9 billion can be attributed to trade misinvoicing, which is a type of trade fraud used by commercial importers and exporters around the world such as mining companies.
This is a very serious problem for Zambia even up to now, says the report.
Zambia’s gross domestic product (GDP) was US$19.2 billion in 2011. Its per capita GDP was US$1,413 while government collected a total of US$4.3 billion in revenue only.
“It [Zambia] can’t afford to be hemorrhaging illicit capital in such staggering amounts,” the report states.
In previous reports, the Washington-based organisation has proven that illicit financial flows drive the underground economy.
This means that as criminals and tax evaders such as mining companies avoid law enforcement and move their money overseas, it becomes easier for them to operate in Zambia quite cheaply.
The underground economy becomes bigger, which makes it even more difficult for the Zambian government to collect taxes. This in turn drives illicit financial flows further, completing the vicious feedback loop as Zambians starve despite being mineral-rich.
These illicit outflows come on top of tremendous outflows from legal corporate tax avoidance. US$2 billion is lost yearly to tax avoidance by multi-national corporations operating in Zambia, according to the Washington-based organisation citing Deputy Minister of Finance Miles Sampa.
Most of this tax avoidance is due to abusive transfer pricing - which is a type of quasi-legal trade misinvoicing - in the mining sector.
According to Mr Sampa, of all the major multi-nationals that export record amounts of copper and other metals out of Zambia, just “one or two” officially recorded a profit, and therefore pay no corporate tax.
Mr Sampa discusses a new law to close corporate tax avoidance loopholes and perhaps raise an estimated US$1.5 billion per year as Zambia tries to cut its losses.
Mr Sampa in an interview with the Washington-based organisation asks, “How many hospitals can that build? How many roads can that help us develop?”
The type of tax avoidance that Mr Sampa is referring to cannot be easily picked up because the activity is not explicitly illicit and because it occurs between two branches of a multi-national corporation, and therefore is not reflected in the International Monetary Fund direction of trade statistics used to calculate illicit financial flows.
Tax revenue loss from capital flight means less to spend on not only education and transportation infrastructure, but also on health, providing clean water and generally building up society.
It means more money has to be borrowed from abroad and it strains aid budgets. If Zambia were to collect an extra US$2 billion per year in revenue from curtailing both illicit financial flows and legal tax avoidance, it could increase government’s budget by 46 percent.
But on top of the tax revenue lost, Zambians need Zambian wealth to stay in Zambia, says the report.
When a mining company moves money out of the country instead of paying corporate tax on earnings, it drains much-needed capital from the economy. Money that stays in the country will provide a compounding boost to the Zambian economy every single year, as it will be invested in the private sector.
Zambia has the natural resource wealth to dig - literally and figuratively - its way out of poverty, but only if the West acts at the same time. Zambia cannot do this alone, adds the report.
The extra money could be siphoned off to the offshore bank accounts of corrupt public officials, or companies could find new ways to legally pretend that their profits were made elsewhere.
In Zambia, a constantly referred to case is that of the Glencore-owned Mopani Copper Mines that was accused of understating its profits while overstating its costs, an accusation its former chief executive officer Emmanuel Mutati denied during a BBC interview.
Others that have been placed on the spot for ‘avoiding’ tax are SABMiller-owned Zambian Breweries that have also denied the charge from Action Aid, a non-governmental organisation.
In September, President Sata announced measures to curb capital flight by receipting all mineral exports through the Bank of Zambia but up to now the step has remained on ice as the country continues to lose money it cannot afford to. - Global Financial IntegritY.
