Originally published on the CGS blog on March 8, 2014.
A company called Zambia Sugar, owned by a European corporation that operates in Zambia, has made an average profit of US$18 million a year over the past five years. During that same time, a Zambian woman named Caroline Muchanga has worked in a market in the same town in which the sugar company operates. Caroline sells drinks, sugar, and other assorted items, and works approximately 15 hours a day, seven days a week. On a good day, Caroline makes about $4 in income – about $1,400 a year. Her two daughters attend a volunteer-run school because the government schools are too costly and government subsidies inadequate.
The question that the non-profit Action Aid asked in its report on Zambia Sugar is simple yet astounding: who pays more in taxes to the Zambian government? Zambia Sugar or Caroline?
From 2008-2010, the answer was, resoundingly, Caroline. During that time, Zambia Sugar paid no taxes to the Zambian government. From 2011-2012, Zambia Sugar paid a tax rate of .5% of its income, roughly 90 times lower a rate than Caroline pays.
What is remarkable about this situation is that Zambia Sugar is doing nothing illegal.
Zambia Sugar routes its profits through a dizzying maze of international tax havens and subsidiary companies that includes stops in Ireland, Jersey, Mauritius, and South Africa. Doing so both reduces its taxable profits in Zambia and avoids taxes usually levied on the types of foreign transactions the company uses to avoid taxation in the first place. The details are complicated, the result is simple, and the impact on the world’s most vulnerable citizens is profound.
The British charity Christian Aid estimates that poor countries lose approximately $160 billion a year to corporate tax avoidance, while official development assistance (ODA) from the wealthiest governments in the world was just $125 billion in 2012. Those statistics are of particular relevance to some of the world’s poorest people who rely on tax revenues from their own countries to fund basic health and education services. In the very same district which Zambia Sugar operates, for example, patients wait hours to see a medical staff that is severely overtaxed and consistently short of medicines because the government cannot afford more. The clinic can’t reach people in the more rural areas as there is not enough funding to fuel medical vehicles. In this district, two children die every month of preventable malnutrition.
Meanwhile, corporations aren’t the only entities using tax havens to hide financial activity. Such havens also allow criminals, terrorists, and the perpetrators of financial fraud to launder money and avoid accountability. Shutting down these secrecy havens is a policy that cuts across ideological and political lines and works to usher in a global economic system that works better for the vast majority of the world’s people.
There are steps that the international community can take to tackle this issue. Last year’s G8 featured a historic declaration calling for such cooperation. The G20 in Russia several months later continued the momentum by calling for rules that would make it easier to force corporations to pay taxes in the county in which they are doing business. Automatic exchanges of information between G20 countries would improve transparency and communication. The Office of Economic Cooperation and Development (OECD) recently announced that the G20 had endorsed a plan to address tax avoidance schemes and would discuss implementation at the G20 meeting this September in Australia.
These are practical steps toward ensuring companies like Zambia Sugar contribute their fair share, so Carolina doesn’t have to make up the difference. These efforts deserve our support.
