February 18 2011 - A subsidiary of one of the world’s largest commodity trading companies stands accused of a series of tax irregularities in Zambia – a desperately poor developing country where life expectancy is 47 and tax revenues are urgently needed.
According to a leaked auditors’ report, the copper and cobalt mining company Mopani Copper Mines Plc may be using derivatives trades to shift profits out of Zambia in order to minimise its tax bill in the country. Swiss giant Glencore International AG has a 73 per cent interest in Mopani through one of its subsidiaries.
The leaked report follows a pilot audit of Mopani. According to the report, Mopani was also unable to satisfy auditors that its sales of copper, mostly to sister companies, were in line with the ‘arm’s length principle’ which is supposed to help prevent tax dodging in trades between different parts of the same company.
Nor did the company convince the auditors – from Grant Thornton and Econ Poyry – that its records of expenditure and income were trustworthy.
For instance, the audit report questions Mopani’s claim that its labour costs increased dramatically between 2005 and 2007, saying that ‘at least USD$50m of the USD$90 million is thus unexplainable.’
As a result of these and other concerns, the auditors suggest that Zambia’s tax authority should reassess the company’s tax bill.
‘We believe that the Mopani cost structure cannot be trusted to represent the true nature of the costs of the Mopani mining operation and that there is reason to follow up the uncovered inconsistencies in a more determined manner,’ say the auditors.
A Christian Aid partner in Zambia, the Centre for Trade Policy and Development, has also called on the government to investigate.
The report claims that there are unexplained irregularities in the company's documentation of expenses and supporting transactions and questions the legitimacy of Mopani's hedging pattern.
The auditors also complained about the lack of co-operation they say they initially received from the mining company. ‘Mopani has used every opportunity to hamper the progress of the audit and the audit team are at the moment not able to conclude whether the copper production from Mopani is trustworthy or not,‘ says the report.
In a statement to Christian Aid, a Glencore spokesman said: ‘We refute the conclusions of this draft report and we question the reasons for the manner in which it was leaked. This draft report contains factual errors and inaccuracies. It is based on broad and flawed statistical analysis and assumptions.
‘From the outset the report fails to recognize that Mopani is a tolling facility where 50 per cent of the copper it produces comes from its own mines and the rest is made from third party concentrates. This failure explains the inconsistent results and is the reason why the audit has been unable to reconcile figures. We have analysed the report in order to go through a proper process with the Zambian authorities.’
The statement also emphasised Mopani’s social and economic contributions to the local community, saying the company had created thousands of jobs and provided financial support for local schools, hospitals and other services.
It is unclear when the audit will be completed or a final report can be expected.
Mopani is the recipient of a 48 million Euro loan from the European Investment Bank, which is owned by EU member states. (See http://www.eib.org/projects/loans/2004/20040101.htm)
Savior Mwambwa, director of the Centre for Trade Policy and Development, said today: ‘The auditors’ report appears to confirm the claims of Zambian civil society that mining companies are depriving the people of Zambia of social and economic benefits that are rightly theirs through tax evasion and avoidance practices.
‘This is a wakeup call to the Government of Zambia to do a financial audit of all mining companies, so that the Zambian Revenue Authority can update its assessments of the tax owed. Donor countries should support this.’
David McNair, Senior Economic Justice Adviser at Christian Aid, said: ‘Given that tax abuse runs counter to European development policy, the European Investment Bank must investigate this issue urgently and, if necessary, review its lending practices’
Mopani Copper Mines Plc is a Zambian registered company, with Glencore International AG owning 73 per cent of the mine through one of its subsidiaries. The leaked report says that Glencore’s ownership is through Carlisa Investments Corporation. That corporation is incorporated in the British Virgin Islands.
Copper is hugely important to Zambia’s economy and accounts for around three- quarters of the value of its exports. The country is one of the eight largest copper producers in the world with the metal used to make wire, rods, brass and other products.
However, Christian Aid has previously highlighted the huge difference between the price that Zambia receives for its copper exports and the dramatically higher price that Switzerland receives when it exports apparently identical copper products.
Had Zambia been able to obtain the same prices as Switzerland, then it would have almost doubled the country’s GDP, which in 2008 was US$14.3 billion. For more details see: http://www.christianaid.org.uk/images/blowing-the-whistle-caweek-report.pdf.
A previous Christian Aid funded report into the poor returns Zambia receives from copper mining, For Whom the Wind Falls? can be found at: http://www.sarpn.org.za/documents/d0002403/Zambia_copper-mines_Lungu_Fraser.pdf
The pilot auditors’ report on Mopani was commissioned by Zambia’s tax authority, the Zambia Revenue Authority (ZRA), and is dated 2010 but only became public after it was obtained by non-governmental organisations.
According to Zambian media, the ZRA regretted the leaking of the report. The Zambian finance minister has said that the government will wait for the complete mining audit report before taking action.
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