ActionAid raised red flags in 2015 on “harmful” tax incentives that Malawi government awarded to Australian mining company Paladin

* This money could have paid for 431,000 annual HIV/AIDS treatments

* or 17,000 annual nurses salaries;

* or 8,500 annual doctors’ salaries

* or 39,000 annual teachers salaries

By Duncan Mlanjira

ActionAid, the global federation working for a world free from poverty and injustice, contended in a issued in 2015 that Malawi, “the poorest country in the world, lost out on US$43 million in revenue from 2009 to 2015 from a single company — the Australian mining company Paladin”.

The report raised serious red flags then, saying the money was lost through a combination of harmful tax incentives from the Malawi government, and tax planning using treaty shopping by Paladin.

“This money could have paid for 431,000 annual HIV/AIDS treatments; or 17,000 annual nurses salaries; or 8,500 annual doctors’ salaries; or 39,000 annual teachers salaries.

“What has happened is not illegal – on the contrary, the combination of tax breaks and tax planning that has resulted in this loss of crucial funds is a result of Malawian and international laws, treaties and agreements.

“People around the world are outraged that companies get away with paying less tax while the rest of us contribute our fair share.”

Paladin unceremoniously stopped mining activities at Kayelekera in Karonga in 2014 after uranium prices slumped on the world market.

ActionAid maintained that the report, from its survey, shows how governments and international tax rules allow this to happen, emphasizing that tax pays for public services such as education, health care and social services, crucial for women, who often end up as the unpaid providers in the absence of decent public services.

“It also pays for infrastructure to provide clean water, functioning roads and communication systems, all of which are essential for a country to develop and for business to operate.

“For most countries, tax revenue is also the most important, sustainable and predictable source of public finance. For the poorest countries especially, tax revenue is key to ensure they have the funds needed to fund their development without being reliant on foreign aid.”

The global NGO further took cognizance that ensuring that enough tax revenue is raised to fund essential services and infrastructure projects “should, therefore, be a key priority for all countries”.

“Yet, developing countries lose billions of US dollars in potential tax revenue each year by giving international companies harmful tax breaks, while some international companies engage in tax planning to pay less tax in developing countries.

“The global network of tax treaties facilitates this. The compound effects of harmful tax breaks and corporate tax planning is devastating for the finances of developing countries.”

The report quoted ActionAid’s previous reports such as ‘Calling Time – Why SABMiller should stop dodging taxes in Africa’ and ‘Sweet Nothings – the human costs of a British sugar giant avoiding taxes in southern Africa,’ — which indicated development effects of tax dodging by multinational companies in countries such as Ghana and Zambia.

“Together with those reports, the findings in this report demonstrate that this is a systematic problem in poor countries, and these are not isolated cases – rather, it is business as usual.

“The solutions to the problems that tax dodging by multinational companies cause must therefore be addressed on a systematic rather than a case-by-case basis.”

The report indicated that Malawi is the world’s poorest country, whose average life expectancy is just 55 years and that around 10% of Malawians are living with HIV/AIDS — yet there are only 4% as many nurses per person as in the Netherlands, and 3% as many as in Australia.

“This is a country where more funds for public services are desperately needed. With tax being the most important and predictable source of income for poor countries to fund their development, ensuring that multinationals operating in their country pay their fair share of taxes should be a priority for all developing country governments.”

ActionAid maintained that Paladin got away with dodging tax “because the Malawian government and the international tax system let them”, saying: “Before starting up operations in Malawi, Paladin managed to negotiate a tax break which saw them lower some tax rates in Malawi and exempt them from paying some taxes altogether.

“This included a lowering of the so-called ‘royalty rate’ that Paladin pays for the right to extract uranium. Royalties can be thought of as a one off payment for the natural resources being removed from the country rather than as a tax on economic activity.

“This rate was lowered from the normal 5% of sales to 1.5% of sales for the first three years and then 3% in all subsequent years. So far, this tax break — which was negotiated in secret without public scrutiny — has cost Malawi US$15.635 million.

“This tax break was, however, not enough for Paladin, who found other ways to lower their tax contributions in Malawi. Normally companies have to pay a so-called withholding tax when they pay e.g. interest payments or management fees from Malawi to another country.

“Until 2014, however, Malawi did have a tax treaty with the Netherlands which meant that companies did not have to pay the 15% withholding tax normally applicable to interest payments and management fees transferred abroad.”

The report further exposed that Paladin set up another subsidiary in the Netherlands, “which had no employees” but received a total of US$183.5 million between 2009 and 2014 in interest payments and management fees — money which was then sent on to Australia without being taxed in the Netherlands”.

“One of the reasons the payments were so large was that the Malawian subsidiary was financed with a very large loan (80% of its total capital) from an intra-company loan which in turn required it to make very large interest payments.

“By routing its loan from Malawi to Australia via the Netherlands, Paladin lowered its withholding taxes in Malawi by more than US$27.5 million over six years. Between the lowered royalty rates and the avoided withholding taxes, Paladin lowered its tax contributions to Malawi by more than US$43 million.

ActionAid stressed that “this is clearly not how things should work”, saying: “The Malawi government, therefore, needs to make sure that it doesn’t hand out tax breaks that prevent it from raising the revenues it needs to fund public services and development plans.

“One way of doing this is to ensure that any tax incentives are subject to parliamentary and public scrutiny before being signed; but also to continuously monitor whether any tax incentives given are actually beneficial to the Malawian people.

“Malawi should also review its network of tax treaties to ensure that companies cannot do what Paladin did and shift money around the globe to pay less tax in Malawi.

“The process of negotiating tax treaties should be subject to public scrutiny before signature. The Malawi government should also publish the details of all new and existing mining agreements.

“The responsibility for this does, however, go beyond Malawi. Rich countries need to review their tax treaties and agree to the removal of provisions which prevent poorer countries from applying rates of withholding tax which are set out in their domestic law.

“They also need to review their domestic tax law and treaties to identify, then reform, any laws which have harmful effects on the ability of developing countries to raise revenue.

“Paladin and other multinational companies operating in poor countries should avoid asking for discretionary tax breaks when negotiating future mining deals with governments. They should also stop shifting payments and profits around the globe thereby reducing their taxes in developing countries.”

What this case also crucially showed, the report further said, “is that despite the reform agenda mandated by the G8 and G20, the international tax system is still not working for poor countries”.

“If the world’s poorest countries — such as Malawi — are to fund their development they must be able to make multinational companies operating in their countries pay their fair share of tax.

“That will require countries themselves not handing out harmful tax and royalty exemptions, but also a fundamental rethink of how the international tax system works to avoid a situation where multinationals can minimise their tax contributions in developing countries.”

In 2020, Malawi government gave Paladin consent to sell off all its 85% shares in Kayelekera uranium mine in Karonga to another Australian mining firm, Lotus Natural Resources Limited.

Deputy director of mines in the Ministry of Energy, Mines and Natural Resources, Peter Chilowomanga was quoted then confirming that the Ministry of Finance gave the go ahead to Paladin to sell off the shares, saying the country’s laws do not bar companies from selling shares in their companies.

But an interview with the media, mining activist, Kossam Munthali accused the government then of lacking transparency in the way it gave consent to Paladin to sell off the shares, saying there were no consultations on the matter — that even the Karonga District Council was kept in the dark on the matter.