Find us on Google+

Monday, 4 August 2008

Conning the Congos ?

A new Greenpeace report accuses foreign companies of employing a system of price fixing and off-shore accounts to avoid paying taxes on timber harvested from Congo and the DR Congo. Greenpeace said the losses to both countries in tax revenues between 2000 and 2006 could top $12 million -- or around 50 times the annual operating budget of Democratic Republic of Congo's Environment Ministry.

17 comments:

  1. Well there is a way around any dispute over profits, and that is simply collecting part of their turnover as taxes. There is no dispute about how many logs of timber are leaving the plantation.

    Another would be to nationalize all the corporations.

    ReplyDelete
  2. Didn't I describe this practise on this blog a few months ago ? Everybody that has some minimal knowledge of th etimber industry knows about it.

    Greenpeace said the losses to both countries in tax revenues between 2000 and 2006 could top $12 million -- or around 50 times the annual operating budget of Democratic Republic of Congo's Environment Ministry.

    Is that the right point of comparison ?
    I mean what is the collect revenue ? I bet comparing it to the operating budget of the ministry of environement would make it sound huge too.

    There is no dispute about how many logs of timber are leaving the plantation.

    That's what you think. With porous borders, corrupt government officials, and a weak tracking system (they use paint, nothing else), knowing the amount is far from obvious.

    Besides that, it's tropical timber, not copper. The value of the turnover itself depends on the declared sell price of the wood. And the market price is at best a "suggestion".Individual deals vary a lot.

    Another would be to nationalize all the corporations.

    That was done before.
    Oddly enough, the nationalized company managed to spend 20 years loosing money and never reinvested in machinery or anything.


    There are other solutions but they're not really sexy and government won't use them because it would minimize rent-seeking.

    ReplyDelete
  3. "Another would be to nationalize all the corporations."

    Nationalized companies don't work well in Africa in terms of revenu and reinvestment. The problem in Congo is the tracking. Everyone's for sale.

    But it is possible to have a decent tracking system, giving the example of the reforms in Katanga by Moïse Katumbi Chapwe. In this case the tracking system targets copper and cobalt.

    Eg at the chared borderpost of Kasumbalesa the revenue out of copper and cobalt ore for the congolese province of Katanga in the period jan-jun 2008 has already been higher than the total revenue in 2007 and 3,5 times higher than the total revenu in 2006.

    This, while the big boost in production will only have place in the second half of 2008 or even in 2009.

    Still, noone doubts the ongoing corruption in Kasumbalesa and the fact that revenus can still be significantly higher...

    so it s all about tracking the exports...

    ReplyDelete
  4. hmmm, no, CF.

    In this case, the companies are not doing anything illegal per se, they're not hidding timber logs at the port.

    They're selling them under value (and the value is taxed) to companies in the same groups to move the profits under another juridiction.

    Tracking wouldn't change much.

    ReplyDelete
  5. It would !!!

    ... because in Congo you often pay a portion tax per exported T (1000 kg). The market price doesn't matter to the tax revenu!

    EG in Katanga you pay 30 USD per ton transported by road, no matter the distance or value per pond of the copper/cobalt).

    ReplyDelete
  6. Yeah but that's in the copper (mining) industry !


    Read the report because that's exactly what they describe. Company A in the Congo sells under price at sister company B in Swtizerland, Germany, France, Belgium, Portugal who then sells at market price.

    The company in the Congo looses money but it doesn't matter because the sister company in the West makes all the profit.

    And as far as I know that's exactly how they do in Congo-Brazzaville and I doubt very much that things were very different on the other side.


    I guess the issue is that there's no such things as "timber price" to the same extend that there's a "copper price". Probably because we're talking about relatively rare and non-abundant tropical species and because each log is different.

    At equivalent size, those logs can go for very different prices depending on how good they are (i never understood how they judged good).

    If there is a flat-rate tax, it's probably not the one that is avoided in this case. It's the one that is proportional to value (and the tax on profits).

    ReplyDelete
  7. Ok, you re right, lol.

    Anyway, they probably paid a good amount of the missing tax under the counter.

    Don't forget that Congo lost 1,3 to 1,8 BILLION dollar in tax revenue for the booking year 2006/2007 (12 months!).

    These are official estimates for seven revenue services put out by the office of the prime minister, meaning the reality is even less flattering.

    The best way to avoid tax disputes is making them public. I believe each company in Africa should be obliged to do so till corruption has dropped dramatically.

    ReplyDelete
  8. Don't forget that Congo lost 1,3 to 1,8 BILLION dollar in tax revenue for the booking year 2006/2007 (12 months!). 

These are official estimates for seven revenue services put out by the office of the prime minister, meaning the reality is even less flattering.

    Oh I know that.
    That's why I was sort annoyed by the fact that the report decided to use the budget of the ministry of environment as a point of reference rather than I don't know, the total corruption or revenue.

    So yeah, it is small beans in the grand scheme of things. And it is Greenpeace.

    The best way to avoid tax disputes is making them public. I believe each company in Africa should be obliged to do so till corruption has dropped dramatically.

    Hmmm.. Not sure what it would change, especially in complicated cases like these.


    But yeah, why not.

    ReplyDelete
  9. CF,

    The best way to avoid tax disputes is making them public. I believe each company in Africa should be obliged to do so till corruption has dropped dramatically.

    Make all of public finances transparant and public. There has been an article in The Post recently, named "Ministers Oppose Proposal For Parliament Oversight Over Debt" by Mwala Kalaluka. Basically, the ministers urged everyone to 'trust the finance minister', instead of having parliamentary oversight.

    It is time that not only the transparancy of public finances, but the exploitation of natural resources was regulated in a continent wide legal framework.

    The AU and SADC should play a major role in that, but there is no reason why the WTO wouldn't be involved either.

    ReplyDelete
  10. Make all of public finances transparant and public. There has been an article in The Post recently, named "Ministers Oppose Proposal For Parliament Oversight Over Debt" by Mwala Kalaluka. Basically, the ministers urged everyone to 'trust the finance minister', instead of having parliamentary oversight.

    It is time that not only the transparancy of public finances, but the exploitation of natural resources was regulated in a continent wide legal framework.

    The AU and SADC should play a major role in that, but there is no reason why the WTO wouldn't be involved either.


    ^^^great ideas (especially the ones about involving AU and regional organs)

    (and i mean it)

    ReplyDelete
  11. CF,

    "Another would be to nationalize all the corporations."

    Nationalized companies don't work well in Africa in terms of revenu and reinvestment. The problem in Congo is the tracking. Everyone's for sale.

    They work well enough in Saudi Arabia (SAUDI ARAMCO) and Botswana (not exactly nationalized, but a single national company that is a joint venture between the Botswanan state and DeBeers - Debswana).

    With the right legislative framework in place (hiring on merit, no crony or family member hires, open bidding processes, etc.) it could work anywhere.

    But it is possible to have a decent tracking system, giving the example of the reforms in Katanga by Moïse Katumbi Chapwe. In this case the tracking system targets copper and cobalt.

    Which is why I suggested that turnover can be taxed. It is much easier to track how many logs leave a tree plantation or how many trucks with ore leave a mine, than it is to find out how much profit a company made, which means you have to find out what their real costs are, etc.

    so it s all about tracking the exports...

    A government agency could even track production on a per mine basis. If there was a law that said all mines and logging operations must have a government officer present and signing off every day trucks left a mine, it would effectively create miniature border posts and would track every single truck in the country. Every mine without a government officer would automatically be illegal. And because of the increase in revenues, the process would be self-financing.

    ReplyDelete
  12. With the right legislative framework in place (hiring on merit, no crony or family member hires, open bidding processes, etc.) it could work anywhere.

    You neglect less corrupt but still bad hiring issues.
    You know, the tendency to overstaff to provide "jobs".

    If you add autonomy with the parliament defining a charter, it'll be more complete.

    Which is why I suggested that turnover can be taxed. It is much easier to track how many logs leave a tree plantation or how many trucks with ore leave a mine, than it is to find out how much profit a company made, which means you have to find out what their real costs are, etc.

    But how do you establish your tax on those logs ?
    Once again, it's not copper. It's hard to know what's the average price of logs because they vary wildly.

    A government agency could even track production on a per mine basis. If there was a law that said all mines and logging operations must have a government officer present and signing off every day trucks left a mine, it would effectively create miniature border posts and would track every single truck in the country.

    That is the case in Congo-Brazzaville. There are quotas, checks at the port (Bzv and PN), taxes collected etc..
    The issue is once again, that rare tropical timber logs have no "set" value.

    ReplyDelete
  13. So I asked my mother (who used to work in the timber industry in the Congo) a few questions:

    - In the Republic of Congo at least, there are wood-specific taxes which are based on a percentage of a set-value of log by species. The value is set by the government every year. They also use a age, quality (4 grades scale), size elements. On that one, it's quite hard to use creative accounting and underselling (the quality and age are self-declared but there are random inspections).

    - There is no such thing as a "market value" of that timber. In fact, in the negotiations, the logs have individual prices. And beyond that, it's quite an old school market with individual buyers and individual sellers building long term relationships. Also, the price set by the government for tax purposes, because it was sort of arbitrary, could be either over or under the final sale value. Not surprisingly, orders, which kind of wood gets cut was more or less affected by that set value.

    - So in short, the "tax fraud" in this case, only applies to the main Corporate Tax rate and possibly to VAT, tarrifs and stuff (although, undervaluing a machine to excape tarriffs prevents you from using its real value in your loss calculations).


    So yeah, it's a complicated thing and with $12 millions of lost revenue in 6 years in both countries , I really think Amnesty International is making it a bigger issue than it is.

    ReplyDelete
  14. "They work well enough in Saudi Arabia (SAUDI ARAMCO) and Botswana (not exactly nationalized, but a single national company that is a joint venture between the Botswanan state and DeBeers - Debswana)."

    They don't work in Africa! Joint ventures are another story, they mostly work because of private interest.

    Eg an investment in road infrastructure by both the private and public sector: much of the "péages" (direct taxing on highways in between roadblocks) is done by joint ventures, money is cashed by highly paid workers of the private company because the private company needs a return on investment. when government does it alone they tend to set minimum revenue goals, which are hardly met. Each privatisation in Africa ended up being a scheme for politicians to cash in.

    ------------

    "CF: The best way to avoid tax disputes is making them public. I believe each company in Africa should be obliged to do so till corruption has dropped dramatically.

    RA: Hmmm.. Not sure what it would change, especially in complicated cases like these."

    It would change alot. You actually see that corruption is lower when big companies are involved, simply because of the fact that they have the obligation to publish their results by term.

    A small non-listed company doesnt, so who cares to whom they pay their taxes. For them it s about getting things done, whether the money slips straight into the pockets of minister X, general Y or administrator Z... it's not their problem as noone's watching them.

    So if everyone would be force to publicly declare their taxes, it would make a great difference ... because at least politicians can't say the money never existed

    ------------

    " Mrk: Make all of public finances transparant and public. There has been an article in The Post recently, named "Ministers Oppose Proposal For Parliament Oversight Over Debt" by Mwala Kalaluka. Basically, the ministers urged everyone to 'trust the finance minister', instead of having parliamentary oversight."

    I know, it's sad... makes me wonder where our beloved country is heading. I was never a big supporter of the cabbage but settled for him by lack of an alternative and because of his anti-corruption legacy.

    I was however in ZED recently and most of my friends actually do things we as european zambians can't really relate to (use of company resources to get girlfriends over from lsk, arranging fake vouchers to share profits, paying weekend fees to personnel of the zra, etc). These are my age so not 30 yet! It made me scared ZED can take a wrong turn in the near future. Let's pray for the best.

    ReplyDelete
  15. CF,

    Each privatisation in Africa ended up being a scheme for politicians to cash in.

    The key to parastatals is oversight through having a transparant legal framework and no secrecy - right down to procurement and hiring.

    Privatisation is another matter, as it is often more like a fire sale, the way the IMF goes about things.

    I know, it's sad... makes me wonder where our beloved country is heading.

    Actually I am pretty optimistic about this. The lack of transparancy is being challenged and answered to by ministers in public.

    This is a start, and with a continuous effort, the right catalist will come along (usually a scandal) and it will become impossible for the government to remain secretive.

    Especially if the donors are leant on, because they cannot justify turning a blind eye to blatant corruption to their own constituencies. And the press should pay a major part in that too.

    The people of the JCTR are doing great work, more (real) civil society organisations will follow. Which is why the corruption of civil society organisations by the US and UK in Zimbabwe and by the mines in Zambia is so evil and destructive. These organisations, like JCTR should at all times express the true will of the people.

    Also, handing over assets to private companies (profits) because they have a better existing legal framework is a very high price to pay, and a unnecessary one. All we need is good legal frameworks for business and government that ensure transparancy and accountability.

    And I'm not against joint ventures, as long as provisions are made to keep most of the profits inside the country.

    ReplyDelete
  16. "Cho: Actually I am pretty optimistic about this. The lack of transparancy is being challenged and answered to by ministers in public.

    This is a start, and with a continuous effort, the right catalist will come along (usually a scandal) and it will become impossible for the government to remain secretive."

    I truly applaud the work that has been done. Things are so much better than 10y ago.

    But i believe that politics reflects the mentality of the masses. And for my age group 25-35 there's a long road ahead. I have higher hopes however for nephews who are in their early teens and think differently from me at that age.

    Everyone knows corruption is rampant within institutions of the EU but in some strange way it's under control. In my humble opinion because it's not accepted in society.

    Rotten apples are to be found worldwide but society can or cannot facilitate certain things.

    Let me give some random examples...

    In ZED it is still considered to be normal...

    -for college lecturers to sex students thanking her with higher grades.
    -for businesses to pay of zra agents to get "reasonable" (yes i quote) tax returns.
    -to aspire for a job in the accountancy department of a company "to get access to the resources" (indeed I quote).
    -for countrymen and foreigners (from greeks to lebanese to indians to west-africans) to get rich on the back of Zambians by illegal trade.

    The day these things are no longer considered to be normal (because they are today openly and constantly discussed on braais and over drinks) is for me the day Zambia is def on the right track.

    Till then, i'm sceptical about a possible return of the old ways.

    ReplyDelete
  17. CF,

    All I know about Zimbabwe is that you can catch the MDC out in lie after lie. See this interview with Roy Bennett on Hardball.

    Add to that, the fast that the BBC relies solely on the MDC for information about Zimbabwe, and we should all disregard the mainstream media reporting and their perceived wisdom of what is going on in Zimbabwe.

    ReplyDelete

All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.