Ramaphosa and MTN’s offshore stash
Emmanuel Mayah, Jeff Mbanga, Francis Kokutse and Nick Mathiason contributed to this joint investigation by the M&G Centre for Investigative Journalism (amaBhungane) and Finance Uncovered, a global reporting project involving journalists in 54 countries.
Shortly after Cyril Ramaphosa left MTN to become South Africa’s deputy president last year, he lashed out at companies that make profits “disappear” by shifting them “to low-tax operations where there is little or no genuine activity”.
But MTN, Africa’s biggest cellphone company, moved billions of rands earned in African countries to offshore tax havens while Ramaphosa chaired its board between 2001 and 2013. This was revealed in a joint investigation by ama¬Bhungane and Finance Uncovered, a global investigative journalism network.
Most of the money, which MTN badged as “management fees”, ended up on the Indian Ocean island of Mauritius, where the company employs no staff and appears to own little more than a postbox.
MTN said this did not amount to a tax avoidance scheme and that it “has not actively engaged in any unlawful activities”.
But it ducked questions about why the fees went to Mauritius in the first place and not straight to South Africa – where the people who provide the management services to its African subsidiaries are located.
Furthermore, authorities in South Africa, Nigeria, Ghana and Uganda have challenged MTN’s opaque and complicated offshore payments.
In Nigeria, the company was forced to reverse R2.5-billion in payments, and the Ugandan tax authorities have demanded that it repay more than R100-million. The fees are currently frozen in both Nigeria and Ghana.
This information comes at a critical time for companies like MTN. This week, the Organisation for Economic Co-operation and Development released proposals for new rules to combat tax dodging by multinationals.
Ramaphosa declined to answer questions.
Multinationals routinely pay management fees to other companies in their group. They often find it more efficient to centralise functions such as human resources management, procurement, and legal and finance services.
MTN told us it uses two such shared-service centres: one at its South African headquarters and the other in the Dubai International Financial Centre, a free trade zone with a 0% tax rate.
The billions that MTN’s African subsidiaries pay in management fees remunerate those offices for work that they do, MTN said.
There is no evidence that MTN’s offshore activities are illegal, but African tax authorities have become increasingly concerned about the scale of management fees paid to low-tax or no-tax jurisdictions.
Kennedy Onyoni, a spokesperson for the African Tax Administration Forum, a group of African government tax collectors that includes the South African Revenue Service (Sars), said African tax authorities report that these management fees “often look excessive”.
By shifting revenues from a high-tax country to a tax haven such as Mauritius, a company can lower its corporate tax bill. He added that sometimes fees are paid but “the tax administration discovers that, in fact, no services have been provided to the local company”, and added that telecommunications companies were among Africa’s worst tax dodgers.
Onyoni emphasised that he was not pointing a finger at any particular company.
Flowing offshore
MTN keeps the scale of its offshore management fees a tightly guarded secret. MTN spokesperson Chris Maroleng said: “There is no requirement to disclose the amount of fees received by any of these companies. MTN, therefore, does not publicly disclose management fees received and paid by its group companies.”
But public and secret company and government agency investigation documents from across Africa exposed the scale of the management fees, which MTN confirmed:
- A total of R3.7-billion was earmarked to flow from Nigeria to Dubai for the “ultimate benefit” of MTN International (Mauritius) from 2007 to 2013 – about 1.75% of Nigerian revenues. But MTN met resistance from the Nigerian government in 2013 and was forced to reverse R2.6-billion of this amount.
- A total of R85.6-million flowed from Uganda to Mauritius in 2009 alone. Representing 3% of Uganda’s revenues, this suggests that hundreds of millions might have flowed out over the years.
- A total of R3.7-billion went from Ghana to Dubai between 2008 and 2013, with an unknown portion flowing on to Mauritius. It’s calculated that the fees are a massive 9.6% of Ghana’s revenues in those years.
- A total of R512.9-million flowed from Côte d’Ivoire to Mauritius from 2012 to 2013. It’s estimated that the 2013 fee is 5% of the country’s revenues in that year.
Maroleng said MTN Mauritius was formed to hold the group’s global investments and to raise finance offshore. Initially there was also an exchange control benefit.
But he said it is fully taxed in South Africa: “There is therefore no tax benefit enjoyed by MTN as a result of the Mauritius entity.”
Since the turn of the century, cellphone use has exploded across the continent. Today, there are 685-million subscribers in Africa and more than a third of them – about 230-million – belong to MTN, making very large profits every year for the South African parent company and its shareholders.
The cellphone industry is a crucial source of African taxes. The telecommunications industry’s huge profits mean that companies like MTN are among the largest taxpayers.
But now some African governments are concerned about the effect of MTN’s management fees on their tax revenues.
Uganda pushes back
MTN has, for a number of years, haggled over the management fees in secret with Sars and the governments of Uganda, Nigeria and Ghana.
In December 2011, the Uganda Revenue Authority (URA) slapped a R467-million tax bill on MTN Uganda.
Of this, R106-million concerned a dispute over management fees paid by the Ugandan operation to MTN Mauritius between 2003 and 2009.
The Ugandans argued that these amounts should have been taxed before being shifted offshore, and challenged the substance of the fees.
The authority told the company: “There is no evidence that the services purported to have been provided to MTN subsidiaries were needed by MTN Uganda. If MTN Uganda did not need those services, then it should not pay for them.”
The URA said MTN had provided it with “very little” evidence for why the fees were deducted: “This information is very far from justifying a payment of 3% of MTN Uganda’s turnover as management fees.”
Four years later, the matter is still being argued before the courts, an MTN Uganda spokesperson said.
Maroleng said the matter was also currently the subject of discussions between the URA and Sars under the terms of a bilateral tax treaty. He added: “We do not want to pre-empt the outcome of these discussions.”
Nigerian fees on ice
For a brief moment in January 2013, MTN’s tax issues were aired in South Africa’s high court.
Ordinarily, disputes between Sars and taxpayers are argued in private in tax courts. In this case, MTN and Sars were fighting a battle over the company’s transfer pricing, but in an interlocutory offshoot, a technical issue was referred to open court and the judgment was made public.
In his verdict, Judge J Tlhapi said that, though it was not necessary for the details of the core tax dispute to be discussed, he would mention a few examples.
“These included issues around the management and royalty fees situation in MTN Nigeria; the failure to submit the management/royalty agreements in respect of Investcom [renamed MTN Dubai]; [and] questions on the arrangement or relationship regarding management/royalty fees between [MTN Mauritius], MTN Nigeria and MTN Dubai.”
Asked to explain this, MTN told amaBungane and Finance Uncovered: “We are not aware of any investigations by Sars connected to or flowing from the high court judgment mentioned above.” Sars declined to answer questions, citing South African tax secrecy laws.
Yet it was clear from the judgment that Sars was questioning aspects of MTN Nigeria’s management fee payments.
Pointing to further trouble, MTN disclosed in its 2013 annual report that it had “reversed” MTN Nigeria’s management fee allocations for 2013 and “prior years”.
When asked earlier this year to explain this, MTN stonewalled, indicating only that it related to “legislation around the payment of management fees, which is still under discussion”. Six months later, following a number of rounds of questions, MTN said its government permission to move the fees offshore had lapsed at the end of 2010.
In spite of this, MTN said it had continued to set aside R2.5-billion in fees for three years “with the hope that the [Nigerian National Office for Technology Acquisition and Promotion (Notap)] approval would be backdated to the day following the expiry of the previous approval”.
By 2013 this had not happened, and the full amount was reversed.
Almost five years after the permission lapsed, MTN said “discussions are ongoing with Notap to secure new approvals”. It would not explain the hold-up, but argued that “this is not a dispute”.
Notap did not respond to questions put to it.
Frozen in Ghana
For multinational companies to deduct management fees in Ghana, they need permission from the Ghana Investment Promotion Centre (GIPC), a government agency that regulates agreements such as MTN’s management fees.
MTN Ghana paid MTN Dubai management fees until its permission expired early last year and the fees were put on hold there too, the group disclosed in its annual report.
MTN would not explain why, but GIPC chief executive Mawuena Trebarh – who used to work for MTN Ghana as head of “government and regulatory relations” – said MTN had reapplied last year, but this was not approved “due to its noncompliance” with Ghanaian laws.
She said in August this year that a second application was being reviewed. Other questions, including whether she felt she had a conflict of interest, were put to her but these went unanswered.
The documents suggest there might be more to the Ghanaian issue than meets the eye. They reflect the findings of an investigation into MTN’s management fees by Ghana’s National Security Council Secretariat. According to sources, the investigation targeted various economic sectors and MTN was probed in 2012 and 2013.
The documents appear to analyse the provenance of MTN’s management fee agreement, which was structured in the years before MTN acquired the Ghana subsidiary in 2006 and it was approved by the GIPC.
In their findings, the investigators indicated there were “distressing” problems with the fees. They called for a “review of all technology transfer and management service agreements currently held by GIPC to remove sections which are inapplicable and wrongly provided for” and for GIPC’s staff to be better trained.
MTN said it was aware of the investigation but that there had been no finding against it.
Following MTN’s money
AmaBungane and Finance Uncovered followed MTN’s management fees as they flowed offshore from Africa to find out whether the full sum made its way to real offices staffed with people doing actual work to earn the money.
It did not.
- MTN’s African companies pay management fees to Dubai or Mauritius for “intellectual property rights and know-how” and also for “technical expertise and back-office support” in some cases, according to MTN;
- Only about 45% of the management fees paid by MTN’s Africa and Middle Eastern operations “compensate MTN Dubai for the services provided by the company”, said MTN spokesperson Maroleng. He said MTN Dubai employs 115 people;
- MTN Mauritius has no staff, Maroleng confirmed, saying it is “effectively managed” from South Africa; and
- According to company documents, MTN relies on the management fees and other amounts paid to Mauritius to service international loans. “Excess cash” then flows from MTN Mauritius to South Africa as dividends.
After several rounds of questions, MTN confirmed that not all the management fees received by MTN Mauritius are used to reimburse the South African offices for services provided.
Maroleng said MTN Mauritius does pay some management fees to two South African companies: MTN International (Pty) Ltd and MTN Group Ltd, but he refused to say how much.
However, the MTN Group’s accounts, which are publicly available, show it receives relatively tiny sums as management fees.
For example, in 2010, when MTN Mauritius received hundreds of millions of rands in management fees, only R58-million found its way to the MTN Group. It was not possible to establish what was paid to the other South African company.
The implication is that a large portion of MTN’s management fees are pooled in Mauritius, where the company uses them for purposes other than paying for management services.
This appears to undermine the basis for deducting these amounts from MTN’s Africa operations. The deductions mean there is less for the authorities in those source countries to tax.
Maroleng said that, in answering questions for this article, “we have also been able to satisfy ourselves that MTN has acted in full compliance with the law, in all the jurisdictions that it operates in, and that MTN has not actively engaged in any unlawful activities”.
Analysis: MTN’s Dubai revenues
MTN does not run a cellphone system in Dubai. Yet its subsidiary, MTN Dubai employs around 115 people who provide services to the MTN group. MTN told us that these include group procurement, group finance, legal services, human resources and other corporate functions.
MTN also told us that 45% of the billions of rand in management fees its subsidiaries send offshore are for services performed in Dubai.
The price paid for these services is a key question that tax authorities have to grapple with under transfer pricing rules.
International tax rules treat all companies as if they are independent entities, even if they are part of the same group. Tax authorities, therefore, have to determine whether the prices group companies pay each other are fair and “at arm’s length”.
This means that they should be comparable to prices that would be paid if the company was buying in services from an external provider.
If a company overcharges its revenue-producing companies for its services, that means that the company may be loading costs,which are tax-deductible, onto companies where it operates. In this way taxable profits could be reduced.
We have no evidence that MTN acts in this way. But as we reveal today, certain African tax authorities have queried the size of its management fees.
One tool that campaigners say will be helpful in establishing whether companies play fast and loose with the tax system is to look at company reporting on a country-by-country basis.
If a company makes huge revenues in a country where it has few employees but there is a low tax rate, it could suggest that there may be some profit-shifting taking place.
The Organisation for Economic Cooperation and Development (OECD) has recommended country-by-country reporting is one of the recommendations it has proposed as part of its base-erosion and profit-shifting reform package.
Currently companies only report their profits on a global consolidated basis. Our investigation ran into this problem, as MTN refused to disclose how much revenue it makes in Mauritius or Dubai.
However, by piecing together various documents we have been able to draw some conclusions about MTN’s revenues on a country-by-country basis.
We discovered that in 2013 the company set aside R758-million in fees from MTN Nigeria to pay to MTN Dubai – although this was reversed after pushback from the Nigerian government – and R783.5-million from MTN Ghana. The combined total is R1.5-billion.
Divide that by the number of employees MTN has in Dubai and each person accounts for R13.4-million in revenue.
Bear in mind that the fees come from just two of MTN’s many subsidiary companies.
MTN has confirmed that all the management fees collected from its operations outside South Africa and Swaziland are routed either through Mauritius or Dubai, so the figure is likely to be larger.
If we compare this to the average revenue per employee in other countries, we see that employees in Dubai generate substantially more income than in the rest of the company – other than in Nigeria.
In South Africa the company generates R5.5-million per worker; in Côte d’Ivoire R6.3-million; R5.7-million in Ghana; and R3.4-million in Uganda.
In Nigeria the company generates R14-million per employee, showing just how profitable the operation is there.
The difference between Nigeria and Dubai is that the Dubai operation is internal to MTN. It only sells its services to other MTN companies, whereas Nigeria receives money from its customers.
Of course, as MTN does not operate any cellphones in Dubai, it will also have significantly lower costs than other MTN companies, as it does not need to pay for shops or the infrastructure needed to run a cellphone company.
The picture is of a substantial amount of value being shifted from countries where MTN operates to Dubai, an emirate where the company enjoys a 0% tax rate.
There is no suggestion that MTN is doing anything unlawful with its Dubai operation. The high revenues the company books in Dubai may be a consequence of the company moving highly valued services there. It does not necessarily mean that MTN Dubai is overpricing its services to the rest of the group.
However, the fact that the company has chosen to locate its shared services in Dubai highlights the difficulties revenue authorities have in taxing multinationals, which can easily move operations around the world, playing different countries off against each another.
It also shows the difficulty facing tax authorities, which have to make judgments about the prices companies such as MTN Dubai are charging other MTN companies.
Because MTN Dubai only sells to other MTN companies, there is no market price, and authorities have to work out what the correct market price might be.
Some of the services MTN subsidiaries “buys” from Dubai would not normally be bought in – for example, procurement. For this reason there are few, if any real world comparables to look at. – George Turner
Ramaphosa: From Bermuda to Mauritius
Last year, it emerged that, while Cyril Ramaphosa was a member of Lonmin’s board, the ¬company moved millions of rands in ¬platinum revenues from South Africa to tax-free Bermuda.
The news broke weeks after Ramaphosa, South Africa’s deputy president, had argued before Parliament that the use of tax havens to make profits ¬“disappear” was a global problem, even if it was often done legally.
He said the South African government was grappling to stem these offshore flows.
Ramaphosa was also MTN’s nonexecutive chairperson from 2001 to 2013, when the company moved billions of rands from Africa to a company with no staff in Mauritius. He led the board that, according to MTN company documents, “considers, debates and adopts” MTN’s “strategic direction”.
The company’s official ¬filings and annual reports make it clear that repatriating earnings as ¬management fees and other ¬offshore remittances has been a “central pillar” of MTN’s strategy.
But Ramaphosa washed his hands of the matter when asked to comment.
His spokesperson, Ronnie Mamoepa, referred all questions to MTN, saying: “The government’s position on the broader question of tax evasion has been clearly articulated by the deputy president and other government leaders in Parliament and on other public platforms.” – Craig McKune
