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EU Development Funds Doing More Harm than Good: EIB Supports Company that Dodges Taxes in Zambia

April 14, 2011

By Berber Verpoest and María José Romero

María José Romero is the Task Force's Regional Advocate for Latin America. She is based out of Lima, Peru.

Berber Verpoest is Media and Advocacy Coordinator at Counter Balance in Brussels.

European Investment Bank

The European Investment Bank in Luxembourg City

The EU must prove itself as a promoter of development, by ensuring that more funds flow from the North to the South rather than vice versa. The case of tax-dodging Zambian copper mining company Mopani, shows that money from the ‘EU bank’ – The European Investment Bank (EIB) – continues to find its way into tax havens.

The EU likes to purvey itself as a benefactor for the developing world. It is the largest ODA donor and proponent of many policy documents underwriting its engagement to promote sustainable development in developing countries. However, partly due to a lack of regulation at the EU level, developing countries lose more than one and half times the amount of development aid they receive, in lost tax revenue due to transfer mispricing by multinational companies. This amounts to USD 160  billion, and is a serious blow to the EU’s image.

Tough stances on tax havens taken by European leaders contrast sharply with the actions of the EU. Strong posturing by Nicolas Sarkozy and Gordon Brown after the financial crisis in 2008 strongly contrast with the actions the EU has undertaken to stop huge capital flows to offshore financial centres. Efforts to define tax havens – such as the OECD grey/black lists – have been undermined, and transparency rules for banks and multinational corporations are still not in place.

As a result this ‘reverse welfare’ mechanism stays in place, seriously affecting the sovereignty of Southern governments and their ability to operate independently from foreign aid. The fact that even EU development money ends up in tax havens by using illegal practices such as transfer mispricing makes it even more severe.

Early march, a leaked tax audit revealed how Zambian Mopani Copper Mine (MCM) siphoned its profits out of Zambia without paying taxes, to the benefit of its Swiss based mother company Glencore. The EIB – whose African loans should foster sustainable development – granted MCM a €48 million loan.

The audit, on demand of the Zambian government, found – among other irregularities – that the company has been both artificially inflating costs and using transfer mispricing tactics, meaning that it sold its commodities much below market prices to its mother company to minimise the profits in order to pay less tax. Five NGOs found this is against the OECD’s arm’s length principles and filed a complaint on 13 April against Glencore and First Quantum, the shareholders of Mopani.

It is unsurprising that this case escaped the notice of the EIB, considering the bank’s weak tax haven policy. It was only updated in December 2010, and references in the updated version to the insufficient OECD blacklist show that even now it is not up to standard.

The value of the Mopani case is that it highlights how EU development money risks doing more harm than good when EU regulations regarding transparency of financial flows are not put in place.

As the EU bank is bound to EU policies and regulations, this is the most important and effective level to adopt changes – and would simultaneously apply to a whole range of other actors (companies, financial institutions, individuals).

Which regulations could help prevent development money flowing to tax havens?

One option is to promote the multilateral convention that makes the exchange of tax information automatic between signing parties. This would allow governments to track where its rich elites store their fortunes but it would only be effective if developed and developing countries participate. The only way to do so is to force them for example by labeling non-signing parties as uncooperative and taking measures against them accordingly.

Another option should be including legally binding measures at EU level on country-by-country reporting which obligates multinational corporations to breakdown their financial report including information on the profits earned and taxes paid in each of the countries where they operate. This standard should apply to ALL sectors, not only extractive industries, in order to create a level playing field for European companies. Such reporting standards would enhance financial transparency and would provide crucial information needed by developing countries to improve the collection of taxes on the profits made by companies in their countries.

In any case, transparency is the bottom line. Those who choose opacity should be excluded from public finance and eventually from competing with transparent companies. By actively walking down these new uncertain paths, the EU could be doing more for development than it has ever done so far.

See also Christian Aid press release

Image License: Creative Commons Attribution-Share Alike 3.0 Unported by Zinneke, Wikimedia

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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