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Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by SABMiller

1. Executive Summary

1.1. SABMiller is one of the world’s leading brewers, with more than 200 beer brands and some 70,000 employees in over 75 countries. Our business originated in Africa, where we have been brewing beer for over 115 years. The future of Africa and its economic development matters deeply to us. Our business growth depends on a healthy, growing economic environment in the communities where we operate.

1.2. SABMiller welcomes the Committee’s inquiry and its recognition that tax policy and economic development are closely linked. This submission sets out our recommendations for a better tax environment in order to drive economic growth, support public services and create inclusive development.

1.3. In summary, we encourage DFID to:

1. Promote fair tax systems which provide stability and certainty

2. Consider tax in the wider context of the total development benefit that business brings to a country, through investment and job creation

3. Encourage better revenue collection through improving authorities’ capabilities and resources

4. Simplify tax policies and tax laws to improve investment and revenue collection

5. Broaden the tax base to encourage legitimate enterprise and increase tax collection by bringing the informal market into the tax net

6. Promote growth through supporting a common tax framework enabling local businesses to benefit from the global scale and skills of their parent company, which leads to greater local profitability and in turn greater local investment and growth

7. Recognise legitimate incentives for investment, allowing developing countries to benefit from the range of incentives employed in developed countries to promote business investment

8. Take care not to dis-incentivise trade through VAT and excise policies and encourage stronger border controls

2. About SABMiller

2.1. SABMiller is one of the world’s leading brewers, with more than 200 beer brands and some 70,000 employees in over 75 countries. Our wide portfolio of brands includes premium international beers such as Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft and Grolsch, as well as leading local brands such as Aguila, Castle, Miller Lite, Snow and Tyskie. We are also one of the world’s largest bottlers of Coca-Cola products.

2.2. SABMiller originated in Africa, where we have been brewing beer for over 115 years. The future of Africa and its economic development matters deeply to us. Beer is a local product: brewed, sold and consumed locally. So for us, a healthy, growing economic environment in the communities where we operate is the key to achieving business success. It is therefore in our interests to invest capital in local economies, to use small enterprises to supply and distribute our products, and to create jobs for local people and develop their skills.

2.3. We pay a significant level of tax and in many countries we are one of the top contributors to government income. See Appendix 1 for a briefing on SABMiller’s taxes paid, with a particular focus on Africa.

2.4. SABMiller has a long-standing history of integrating sustainable development into its core business decisions through our ten sustainable development priorities. These range from addressing water issues to tackling the HIV/Aids pandemic, particularly acute in Africa. We address these issues across the value chain and not only within the boundaries of our own operations. In addition, we report the performance of each of country against the Ten Priorities, with the results published annually on our website.

3. Recommendations to the Department for International Development on tax and development

A fair approach to tax

3.1. We agree with the IMF that "fair and efficient tax revenue systems are essential to the long-term sustainability of public finances in low-income countries. Effective revenue collection can unlock vital resources for African countries to tackle the root causes of poverty and promote their long-term development in an equitable and transparent manner." [1] Tax collection is essential if countries are to break out of the aid trap. The World Bank Group has argued that "tax policy and administration are a key part of a country’s private sector development strategy" [2] . Businesses look for a fair system of taxation that is efficient, that provides stability and certainty. Because we invest for the long term, and our business growth depends on economic development, we have a vested interest in strong public services which support healthy and educated communities.

Take a broader focus than just tax

3.2. We recommend that tax is not considered alone but rather in the context of the total development benefit that business brings to a country, namely its wider contribution in terms of jobs created, investments made and therefore the growth that results. Indeed considering tax policy alone, apart from the broader economic context, could lead to policies which result in a lower net benefit for the economy.

Encouraging better revenue collection through improving authorities’ capabilities and resources

3.3. We believe that it is critical that revenue authorities are well equipped to understand the tax positions of the companies they are collecting revenue from. We support steps to improve management and administration of taxation in developing countries, including greater investment in both the capability and resourcing of local tax authorities, to ensure that businesses are taxed fairly and in order to optimise revenue collection. DFID should encourage private sector engagement and dialogue with revenue authorities, the African Tax Administration Forum (ATAF) and other similar organisations in order to build capability across revenue departments and to further understand the impact of revenue policies on business. We would support the establishment of a Regional Tax Academy in Africa to provide training for tax officials so as to improve skills and increase knowledge of tax systems, as well as training new candidates.

Simplifying tax policies and tax laws to improve investment

3.4. We agree with the World Bank, that in developing countries "tax constitutes a significant barrier to investment. Vague tax provisions, multiple tax instruments, arbitrary implementation of tax laws, limited opportunities for redress of taxpayers’ grievances, and laws that give excessive discretion to tax authorities trouble both investors and deter potential investors." [3] Complying with complex tax codes can be a particular burden for small businesses, and discourage entry into the formal economy. When considering tax reforms, donors and governments should consider how a simplified tax system can encourage investment, business growth and revenue collection.

3.5. We support workshops such as those arranged by the International Tax and Investment Center (ITIC), a non-profit organisation whose aim is to bring together government, academics and industry in order to discuss and debate matters such as tax policy.

Broadening the tax base to encourage legitimate enterprise

3.6. We encourage DFID and governments in developing countries to partner and engage in discussion with local businesses to broaden the tax base through bringing the informal market into the tax net. We believe there are significant opportunities to increase tax collections through a focus on the large, informal sectors of the economy which currently contribute very little tax.

3.7. We urge DFID to continue promoting reforms in this area. For example, an ICF cross-country study has found that "a 10 percentage point decrease in the effective corporate tax rate is associated with an increase in the total number of registered businesses of 2 per 100 people of working age". [4] Building a package of incentives around business registration and tax breaks in the first few years may help small and informal businesses to enter the tax system for the first time. In particular, making it simpler and easier for businesses to register is an important issue. We do, however, recommend that such incentives are applied uniformly and fairly across various industry sectors.

Promoting growth through enabling effective business operations

3.8. We recommend that DFID and developing country governments promote the tax guidance embodied in the OECD Guidelines for Multinational Enterprises. These guidelines provide a helpful framework for developing responsible tax policies across a multinational business such as ours whilst at the same time enabling local businesses to benefit from our global skills and scale.

3.9. For example local businesses which are part of multinationals benefit from high quality centralised corporate services including financial consulting; human resources; corporate communication; marketing support; IT support and data processing. Centralising these services lowers the financial burden for local businesses by cutting administrative costs, enabling local businesses to focus more resource on growth and investment. The treatment of the costs incurred in providing the services should be in accordance with the OECD transfer pricing guidelines.

3.10. The ability of companies to offer brands to new markets outside of their home market is enhanced by using centralised brand holding companies, which make the brand available on a royalty basis to enhance local profitability. This allows for a team of specialist trade-mark experts in one place to manage international rights, rather than duplicating this resource across all markets. On some rare occasions brand rights may be purchased out of their home markets as a mechanism to provide finance for local investment and expansion.

3.11. The outcome of local businesses benefiting from global skills in this way is greater local profitability, which in turn leads to greater investment and growth.

Recognising legitimate incentives for inward investment

3.12. Developed countries provide a whole range of incentives for businesses to invest and provide employment in their markets, including tax allowances for capital investment. We do not think that developing countries should be prevented from doing the same.

Taking care not to dis-incentivise trade

3.13. Exports are commonly zero rated for VAT and excise. This avoids an irrecoverable VAT cost to customers abroad and is therefore important trade facilitation. However, governments have understandable concerns about tax fraud stemming from zero rated export goods being diverted to tax free home consumption. Businesses understand this risk. We typically carry out additional checks on the legitimacy of export customers, not least to ensure that we get paid. Whilst we take care to collect and check proof of export, complying with VAT requirements can prove difficult. The risk of not being able to meet onerous VAT proof requirements can hinder trade where it would add value to regional economies. Stricter border controls are often required in order to reduce smuggling, which of course leads to products entering the market outside of the tax net.

4. SABMiller’s economic contribution

4.1. Businesses create significant wealth and SABMiller is a good example. In 2011 SABMiller generated over US$21,072m of economic value, of which the majority was distributed through the course of our business to our employees, shareholders and investors, suppliers and governments as well as to local communities through our Corporate Social Investment (CSI) activities. We invest heavily in developing markets. In Africa alone (excluding South Africa) in the last four years we have invested over US$1,760 million in acquisitions, new breweries, capacity expansion and malting facilities. As one of the co-founders of Business Action for Africa, SABMiller is committed to assisting poverty alleviation through market-based solutions.

4.2. We directly employ over 13,400 [5] people across Africa (excluding South Africa). However, our businesses also drive employment throughout the value chain. Independent research by Professor Ethan Kapstein of INSEAD has found that the job multiplier (the number of jobs supported in the wider value chain from farmers who supply our barley to the retailers who sell our products) can be significant. For example, in Uganda Professor Kapstein found that every worker that Nile Breweries employs supports another 247 workers in the value chain and the broader economy (a further 90,400 workers) [6] .

4.3. Africa contains some 60% of the world’s uncultivated arable land and 70% of Africa’s population still depend on smallholder or subsistence farming. Brewing uses large amounts of agricultural raw materials, such as barley, maize and sorghum; and building inclusive local agricultural value chains is a critical part of SABMiller’s strategy in Africa. We currently directly source agricultural raw materials – barley, sorghum and most recently cassava – from some 20,000 smallholder farmers in Africa and this number increases significantly when farmers we buy from through brokers are taken into account.

4.4. We are the first brewer to produce a commercial-scale beer brewed from cassava. This recently launched in Mozambique, creating new employment and generating incomes for over 1,500 smallholder farmers. This has the potential to be developed in many other markets around Africa, where cassava is the most widely-grown, but least commercialised crop. We aim to increase our local sourcing of raw materials to 50% of our total requirement in Africa in the next two years. Many of our smallholder farmers have previously been subsistence farmers. By creating market opportunities for subsistence farmers in our value chains, we are able to increase their productivity allowing them to feed their families and generate an income for the first time.

4.5. As our businesses grow, so does our economic – and social – impact. Our work with Professor Ethan Kapstein has helped us understand the broader socio-economic impact of our operations in Africa. For example Professor Kapstein found that our operations in Mozambique generate value-added of US$233m, which is the equivalent of 2.4% of GDP. Studies of this kind have helped us to understand the broader socio-economic impact of our operations in Africa (see Appendix 2).

5. Engaging with local authorities

5.1. We are keen to encourage local engagement in our business and most of our African markets have local partners and minority shareholders including governments or their investment agencies, who have expressly endorsed and approved our corporate structures including brand ownership, procurement and management agreements.

We regularly engage with revenue authorities and welcome engagement with regional organisations such as ATAF.

February 2012

[1] Carlo Cottarelli, IMF Director of Fiscal Affairs, Kenya , March 2011, Conference for Sub-Saharan Africa on Improving Tax Revenue Mobilization

[2] ‘Reforming Business Taxes: what is the effect on private sector development?’, viewpoint 330, The World Bank Group

[3] ‘A handbook for tax simplification’, Investment Climate Advisory Services, The World Bank Group, 2009

[4] ‘Reforming Business Taxes: what is the effect on private sector development?’, viewpoint 330, The World Bank Group

[5] Average monthly number of employees on a full-time equivalent basis, excluding employees of associated and joint venture undertakings and including executive directors

[6] Revised 2011 Nile Breweries Socio-Economic Impact Report

Prepared 22nd February 2012