Wherever you go in Malawi—whether it is in the cities, towns or the countryside—Airtel Malawi is part of the landscape, and almost everyone knows about it in this Southern African country of 18 million people.
In 2018, Milward Brown, a global leader in brand strategy consultancy, advertising development and brand equity research, passed Airtel as the ‘most popular brand’ in Malawi.
This is easy to understand; because wherever you go, the red and white corporate adverts of the service provider are so loud and imposing as Airtel Malawi boasts the largest footprint in Malawi.
But that could be as far as the glow and ring could be reaching.
The company’s 2018 audited financial results by Deloitte Chartered Accountants (https://www.airtel.in/about-bharti/equity/results) shows a complex web beneath Airtel’s much vaunted smartness.
Questions in Airtel’s books before IPO
In February 2020, Airtel Africa announced that the initial public offering (IPO) of its Malawian subsidiary raised around $37.5 million.
The listing on the Malawi Stock Exchange enabled Airtel to comply with the Malawi Communications Act of 2016, which required the firm to have at least 20 percent local shareholding.
A few months prior to the much-hyped initial public offering (IPO) in 2019, Airtel Malawi’s accounts show ‘questionable’ transactions to its parent company in the Netherlands, Bharti Airtel Malawi Holdings BV; Kenya based Airtel Africa and also within the group with another company called Malawi Towers.
Airtel Malawi has two affiliates - Airtel Mobile Commerce Limited, which was incorporated on 11 June 2009 and Malawi Towers Limited which was incorporated on 15 Dec 2010. These companies are wholly owned by the holding Dutch company.
These transactions include: dividend payments, debt cancellation, related-party debt and payment of management fees to related parties in the Netherlands and Kenya.
Taxation treaties Malawi has signed with other countries over the last 50 years are costing the country billions of kwacha since they have opened up opportunities for multinational corporations to reduce their tax liability through tax avoidance.
Malawi could have lost out on $22m profit
For instance, Airtel Malawi paid a dividend of $22 million to its parent company registered in the Netherlands. This same amount is also reflected as dividend income from Airtel Malawi.
“These transactions happened in 2018 before the company was listed in 2019 thus outside of our jurisdiction at the time it was done. Among other things…our role is to ensure there is adequate information for an investor to make an informed decision when investing,” said Kelline Christabel Kanyangala, operations manager at the Malawi Stock Exchange.
Airtel Malawi public relations manager Norah Chavula disputes any misconduct on the company’s finances, saying they did not declare any dividend in 2018; hence there was no declaration and payment of dividend prior to the IPO.
The sale of Airtel Malawi’s Towers firm
In 2014 Airtel Malawi sold its telecoms towers to Malawi Towers.
Malawi Towers owed money to Airtel Malawi for these towers while Airtel Malawi owed money to Malawi Towers for the use of the towers.
In 2018, both these debts were written off. But because Malawi Towers’ debt to Airtel Malawi was much larger than the debt the other way round, the net effect is that Malawi Towers’ balance sheet was made much stronger while Airtel Malawi’s took a hit.
The accounts also show that Airtel Malawi made a net profit of $26,000 and attributes this to “waiver of the loan”.
However, the company’s 2019 financial results show that the company made a “net foreign exchange gains of $26,000” which is the same amount Airtel Malawi lost from the waiver.
The financial results also show that Malawi Towers had borrowed $17 million from its Dutch parent company, Bharti Airtel Malawi Holdings BV in the Netherlands.
The parent company’s accounts show that it borrowed this money from elsewhere in the Airtel group and charged a mark-up on the loan to Airtel Malawi.
But at the end of 2018 the Dutch company only had $7 million of reserves.
Speaking on condition of anonymity, a local financial expert explained that it looks as if the Dutch parent company received a big dividend from Airtel Malawi in 2018 and lent some of that money back to Malawi Towers in 2019, making $1.39 million in interest on it last year.
“The problem here is that the interest paid to the Netherlands may be deductible against tax in Malawi, so basically Bharti Airtel gets a tax benefit for lending its own cash to its own subsidiary,” the expert said.
Malawi Towers has been paying interest to its Dutch parent company at a rate of 3-month London Interbank Offered Rate (LIBOR) plus 450 basis points – in 2019, this means about 6-7 per cent.
But Airtel Malawi is borrowing from Bank of America at LIBOR plus 105 basis points, which was 3-4 per cent in 2019, according to Airtel Malawi’s financial statements.
“The cost of this debt is much lower than as compared to the local market rate; hence Airtel Malawi is paying significantly more corporate income tax than if it were paying interest on local borrowings,” the company said.
The company’s accounts also show the company paid $3.3 million in 2019 which is equivalent to nearly 10 per cent of the pre-tax profit for that year as management fees being paid to related parties in the Netherlands.
“The management fee is paid to the parent company and headquarters in Kenya and the Netherlands for their efforts in designing and execution of the local strategy. The Airtel group is fully compliant with all transfer pricing requirements in every jurisdiction where it operates,” Chavula said in emailed responses.
When asked to clarify what type of management services were rendered to Airtel Malawi, Chavula shut the door to further inquiries.
Malawi’s Tax busting body, the Malawi Revenue Authority (MRA) refused to comment citing the confidentiality clause in Tax matters.
Paradoxically, in October 2020 MRA partnered with one of Airtel Malawi’s local subsidiary, Airtel Money a move its says will create more avenues for registered Taxpayers to pay taxes via the Airtel Money virtual platform.
“MRA is leaving no stone unturned to enhance tax compliance,” MRA’s Head of Corporate Affairs Steve Kapoloma said
Malawi losing out on taxation treaty with Netherlands
Double taxation agreements can contain provisions that are harmful to domestic resource mobilization and can be used to facilitate illicit financial outflows, a 2016 Action Aid Malawi report faults tax treaties like the one between Malawi and the Netherlands.
The treaty between Malawi and the Netherlands allows for very low taxing rights of dividend payments (only 5 percent in most cases) while also giving limited rights to tax capital gains on shares.
The report, ‘Malawi’s tax treaties: From independence to the year 2015ʼ revealed that around $27 million in taxes was lost as former Australian mining company Paladin shipped out money from Malawi to Australia via the Netherlands by taking advantage of the tax treaty that exempts interests and management fees from tax.
“This article was developed with the support of the Money Trail Project (www.money-trail.org).” “Dit artikel is onderdeel van het Money Trail Project onderstennd door de Nationale Postcode Loterij”