by Mwanda Phiri and Shebo Nalishebo

The destination of Zambia's copper exports has recently triggered a myriad of reactions from various stakeholders in Zambia. While official Zambian trade statistics label Switzerland as the major destination of Zambia's copper exports (accounting for 59.5% in 2014), many stakeholders contend that China is in fact the major destination market.

Arguably, this large volume of trade between Zambia and Switzerland comes as a surprise to many stakeholders largely because copper is not a product for which there is particular significant demand in Switzerland.

The Swiss economy, although largely driven by micro-technology, hi-tech, bio-technology, pharmaceuticals, banking, insurance and tourism activities, is also commonly known for brokerage services. Therefore, copper exports to Switzerland need not come as a surprise as these exports are re-exported by Swiss-based traders.

As far as trade statistics are concerned, the general expectation is to see a symmetric pattern between two trading countries, whereby the amount that country A exports to country B should be equal to what country B imports from country A. This however, is seldom the case in reality. A scrutiny of the World Bank's World Integrated Trade Solution (WITS) data shows some interesting revelations on the flow of Zambia's copper exports. In 2013, Zambia exported $2.1 billion worth of copper products to China. In the same year, China is reported to have imported $2.8 billion worth of copper from Zambia, giving rise to a discrepancy of almost $700 million between the two countries.

This variance between the value of copper exports from Zambia and the corresponding mirror value of copper imports to China is not unusual. There are a number of probable reasons that could explain this disparity. For instance, countries use different valuation methods. According to international standards, exports should be valued FOB (Free on Board) and imports CIF (Cost, Insurance and Freight) but some countries do not follow this standard. Additionally, countries may differ on the type of the trade recording system used. That is, the general or the special trade system whereby the former includes trade made in free trade zones and the latter excludes such trade.

Moreover, the timing at which trade flows are measured could also be a source of discrepancies. For example, exports recorded in one particular year in the exporting country could be recorded as imports in the importing country the subsequent year. Equally of importance is the treatment of re-exports and goods in transit. The United Nations recommends that port statistics should be compiled by country of origin, export statistics by last known destination and goods in transit should be excluded from trade statistics. While these reasons alluded to are not exhaustive, they offer some plausible explanation for the difference in the value of trade between Zambia and China.

Notwithstanding our trade with China, the big exposé is on the whereabouts of our copper supposedly exported to Switzerland. Zambia exported $3.9 billion worth of copper to Switzerland in 2013 but equivocally, there are no corresponding mirror records showing that Switzerland imported any copper products from Zambia. In fact, during the same year, Switzerland's total copper imports from the rest of the world amounted to only $1.2 billion (about 31% of Zambia's reported copper exports to the country). Conversely, Switzerland's total copper exports to the rest of the world amounted to a mere $712 million of which $15 million was exported to China, which is consistent with China's import data.

The final destination of the largest share of Zambia's copper exports is therefore indistinguishable. If copper exported to Switzerland is neither captured by Swiss customs nor re-exported to China, do our copper exports to Switzerland simply disappear into thin air? This raises concerns not only on the accuracy of information on export destinations declared to the Zambia Revenue Authority by the mining companies, but also their information on profits. The major concern is not so much the final destination of Zambia's exports but rather transfer pricing and tax avoidance associated with it.

Transfer pricing happens whenever two companies that are part of the same multinational group trade with each other. Transfer pricing is not, in itself, illegal. What is illegal is transfer mispricing. The conventional international approach to dealing with transfer pricing is through the “arm's length” principle: that a transfer price should be the same as if the two companies involved were indeed two unrelated parties negotiating in a normal market, and not part of the same corporate structure.

This arm's length price is usually considered to be acceptable for tax purposes. But when two related companies trade with each other, they may artificially distort the price at which the trade is recorded to minimise the overall tax bill. This might, for example, help it record as much of its profit as possible in a tax haven with low or zero taxes. Switzerland is a well-known tax haven. The fact that Copper exported from Zambia to Switzerland hardly shows up in the Swiss books as imports from Zambia, or re-exports to China or the rest of the world, strongly suggests transfer mispricing is going on. Zambia could be losing out on potentially large volumes of tax revenue, thus impeding the country's development and poverty reduction efforts.


The authors are researchers at the Zambia Institute for Policy Analysis and Research (ZIPAR).
For details contact the Director,
ZIPAR,
P.O. Box 50782,
CSO Annex Building, Corner John Mbita and Nationalist Road, Lusaka.
Tel: +260-211-252 559,
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.