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Shell fraud and tax evasion in Ethiopia

The headquarters of Libya Oil Ethiopia Ltd, located on Aba Sebsib Avenue (Debre Zeit Road) in Gotera.

Oil Libya Ltd was ordered last week to pay 210 million Br in back taxes for the purchase of shares from Shell Ethiopia Ltd, to the Ethiopian Revenues and Customs Authority (ERCA).

Shell Ethiopia, which was established pursuant to the United Kingdom (UK) Companies Act, was engaged in the distribution of petroleum products in Ethiopia since 1948. Shell Petroleum, a London based company, was the major shareholder with 587,813 of the company’s total 587,817 shares.

Shareholders of Shell Ethiopia passed a resolution on November 14, 2008, to sell all its shares to Libya Oil for an amount they claimed was 99 million Br.

Libya Oil, owned by the Libyan government and registered in Mauritius, became operational in Ethiopia upon acquiring the shares of Shell Ethiopia on May 20, 2009.

Libya Oil had a registered capital of 60.1 million Br at the time, according to the data from the former Ministry of Trade and Industry (MoT).

The company has five major shareholders: Libya Oil Holding Ltd and Tamoil Africa Holding Ltd as well as three Libyan individuals named Sultan Abusahawashi, Saleh Saad Abdall, and Abadulsalah Yuneus.

Upon receiving the payment of seven million Br for capital gain tax dues from Shell Ethiopia following the share transfer, the ERCA issued a tax clearance certificate to the company.

However, in August 2010, the ERCA was approached by a Libya Oil employee claiming that the tax authority had been intentionally defrauded over the transfer of the shares between the companies to avoid paying taxes, according to sources inside the ERCA.

Subsequently, an investigation was launched into the matter by the authority which ended in England, according to sources inside the authority who were not authorised to comment.

Information was obtained from Her Majesty’s Revenues and Customs (HMRC) and authenticated by the Ethiopian Embassy in London that Oil Libya acquired the downstream operations and assets of Shell in Africa for 323.4 billion Br, according to a senior official at the ERCA.

“Shell Ethiopia’s attorney in England also affirmed it and confessed that the companies had entered into a contract not to disclose the details of the agreement,” sources told Fortune.

Both companies acted intentionally to evade taxes, the ERCA claimed.

Had the real amount been disclosed, the capital gains tax would have amounted to 16 million Br.

The transaction between Shell Ethiopia and Libya Oil was not a mere transfer of shares but a transfer of business, some legal experts argued.

The experts were called in by the ERCA upon learning of the alleged fraud.

“Since such kinds of cases are unique for the authority, we were very careful in deciding everything,” a senior official at the ERCA told Fortune.

The group included instructors from the Law Faculty of Addis Ababa University (AAU) and notable legal experts such as Membere Tsehay, former president of the Supreme Court and now director of the Justice and Legal Systems Institute.

Shell Ethiopia vanished following the transfer of the shares, which is contrary to the normal transfer of shares which results in a change of shareholders while the company continues to operate, some of the experts argued.

Upon concluding the transaction to be a business transaction, the ERCA was advised by some experts to levy all the dues that are usual when a business is transferred. These are business profit tax, VAT, dividend tax, stamp tax, property tax, and capital gains tax.

A different legal argument was made by other experts who suggested that the transaction be considered a transfer of both shares and business property. This would allow the ERCA to levy capital gains tax, stamp tax, and dividend tax from the share transfer in addition to all the other taxes involved with a business transfer.

These different legal arguments on how to proceed with the case delayed the authority’s decision.

“The discussion lasted for about six months before a decision was made as a result of the international nature of the case,” sources disclosed.

The ERCA was finally convinced by the arguments of first group. The authority had little recourse but to take Libya Oil to task as Libya Oil Holding and Shell Petroleum had entered into a contract that Libya Oil would be liable for any debt or third party claims arising from their agreement.

The payment of 119 million Br in capital gains tax (including interest and penalties) and 91 million Br in dividend taxes that should have been declared truthfully and paid by the company to begin with was ordered by the authority.

Mengistu Demesse, deputy manager of Libya Oil, claimed the company had not received the notice, on Friday, April 29, 2011. He refused to say more.

The ERCA is also putting together a case to claim the taxes for a business transfer, which would not amount to less than the current claim, sources disclosed.

The company’s shareholders may also be held criminally liable for not declaring the correct sum of the share transfer, sources pointed out.

Supplying false information to the authority is regarded as a crime, according to the income tax law.

Questions arose about whether Ethiopian courts have the jurisdiction to try the case, since both companies are registered abroad.

Since Shell Ethiopia was established in Ethiopia, a regular tax payer, registered with the former MoTI, and all the dispute assets are situated in Ethiopia, Ethiopian federal courts have the jurisdiction to try the case, experts argued.

Over the past two years, the ERCA has paid around 33 million Br in rewards to informants who supply information about tax crimes and people who aided in the seizure of contraband and illegal items.

If the ERCA succeeds in securing its claim for 210 million Br, the informant would be paid around 41 million Br, the highest reward the authority has ever paid to an informant. To date, the largest payout was 2.5 million Br, in August 2010, to an informant who tipped off the authority about an individual who attempted to smuggle gold to Djibouti.

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