FIJI CALLS WATER COMPANY’S HARD BALL BLUFF

Analysis

By Matthew Dornan

CANBERRA, Australia (Dec. 10, 2010) - Fiji Water Company announced on Wednesday that it will maintain its water manufacturing operation in Fiji, just one day after stating it would leave the country over an ‘untenable’ tax increase on exports of water. This is one chapter in an extraordinary story concerning the boutique water manufacturer; a story that has led to the resignation of Fiji’s Minister for Defence, National Security and Immigration, Epeli Ganilau, and to the deportation of Fiji Water’s Director of External Affairs on ‘security and national interest’ grounds.

The recent conflict between Fiji Water and the military-led government is the result of an increase in the tax on mineral water exports, which saw the rate paid go from 0.33 to 15 Fijian cents per litre of water for any company exporting over 3.5 million litres annually. The California-based Fiji Water, owned by billionaire couple Lynda and Stewart Resnick, is the only company that exports this amount (other water exporters continue to pay 0.1 Fijian cents per litre). The tax increase follows government allegations of transfer pricing by Fiji Water, which is claimed to understate the value of water sold to its parent company in the United States in order to avoid paying tax in Fiji.

The response of Fiji Water to the recent tax increase was to play hardball. On Tuesday its CEO, John Cochran, announced the closure of the manufacturing plant in Fiji, claiming that "The country is increasingly unstable, and is becoming a very risky place in which to invest." A ten minute meeting was also held with the 400 workers at its Fijian manufacturing plant to inform them of the decision. At the end of the meeting, employees were given two weeks pay and told to exit the premises, leaving behind all company property and clothing. In an additional blow to the communities surrounding the plant, several humanitarian projects the company was implementing in the area were put on hold, including the renovation of the nearby Drauniivi Primary School.

Had the closure of Fiji Water’s operations in Fiji been permanent, it would have had a major impact on Fiji’s economy. Exports of water are Fiji’s fourth biggest earner of foreign currency, after tourism, sugar and remittances. The company has previously claimed that its exports comprised 20 percent of Fiji’s total exports, and that it contributed about 3 percent of Fiji’s Gross National Product. The Fiji Government is mindful of this. In 2008, a similar increase in the tax paid by Fiji Water (this time, to 20 Fijian cents per litre) was reversed following threats by the company that it would leave the country.

At the same time, it is clear that the government does not consider what it receives from the company as fair. Conflict between Fiji Water and the government is longstanding. In early 2008, the Fiji Islands Revenue and Customs Authority (FIRCA) blocked exports of Fiji Water for two weeks on the grounds that it was avoiding tax payments using transfer pricing. Exports were only resumed as an interim measure following legal action by Fiji Water. The case proceeded to the High Court, but a judgment was never made. The presiding judge, along with the whole Fijian judiciary, was dismissed following the High Court ruling that the interim military government was illegal. As a result, exports continued as normal.

This time, the government has not backed down. In response to the closure by Fiji Water, the government announced on Tuesday that it would tender for another company to take over the artesian springs currently used by Fiji Water. Fiji’s military leader, Commodore Frank Bainimarama, also criticised the company, stating that: "As usual Fiji Water has adopted tactics that demonstrate that Fiji Water does not care about Fiji or Fijians". There were reports that military personnel were also guarding the facilities on Tuesday, although it is unclear whether these were Fiji Government troops or members of the Homelink security service employed by Fiji Water itself. The hardline strategy seems to have worked. After a meeting with Bainimarama, Fiji Water announced it would not be closing its production facilities after all. It also agreed to pay the new tax of 15 Fijian cents per litre, with no apparent moves by the government to placate its concerns.

This hardline attitude in part reflects the personality and nature of Fiji’s current military rulers, who have been equally unwilling to compromise with opponents of the regime. It is also the result of the perceived use by Fiji Water of unfair accounting practices to avoid paying tax (whether such practices are illegal is another matter). To give an illustration, the Fijian subsidiary of Fiji Water sells a 12 litre carton of water for $4 US dollars to its parent company based in the United States, which then sells the water to distributors for $13 US dollars (by way of comparison, the lesser known brand Aqua Pacific declares a selling price to Fiji tax authorities of $10 US dollars per carton). The carton retails in the United States for anywhere from $20-$28 US dollars. This arrangement ensures that the Fijian subsidiary generates low profits and largely avoids Fiji’s 28 percent corporate tax rate. Both the parent company and its subsidiary are registered in tax havens.

Similar arguments were made by the Fiji Government in response to the threat of departure by Fiji Water. Bainimarama stated that the company had paid less than $1 million Fijian dollars in tax since its establishment in 1995, and that it was involved in transfer pricing. This $1 million figure is miniscule when compared to the $150 million of export revenue earned annually by the Fijian subsidiary of Fiji Water (the parent company based in California generates far greater revenues again). It is also well below the amount spent on marketing by the companies in 2007 – said by Fiji Water CEO to be $74 million Fijian dollars. The main reason for these low tax rates are measures implemented by successive governments to promote export industries in Fiji. Fiji Water was given a 10 year tax holiday by the government when it was established, and according to the government, receives approximately $4-5 million Fijian dollars in VAT refunds annually as an export-driven company. Raising the per-litre tax paid by Fiji Water was therefore a means for the government to increase its share of revenue from the profitable Fiji Water business.

In some ways, the actions of Fiji Water can be viewed as an example of the power exercised by large multinational companies in influencing government policy. Historically, this has been viewed as most prominent in small and poor third world ‘banana republics’, although the recent overhaul of the (now renamed) Mining ‘Super Profits’ Tax in Australia reminds us that large companies also wield significant power in larger, developed countries. The strongarm tactics employed by Fiji Water were successful in 2008, but not this time. One difference is the Fiji Government’s worsening fiscal position, with the fiscal deficit set to reach 58.2% of Gross Domestic Product in 2011. However this does not fully explain the tax increase, which is expected by PricewaterhouseCoopers to raise the government's annual earnings from Fiji Water from $0.5 to $22.6 million Fijian dollars (or slightly more than one-tenth the fiscal deficit in 2011). Government perceptions that the company was avoiding tax combined with Fiji Water’s strongarm tactics to pressure the government are probably more responsible for the recent increase.

The conflict between Fiji Water and the government also has strong political overtones.

The military regime one week prior to these events expelled Fiji Water executive David Roth for being a threat to national security. Pro-democracy websites claim this followed a meeting he had with two senior military officials, Roko Ului and former Land Force Commander Pita Driti, both of whom were sent ‘on leave’ by Bainimarama (rumours suggest they represented a threat to the military regime). The Minister for Defence, National Security and Immigration and Acting Prime Minister at the time, Epeli Ganilau, was asked to sign the deportation papers for David Roth (a friend of Ganilau’s). Ganilau refused, tendering his resignation instead. Prior to this, another Fiji Water executive and friend of David Roth had also been expelled, reportedly after referring to Bainimarama as a ‘dickhead’.

The extent to which political motives are behind the conflict between Fiji Water and the Fiji Government is unclear. What is clear is that there remains bad blood between Fiji Water and the military government. This is largely the result of what the government perceives to be unfair accounting practices, as well as Fiji Water’s strongarm tactics used to block past attempts to impose higher taxes on the company. In the meantime, Fiji Water has been investing in alternatives. It has taken over the facilities of a New Zealand mineral water company near Christchurch, and could potentially use these if supplies of water from Fiji are blocked in the future. It appears as though a truce has been negotiated for now, but whether Fiji Water remains in Fiji in the long run is another matter.

Matthew Dornan is a PhD Candidate at the Australian National University.

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