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It has been five years since former South African President Thabo Mbeki and his high-level panel released their landmark report on illicit financial flows (IFF) from Africa. (Photo by Gallo Images / Sunday Times / Alaister Russell)
Despite having much to gain from them, Africa’s role in the negotiations to reform international taxes is negligible.
It has been five years since former South African President Thabo Mbeki and his high-level panel released their landmark report on illicit financial flows (IFF) from Africa. They calculated that these flows – the products of crime and corruption, but mostly also tax evasions by multinational companies – cost Africa at least $ 50 billion annually in lost revenue.
This represents a considerably larger capital outflow than the capital inflow through foreign aid. Mbeki’s report was full of helpful tips to fix the problem.
This month, however, the United Nations Conference on Trade and Development (UNCTAD) released a report suggesting that, if anything, the problem has worsened. The report estimates that from 2013 to 2015, Africa’s annual capital flight averaged around $ 88.6 billion. This compares with a combined inflow of official development assistance and foreign direct investment of $ 102 billion.
IFFs are particularly damaging to Africa, which is more dependent than other regions of the world on multinational corporate tax, as its national tax base is very small. UNCTAD says the $ 88.6 billion annually lost could bridge half of the continent’s gap to fund the UN’s Sustainable Development Goals (SDGs), the core of which is the eradication of extreme poverty.
The report finds that the largest component of illicit capital flight from Africa, totaling $ 40 billion in 2015, is related to “extractive raw materials,” more than three-quarters in gold alone, followed by diamonds. and platinum.
Illegal capital outflows from three countries (Nigeria, Egypt and South Africa) accounted for more than four-fifths of the annual total between 2013 and 2015. Nigeria alone accounted for nearly half of that, according to UNCTAD estimates.
Many of UNCTAD’s recommendations to address this problem, rather depressingly, echo those of Mbeki in 2015. It is clear from the UNCTAD report that both Africa and the international community could and should have done much more. to end the FIB.
The Organization for Economic Cooperation and Development (OECD) and the European Union (EU) have embarked on a reform of the international tax system to close the loopholes. These gaps allow corporations, in Africa, particularly mining and energy companies, to shift their profits to tax havens to avoid paying higher taxes in countries where they actually make money.
Some progress has been made, but the two organizations have clearly encountered significant resistance from tax haven countries. Results so far, mainly through the Base Erosion and Earnings Shift Initiative (BEPS), have not been entirely fair.
The report notes that several smaller tax havens have been named and shamed as “non-cooperative jurisdictions,” prompting some to reform their forms. But the EU has not included larger countries like Switzerland or the United States, and EU member states are simply exempted from the list, leaving out the tax havens of Ireland, Luxembourg and the Netherlands. Africa also has tax havens, particularly Mauritius and the Seychelles.
UNCTAD also chides African states for not actually participating in these international negotiations to reform international taxes, despite having much to gain from them. The report notes that, as of March 2020, there had been no official statements on an intergovernmental African position on the second wave of OECD proposals on the BEPS initiative.
The report also proposes that African countries create protocols within the African Continental Free Trade Area, which will begin operating on January 1, 2021, to avoid competition among themselves to reduce taxes in order to attract investment. This has led to a “race to the bottom” with a huge loss of income.
It is mainly about addressing the dichotomy between companies that carry out their economic activities in one place, such as an African country, but have a “permanent establishment status” elsewhere, for example in Europe. This allows their earnings to be taxed abroad in their home country rather than in Africa, and “is at the core of perceived injustices,” the report says.
He questions the extent of African participation in these issues and calls for “strong political leadership from Africa in international tax reforms.” Africa should also be more involved in pushing for a UN body to regulate international taxes, as this would be more representative than the OECD and the EU, which clearly have vested interests at stake.
UNCTAD offers many other recommendations for African governments. These include negotiating fairer tax treaties with multinational companies that now mostly favor large corporations, he says, usually in a rather desperate effort to attract scarce foreign investment.
Some countries, such as Malawi, Rwanda, Senegal, South Africa and Zambia, have already canceled or renegotiated tax treaties, while Ireland and the Netherlands have reviewed the impact of their treaty networks on developing countries.
Among the clauses in tax treaties that should be reviewed, the report suggests, are those that treat subsidiaries of multinational companies as separate independent entities that “transact with each other at arm’s length.” In fact, many multinational companies use these subsidiaries to avoid paying taxes in the African countries where they operate, even through “abusive transfer pricing”.
This involves a multinational company mining copper in Zambia, for example, and then selling the copper cheaply to its commercial affiliate domiciled in a foreign tax haven. This marketing branch then sells the copper for its true market value, but at a very low tax rate. The multinational company pays little tax on the entire transaction and Zambia loses a lot of revenue.
Zambia and Senegal have already started to tackle the problem, ending their double taxation agreements with Mauritius. Their decision was made due to clauses that prevented them from taxing payments for operations in their countries that were paid to shell companies in Mauritius. Senegal said that it had therefore lost $ 257 million in 17 years.
The UNCTAD report also urges African countries to strengthen their capacity to recover IFF. It notes that only $ 1.5 billion has been recovered so far through the Stolen Asset Recovery Initiative established for this purpose in January 2020.
The report also proposes that African countries create protocols within the African Continental Free Trade Area, which will begin operating on January 1, 2021, to avoid competition among themselves to reduce taxes in order to attract investment. This has led to a “race to the bottom” with a great loss of income.
UNCTAD also recommends that all African countries cooperate to monitor the flow of goods across their borders and strengthen their national tax authorities to detect IFFs.
Greater domestic resource mobilization has long been seen as the main avenue for African countries to finance their development and reduce their dependence on foreign aid. The effective reduction of IFFs would be a big step in this direction. DM
First published by ISS today
