In the past 50 years, more money has illegally left Africa than the amount of money received in aid, and the private sector is mostly to blame.
Corporations and organised crime rings have channelled US$1-trillion away from the host countries in Africa where they operate, using a range of tax-cheating mechanisms known as illicit financial flows.
This money is defined as money illegally earned, transferred or used, and the biggest culprits of the practice are multinational corporations operating in Africa, mainly in the extractives industry.
Sub-Saharan Africa loses about US$50-billion a year, or 5.5% of gross domestic product, through illicit financial flows.
This information went largely unnoticed last week at the African Union summit held in Ethiopia. It is the result of research conducted by a panel of experts, chaired by former president Thabo Mbeki.
Mbeki’s foundation and other international bodies such as Global Financial Integrity and Transparency International have tried for years to get illicit financial flows on the international agenda, with little success.
Vested interests and push-backs
The reasons for this are complex, but in part it is because countries that receive the money illegally funnelled away from Africa have an interest in keeping their tax laws lax.
Now, the AU has accepted a range of proposals contained in the report. Chief among them is that Africa must take steps to put illicit financial flows on the United Nation’s agenda, and a UN proclamation must follow.
In Europe, home to a large number of tax secrecy jurisdictions where money that belongs to Africa is routinely stored offshore, attempts to curb the practice by, at the very least, ensuring that governments share tax information have fallen on deaf ears. Luxembourg and the Netherlands quickly rejected the idea.
Meanwhile, the European Commission is expected to make a decision soon about whether it will launch an inquiry into tax practices. Although there is support for the idea, there has also been push-back from some countries.
Opening up tax secrecy jurisdictions would allow for the exposure of corporations that not only avoid paying income, import or export tax where they operate, but who set up fake companies offshore. The ownership of large corporations would also be up for greater scrutiny.
False invoicing and profit shifting
The Mbeki report found that, in the main, companies used a practice called trade misinvoicing: over- or under-charging on invoices in order to pay less import or export tax. But there are various other ways used by corporations to avoid paying taxes, including profit shifting.
Transfer pricing is also common. Companies shift their profits offshore between subsidiary companies in an attempt to avoid paying tax in their host countries.
According to the Mbeki report, in South Africa, one multinational (which the report did not name) was able to avoid paying $US2-billion in taxes. The company claimed to conduct a large chunk of its operations from the United Kingdom and Switzerland, which have lower income tax rates for businesses.
But when the South African authorities investigated, they found the UK and Swiss operations consisted of a few low-paid employees and some office furniture – hardly enough to justify paying UK and Swiss tax rates instead of South African rates. South Africa reclaimed the money.
It’s an African problem
Mbeki described the problem as an African one with global solutions, although Africa is particularly vulnerable to the practice.
Although African countries have an obvious interest in curbing illicit financial flows, which is to maximise tax revenues to aid development, the Mbeki panel found governments had little knowledge of the practice at all.
Limited capacity and weak institutions in many countries also makes policing illegal outflows particularly difficult.
And although the banking sector has a duty to report transactions that could be illegal, the panel found that many banks had invented ways to assist corporations in the practice.
But countries on the receiving end are also complicit: tax incentives are often put in place with a “positive intention” but the panel said that these incentives were regularly abused to hide illicit wealth.
The panel found that some African countries wanted to become tax secrecy jurisdictions themselves, to attract foreign investment, but this would instead provide a home for illegally generated wealth.
A raft of recommendations followed the panel’s investigations. Chiefly, poor governance had to be addressed if fraud was to be combated. But critically, it was important to reverse the perception held by citizens that anyone who discovered resources had carte blanche over what to do with the wealth generated in another country.