Tax-base erosion cripples Africa

Multinational companies contribute significantly to the income of many African nations, so it is imperative that the countries’ tax bases are protected from dubious practices such as profit shifting.

Finance Minister Nhlanhla Nene made this point at the Africa Tax Administration Forum (Ataf) conference on base erosion and profit shifting in Sandton this week.

“In some African countries, tax revenue from multinational enterprise often represents a significantly greater share of the tax base than in more developed countries and such countries rely very heavily on multination enterprise taxation,” he said.

Rwanda, for example, reported that 70% of its tax base came from multinational entities and Nigeria reported that they made up 88% of its tax base.

In Burundi, one multinational company contributed nearly 20% of the country’s total tax collection, Nene said.

“In this context, the revenue loss from Beps [base erosion and profit shifting] can be very substantial for some countries in Africa and addressing these Beps issues is therefore crucial.”

Multinational corporations often exploit gaps and mismatches in tax rules to lower their tax liability. A global initiative is under way to tackle tax avoidance.

A total of $530-billion is estimated to have been lost to sub-Saharan Africa by the illicit flow of funds, which would include both tax avoidance and illegal activity, in the years 2003-2012, according to Global Financial Integrity, a nonprofit, research and advocacy organisation.

The Organisation for Economic Co-operation and Development (OECD), in an action plan published in July 2013, outlined 15 measures for governments to address the issue.

But some key proposals in the document, such as a review of transfer pricing documentation and a template for country-by-country reporting of income, taxes and economic activity for tax administrations, require an administrative capacity that is beyond many African nations.

Organisations such as Ataf have previously raised concerns that consultation about the proposals had been poor, and had been driven to such a large extent by multilateral organisations that developing countries had been bypassed.

The Ataf conference brought together the heads of taxation of 30 African countries and representatives of business and civil society. It was the second consultative meeting, following one in March last year, at which an African response to the global Beps project was developed.

The conference addressed the effect of tax base erosion in Africa and aimed to report on Africa’s contribution to the global process of developing new standards for international cross-border taxation and the participation of Africa in the OECD’s initiatives.

“The new standards being developed in the Beps project must take into account the needs of Africa, and it is critical that African perspectives inform the policy decisions and solutions on cross-border taxation currently underway,” Ataf said in its conference outcome statement.

The meeting urged the African Union to consider the establishment of a tax policy and a tax administration commission to harmonise the continent’s tax policy, legislation and administration, as well as seeking ways to improve cross-border co-operation. The meeting also welcomed the significant steps made by Ataf’s cross-border taxation technical committee.

The OECD draft document also recommends that nations should not offer multinationals tax incentives, which effectively sabotage their own tax base.

“It has been suggested that weaknesses in Africa’s tax regimes give away so much of the tax base that some of these new international tax rules may not even matter,” Nene said.

There are concerns that, without tax incentives, investment would be curbed, but, Nene said, other practices eroded the tax base in Africa that were not directly related to multinational enterprises. These included incorrect trade invoicing, such as the fraudulent over- and under-invoicing of transactions.

“African losses from trade misinvoicing are more than $50-billion per year and Africa needs to build its capacity to address this issue,” Ataf said.

“There is a need for greater integration and engagement between customs, revenue officials and other government agencies, and countries need to share their experiences and best practices,” it concluded.

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