Editorial: Tax loopholes impoverish South Africa

Thabo Mbeki is not alone in his concern about capital outflows. (Oupa Nkosi, M&G)

Thabo Mbeki is not alone in his concern about capital outflows. (Oupa Nkosi, M&G)

‘Illicit financial outflows drain hard currency reserves, heighten inflation, reduce tax collection, cancel investment, undermine trade, worsen poverty and widen income gaps.” Thus spake former president Thabo Mbeki recently, lamenting the fact that huge amounts of money earned in Africa are spirited out of the continent, mostly to avoid tax but also simply to stash the cash somewhere safer than some of Africa’s unstable states. Celebrity economist Thomas Piketty made similar points in his recent address in South Africa, and the richer countries of the world, as represented by the Organisation for Economic Co-operation and Development, are also seeking ways to ensure corporations pay their fair share in taxes. An example would be the recent British determination to discipline Amazon in this regard.

This week the Mail & Guardian reports on communications giant MTN’s moving of billions of rands from Africa to tax havens.
There is no suggestion that what MTN did is illegal, but its use of tax havens is a feature of multinational business practice that is increasingly seen as a problem. The secrecy and complexity of its attempts to shunt its money into the low-tax haven of Mauritius only raises more questions. The use of “management fees”, sent to obscure entities that may not in fact be doing any management (MTN has no actual staff in Mauritius), has the effect of getting that cash very far away from local tax authorities. And, if it was all entirely above board, how did countries such as Nigeria force MTN to reverse some of those flows?

Mbeki traced the roots of these sorts of flows to the 1960s and the period of decolonisation, when “the elite class of the newly decolonised countries felt uncertain about political stability and the duration of their reign[s]” while, at the same time, “the growing international reach of corporations propelled the development of a whole system of offshore finance that was designed to avoid taxes and regulation. In the process, the system also obscures the origin and destination of the increasingly large sums of money passing through it.”

There is some irony in such a statement coming from Mbeki, who oversaw the liberalisation of financial regimes in South Africa, allowing more ­companies to list offshore and increasing the amount of earnings they could take out of the country – a number to which his successor, Jacob Zuma, added a zero, increasing the sum tenfold. But Mbeki is not alone in his (new-found?) concern about capital outflows – and not just the illegal or borderline illicit flows. 

South Africa’s deputy president, Cyril Ramaphosa, chaired MTN’s board for more than a decade, so a lot of money was shifted on his watch. He was also on the Lonmin board when that mining company was engaged in similar practices – taking its money offshore even as it neglected to provide promised housing for its employees. Yet it was Ramaphosa, as deputy president, who stood before Parliament and deplored such capital losses and promised that South Africa would tighten the relevant regulations.

This may simply be hypocrisy, or a slide from one position to another as Ramaphosa slid from billionaire businessperson to deputy president and, indeed, presidential hopeful. Either way, it doesn’t look good coming from someone who also insists the ANC is committed to bettering the lives of ordinary South Africans, especially the poor.

Ramaphosa has been hailed as a “Mr Fixit” and sent to reform state companies such as Eskom. He should be mandated now to fix South Africa’s tax loopholes for big corporations, and be empowered to develop the necessary legislation to make sure that a South Africa desperate for capital investment does not simply let such monies slip away. 

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