Effective taxation lies at the heart of the social contract between citizens and the state. It is a powerful instrument to reduce inequality, stimulate growth and enhance human development – for all countries. But getting it wrong is costly – tax evasion, tax avoidance and a lack of transparency destroy trust in public institutions.
For citizens everywhere, in Africa, in G20 countries and across the globe, current tax practices raise questions about fairness, social justice and citizenship.
These were the issues we discussed recently in Portugal at Horasis: The Global Visions Community. Without doubt, this is a hot topic since tax justice unites many people who feel cheated by a global tax system that thrives on secrecy and has failed to keep pace with the realities of globalization.
Put simply, the global tax system is broken. The pursuit of private profit is being placed above the public interest in transparency, accountability and financial stability.
Africa is rich in resources but tax havens keep its people poor
The recent Panama and Paradise Papers are not just about famous people who use offshore accounts to avoid paying tax. The papers have also lifted the veil on a secret world in which tax havens are used to shift billions out of the world’s poorest countries in Africa. Tax avoidance and tax evasion are facilitated by the extensive use of offshore companies.
The costs are huge. According to the UNECA, illicit financial flows from Africa are estimated to be more than $50 billion a year. This is twice as much as Africa receives in international aid. As Kofi Annan recently stated, “It is unconscionable that some companies, often supported by dishonest officials, are using unethical tax avoidance, transfer pricing and anonymous company ownership to maximize their profits, while millions of Africans go without adequate nutrition, health and education.”
The secret world of the DRC
The Democratic Republic of Congo (DRC) provides a case in point. The DRC has enormous mineral wealth – especially cobalt, copper and diamonds. Yet it has some of the world’s worst malnutrition and child mortality, and millions of children who are not at school.
But mining concessions are being sold for much less than their market value to middle people who resell them at vast profits. The money is hidden by being routed through the complex networks of offshore companies.
In 2013, the Africa Progress Panel examined just five major sales of mining rights in DRC. Each deal involved firms registered in the British Virgin Islands. The gap between the market value of the concessions and the price paid was estimated to be nearly $1.4 billion – almost double what the DRC spends each year on health and education combined. This exercise captured what is likely to be a small share of the overall value within a small subset of deals from 2010-2012.
In the case of the DRC deals, the complex structures of interlocking offshore companies, commercial secrecy on the part of major mining companies and limited reporting by state companies and government agencies to the DRC’s legislators creates what amounts to a secret world. With this limited transparency, the government struggles to raise revenues from taxes.
But weak national governance is also to blame. Poorly managed state-owned mining companies with limited transparency are part of the problem. With this lack of transparency, the potential is great for political leaders and public officials to benefit from secret deals made with foreign investors.
Not all offshore activity is harmful to Africa’s interests. But the absence of transparency in some jurisdictions makes it difficult to work out what is legitimate and what is criminal. For African revenue authorities, tracking accounts that pass through jurisdictions such as the British Virgin Islands is almost impossible.
What can be done?
For global tax justice, some progress has been made. We were pleased to see the G7 and G20 promising automatic exchanges of tax information around the world and support for tax administration capability in African countries. At the beginning of May this year, the UK announced that its overseas territories and crown dependencies would also need to have public registers of beneficial owners. African countries, including the DRC, Ghana and Guinea, are publishing mining contracts online. And the work of the OECD on base erosion and profit shifting is making good progress.
But more action is needed.
First, country by country reporting is crucial to show where profits are shifted by spotting where there is a mismatch between where firms do business and where they are taxed.
Second, more transparency is needed especially around beneficial ownership. Ultimately, there is no good reason not to know with whom you are doing business. The G7 and the G20 should strengthen multilateral rules on taxation to clamp down on transfer pricing practices. This must include the Swiss commodity trading companies – known to be some of the most opaque businesses in the world.
Third, African countries must strengthen their tax policy and administration, and enhance tax information sharing among governments. More needs to be done too on defining and measuring illicit flows.
ACET has been busy in this area. Highlights include:
- For the past two years, ACET has been supporting Rwanda, Burkina Faso, Ghana, Tanzania, Uganda and Zambia to identify best regional and global practice for resource mobilization and management.
- In collaboration with the IMF and the OECD, ACET is working with the G20’s Compact with Africa countries where countries are learning from each other and global partners about policies to increase domestic resource mobilization; and
- The Compact with Africa aims to encourage private investment through greater macroeconomic stability and fairer, more transparent tax systems. Through its secretariat role in supporting peer-to-peer learning among the Compact with Africa countries, ACET is reinforcing the valuable work of other institutions including UNECA, the OECD, Tax Justice Network, the World Bank and the IMF in measuring and tracking illicit financial flows.
I believe it is time for multinational companies to pay fair taxes to African governments; for African governments to be involved in discussions to reform the global tax system; and for the gap between what is legal and what is fair to be narrowed.
Ultimately, we need global solutions; otherwise the issue is simply relocated rather than solved. Governments worldwide should commit to halt the practices that are effectively undermining progress and trapping millions in poverty.
Caroline Kende-Robb is a Senior Fellow at the African Center for Economic Transformation.