In this brief paper
I try and make recommendations for a common stand that representatives from
civil society from Africa should take on the fight against Illicit Financial
Flows (IFF). It is envisaged that tackling IFF from Africa requires reform of international
corporate taxation. This tax system has many loopholes, and Transnational
Corporations (TNCs) have exploited them. Profit shifting, and transfer pricing remain
the primary drivers of corporate tax practices that facilitate IFF. Yet, these practices
have not been adequately dealt with at both the international and regional fora.
Estimates from the African Development Bank reveal that IFF have resulted in
corporate tax losses in excess of a trillion dollars from Africa since 1980.[1] The Tax Justice
Network (TJN)[2]
and the IMF’s Fiscal Affairs Department[3] estimate these
losses at $500bn and $200bn respectively per annum. In 2015, the United Nations
Economic Commission for Africa (UNECA) published its High-Level Panel Report on
Illicit Financial Flows (HLP Report) in which it reported that Africa is losing
more than $50 billion annually in IFFs. The Report asserted that this estimate
may well fall short of reality because accurate data does not exist for all
African countries, and these estimates often exclude some forms of IFFs that by
nature are secret and cannot be properly estimated, such as proceeds of bribery
and trafficking of drugs, people and firearms as well as corruption. In July
2018, at the High-Level Policy Dialogue on Development Planning in Africa the
Head of Development Planning and Statistics at the Economic Commission for
Africa reported that $100 billion a year is illegally earned, transferred, or
used due to mis-invoicing. These Tax losses resulting from IFF have become too
serious to neglect anymore.
A number of preventive
solutions have been proposed at both the international and regional levels by
governments, but they remain wanting in so far as the African continent is
concerned. The latest of these proposed reforms are set out in the 2018 report
on ‘A Roadmap to Improve Rules for Taxing
Multinationals’ by the Independent Commission for the Reform of
International Corporate Taxation (ICRICT).[4] ICRICT has
identified profit shifting as the leading contributor of unprecedented levels
of economic inequality in Africa and castigated the OECD’s Base Erosion and Profit
Shifting project (BEPS) as failing on its mandate to ensure that profits are
taxed where economic activities take place and value is created. ICRICT
proposes a global formulary apportionment, coupled with a minimum corporate tax
rate as the only effective way for all countries to collect a fair share of tax
revenue from TNCs and avert a race to the bottom.
Other than
ICRICT’s recent proposals, a number of international and regional law and
policy reforms have also been identified by States as crucial to reducing and
preventing IFF. These reforms are focused on transfer pricing, beneficial
ownership, country by country reporting and the review of the international tax
treaties. While these reforms are targeted to combat IFF through tax evasion
and avoidance schemes employed by TNCs to increase the amount of their profits
invested in relatively lightly taxed jurisdictions, they relegate the African
experience to merely adopting the reform measures as policy initiatives without
targeted and concrete proposals in detecting and preventing IFF and
transitioning towards a convergence on unitary taxation as proposed by ICRICT. Certain
accepted international corporate taxation measures such as thin capitalization
rules, tax incentives, source and residence-based taxation, interest limitation
and tax competition that TNCs use are being addressed under the BEPS project.
However, this OECD reform proposal is patchy and does not address structural
issues peculiar to African states and the measures it recommends are not adapted
to African states interests and capacities.
The Tax
Inspectors Without Borders, which is an OECD/UNDP joint initiative aims to help
developing counties bolster domestic revenues by strengthening their tax audit
capacities. This initiative seeks to facilitate the transfer of tax audit
knowledge and skills by matching tax audit experts with local officials to work
directly on current audits concerning international issues, and to share
general audit practices. While the provision of technical assistance to
developing countries is welcome and necessary, adequate care has not been taken
to avoid conflicts of interest. For example, there have been concerns that some
tax experts providing advice have previously assisted TNCs in negotiating
problematic advance pricing agreements for them or assisted them in other ways
to avoid tax payments in the African region.
At the United
Nations summit for the adoption of the post-2015 development agenda, Member
States adopted 17 Sustainable Development Goals, including two targets
particularly relevant to IFF. Target 16.4 of the Goals commits States to
“significantly reduce illicit financial and arms flows, strengthen the recovery
and return of stolen assets and combat all forms of organized crime” by 2030.
Under target 17.1, States agreed to strengthen domestic resource mobilization,
including through international support to developing countries, to improve
domestic capacity for tax and other revenue collection. However, the outcome on
the post-2015 development agenda will only be of benefit to Africa if the full
implementation of the Addis Ababa Action Agenda for the realization of the SDGs
is achieved. The Addis Agenda calls for the elimination of IFF by combating tax
evasion and corruption through strengthened national regulations and increased
international cooperation. It also seeks to reduce tax avoidance by eliminating
safe havens and improving disclosure practices and transparency in both source
and destination countries. What remains lacking in the Agenda is the extent to
which international cooperation is to aid in enhancing transparency on
beneficial ownership, permanent establishments, base eroding payments, treaty
negotiations, restructuring of supply-based chains and controlled subsidiaries
in a continent that is unable to afford competent staff in the right numbers
with the capacity to investigate these areas.
Further, the Group of Eight countries made a commitment at its
39th summit, in June 2013, to introduce automatic exchange of information by
tax authorities across the world in order to fight the scourge of tax evasion;
to change rules that let companies shift their profits across borders to avoid
taxes; to assist developing countries with information and capacity to collect
taxes owed to them; to introduce public country-by-country reporting for
extractive companies; and to address the issue of misuse of shell companies to
facilitate IFF.[5] In July 2014, OECD and the Group of 20 published a new
global standard for automatic exchange of tax information, providing for the
exchange of non-resident financial account information with the tax authorities
in the account holder’s country of residence. As at 30 October 2015, 96
countries had committed themselves to implementing the standard to
automatically exchange tax information by end of 2018.[6]
The OECD was also tasked by the Group of Eight and Group
of 20 Finance Ministers with developing an Action Plan on BEPS, published in
July 2013, containing 15 specific actions to address a range of issues relating
to tax transparency, accountability and information exchange. The
leaders called on OECD to develop a framework for monitoring the implementation
of BEPS by 2016 and to encourage all countries and jurisdictions, including developing
countries, to participate in it. While that project includes country-by-country
reporting by transnational corporations as one of its action points, it
requires that this information be provided only to the home tax authority of
those corporations and not that it be made publicly available. Other countries
will only be able to access that information through official treaty requests,
which will make it more difficult for African countries tax authorities to
access the information and will prevent public scrutiny.
Regional African measures have
attempted to address these gaps in their reform proposals but still remain
wanting. In Africa,
in 2010 following a meeting of revenue authority officials, the African Tax
Administrators Forum (ATAF) was created and
their work includes facilitation of joint audits on cases of potential IFF from
African states. They developed a model on information exchange between revenue
authorities. In 2011, the African Commission on Human and Peoples’ Rights (ACHPR) passed a resolution stating that IFF was
affecting the development of Africa and its ability to achieve human rights.
Later in 2014, the Tana Forum of African Heads of State held their 3rd session
on IFF and its effect on peace and security in Africa. In 2015 the African
Union released the High-Level Panel Report on Illicit Financial Flows (the HLP
Report) reflecting on the urgency in dealing with IFF.[7]
The HLP Report on IFF attempted
to improve and strengthen the definition of IFF. The OECD and the Global
Financial Index (GFI) both limit the definition of illicit financial flows to
illegal actions. Those financial flows that are against the spirit of law or
are just not criminalized in a particular country but as such are perceived as
unacceptable are not covered. A much broader scope of IFF was proposed in the HLP
Report which defines them as activities “that, while not strictly illegal in
all cases, go against established rules and norms, including avoiding legal
obligations to pay tax”.[8] It covers not only
illegal actions but also those which are not explicitly forbidden by the
statutes but are unacceptable in the light of unwritten rules, spirit of the
law, or their purpose. This broad definition captures all financial flows even
if they involve legal transactions. This definition must also be adopted at the
international level since a higher proportion of IFF from Africa occurs as a
result of legal transactions. The HLP Report called for a United Nations
Declaration on the issue of IFFs from Africa and for concrete steps to be taken
for the UN to adopt a unified policy instrument on IFF. This however has to
date not taken place and there is no action from African states to draft either
the declaration or a policy instrument to be taken forward to the United
Nations as a result of a lack of agreement among the African states.
In February 2016
the HLP on IFF discussed its findings with UN Member States at a special
briefing of the UN Economic and Social Council and stressed that Africa faces
challenges in the areas of taxation, financial intelligence and IFF which
require strong institutions to address and for which the UN is to build
capacity.[9] The AU has also passed
a special resolution on IFF where it asked UNECA, the African Development Bank
and the Regional Economic Communities to submit annual reports on the progress
of the counter measures to IFF.[10] In 2017, the
Yaounde Declaration confirmed that the gaps in domestic legislation and
administrative capacity in many African countries hampered their efforts to
tackle IFF and this was compounded by the lack of transparency in international
corporate tax matters. This has resulted in delays in the submission of the REC
reports to the AU.
The AU
resolution also called for the AU, UNECA and the African Capacity Building
Foundation and other development partners to build capacities of AU Member
States and institutions, particularly in contract negotiation, tax management,
regulatory and legal frameworks, policies, money laundering, asset recovery and
repatriation, and resource governance for effective and optimal management and
governance of African natural resources. The resolution also reiterated that
the issue of international co-operation on IFF be raised in the Post-2015
Development Agenda. This was done. However, African states have not moved the
proposal to replace the UN expert committee on tax with a fully-fledged agency giving
Africa an equal say in global tax rules and help them combat IFF. International
corporate tax standards are still being developed behind closed doors at the
OECD. In so far as Africa has its voice in reforming international corporate
taxation the Addis Tax Initiative provides a dual approach; to improve tax
rules for the benefit of all countries and train qualified inspectors in
developing countries who will collect tax and offers a proposal for an
intergovernmental expert committee[11] as part of the
global architecture needed to fix the IFF challenges posed by TNCS in terms of
their impact on development and inequality.
Despite these
regional initiatives, the financial, technical, institutional and human
capacity constraints in Africa, coupled with;
·
a lack of adequate supply
of specialised technology and equipment for collecting, processing and storing
specialised information on tax practices by TNCs,
·
lack of publicly
available disaggregated financial information on TNCs,
·
restrictions on
determining beneficial ownership,
·
lack of harmonized
unitary taxation,
·
tax incentives, and
·
lack of clarity in the
automatic exchange of information between resident and source states continue
to facilitate IFF. Curbing IFF therefore, also requires a unified regional
response.
There are
various connections between IFF and their impact on development and inequality
in Africa. First, IFF deprive African governments of resources required to achieve
structural transformation, economic development and progressively realise human
rights. Second, IFF exacerbates inequality. Tax evasion and avoidance by TNCs
forces governments to raise revenue from other sources, including through
regressive taxes, the burden of which falls hardest on the poor. TNCs adopt the
OECD double taxation model that favours the Global North at the expense of the
African economy in the taxation of profits and deprives Africa of taxes from
income sourced domestically and from whence value is created. TNCs by their
global nature are predominant movers of IFF by creating global wealth and value
chains through which money is moved and made untraceable. The international
corporate structure enables this movement within the parameters of the law
though the use of definitions such as residence, subsidiaries, affiliates,
beneficial ownership, debt servicing and permanent establishments. Legal
concepts that are ambiguous and lacking in transparency.
Third, IFF
perpetuates and aggravates extreme economic inequality, benefiting the rich at
the expense of the poor. Inequality prevents millions of Africans from enjoying
social and economic rights on a non-discriminatory basis, such as access to
adequate housing, healthcare and food. Curbing IFF is therefore not only
essential for achieving equality, but also for financing development in Africa.
Thus, making progress on target 16.4 of the Sustainable Development Goals on
reducing IFF will make an important contribution not only to achieve various
other goals included in the Agenda 2030 for sustainable development, but also
to the enjoyment of development and equality.
Finally, IFF
also contributes to the build-up of debt crises since, in the face of missing
revenues, African governments resort to external borrowing. Debt servicing
reduces the amount of public resources available for development and achieving
equality. TNCs focus their market in jurisdictions where the legal system is
fragile such as in failed African states and states in conflict, as well as in
countries that host financial centres that are self regulated with minimal
supervision from the domestic capital markets to trace financial flows. TNCs
also invest in states where their financial institutions are yet to comply with
the Financial Action Task Force recommendations on tracing the source and flow
of money. These weaknesses in the law contribute to the capital flight schemes
employed by TNCs.
From the
foregoing, it is apparent that various approaches to deal with IFF at both the
international and regional levels exist but have to be improved and
strengthened. The cross-border nature of international corporate tax avoidance
means that action only at the national level cannot tackle the problem and can
even lead to further problems. Tax competition, profit shifting, tax havens,
lack of registries on beneficial ownership, digitalized customs data and global
value chains can be addressed through the ICRICT proposal on unitary taxation
as a first step towards accountability. Therefore, building on this proposal to
boost African state’s collective stance against the problem of IFF under the
current international corporate tax structure and to restore fairness in
taxation ensuring stability for businesses and investors in the AU a common
position towards pursuing a coordinated AU approach to reform international
corporate taxation to combat IFF relying on ICRICTs proposal for unitary
taxation under a formulary apportionment is necessary.
Under a unitary
taxation model, African states will be able to tax a TNC as if it were engaged
in a unified business as a single entity, requiring it to submit a single set
of worldwide consolidated accounts in each country where it has a business
presence, and then apportioning the overall global profit to the various
countries according to a weighted formula reflecting its genuine economic
presence in each country. Each African state in which the TNC has a presence
sees the combined report and can then tax its portion of the global profits at
its own rate. The question is how African states are to apply this model. The
following list of demands will help manage the transition to unitary taxation:
1. African states at the AU level to agree on a global minimum
effective tax rate and work towards a common definition of the tax base – this
would be problematic for African states initially to agree on a minimum
effective rate for corporate tax - which worldwide appears to be converging
around 25% but various African states have adopted much lower corporate rates
and even more generous cuts to the tax base, and may be reluctant to give them
up. Hence discussions at the AU level are necessary to come to common terms
towards pushing for the UN Committee of Experts on International Cooperation in
Tax Matters to be upgraded to an Intergovernmental Commission so that African
states can pursue minimum effective tax rates within regional groupings en
route towards global convergence.
2. African states to introduce the requirement for TNCs to submit a
combined report in each African state where they are subject to tax or have a
presence. This should follow the country by country reporting of the taxes
actually paid.
3. African states to direct efforts within
UNECA, HLP on IFF, Addis Agenda, Addis Tax Initiative and Tax Justice Network
-Africa’s ‘Stop the Bleeding’ campaign to push for an African Declaration in
support of ICRICT’s proposal on global formulary apportionment and taxation of
TNCs where economic activities take place and value is created to counter the
OECD stand on taxing TNCs under its residence principle.
4. To
use the Coalition for Dialogue on Africa (CoDA) and G77 platform to collaborate
with the UN Expert Committee on Tax to push for the creation of an
intergovernmental tax body under the auspices of the UN to lead the process of
reforming international taxation instead of the OECD.
5. AU
to consider establishing a legal enforcement branch that pursues legal redress
against TNCs for commercial tax evasion practices in order to recover the
proceeds of IFF.
6. In the move to introduce a uniatry tax model
for TNCs African states:
i.
To start sharing trade price data which would automatically expand the
dataset against which African states can judge and identify abnormal pricing.
This can be done in real time. African states can start a regional Open
Government Guide on ‘following the money’ partnerships, to work with major
trading partners in identifying abusive pricing happening at each end of the
same transactions.[12] Starting such a process on a regional basis
could be effective in reducing IFF.
ii.
To digitise the registry of companies. There
should be a clear register of companies for tax purposes where domestically
registered companies and their foreign related party data ought to be
accessible. This is currently one of the biggest problems on the continent, forms
are not filed, updated or if filed are misplaced. Current registries to be
updated, triangulated with tax data, as well as stock exchange and even
service-based data.
iii.
Each African state to
establish transfer pricing (TP) laws. Currently only 9 African states have TP
laws within their domestic frameworks. This means that whether or not there is
a tax treaty in place on a cross-border tax issue, there is still no
possibility of monitoring issues of TP without a clear legislative framework in
place.[13]
This law will empower African states to require TNCs operating in their
countries to provide the revenue authority with a comprehensive report showing
their disaggregated financial reporting on a country-by-country or subsidiary-by-subsidiary
basis. African governments could also consider developing a format for this
reporting that would be acceptable to multiple African revenue authorities.[14]
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[1] Alex Cobham. 2014. The
Impacts of Illicit Financial Flows on Peace and Security in Africa, Study for
Tana High Level Forum on Security in Africa.
[2] Alex Cobham, & Janský, P. 2018. Global
distribution of revenue loss from corporate tax avoidance - Re-estimation and
country results. Journal of International Development, Forthcoming. Ungated
version: 3 http://www.europarl.europa.eu/legislative-train/theme-deeper-and-fairer-internal-market-with-a-strengthenedindustrial-base-taxation/file-quantification-of-the-scale-of-tax-evasion-and-avoidance
[3] Crivelli, E., de Mooij, R., & Keen, M. 2016. Base
Erosion, Profit Shifting and Developing Countries. FinanzArchiv: Public Finance
Analysis, 72(3), 268–301.
[7] Report of the High-Level Panel on Illicit Financial
Flows from Africa commissioned by the AU/ECA Conference of Ministers of
Finance, Planning and Economic Development, page 85 available online at.
[10]Assembly Special Declaration on Illicit Financial
Flows Doc. Assembly/AU/17(XXIV) http://summits.au.int/en/sites/default/files/Assembly%20AU%20Dec%20546%20-%20568%20%28XXIV%29%20_E.pdf
at para 4.
[11]https://www.theguardian.com/global-development-professionals-network/2015/jul/15/addis-ababa-talks-risk-deadlock-over-un-agency-for-tax-ffd3-financing-for-development
[12]Open Government Partnership. 2016. Great Ideas for OGP
Action Plans: Follow the Money. https://www.opengovpartnership.org/stories/great-ideas-ogp-action-plans-follow-money
[13] Attiya Waris. 2017. How Kenya has Implemented and
Adjusted to the Changes in International Transfer Pricing Regulations:
1920-2016. ICTD: Working Paper 69.
[14] Attiya Waris. 2016.
Measures being Undertaken by African Countries to Counter IFF: Unpacking the
Mbeki Report. High Level Conference on Illicit Financial Flows: Inter Agency Cooperation
and Good Tax Governance in Africa. Pretoria.
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