How African gov'ts lose US$50b in tax fraud

Every year, African countries lose over US$50 billion in Illicit Financial Flows (IFF), according to a new study by a High Level Panel (HLP) that was chaired by former South African President Thabo Mbeki.
Former South African President Thabo Mbeki chaired a commission which found that African countries lose over US$50 billion in Illicit financial flows. (Internet photo)
Former South African President Thabo Mbeki chaired a commission which found that African countries lose over US$50 billion in Illicit financial flows. (Internet photo)

Every year, African countries lose over US$50 billion in Illicit Financial Flows (IFF), according to a new study by a High Level Panel (HLP) that was chaired by former South African President Thabo Mbeki.

By definition, IFF are financial resources that countries lose in form of illegal activities such as tax evasion, corruption, unfavorable taxation agreements, money laundering, to mention but a few.

The loss is double the official development assistance (ODA) that Africa receives from donors and, the report, whose findings Mbeki recently tabled before the Pan-African Parliament in Midrand, South Africa has now become a major concern for African leaders.

Ideally, this should be more of a concern for governments but civil society organisations have swung in action to drum up attention and provoke action from countries to fix the loopholes responsible for such a huge sum leaving the continent at the expense of development.

In the Kenyan capital, Nairobi, a two day conversation by members of civil society organisations ended on Friday with a call on governments to re-visit their investment promotion and taxation policies that have turned the continent into a tax-haven for multi-national investors.

The workshop, organized by the Nairobi based Tax Justice Network-Africa (TJN-A) drew participants from civil society groups in the region whose efforts are dedicated to advocacy on taxation policies.

What’s shocking in the Mbeki report is that multi-national companies account for over 60 percent of the US$50 billion siphoned out of the continent.

The irony is that these are large investors that every African leader is working around the clock to attract to boost their countries’ Foreign Direct Investment (FDI), create jobs, improve people’s incomes and reduce poverty.

To attract them, Alvin Masioma, the Executive Director of Tax Justice Network Africa (TNJ-A) said governments are willing to promise anything to potential investors, a process that has given rise to governments signing unfavorable investment agreements in the pursuit of being attractive to investors.

Masioma cited Double Taxation Agreements (DTAs) and other tax incentives as the leading loopholes that cunning investors are exploiting in order to avoid their tax obligation.

“For instance, a Kenyan businessman will go and register a company in Mauritius and return to Kenya as a foreign investor, run a business here without paying taxes because it’s assumed he’s paying them to Mauritius,” said Masioma.

The DTAs are mainly between the two tax-administrations of two countries whose purpose is to enable the administrations to eliminate double taxation on investors from either party.

For instance, under the 2001 DTA between Rwanda and Mauritius, businesses from the latter would be exempted from paying taxes on dividends, interests and royalties because they were assumed to be paying the same liabilities in Mauritius.

But experts thought the agreement favoured Mauritian companies more and benefited Rwanda less.

So Rwanda initiated talks to renegotiate its DTA with Mauritius and a new agreement between the countries was concluded in 2013 and it came into force in August 2014; under the new terms, Mauritius firms in Rwanda now have to pay 10 percent tax on elements previously exempted.

Adeyinka Adeyemi, a senior official with the United Nations Economic Commission for Africa (UNECA) which is working closely with African Union to eliminate IFFs, said African governments wouldn’t be talking about debt relief if they weren’t losing US$50 billion annually.

“We must stop these resources from leaving, we must seek ways not only to recover the lost resources but also develop measures to stop more from being lost,” he told Sunday Times.

So as one of the measures, UNECA, where Adeyemi works as a senior advisor on regional integration and infrastructure cluster capacity building, is developing a Smartphone application that will reportedly be able to track in real time, the finances leaving any of the countries in Africa.

It sounds farfetched but with the high level secrecy involved in moving high volumes of money, it might take such high tech interventions to break the cycle, according to Adeyemi.

UNECA is going to be working closely with civil society organisations, about 30 of them that are members of the Tax Justice Network-Africa, to engage governments especially countries’ tax authorities to see how they can form a partnership to defeat illicit flows of resources.

But IFFs are not only about tax fraud and avoidance. The Mbeki report which was commissioned by African governments under the auspices of the African Union Commission (AUC) and UNECA also named other factors responsible for huge sums of illicit outflows.

These include money-laundering proceeds, abuse of power and market abuse with a considerable portion emanating from tax fraud from commercial and criminal activities as well as corruption.

Previously, it was thought that corruption was the leading cause of illicit financial flow out of the continent where the thinking was that corrupt public officials hide their stolen wealth abroad, in countries far from home to avoid being detected.

But Mbeki’s report found that commercial activities of multinationals are the leading cause of resource flight from the continent. It’s a finding that’s likely to put governments between a hard place and a sword because no one wants to upset investors by increasing scrutiny on them.

“So this is a delicate fight for governments, it’s a fight that requires political will to win,” said UNECA’s Adeyemi.

Of the US$50 billion lost, Mbeki’s findings show that bribery and embezzlement only make up on average, 3 percent of illicit outflows.

The real contributory factors are criminal activities such as drug trafficking and smuggling that make up 30 to 35 percent while commercial transactions by multinational companies make up a whopping 60 to 65 percent.

Information sharing

As a way of closing in on the IFF activities in Africa, there are new efforts by the Organisation for Economic Cooperation and Development (OECD) based in Paris, France, under an initiative called Global Forum on Transparency and Exchange of Information for Tax Purposes.

Sunday Times talked to Mr. Donal Godfrey, the deputy head of the Global Forum who said that so far, twenty African governments have signed up as members of the forum including Tanzania, Uganda and Kenya, in East Africa.

“This is something we believe can greatly help African governments to fight tax evasion and other related vices if we can only enhance cooperation on information sharing,” he said.

But for that to happen, Godfrey says they want to increase the forum’s membership, work closely with countries’ ministers of finance and build capacity of member countries to detect resource movements.

In an exclusive revelation to Sunday Times, OECD wants to approve Rwanda’s Dr. Donald Kaberuka, whose presidency at the African Development Bank is coming to an end this month, to take up a role as the Global Forum’s patron.

The purpose would be to give the initiative a respected African face and bring more African governments on the table to tackle the problem.

As things stand, Nigeria, Egypt, South Africa and Morocco top the list of the ten African countries where most IFF has originated. In three decades, between 1970 and 2008, Nigeria alone lost some US$217 billion, money that should never have left the country’s economy.

It’s thought that if Africa can stop losing such amounts of financial resources, the continent can move closer to gaining economic independence.



Have Your SayLeave a comment