Tax avoidance by some multinational companies is undermining domestic resource mobilisation efforts in most African countries, leading to loss of nearly $50 billion over the last decade.
Jason Braganza, the Tax Justice Network Africa deputy executive director, says African states must embrace and implement recommendations made in 2015 by the high level panel chaired by former president of South Africa Thabo Mbeki to deter illegal cash outflows and use the money to support development initiatives.
Braganza discussed the issue and ways through which African countries can reduce the vice with Business Times’ Peterson Tumwebaze.
Africa has lost $50 billion through weak tax laws and treaties that multinationals exploit to siphon money out. What can the continent do to stop illicit financial flows?
First of all, there is need to broaden Africa’s approach at defining and calculating illicit financial flows with a view to stopping them. This is because there are many ways multinationals use to cheat African countries, taking advantage of the weak laws and policies in place. Therefore, there is need to come up with new approaches, including aggressive tax planning, to ensure big businesses and multinationals do not engage in harmful tax practices to maximise profits.
The different national revenue bodies on the continent should institute mechanisms to detect channels that multinationals use to siphon out profits to offshore tax havens where there is high level of secrecy and tax laws that favour multinationals.
Do you have any practical suggestions on what should be done to stop this practice?
There is need to embrace some of the recommendations by the former president of South Africa, Thabo Mbeki, because most of the recommendations sought to enable African economies to approach illicit cash flows from a much broader perspective beyond corruption and tax evasion.
For instance, there are situations where companies and organisations trade within each other; in some cases there are transactions where one subsidiary may charge another lower or higher fees to avoid the tax liability.
Secondly, ensuring transparency in the way companies conduct businesses and what they report in their financial and audit statements. Governments should work together so that they are able to track business transactions of suspected firms and their finances.
Generally, African countries need to strengthen their laws, policies and strategies to close loopholes that promote illicit cash flows.
If nothing is done to stop the financial outflows, it will have a huge negative impact on the continent’s ability to collect revenues and the ability to implement development projects thus affecting economic growth.
Most investors come looking or expecting tax holidays in African countries. How do countries ensure that such incentives do not actually translate into or promote illicit financial flows?
The way businesses conduct their activities can be complex given the fact that international financial architecture is fractured as the complexity of operating tools and models for business transactions means that one business can have over 100 subsidiaries or special purpose vehicles they can use to take money out of the continent.
This is sort of arrangement provides them with the platform to hide or not fully reveal the kind of activities they undertake, or the income made. They take advantage of weak laws to hide what they are supposed to be paying to government...This is a big problem that is facing African countries.
We are, therefore, encouraging African countries to review their laws to curtail such excesses by multinationals.
What lessons can economies like Rwanda learn when it comes to signing treaties with multinational firms?
There are a number of lessons and good examples: for instance, in Kenya there are treaties that date back to the 70s that have never been analysed for people to understand what the country has signed itself up for.
The first step, therefore, is to really appreciate that some of the treaties that were signed several decades ago are harmful and detrimental to the economies.
Secondly, legislators on the continent must get involved in this conversation and be part of the negotiation process...They should not let government technocrats to negotiate and sign treaties without scrutinising them. This oversight can help strengthen the process and plug loopholes that promote illicit outflows from African economies.
This is important because the legislators are the ones that pass laws that have significant impact on how a government or an economy can run.
The third element is for African governments to start showing more political commitments to implementing what is considered as very good sets of recommendations that are being made on these issues.
The Mbeki report is a good example since the panel made good recommendations that can actually help African governments to try and stop illegal outflows and improve agreement negotiations.
The African Tax Administrative Forum is another platform, where governments should sign on because it is responsible and involved in developing legislation and policy guidelines with an African perspective.
Therefore, we advise African countries to review all trade treaties but, most importantly, implement the recommendations of Mbeki report, that they have signed up to.
There is a charter that all Heads of State have signed up to, committing themselves to working with their parliaments to try and curb outflows.
What other suggestions is the Tax Justice Network Africa is bringing to the table?
TJNA has also been engaging Members of Parliaments in different African countries to build their skills to understand the technicalities of some of these issues to inform their law making process.
We have a specific programme, African Parliamentary Network on Illicit Financial Flows and Tax, which is dedicated to working with lawmakers across the continent.