Multinational corporations doing business in Africa are finding it all too easy to circumvent taxation — and that loss of tax revenue just makes countries even more dependent on foreign aid.
Stemming from underdeveloped tax administration systems, tax avoidance is one of the biggest obstacles toward achieving transparency as a catalyst for development in the continent, Tanzanian MP Zitto Kabwe told Devex.
Africa is losing $50 billion every year from illicit financial flows, while at the same time receiving around $30 billion in foreign aid. That means Africa is losing out on tax revenues equivalent to almost twice the amount it gets in official development assistance from overseas, noted the deputy opposition leader and shadow finance minister.
Kabwe is one of 10 African experts on a fact-finding mission to look at tax and transparency issues in Europe. Organized by the European Network on Debt and Development, the initiative is taking the experts — among them several MPs — to discuss national taxation issues and challenges with representatives of EU member state governments, the United Nations, the Organization for Economic Co-operation and Development, EU institutions and civil society groups in Brussels, London, Oslo and Paris.
“We are here in the developed world to engage with various organizations, discuss and present our [side] of the story, in order to get their views on how some of these problems can be addressed,” explained Malawian MP McJones Mandala Shaba.
African countries see the issue of improved tax revenues as part of a long-term strategy to become less dependent on foreign aid. But multinational corporations need to be willing to change their ways and start paying taxes, the MPs asserted. For that to happen, they explained, help would be required from the governments of the countries in which these companies are based.
“If developed countries support us in our effort to ensure we don’t lose our own revenues, we won’t need foreign aid and we’ll have a partnership of equal footing, rather than the donor-recipient relationship that has lasted more than 50 years,” Kabwe noted. “We just need our taxes: companies must come, invest in Africa, get their profits, but pay their taxes in Africa. Once we have our own revenues, we’ll be able to finance our development, we’ll build our schools, facilities, infrastructures, pay our teachers well, and have a good health system.”
But how can this goal be met? With more transparency, argue the MPs.
First of all, explained Mandala Shaba, donor governments should demand that multinational corporations report the profits they make in the country where “real economic activities take place,” not only in the country where the headquarters is located.
Kabwe agreed with Tax Justice Network senior analyst Marcus Meinzer, who recently suggested to Devex that the main issues to tackle illicit financial flows concern transparency of ownership (concerning shell companies and trusts registered and created in the EU on behalf of residents of developing countries), better exchange of financial account-related tax information, and transparency of multinational corporations’ annual accounts.
“I totally agree with his analysis. In a country like Tanzania, minerals exported over a period of 10 years were valued at $11.3 billion, but the taxes paid were around $440 million, less than 4 percent of the total. A similar situation [occurred] in Zambia … It clearly shows how transparency in the accounts is crucial for the extractives industry,” said the lawmaker.
Kabwe argued that the first step to assess, monitor and prevent incoherence is to set up a system of automatic exchange of information.
“Various initiatives [have been undertaken] by the EU and the OECD to set a convection of mutual exchange of information. I call on developing countries, especially African countries, to sign up to this convention. Signing it is the first step to have access to information, automatically or by request.”
He added that a global intergovernmental body is also needed to provide rules and guidelines, and a system implementing a single convention on tax avoidance.
“Having one single convention, ratified by all countries of the world, would be easier and even sanctions could [imposed] to countries that are not providing information.”
Archaic legal framework
However, the tax administration in Africa lacks the capacity to come up with specific legislation that would ensure “getting as much as possible” from the investments of multinational companies, pointed out Mandala Shaba.
“One of the challenges we face … is that we have outdated, odd and archaic legal policy frameworks and legislation.”
He gave the example of Malawi’s mines and mineral act, enacted almost 40 years ago, but never reviewed since to be brought more in line with current social economic developments.
“Companies are taking advantages of this particular aspect. We should come up with an appropriate legal framework, which would guide the management of natural resources, in particular mines.”
On tax issues in Africa, there is almost always the same elephant in the room: corruption, in the form of powerful bureaucrats who appropriate revenues from natural resources and hide the money abroad in tax havens.
“We recognize that corruption in most African countries is like the way of life — corruption in the street with the traffic police, all the way to the top executives and politicians,” said Kabwe.
A solution to address the problem, he argued, would be to bring the fight to offshore tax havens.
“Corrupt money needs a place to hide, so we have to create an environment where if you are corrupt you don’t have any place to hide … so that corrupt politicians have less incentives to engage in stealing.”
Kabwe mentioned that another solution is to establish accountability mechanisms — ways of holding everybody responsible through the actions they commit, while ensuring that the citizens are empowered to inform on acts of corruption.
Both solutions would be music to the taxman’s ears.
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