Tax evasion crippling Africa’s critical service sectors

Corporate tax avoidance – the practice of using legal means to pay the least amount of tax possible – and tax evasion – the general term for efforts by individuals, firms, trusts and other entities to evade the payment of taxes by illegal means – are Africa’s biggest financial drain depriving governments of essential revenues that they need to deliver on basic development needs: health, education, housing as well as access to water.

Dubbed “the ugliest chapter in global economic affairs since slavery” by Raymond Baker – an authority in financial crime, these schemes are crippling Africa’s critical services, denying citizens access to human rights services and stalling socio-economic transformation.

Thabo Mbeki, the second president in post-apartheid South Africa, says: “Due to tax avoidance and evasion schemes, African countries like the Democratic Republic of Congo (DRC) lack the public resources that would provide the nutrition, healthcare and education to lift people out of poverty.”

Mbeki also stressed that multinational tax avoidance and evasion plots are entrenching poverty and weakening developing countries’ economies, a fact shared by Oxfam, an international agency.

Oxfam states that developing countries lose an estimated US$100 billion to US$160 billion annually to corporate tax dodging.

“Africa is hemorrhaging billions of dollars because multinational companies are cheating African governments out of vital revenues by not paying their fair share in taxes,” Oxfam International’s executive director, Winnie Byanyima, said in a statement.

“If this tax revenue were invested in education and healthcare, societies and economies would further flourish across the continent.”

Koffi Annan, former United Nations secretary general, also says “tax avoidance and evasion are global issues that affect us all.”

In Africa, he adds, they have direct impact on the lives of mothers and children.

He added: “Tax avoidance and evasion practices are responsible for significant leakages of development financing resources as some companies, often supported by dishonest officials, use unethical tax avoidance practices to maximise profits, while millions of Africans go without adequate nutrition, health and education.”

Echoing same sentiments, country director at Action Aid, Malawi, Martha Khonje argues that entirely legal tax deals for one multinational have cost Malawi £27 million in six years and the real cost is to Malawians.

“Action Aid recently released a new report – called An Extractive Affair – revealing that the Malawian government lost out on more than US$43 million (£27 million) in potential tax revenues from a single Australian uranium mining company in six years.

“That is enough money to pay the salaries of 39 000 teachers or 8 500 doctors for a year,” she said.

Khonje added: “Our health service is threadbare, with a great shortage of nurses and doctors and our schools need teachers; the country desperately requires investment in public services, including health and education programmes.”

She, therefore, urged governments in developing nations to reduce losses from tax avoidance and evasions.

“Tax avoidance and evasion require urgent and coordinated action from government sectors, individually and collectively, to address them.

“They demand renewed political interest in fighting corruption, increased transparency in extractive sector transactions, a crackdown on banks that aid fraudulent transfers over and above improved laws and enforcement,” she explained.

Khonje urged Malawi and other African governments to increase income through taxation.

“Most countries in the region are resource rich. 

Therefore, they should allow large mining companies to extract mineral resources and then tax those operations to raise millions if not billions of dollars in revenues,” she noted.

As for Byanyima, African countries simply need to halt tax exemptions for foreign companies if they are to curb tax avoidance as well as evasion practices.

Oxfam’s Russia country director Dmitri Medlev says: “Developing as well as developed (Western) governments must monitor and enforce global companies to pay the correct taxes in the countries in which they operate.

“Further, powerful Western nations must treat developing states as equal partners in efforts to stop tax dodging.”

African governments also need to improve governance and strengthen national capacity to manage extractive industries as part of a broader economic and development strategy.

To put transparency and accountability at the heart of natural resource policies is another option proposed by accountant and economist Richard Murphy who added: “The most basic rule of efficient markets is transparency. Opaque markets misallocate resources, result in inefficient decisions and can lead to corruption.”

Murphy added that government sectors should encourage multinational companies as well as banks to publish details of profits, turnover, staff numbers or costs and numbers of clients, broken down by onshore and offshore activity for each subsidiary and permanent establishment, in each remaining tax haven.

Ernst and Young Chief Executive Officer, Gitahi Gachahi, encourages developing nations to build technical expertise to confront sophisticated multi-national corporations and their platoons of accountants as well as attorneys with increasingly opaque ways of dodging their tax bill.

More so, he believes the introduction of Tax Information Exchange Agreements in national budgets will help bride budget deficits and seal tax loopholes, a move that could see government sectors collects billions of dollars in revenue.

Fighting tax avoidance and evasion practices is not Africa’s isolated case as one of the key anti-tax dodging proposals on the international table tax is from the Organisation of Economic Co-operation and Development (OECD).

The OECD has launched a base erosion and profit shifting (BEPS) action plan, and billed it “as an answer to tackling tax avoidance in both rich and poor countries.”

Sadly, the base erosion and profit shifting action plan process does not deal with either tax breaks or the balance of taxing rights between rich and poor countries, enforced by the global spider’s web of tax treaties.

This means it will allow business to go on as usual, a fact supported by Byanyima, who said “existing international efforts to tackle corporate tax dodging such as the BEPS process will leave gaping tax loopholes that multinational companies can continue to exploit across the developing world.”

She added, “Many African nations have been shut out of discussions on BEPS reform and will not benefit from them as a result; African countries and other developing states are not consulted in shaping global tax rules, and this must change.”

As all the world’s governments are met in Addis Ababa last week to agree on how to finance the fight against poverty, developing nations were expected to speak out strongly and in unison as well as push hard for them to be given a say in writing global tax rules, potentially through a tax body at the United Nations.

African countries were also expected to use this summit as an opportunity to reshape the international tax system – a change urgently needed.

July 2015
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