African countries lose billions of dollars a year due to illicit financial flows. Léonce Ndikumana looks at what can be done to combat capital flight through tax avoidance.
The recent inclusion of the African Union in the G20 acknowledges a fact that traditional geopolitics has been reluctant to accept: Africa has emerged as a potent force propelling global transformation.
African countries are dealing with multiple crises at once, from terrorism to coups. Six members are currently suspended from the African Union due to institutional failures. The shadow of genocide is back in Darfur. The continent shoulders a disproportionate share of the effects of multiple recurrent and cumulative shocks – climate change related shocks, health pandemics such as Covid-19, wars in Ukraine and in the Middle East – with limited financial and technical coping capacity.
According to pollster Afrobarometer, the winds of growing discontent with democracy are blowing across the African continent.
On another front, Africa faces a financial gap of $1.2 trillion through 2030 to fund its SDGs, according to the African Development Bank.
This is why it is so disheartening that the continent loses $89bn dollars a year to illicit financial flows, with tax avoidance by mining multinationals estimated to cost sub-Saharan Africa as much as $730m a year. Far more than it receives in development aid.
Harmful tax practices
Harmful tax practices drain necessary resources needed for development. Africa’s average tax revenues were 16% in 2020, half of the OECD’s 33% and five percentage points below Asia and the Pacific. In that year, the largest economy on the continent, Nigeria, had a tax-to-GDP ratio of just 5.5%.
Capital flight, a pathology of the African economy, worsens both poverty and inequality. It also generates blowback effects on destination economies in the West: financial instability, corrosion of the rule of law, and urban property market squeeze.
In Angola, capital flight almost doubles government spending on health. From 2000 to 2018, the country lost $4.2bn a year, while annual health spending was $2.3bn. Over the same period, South Africa, dubbed “the most unequal country in the world,” lost $15.7bn annually to capital flight, almost half of what it invested in health ($27.4bn). And Côte d’Ivoire could have doubled its public health budget ($1.6bn) if it had retained the $1.1bn lost to capital flight annually.
These are hospitals that are not built, medical supplies, vaccines, antibiotics, which could not be purchased. Improvements in African economies over the recent past have been offset by setbacks due to the financial hemorrhage facilitated by transnational plunder networks. The amount of African private wealth illegally acquired or illegally transferred abroad is about three times the stock of its external debt. This makes Africa “a net creditor” to the rest of the world.
That money must return home. And it must do so not just to be automatically transferred abroad again straight into the hands of the financial institutions that own Africa’s inflated debt.
Halting illegal financial flows
Essential to any political strategy to reinforce democracy, combat poverty, fight climate change and consolidate human rights is the need to halt illicit financial outflows towards tax havens. They stem in large part from longstanding tax avoidance strategies employed by multinational corporations. When the G20 leaders could no longer ignore the public outcry over these nefarious practices, discussions were initiated at OECD in 2013.
Nonetheless, it was only in 2015, with the inception of the Inclusive Framework, that African nations were invited to the discussions. But less than half of African nations attended these negotiations where American and European bureaucrats disputed over who could claim a larger share of the pie.
A decade later, the result is far from global solidarity. For emerging economies, and Africa in particular, it was a wasted effort. It even threatens to aggravate current regional tax positions. The proposed very low minimum tax rate of 15% – as opposed to the 25% we advocate at ICRICT, the independent commission for tax reform chaired by Joseph Stiglitz and Jayati Ghosh of which I am a member – and the lopsided formula for deciding which country has the right to tax the profits of digital businesses, led to disappointment.
Almost no revenue allocation goes to the countries that need it most. The G7 countries – barely 10% of the world’s population – would be keeping 60% of the revenues generated under the new minimum tax.
New tax convention is a bad deal for Africa
African countries will soon be asked to ratify a multilateral convention to implement this new inequitable reallocation of taxing rights. It could take years before this new convention starts generating revenues for Africa and with the United States reluctant to ratify it, the convention may never be implemented. Overall, it’s a bad deal. Africa should not sign it and should start considering unilateral measures, such as digital services taxes, to ensure digital multinationals start paying their fair share.
The deal is so bad that at the United Nations General Assembly in September, Nigeria, on behalf of the African Group of countries, demanded the start of a fresh intergovernmental negotiation, this time under the aegis of the United Nations
Could this herald a fairer outcome for African countries? OECD countries are unlikely to become all of a sudden more benevolent. This is why South-South solidarity is essential to thwart attempts to obstruct the UN negotiations.
Global geopolitics favours this.
The Cold War between the United States and China, the instability aggravated by the war in Ukraine and the Middle East, the polarisation of international relations, the attempt by the EU to forge a new partnership with Africa, and the competition between actors to win allies in the Global South or not to lose them to competitors, are all factors that create a potentially favorable environment for advocating for genuine multilateralism in tax matters.
Countries in Latin America, from Colombia to Brazil have also made clear their frustration with the OECD deal. Perhaps a common position can be found to advance together at the United Nations.
African countries demonstrated that regional cohesion and leadership can lead to a new tax reform momentum. Their new seat at the table can help shape a new agenda at the G20, one that includes tackling illicit financial flows, from putting an end to tax avoidance by multinationals to ensuring offshore wealth in tax havens is appropriately taxed.
A united Africa and South-South solidarity can strengthen a truly inclusive and democratic development agenda.
While global core institutions of the rules-based order grow less relevant, developing countries, by speaking with one voice, can readdress current power imbalances in international negotiations in favor of equity and inclusion, and in defense of democracy.