0 Tax me if you can - New African Magazine
Close
Tax me if you can

News & Analysis

Tax me if you can

If there is a richer, undeveloped continent on my world map, I can’t find it. Yet, by almost every conceivable measure of development, Africa is left trailing behind other continents. Why is that? Simple: the rape of the continent is happening faster, more violently and with less resistance today than at any time in its history.

The great wealth of Africa is being lost and squandered, day by day, week by week, year by year, by the failure of governments to manage their resources competently and the greed of ruthless and predatory companies that exploit this weakness. It is not a case of blaming the governments or the companies – they are both complicit – but, too frequently, African governments do not have competencies equal to the companies that have huge legal resources to draw up agreements.

In 2010, Africa’s exports of oil and minerals (€252 billion) were worth roughly seven times the international aid (€36 billion) given to the continent. How can it be that the nations that provide the raw materials that fuel the entire global economy – like DRCongo – are poor, whilst those with none – like Japan, Singapore or many European countries – are rich? Who are the real creditor and debtor nations here, and why?

The answer is not entirely straightforward. But one of the principle causes of Africa’s hamstrung development is illicit financial flows (IFF). What are they and what can be done about them? According to the United Nations, Global Financial Integrity, the World Bank and others, IFFs are monies that are illegally earned, transferred, or utilised. Somewhere at its origin, the movement or use of these monies broke laws and hence they are considered illicit. Around two-thirds of IFF are estimated to be the consequence of tax avoidance – mainly using trade mispricing. Around a third of IFF are also estimated to be the proceeds of crime. This obviously has very serious results for debtor nations. They drain hard currency reserves, increase inflation, impede tax collection, prevent investment, and undermine free trade.

“Trade mispricing” (also known as transfer pricing or re-invoicing) involves routing a sale within a multinational company via a low tax jurisdiction to ensure the margin (and thus the profit for accounting purposes) is incurred where taxes are lowest and not where they are highest. Whilst there is nothing wrong with, say, Acme (Chile) Ltd selling metals to Acme (Mexico) Ltd which makes cars to sell to Acme (US) Ltd and then on to the US public, these transactions are not free market transactions, so they are open to abuse. Given that they are internal transactions, Acme’s management are under pressure to limit the profits made in the US, say, where taxes are high, and increase them in Mexico, say, where Acme (hypothetically) benefits from tax breaks.

To get to know the real scale and importance of this issue, which may seem arcane, it is pertinent to point out that an estimated 60 to 70% of all global trade is internal to multinational corporations. This figure takes on even more importance if juxtaposed with figures showing the size of the global economy to be $60 trillion in total, of which $21 trillion is hidden offshore ($9 trillion of the $21 trillion comes from developing countries), and an estimated $854 billion (some authorities quote it as much as $1.8 trillion) was lost to Africa between 1970 and 2008 due to capital flight. The same figures show that the top five African nations hit by illicit outflows between 1970 and 2008 were Nigeria ($89.5 billion), Egypt ($70.5 billion), Algeria ($25.7 billion), Morocco ($25 billion), and South Africa ($24.9 billion).

Related Posts

Must Read – August/September Print Edition – Cover Story

Unmissable Past Stories