Tax can end Africa’s aid dependency

Combating corporate tax avoidance and illicit financial flows is a recent phenomenon, in the US and Europe, and Africa. Nobody talked about it until the financial crisis in 2007–8 when the corporate goose suddenly stopped laying golden eggs and tax revenues dried up.

Now that economic growth is sluggish – and likely to remain so for the foreseeable future – cash-strapped governments need to bolster their tax bases.

Tightened public purse strings have also resulted in a diminishing appetite to increase – or in some cases even maintain – overseas aid spending.

The underlying narrative of July’s Financing for Development Conference in Addis Ababa was that increasing the domestic tax take, alongside a much greater role for the private sector, will have to fill the aid gap.

As a result, tax transparency and reducing illicit financial flows, which costs Africa more than $50bn per year, according to a report released in February by an African Union group chaired by former South African President Thabo Mbeki, were among the solutions to be offered at Addis.

Legislation in Europe and North America is now in force requiring extractive sector firms to publish country-by-country reports of all payments they make to governments, a system that is gradually being expanded to other sectors of the economy.

For their part, a number of sub-Saharan African governments are in the process of rewriting their domestic laws on the extractive sectors, although it remains to be seen how, if at all, they will complement the new transparency rules.

Meanwhile, the Paris-based Organisation for Economic Cooperation and Development (OECD) has drawn up plans on base erosion and profit shifting (BEPS), that would prevent firms from re-routing profits through shell companies, and require automatic exchange of information on tax payments between governments by 2016.

The group of African, Latin American and Asian nations – known as the G77 – proposed to upgrade the UN’s committee of tax experts to become a formal rule-making body – taking over the OECD’s role – on the grounds that they are not represented among the OECD’s 34 member countries.

However, the proposal was rejected by the EU, US and Japan on the grounds that it would slow the process of tax reform, much to the chagrin of civil society activists.

“Nobody is disagreeing about the need for global tax standards but on how and by whom they are drawn up,” commented European Network on Debt and Development (Eurodad) director, Tove Maria Ryding.

The refusal of Western governments to agree to the request was “a major disappointment,” says Alvin Mosioma, director of the Tax Justice Network, Africa, although his ire is not reserved solely for the US and European governments. “I didn’t really see much determination among developing countries to force it onto the agenda,” he tells me.

Despite the setback, the fact that tax policy is part of the debate on Africa’s future is a breakthrough, he says.

For Mosioma, “the biggest struggle was getting governments to take up the cause of tax transparency…I did a scan of AU resolutions. In 2008 there were maybe three mentions of tax and illicit financial flows in the whole document, 10 mentions in 2010 and almost a full page in 2012…it has been a gradual progression,” he says.

Matching the rhetoric of the Mbeki report, which cites poor governance, weak regulatory structures and corruption involving government officials as the main causes of illicit financial flows with the
legal frameworks and regulation needed to make it reality, will not happen overnight.

For the moment, at least, many African countries, particularly those which are resource rich, tend to be characterised by weak tax authorities and lax implementation of regulations, particularly those related to anti-money laundering, parent companies and subsidiaries, and tax evasion.

As Mbeki himself said in Addis, “Many governments will only work on this issue when there is pressure from the AUC [African Union Commission].”

While Kenya was taken off the “grey list’ of countries with a high risk of money laundering and terrorist financing by the Financial Action Task Force, the watchdog still deems the country, together with nearby Ethiopia and Tanzania, to be non-cooperative in terms of implementing anti-money laundering regulation.

It seems that the tools to tackle dirty money exist, but that they are not being used.

Avoidance culture

The avoidance culture and lack of prosecutions for tax evasion is also bemoaned by Gitahi Gachahi, the chief executive of Ernst & Young’s East Africa office in Nairobi.

“We have not seen laws to put tax evaders and corrupt officials in jail,” he says, adding that the practice will continue “until people know that they will be held accountable”.

However, if nothing else, the Mbeki report is a mark in the sand.

“From a purely political point of view we have a document signed by African governments which states that this is a policy priority,” says Mosioma, adding that “this is the most valuable part of the Mbeki process.”

All of this puts pressure on governments to shape up, but the general absence of media and civil society scrutiny on tax policy, together with revolving doors between politics and the private sector, has made the reform process harder.

In June, the Kenyan government quietly scrapped a 5% tax on capital gains (CGT) following a concerted business backlash, less than six months after introducing the levy.

Though criticised by stock exchange brokers, introducing CGT would have been a small step away from a regime dominated by labour taxes which account for 50% of Kenya’s tax base, despite the fact that only 6.5m Kenyans out of an estimated working population of 22m currently pay tax, according to the World Bank.

Kenya is far from alone in needing to rebalance its tax regime, but the lack of much vocal protest or national debate on tax policy during the drawing up of the June budget, suggests that journalists and civil society activists have their work cut out.

Nonetheless, the declining role for publicly funded aid spending has helped put tax squarely on the
African agenda.

Despite the symbolic failure in Addis, the political momentum behind tax transparency and ending corporate tax avoidance is unlikely to disappear.

The challenge now is for political will to be translated into policies and ‘domesticated’ by African governments.

“Tax has been seen for so long as a very technical subject, but for the first time there is a clear recognition by African countries of illicit finance and the effect it is having,” Norwegian diplomat Bjørn Brede Hansen noted at a side event in Addis.

“The question is: what next?”

Benjamin Fox