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Africa/Global: Fighting Tax Evasion and Tax Avoidance
AfricaFocus Bulletin
April 30, 2019 (190430)
(Reposted from sources cited below)
Editor's Note
The UN Economic Commission for Africa (ECA), in its annual
Economic Report on Africa, focused on financing development in
Africa, highlighted the urgency to curb what it termed �revenue
leaks� through tax evasion and tax avoidance, as well as through
misguided government policies. Multinational corporations, corrupt
officials, and financial intermediaries around the world siphon
off African wealth, leaving national budgets starved for resources
to invest in health, education, and sustainable economic growth.
This report, released on March 23 and available on the ECA website
(http://www.uneca.org; direct link http://tinyurl.com/y2w8vl6d),
lays out specific ways in which African countries can curb these
revenue leaks. But it also stresses that these are limited by the
fact that so much of the diverted wealth is hidden in financial
capitals outside Africa.
Less than a month later, from April 15-18, the UN forum on
financing for development (https://www.un.org/esa/ffd/ffdforum/)
met at the UN headquarters in New York. But references to illicit
financial flows from tax evasion and tax avoidance were buried in
short references deep within the report. Ironically, examples of
stolen wealth parked in high-end real estate or passing through
global banks could be found only blocks away from the UN in mid-Manhattan.
This AfricaFocus Bulletin contains excerpts from the ECA report,
as well as brief descriptions and links to two cases illustrating
such illicit financial flows: a $7.1 million condominium in Trump
Tower owned by the daughter of an African president and a $2.2
billion set of bank loans to Mozambique now under indictment in a
New York court.
For previous AfricaFocus Bulletins on illicit financial flows and
related issues, visit http://www.africafocus.org/intro-iff.php
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Economic Report on Africa 2019
Fiscal Policy for Financing Sustainable Development in Africa
https://www.uneca.org/publications/economic-report-africa-2019
Executive Summary
Background
Transitioning to the Africa we want is within our reach. Africa is
making steady progress in building the critical ingredients for
sustainable and resilient societies, but progress towards
achieving the Sustainable Development Goals (SDGs) is slow and
uneven across the continent. Access to basic infrastructure such
as energy, water and sanitation services is improving but falls
well below the global average.
�
The financing needs across the continent to meet the SDGs are
huge, and the financing gap is wide. Estimates of the financing
needs range from $614 billion to $638 billion a year (UNCTAD,
2014). Africa�s annual financing needs for infrastructure, food
security, health, education and climate change mitigation alone
are estimated at $210 billion (UNCTAD, 2014). To narrow the
financing gap, African countries need to enhance domestic resource
mobilization, and that requires sustained improvement in the
efficiency and efficacy of fiscal policy.
�
Key Findings
Economic growth in Africa, which moderated from 3.4 per cent in
2017 to 3.2 per cent in 2018, was supported largely by solid
global growth, a moderate increase in commodity prices and
favourable domestic conditions. In some of Africa�s largest
economies�South Africa, Angola and Nigeria�growth trended upwards
but remains vulnerable to shifts in commodity prices. At the
subregional level East Africa remains the fastest growing, at 6.1
per cent in 2017 and 6.2 per cent in 2018. West Africa�s economy
expanded by 3.2 per cent in 2018, up from 2.4 per cent in 2017,
while Central, North and Southern Africa�s economies grew at a
slower pace in 2018 compared to 2017.
�
Africa has made notable progress in education, health and other
social outcomes. Progress in poverty reduction has been steady.
The poverty rate dropped from 54.3 per cent in 1990 to 36 per cent
in 2016. However, the pace of poverty reduction is also slow, and
inclusive growth � leaving no one behind �remains elusive. The
poverty gap, which measures the depth of poverty, remains high, at
15.2 per cent against a global average of 8.8 per cent, partly
because of high income-related inequities in access to public
services.
�
Corporate Tax Reductions Offer Little Incentive for Investments
For African countries, lowering taxes does not significantly
influence investment. The Report finds that to achieve a 1 percent
increase in total investment, governments could lose up to 20 per
cent in tax revenue. African countries should thus avoid joining
the race to the bottom and lowering taxes to attract foreign
investment, since the gains will be much smaller than the revenue
loss.
�
Base Erosion and Profit Shifting are Major Sources Of Revenue
Leaks
Eliminating base erosion and profit shifting could boost tax
revenue in Africa by an estimated 2.7 per cent of GDP. The main
avenues of tax evasion and avoidance in the natural resources
sector in Africa highlighted in the Report are the use of nonstrategic
tax incentives, loopholes in double-taxation agreements,
difficulties in applying the arm�s length principle effectively in
regulating intra-company transactions, inclusion of fiscal
stability clauses in contracts and a lack of coordination and
information sharing among government agencies.
�
Policy options for the natural resources sector.
African countries should strengthen their oversight of the natural
resources sector. They could consider a more equitable and less
administratively challenging approach to assessing what share of
multinational corporations� profits to tax (for example, based on
the share of sales or other variables), or they could base taxes
on variables that are harder to manipulate than corporate income.
At the same time, governments need to close loopholes to thwart
base erosion and profit shifting.
Chapter 6: Multinational Corporations, Tax Avoidance And Evasion
And Natural Resources Management
Introduction
Natural resources production in Africa has expanded in the past
decade. Africa�s production of 15 important metals was forecast to
rise by 78 per cent over 2010�2017, more than double the 30 per
cent forecast for the Americas and Asia (US Geological Survey,
cited in AfDB, 2013). As Africa�s subsoil remains relatively
underexplored, increased investment can only enhance discovery
rates (Knebelmann, 2017).
Natural gas fields offshore of northern Mozambique have attracted
investments from multinational corporations. But future government
revenues are threatened by a $2.1 billion loan scam that was engineered
by bankers in London and a shipping company in Abu Dhabi.Credit: Anadarko.
The natural resources sector is dominated by multinational
corporations and state-owned enterprises, which are the only firms
that have the ability to raise the necessary capital and manage
the associated high risks (IMF, 2014a; Mullins, 2010). However,
multinational corporations also have the ability to undertake
complex international tax avoidance strategies that shift profits
from where the underlying economic activities take place to lowor
no-tax jurisdictions, a behaviour referred to as base erosion
and profit shifting. This can significantly reduce fiscal revenue
in countries that rely heavily on natural resources revenue (UNDP,
2017; OECD, 2015).
Multinational corporations have engaged in tax avoidance running
into the tens of millions of dollars for individual companies and
billions of dollars a year for individual countries (ActionAid,
2015; Africa Progress Panel, 2013, Bloomberg, 2012; Oxfam, 2015).
In 2015 base erosion and profit shifting led to an estimated $240
billion annual revenue loss for countries around the world in all
sectors (Solheim, 2016).
The impact of base erosion and profit shifting as a percentage of
tax revenues is higher in developing countries than in developed
countries (OECD, 2015, 2014). In 2013 base erosion and profit
shifting cost Africa an estimated 2.7 per cent of GDP in lost
revenues (Cobham and Janský, 2018). Other estimates of losses
through base erosion and profit shifting ranged from 1 to 6 per
cent of GDP (Moore, Prichard and Fjeldstad, 2018). Natural
resources taxation will continue to present critical fiscal
concerns for developing countries, particularly in resource-rich
countries (OECD, 2014).
�
Multinational Corporations and Illicit Financial Flows
Tax Avoidance and Evasion
Tax avoidance is an elusive term. The Organisation for Economic
Co-operation and Development notes that it is �generally used to
describe the arrangement of a taxpayer�s affairs that is intended
to reduce his tax liability and that although the arrangement
could be strictly legal it is usually in contradiction with the
intent of the law it purports to follow.� Defining tax evasion is
more straightforward; it is �generally used to mean illegal
arrangements where liability to tax is hidden or ignored, i.e. the
taxpayer pays less tax than he is legally obligated to pay by
hiding income or information from the tax authorities� (OECD,
n.d.a).
Illicit Financial Flows
The High Level Panel on Illicit Financial Flows from Africa
defines illicit financial flows as international financial
transfers that are illegally acquired, transferred or used, as
well as aggressive tax avoidance. Illicit does not necessarily
mean illegal, but the harm that base erosion, profit shifting,
aggressive tax avoidance and aggressive tax planning do to
development justifies considering them illicit flows because they
are morally wrong (ECA, 2018b, 2018c). Anyone who facilitates such
flows (including the jurisdictions that attract them) has an
obligation to act to prevent them.
Channels For Illicit Financial Flows
Multinational corporations and other economic actors in the
natural resources sector may generate illicit flows in a number of
ways, as discussed below.
Aggressive tax planning
Tax treaties may enable multinational corporations in the natural
resources sector to structure their operations to minimize tax
liabilities. One way is to set up a complex network of offshore
companies to facilitate intra-company trade (Mullins, 2010). This
network of offshore companies can be used to circumvent public
disclosure requirements and create an avenue for tax avoidance by
enabling multinational corporations to report more of their
profits in low-tax jurisdictions.
Abusing transfer pricing
Multinational corporations can also manipulate the prices of goods
and services traded between different parts of the multinational
group in order to shift profits to jurisdictions where corporate
income taxes are low. Such abuses of transfer pricing by
multinational corporations can result in major losses of public
revenue (Readhead, 2016).
�
In addition to avoiding taxes, abusive transfer pricing can also
be used to enable multinational corporations to transfer funds to
jurisdictions with a high degree of financial secrecy. This can
allow them to use these funds to engage in corrupt transactions
(such as paying bribes to government agents in exchange for
favourable treatment) while avoiding detection because of the
financial secrecy surrounding the part of the company dealing with
the relevant financial resources (Africa Progress Panel, 2013;
OECD, n.d.a).
Misclassifying the quantity or quality of extracted resources
Taxes are levied on the value of extracted natural resource, so
countries have an interest in ensuring that reported quantities
and qualities are accurate. Royalty rates for mineral products
generally depend on their composition or quality, which may vary.
Companies may take advantage of this process of royalty
calculation by declaring that extracted minerals are of lower
quality than they truly are. Where companies export unprocessed
minerals such as ores, it may be difficult for government
authorities to assess the mineral content of the exports.
�
Misinvoicing trade transactions
Natural resources and commodities are susceptible to the
intentional manipulation of invoices of goods or services exports
or imports to disguise their true value and evade taxes and
customs duties. Misinvoicing and mispricing are also done to
facilitate the shifting of profits to low-tax jurisdictions
(African Union and ECA, 2014; Baker et al., 2014; Save the
Children UK, 2015; UNCTAD, 2016).
Overvaluing deductible expenses
Another channel for illicit flows is inflating deductible
expenses, again through relationships of multinational
corporations with affiliates. For example, firms may inflate costs
on loans and technical services acquired from related parties and
overstate deductible expenses for equipment and other supplies.
While under-declaration of the quantity and quality of resources
affects royalty payments to the government, cost inflation usually
affects income-based taxes, which are becoming more common in many
countries.
Treaty shopping has reduced corporate income tax revenue by above
15 per cent in African countries that have signed a treaty with an
investment hub (Beer and Loperick, 2018), a particular blow to
countries with a high dependence on corporate income taxes.
Mauritius, which has received attention recently for facilitating
treaty shopping, took steps to address this by revising its double
taxation agreements with India and South Africa in 2015.
Multinational corporations in the natural resources sector can
also avoid taxation in resource-rich countries by routing asset
sales through low-tax jurisdictions.
Administrative corruption and illicit financial flows
Administrative corruption also contributes to the prevalence of
illicit financial flows in the natural resources sector in Africa
(table 6.4). Weak governance systems and lack of transparency give
government officials too much discretionary power, making them
susceptible to bribes or theft of natural resources or associated
revenue (African Union and ECA, 2014). Officials� discretionary
power can also be used to award contracts to multinational
corporations that cede or limit some taxation rights in return for
bribes, thus undermining competition. Multinational corporations
often encourage the corruption that facilitates illicit financial
flows (ECA, 2016).
Because illicit financial flows benefit both multinational
corporations and corrupt officials, it can be difficult to
introduce more transparency to stop illicit financial flows in
Africa. This may explain why organizations dealing with illicit
financial flows are often underfunded and lack the power to
prosecute cases related to illicit financial flows (African Union
and ECA, 2014; and ECA, 2018c).
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Stolen Wealth Hiding in Plain Sight
While UN officials debate how to find funds for financing
development, stolen wealth that has already left Africa is hiding
only a few blocks away in mid-town Manhattan, in high-end realestate
such as Trump Tower and in records at global banks such as
Credit Suisse.
While some is still deeply hidden in mazes of shell companies or
misleading corporate reports, more and more is being exposed by
investigative journalism and court investigations. Two prominent
recent cases highlight a $7.1 million condominium in Trump Tower
purchased with funds stolen for oil revenues in the Republic of
Congo, and the other funds channeled through the New York office
of Credit Suisse as part of a fraudulent $2.2 billion set of loans
to Mozambique.
Recovering the funds is far from easy. But exposing the money
trails is an essential first step, whether for doing that or for
preventing similar tax evasion and avoidance in the future.
The Trump Tower condominium, it was revealed in a recent Global
Witness report, was purchased in 2014 by Ecree, a New York LLC newly created by
a leading New York law firm. Global Witness traced the purchase
across multiple countries (http://www.globalwitness.org; direct
link: http://tinyurl.com/y2lkey9e). Beginning with a payment by
the government of the Republic of Congo of $765 million to the
Delaware subsidiary of a Brazilian firm in late 2013, through a
$31 million payment from Delaware through a shell company in the
British Virgin Islands to another shell company in Cyprus set up
by a lawyer in Portugal, to the final transfer of $7.1 million to
the New York LLC. Meanwhile, the Portuguese lawyer, who
represented both the Brazilian company and the government of the
Republic of Congo, had transferred ownership of the company in
Cyprus to Claudia Sassou-Nguesso, the daughter of the President of
the Republic of Congo.
The wealth ending up parked at Trump Tower is only a fraction of
that funneled out of Congo´s oil wealth by its president and his
family. Most oil sales are managed through Swiss trading companies
and through the refinery managed by the president´s son
(http://www.africafocus.org/docs15/iff1503.php), and invesitations
in France have targeted the family´s numerous holdings in that
country (http://tinyurl.com/yymr6qjc).
In the Mozambique case, an indictment issued by a grand jury in
the Eastern District of New York in December 2018 featured a
multinational cast of characters (http://www.africafocus.org/docs19/moz1901.php). The five named
individuals indicted include the former Minister of Finance of
Mozambique, a Lebanese businessman representing an international
shipping conglomerate in Abu Dhabi, and three London-based
bankers, employed at the time of the loans by the giant Swiss bank
Credit Suisse. Mozambican civil society is challenging the
legitimacy of the loans given that they were not legally approved,
and the Mozambican government has filed a case in London. But the
future disposition of liability will depend on court proceedings
in Mozambique, London, and New York. Given the damages suffered by
Mozambique in recent months, the outcome will have major impact on
the country´s capacity to recover.
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Actions that disrupt any part of this vicious cycle of illicit
financial flows and poor governance can help to tackle illicit
financial flows. African countries may wish to strategically plan
for which parts of the chain to address first, focusing on those
that are easier to achieve and that will make it easier to target
others later. For example, if the customs authority is a pocket of
efficiency in a national administration, strengthening its
capacities to prevent illicit financial flows through trade may
cut off the resources used by corrupt officials to prevent
improvements in public transparency. This, in turn, can make it
easier politically to pursue anti-corruption measures.
Challenges In Ending Illicit Financial Flows
African countries face several challenges in fighting illicit
financial flows from the natural resources sector. First, many
countries lack the skills and resources (including laboratories
for testing the composition and quality of extracted resources)
needed to verify the submissions of multinational corporations.
Countries need to build capacities in this area, in some cases
with international assistance. Efforts to build national
administrators� capacities in tax audit, such as the Tax
Inspectors without Borders initiative, have experienced
challenges. In some countries, national administrations have been
sidelined, while the external auditors assigned to the project
have had conflicts of interest (ECA, 2018b).
Second, in light of the complex network of offshore companies used
by multinational corporations, weak public disclosure requirements
and enforcement may jeopardize efforts to curb the abuse of tax
provisions and illicit financial flows.
Third, the form that illicit financial flows take depends on
individual country characteristics. Many government officials in
Africa are unfamiliar with how such flows operate in their
national context, and estimates of the extent of such flows and
their sources are scarce. Learning more about them should be a
priority (ECA, 2018c).
Fourth, as with natural resources taxation, there is little
information sharing and coordination on illicit financial flows
among relevant government agencies within or between countries.
Coordination is a relatively inexpensive yet effective way to
counter illicit financial flows (ECA, 2018b, 2018c; Institute for
Austrian and International Tax Law, n.d.).
Initiatives To Combat Tax Avoidance And Evasion
OECD Base Erosion and Profit Shifting package The OECD�s Base
Erosion and Profit Shifting (BEPS) report set out a 15-point
action plan to equip governments with the domestic and
international tools they need to combat base erosion and profit
shifting (OECD, 2014). The report recognised that greater
transparency and improved data are needed to uncover and stop the
divergence between where profits are made and where they are
reported for tax purposes. With multinational corporations
dominating the natural resources sector, cross-border transactions
between related parties abound and create multiple opportunities
for abusing transfer pricing. The OECD�s BEPS (in particular
Actions related to transfer pricing outcomes and value creation,
and Country-by- Country Reporting) can provide a starting point
for countries in Africa to deal with transfer mispricing.
Country-by-Country Reporting is a risk profiling tool that can be
used to flag discrepancies between where economic activity by
multinational corporations takes place and where the corporations
pay taxes (OECD, 2014). Other priorities for tackling base erosion
and profit shifting, such as non-strategic tax incentives,
governance of tax administration and tax competition, are not
included in the OECD package. African countries will therefore
need to consider additional policies that are outside of the OECD
BEPS package. For example, the �sixth method�, pioneered and used
successfully in Argentina, calls for commodities traded within a
multinational group to be priced according to publicly quoted
prices to simplify transfer pricing administration and settle
disputes (Grondona, 2018).
�
Formulary apportionment and moves away from income-based taxation
While the OECD BEPS actions can be a useful starting point for
African countries to reduce base erosion and profit shifting, some
of the proposed solutions may be difficult to apply. Taxing
multinationals on the income of their local branches or
subsidiaries is inherently vulnerable to the manipulation of
profits, even with the OECD BEPS package.
�
This suggests that there may be advantages to a shift away from
income-based taxation, which may be easier to manipulate, towards
taxation based on variables that are more difficult to manipulate.
Given the arguments about the role of income- based taxation in
balancing risk, a good approach might be to use a variable that
closely tracks corporate income but is less easy to manipulate.
This would seem to rule out any variable that is based on intracompany
transfers (including sales and imports), particularly
those for which comparable prices are not available, as these may
be more susceptible to manipulation. Other variables may be less
susceptible to manipulation, such as gross sales of minerals,
payments to factors of production (capital, labour and land) that
are located in country or domestic utility payments. Though gross
sales of minerals, for example, can be manipulated by
multinationals, in many cases this may be more difficult than
manipulating corporate income, since the prices at which minerals
are traded can be compared with global market prices.
�
The High Level Panel on Illicit Financial Flows from Africa and
others recommend increasing tax transparency, expanding networks
for the exchange of information and participating in the automatic
exchange of information between countries, and ensuring the
availability of ownership information to reduce illicit financial
flows (ECA, 2018b; Mullins, 2010). 12 There is now a burgeoning
movement towards greater transparency in tax matters which may
change the way that multinational corporations operate.
To facilitate the detection of aggressive tax planning, a new
global standard for the Automatic Exchange of Information for Tax
Purposes, endorsed by the OECD in July 2014, calls on
jurisdictions to obtain information from their financial
institutions and automatically exchange that information with
other jurisdictions. The standard is intended to �strengthen
international efforts to increase transparency, cooperation and
accountability among financial institutions and tax
administrations and enable governments to recover tax revenue lost
to non-compliant taxpayers. The new standard will generate
secondary benefits by increasing voluntary disclosures of
concealed assets and by encouraging taxpayers to report all
relevant information� (OECD, n.d.b).
�
Noting the challenges that African countries face in the exchange
of information for tax purposes, the Global Forum and its partners
launched the Africa Initiative in 2014. The initiative is intended
to use technical assistance and political engagement to enable
African countries to take advantage of improvements in
international tax transparency that can increase domestic resource
mobilization and fight illicit financial flows (OECD, n.d.c). The
original three-year mandate was renewed for three more years
(2018�2020) at the Global Forum plenary meeting in November 2017
(OECD, n.d.d).
There is also a move towards public and centralized registers of
the ultimate owners of trusts, foundations and other opaque
vehicles used by multinational corporations. Advances in this
effort will improve transparency in the natural resources sector
and illuminate instances where �apparently unrelated parties� are
engaged in base erosion.
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a particular focus on U.S. and international policies. AfricaFocus
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