AFRICA ILLICIT FINANCIAL FLOWS

While most of Africans struggle to pay their share of tax, many multinational corporations are avoiding taxes.

A Report by the High Level Panel on Illicit Financial Flows (AU/ECA HLP) from Africa, indicates that Africa loses more than $50 billion annually through illicit financial flows.
Such shocking figures are a case for serious concern, given that taxation is the most sustainable source of development finance, but African tax systems still do not raise enough revenue to meaningfully reduce poverty. Africa remains a net creditor to the developed countries for this reason.

 Former South Africa President Thabo Mbeki, told the Pan African Parliament that illegal financial flows have cost the continent $1 trillion over the past 50 years.

Mbeki, who’s also the chairperson of the African Union’s (AU) panel on illicit financial flows, presented his report to the Parliament sitting in Midrand.

He noted that multinational corporations are the prime suspects and illegal drug trafficking accounts for about 30 percent of the money.

Mbeki who first started investigating illicit financial flows for the African Union,(AU) in 2012 and noted that since then they’ve uncovered wide-ranging abuses of financial laws.

“The figure of 50 billion is an underestimate, as it excludes such elements as trading services and intangibles, process of bribery, and trafficking drugs, people and firearms.”

Mbeki blames the poor system of African states to prevent the outflow of capital and tax evasion has had a serious impact on Africa’s growth.

“You know that many of our African countries did not achieve all these MDGs because of insufficient capital to finance the required actions.”

The amount of money leaving the continent every year is estimated to be enough to finance the African Development Bank’s infrastructure.

Back at home, Kenya, have lost as much as $1.51 billion between 2002 and 2011 trade misinvoicing, a method of moving money illicitly across borders which involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs. The role of illicit financial Flows (IFFs) and their adverse effects on the country’s economy cannot be ignored.

The adoption of this report by the heads of states needs to be lauded, as it shows the willingness of African leaders to rein in on illicit financial flows.

The report gives concrete recommendations towards putting an end to illicit financial flows, it is ostensibly clear that ‘legal’ commercial activities are by far the largest contributors to illicit financial flows (IFFs).
Indeed, many corporations are avoiding paying a staggering amount of tax through tax incentives offered by our governments, and the exploitation of existing loopholes in and between national legislations.
Most of these corporations also have the financial muscle to retain the best professional legal, accountancy and banking experts, to help them perpetuate their aggressive dealings.
Despite the importance of tax for financing sustainable development and redistributing wealth, many African countries face challenges in their efforts to increase their tax revenues.

And as Africa continues to labor under the yoke of poverty, the monies, which could have been used to finance development, are transferred to other countries in illicit financial flows. The developmental impact of this is monumental, and has resulted in loss of tax revenues, representing a significant threat to Africa’s governance and economic development.
African countries therefore need to urgently plug the hemorrhage of outflows from the continent, retain the capital that is generated to enhance domestic resource mobilization, in order to sustainably finance inclusive development.

In line with the HLP recommendations there needs to be increased transparency of financial transactions whilst building the capacity of revenue authorities to be able to detect capital movements from various jurisdictions and the manipulation, evasion, or avoidance of taxation to deal with the challenges of trade and tax related malpractices.

Africa must enforce the arm’s length principle, the condition or the fact that the parties to a transaction are independent and on an equal footing accepted as an international standard to avoid the abuse of transfer pricing. Transfer pricing is the principle of pricing all goods traded Intra Company at the same price as market price to avoid cost manipulation that would allow reporting profits in low tax jurisdictions and losses in high tax jurisdictions.
It is hard for revenue authorities in Africa to control whether these are the real market prices or whether they have been manipulated as there is no comparable data. Thus to further deal with transfer pricing, more emphasis needs to be put on advancing country-by-country or subsidiary-by-subsidiary reporting basis as emphasized in the panel report recommendations.

Regional integration and cooperation on tax harmonization, strengthening customs, enforcing automatic information exchange and country by country reporting requirements can reduce secrecy and improve information exchange and data collection, greatly improving revenue collection and reduce means of avoidance.
While building capacity and increasing transparency are important measures to implement at the home turf, the problem of IFF is a global problem and can only be truly curbed with international cooperation.
African governments should demand; an international tax reform system where they can fully participate at the negotiation table.

It’s about leveling the playing field in order for countries to begin getting their fair share of tax revenues.
The emphasis by African governments on the extent of the problem and their commitment to address it is commendable. We now need to see progress on enforcement measures to adopt clear and concise laws and/ or regulations to make sure it’s not just ink on paper.