"The Detrimental Influence of Multinational Tax Dodging on Development in Sub-Saharan Africa: Case Studies of Nigeria and Zambia"

"I couldn't help but wonder why Zambia was in need of $3 billion for a bailout when it loses the same amount annually due to tax evasion and avoidance by multinational corporations. This alarming situation calls for urgent action to hold these companies accountable and ensure that the resources rightfully belonging to the country are retained for its development and the well-being of its people."

• Ibrahim Salifou

Introduction:

This article delves into the detrimental influence of multinational tax dodging on development in Sub-Saharan Africa, with a specific focus on the cases of Nigeria and Zambia. It sheds light on the negative consequences arising from the actions of multinational corporations, which have impeded economic progress and hindered the overall development of these countries. By examining the extent and effects of tax dodging, this article aims to provide insights into the challenges faced by these nations and the urgent need for effective measures to address this issue. Understanding the impact of multinational tax evasion is crucial for formulating strategies that promote sustainable development and equitable economic growth in Sub-Saharan Africa.

Quote of the Day:

"We need to break free from the cycle of relying on foreign assistance while multinational companies exploit our continent. It is imperative to recognize and harness the capabilities of local knowledge consultancy firms. Africa's consultancy market size exceeds annually $13 billion, presenting substantial opportunities for economic growth and development impact. I firmly advocate for drawing inspiration from success stories like Tata Consultancy Services and empowering our local knowledge firms to tackle our development challenges. We must value and leverage our own expertise rather than solely relying on foreign models or striking a delicate balance. Africa possesses an abundance of local talent capable of establishing numerous successful knowledge-based businesses. To further promote our continent's progress and prosperity, we must also prioritize knowledge sharing and ensure that Foreign Direct Investment (FDI) laws incorporate local content requirements, enabling local law firms to play their essential roles."

In order to address the complex issue of multinational tax dodging and its impact on development in Sub-Saharan Africa, several key issues need to be addressed. Diplomats and international tax experts play a crucial role in examining and carefully assessing tax treaties to ensure they are equitable and beneficial for African nations. Additionally, measures should be taken to counteract the adverse effects of international tax arrangements by empowering local firms and addressing the chilling effects caused by the sharing of insider information, often passed on to multinational corporations.

Tax evasion scandals in Nigeria have been a subject of concern and scrutiny. Several high-profile cases have shed light on the extent of tax evasion practices in the country, which have significant implications for government revenue, economic development, and social welfare.

One notable tax evasion scandal in Nigeria involved multinational corporations operating in various sectors. These companies have been accused of employing sophisticated strategies to avoid paying their fair share of taxes. By exploiting loopholes in the tax system, engaging in transfer pricing manipulations, and utilizing offshore tax havens, they have effectively reduced their tax liabilities, depriving the Nigerian government of much-needed revenue.

The Nigeria Case

According to a report by the Civil Society Legislative Advocacy Centre (CISLAC), Nigeria experiences an annual loss of approximately $2.9 billion due to tax waivers granted to multinational companies. CISLAC further revealed that Africa as a whole has lost $1 trillion in illicit financial flows (IFFs), with an annual loss of $50 billion over the past 50 years. The executive director of CISLAC, Auwal Rafsanjani, highlighted the detrimental effects of these financial losses on sustainable development and increased inequality. Despite the significant revenue loss from tax waivers, the Nigerian government raised the value-added tax (VAT), disproportionately impacting the poor. The issue of IFFs, encompassing corruption, crime, and tax evasion, is a growing concern as it reduces government revenue available for development financing. The COVID-19 pandemic has exacerbated these challenges, with estimations indicating that over 42% of the sub-region's population may fall into extreme poverty. The wealthiest individuals in the region, particularly in Nigeria, have seen their wealth expand significantly during the pandemic, leading to calls for using their resources to fund critical initiatives such as vaccination programs. The amount lost to IFFs in Africa is roughly equivalent to the total official development assistance (ODA) received by the continent during the same period, underscoring the magnitude of the issue. However, the exact extent of these losses may be even greater due to the lack of accurate data for all African countries.According to a 2015 investigation by PREMIUM TIMES, MTN, a prominent telecommunications company in Nigeria, has been involved in a tax evasion scheme that allowed it to ship billions of naira overseas while paying less tax in Nigeria. The company utilized a tax avoidance strategy called Transfer Pricing, which involved making payments to two overseas companies, MTN Dubai and MTN International in Mauritius, both located in tax havens.

The investigation revealed that in 2013 alone, MTN Nigeria transferred a total of N23.187 billion to the offshore account in Dubai. It was also disclosed that unauthorized payments of N37.6 billion were made by MTN to MTN Dubai between 2010 and 2013, which were then transferred to Mauritius, a shell company with no physical presence or staff.These revelations raised concerns about the magnitude of tax evasion by MTN in Nigeria. Considering the earlier management fees agreement that was invalidated by the National Office for Technology Acquisition and Promotion (NOTAP), it was estimated that since its establishment in 2002, the company could have transferred around N90.2 billion out of Nigeria in management fees alone.

The investigation highlighted the damaging impact of such tax evasion practices on Nigeria's economy and the urgent need for stricter regulations and enforcement measures to prevent multinational corporations from exploiting tax loopholes. Addressing these tax evasion scandals is crucial to ensuring that companies like MTN fulfill their tax obligations, contribute to government reLet's examine some of the key issues related to tax evasion and avoidance in Zambia:venue, and support the development of the Nigerian econonmy.

Tax avoidance and illicit financial flows have significant negative impacts on development in African countries, including Nigeria and Zambia. Multinational corporations use complex schemes, such as transfer pricing and tax havens, to shift profits and evade taxes, resulting in substantial revenue losses for governments.

Tax plays a crucial role in financing public goods, social programs, and promoting development. However, when companies engage in tax avoidance, it undermines the effectiveness of tax incentives and reduces the legitimacy and efficacy of tax as an industrial policy tool. This problem is exacerbated when influential individuals and companies benefit from the rent distribution system, perpetuating the cycle of tax avoidance and illicit financial flows.

The misalignment between declared profits and actual economic activity, often facilitated by tax havens and offshore wealth, distorts markets, fosters corruption, and hampers local beneficiation. Mining companies, for example, may avoid supporting local beneficiation by underreporting profits or operating through subsidiaries in tax-haven jurisdictions.

Foreign development finance institutions investing in African countries may also take advantage of tax incentives and fail to pay their fair share of taxes, further eroding the tax base and creating unfairness for local companies.

The average tax-to-GDP ratio in Africa is significantly lower than the OECD average, indicating a need to increase tax collection and clamp down on illicit financial flows and tax avoidance. Efforts such as the OECD's proposed new tax rules aim to address these issues by allowing countries to increase taxes on multinational corporations if they are being taxed below a certain effective rate.

However, the implementation of such initiatives and the adoption of stricter tax regulations require further action and coordination among governments. It is essential for African countries to address these issues effectively, improve tax collection mechanisms, and ensure a fair and transparent tax system that supports sustainable development.

The Zambia Case

In May 2020, the Zambian Revenue Authority (ZRA) achieved a significant legal victory in a tax case against Mopani Copper Mining plc in the Supreme Court. The court ruled that the company must pay an additional tax of 240 million Kwacha (USD 13 million). The case revolved around Zambia's presentation of evidence demonstrating tax avoidance through base erosion and profit shifting (BEPS) strategies. BEPS refers to the exploitation of gaps and discrepancies between different countries' tax systems by multinational enterprises (MNEs), resulting in substantial revenue losses for countries worldwide, estimated at 100-240 billion USD annually.

Developing countries like Zambia, which rely heavily on corporate income tax, are disproportionately affected by tax base erosion and profit shifting. Zambia, along with many other African tax administrations, identifies the abuse of transfer pricing rules, which involve the pricing of goods and services between related parties of MNEs, as a significant risk to their tax bases.

The Mopani case was one of the first major transfer pricing cases handled by the Zambian Revenue Authority. The dispute arose from the pricing of copper sold by Mopani Copper Mining plc to its shareholder company, Glencore International AG, located in Switzerland. Drawing on guidance and training received through a long-term technical assistance program conducted by the African Tax Administration Forum (ATAF), the OECD, and the World Bank Group, the Zambian Revenue Authority built its case, arguing that Mopani had undervalued the copper sold to Glencore, thereby reducing its taxable income and tax liability. The Zambian Revenue Authority contended that the prices of copper sold to Glencore were significantly lower than those of comparable sales to third parties. In December 2016, the Zambian Tax Appeals Tribunal upheld the tax assessments raised by the Zambian Revenue Authority. Mopani Copper Mining plc appealed the decision to the Supreme Court, which ultimately ruled in favor of the Zambian Revenue Authority on May 20, 2020.

In recent years, Zambia has made substantial efforts to combat BEPS abuses by strengthening the audit skills of ZRA officials and enhancing the country's legislative framework concerning transfer pricing and other BEPS-related issues. In 2017, Zambia joined the OECD/G20 Inclusive Framework on BEPS, a global coalition of 137 jurisdictions working together to tackle tax avoidance. Additionally, Zambia became a member of the Tax Inspectors Without Borders (TIWB) initiative in 2018 and, more recently, joined the BEPS in Mining Programme, led by ATAF, the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), and the OECD. These initiatives aim to provide targeted support for transfer pricing audits in the mining sector and the improvement of related legislation.

Since 2015, the Zambian Revenue Authority has achieved notable results in its transfer pricing audit efforts, including USD 133 million in assessed tax and USD 111 million in collected tax. The landmark victory in the Mopani case sends a message beyond Zambia, demonstrating that African tax authorities are capable and confident in addressing complex transfer pricing transactions. The case illustrates the value of long-term capacity building support, which equipped the Zambian Revenue Authority's audit and legal teams to effectively tax multinational enterprises and generate additional tax revenue for the Zambian government.

The Zambia case study is part of a series on tax and development launched by the OECD's Centre for Tax Policy and Administration in collaboration with partners such as ATAF.

Tax treaties can sometimes be exploited as loopholes by multinational corporations for tax avoidance purposes. Here are some reasons why tax treaties can create loopholes in light of above cases .

Tax Treaties as a loopoholes

Treaty Shopping

Multinational corporations may engage in treaty shopping, which involves structuring their operations to take advantage of favorable provisions in specific tax treaties. By establishing subsidiaries or headquarters in countries with more beneficial tax treaty networks, they can minimize their tax liabilities.(MTN Nigeria case subdary of MTN .....?)

Thin Capitalization

Some tax treaties allow for lenient rules on thin capitalization, which refers to the use of a high level of debt compared to equity in a company's capital structure. This can enable multinational corporations to shift profits to low-tax jurisdictions by paying excessive interest on intercompany loans.

Transfer Pricing Manipulation

Tax treaties often include provisions related to transfer pricing, which is the pricing of goods, services, and intellectual property between related entities within a multinational corporation. These provisions can be exploited by manipulating transfer prices to artificially shift profits to jurisdictions with lower tax rates. (Both exploited in Nigeria and Zammbia Case )

Lack of Anti-Abuse Measures

Tax treaties may not always include robust anti-abuse measures to prevent aggressive tax planning. This can create opportunities for multinational corporations to engage in complex tax avoidance schemes that exploit gaps and mismatches between different countries' tax systems. (

Lack of Information Exchange

In some cases, tax treaties may not have adequate provisions for the exchange of tax-related information between countries. This lack of transparency can hinder the detection and prevention of tax evasion and avoidance practices.

It is important for countries to regularly review and update their tax treaties to address these loopholes and ensure that they align with international best practices, such as those outlined by the OECD and UN. Additionally, strengthening domestic anti-avoidance measures and promoting international cooperation in tax matters can help mitigate the risks associated with tax treaty loopholes.

There are potential risks and challenges that African countries may face when signing tax treaties. Tax treaties can sometimes be used as a pathway for tax avoidance, where individuals or companies exploit provisions in the treaties to reduce their tax liabilities.

Domestic anti-avoidance rules are designed to prevent such tax avoidance schemes. However, in a cross-border context, conflicts may arise between domestic anti-avoidance rules and tax treaty provisions. For example, if a taxpayer artificially transfers income to a resident of another country, anti-avoidance legislation in the taxpayer's home country may allow them to continue taxing the income. But a tax treaty between the two countries may state that the income is taxable only in the other country, creating a potential defense against the anti-avoidance legislation. This situation can be seen as a form of tax treaty abuse.

To effectively combat tax avoidance, domestic anti-avoidance rules need accurate information about the tax avoidance schemes and income involved. In a cross-border context, obtaining this information from another country has traditionally been challenging. However, tax treaties often include provisions for administrative assistance, such as the exchange of information and assistance in tax collection, which can supplement the operation of domestic anti-avoidance rules and make them more effective.

The UN Model Convention on Double Taxation provides extensive discussion and elaboration on the improper use of tax treaties and tax avoidance. It addresses various aspects of tax treaty abuse and provides guidelines for countries to prevent and combat such abuse. The commentary on Article 1 of the UN Model Convention offers detailed explanations and readers are encouraged to consult it for further information.

It's worth noting that the terminology used in tax matters distinguishes between tax evasion and tax avoidance. Tax evasion involves the deliberate escape from a tax liability that has already arisen and is considered a criminal offense. On the other hand, tax avoidance refers to strategies that minimize tax liabilities without involving criminal conduct, although they may be deemed unacceptable and subject to penalties. Tax treaties often include language related to the prevention of fiscal evasion, but the provisions within these treaties are commonly used to address tax avoidance rather than tax evasion.

Conclusions and recommendations

Tax auditing by an independent local firm can play a crucial role in boosting tax revenue for Zambia. Here are some potential benefits:

• Local firms specializing in tax auditing possess extensive knowledge of local tax regulations and practices. They understand the intricacies of tax system and can effectively identify potential areas of tax evasion or avoidance. Their expertise can help ensure that mining companies operating in Zambia are accurately reporting their income and complying with tax obligations.
• Engaging independent local firms for tax auditing strengthens tax enforcement efforts. These firms can conduct thorough and independent audits of mining companies' financial records, ensuring compliance with transfer pricing regulations, analyzing royalty payments, and identifying any potential discrepancies or underreporting of taxable income. This heightened scrutiny can lead to increased tax revenues for the Zambian government.
• Independent local firms can provide an additional layer of transparency and accountability in the tax auditing process. Their involvement can help instill confidence in the public and stakeholders that tax assessments and audits are conducted objectively and without undue influence. This can promote a fair and transparent business environment, attracting investment and fostering trust between the government, mining companies, and the public.

Regarding the processing of raw materials locally, there are several potential benefits for Zambia:

Value Addition and Economic Diversification

Processing raw materials locally, especially in the mining sector, allows for value addition and economic diversification. Instead of solely exporting raw materials, Zambia can develop its local processing industries, such as smelting and refining, which can create additional job opportunities and contribute to the growth of downstream industries.

Increased Revenue Generation

By processing raw materials locally, Zambia can capture a greater share of the value chain and generate higher revenues. Finished or semi-finished products generally command higher prices in the international market compared to raw materials. This can lead to increased tax revenues from value-added activities and a reduced reliance on export revenues.

Technology and Skills Transfer

Establishing local processing capabilities requires technological advancements and skill development. Collaborating with international partners or companies can facilitate knowledge transfer and skill development in various stages of processing, contributing to the growth of the local workforce and enhancing Zambia's industrial capabilities.

Mitigating Price Volatility

The global prices of raw materials can be volatile, impacting the export revenues of countries heavily reliant on commodity exports. Processing raw materials locally can help mitigate price volatility risks by diversifying revenue sources and reducing dependence on international market fluctuations.

However, it is important to consider the feasibility, infrastructure requirements, and cost implications of establishing local processing facilities. A comprehensive assessment should be conducted to evaluate the economic viability, environmental impact, and potential benefits of processing raw materials locally.

Combining effective tax auditing by independent local firms with the promotion of local processing industries can contribute to increased tax revenues, economic diversification, and sustainable development in Zambia.

The Implementation of multiple layers of audits by independent law firms can be an effective measure to address tax loopholes related to operation costs in the mining industry.

Here are some grounds of justifications

Enhanced Scrutiny

Independent law firms can conduct thorough audits of mining multinationals' operation costs to ensure they are accurately reported and align with relevant tax regulations. These audits provide an additional layer of scrutiny beyond regular tax audits conducted by government authorities.

Expertise and Specialization

Independent law firms specializing in tax and mining laws can bring specialized knowledge and expertise to the auditing process. They have a deep understanding of the specific tax regulations and industry practices, enabling them to identify potential loopholes related to operation costs more effectively.

Detection of Tax Avoidance Schemes

Multiple layers of audits increase the likelihood of detecting tax avoidance schemes related to operation costs. Independent law firms can analyze financial statements, contracts, and transactions to identify any artificial inflation or manipulation of costs that may be aimed at reducing tax liabilities.

Strengthening of Tax Governance

The involvement of independent law firms in the audit process can strengthen tax governance and promote compliance with tax regulations. It sends a clear message to mining multinationals that tax obligations are taken seriously and that any attempts to exploit operation costs as tax loopholes will be thoroughly investigated.

Deterrence Effect

The implementation of multiple layers of audits by independent law firms acts as a deterrent for mining multinationals considering engaging in tax avoidance practices. The increased scrutiny and risk of detection can discourage such behavior and encourage compliance with tax obligations.

It is advisabale that the implementation multiple layers of audits should be accompanied by strong legal frameworks, effective enforcement mechanisms, and adequate resources to ensure the audits are conducted efficiently and transparently. Collaboration between independent law firms, tax authorities, and other relevant stakeholders is also crucial to address tax loopholes effectively in the mining sector.