Europe’s crackdown on shell firms puts spotlight on Africa

The chickens are quietly coming home to roost. In Europe, that is.

For a long time, multinational companies have created shell companies – those offices where, beyond furniture and a teapot, there is hardly any business going on – to mainly pay lower tax and move illicit funds.

These opaque companies are usually located in areas known to be tax havens.

Last week, the European Parliament cast a vote that said it all; they have had it to the neck with these shell companies.

The European Union will now create a public registry that details who owns and controls companies and trusts in the bloc. The registry will go further by naming names of those individuals behind the shell companies.

So why should we, here in Kampala, be even remotely bothered by this news, which went largely unreported among the huge international media houses? At least four reasons come to mind.

The first and simple reason is that there are many firms operating in Uganda with jurisdictions that are located in areas known to be tax havens.

There are multinational firms in Uganda today with offices incorporated as headquarters in such areas like the Isle of Man, the Virgin islands, just to mention a few. A number of these companies are involved in Uganda’s natural resource wealth.

For instance, Heritage Oil Plc (formerly active in the Albertine graben) is incorporated in Jersey, while East African Mining, which is prospecting for gold in Karamoja, is a subsidiary of East African Gold in Jersey. There are many more.

While a number of these firms are operating legally, the problem usually comes when they are selling their Uganda business.

It becomes a problem for URA to tax them because these firms tend to argue that they have already paid tax at their headquarters. URA’s charge, they usually argue, is double taxation and grossly unfair.

URA says it is now training its staff on how to understand the company structures of shell companies, and ways of taxing them. The tax body, two years ago, instituted transfer pricing rules, which try to separate related companies, in order to assess tax.

How these companies find their way into Uganda also raises questions, and is my second reason. Of course every company that seeks to enter into new territory requires an influential contact. The issue comes when their local representatives use these companies to transfer money or get paid.

African despots, their close family members, and cronies, usually buy property abroad or take dream holidays by moving illicit funds through shell companies. The third point is that while these rules are about to be enforced in Europe, they will very likely widen to regions like sub-Saharan Africa.

We are likely to see international civil society groups like the Tax Justice Network and Global Witness become aggressive in pushing for similar reforms of public registry in countries like Uganda. A number of corrupt government officials have opened up companies and listed their sons, daughters, and ghost names as shareholders, with the real owners staying in the shadows, far away from the long arm of the law.

The companies have gone on to engage in dubious business practices and win contracts illegally. Just like the global efforts to have European companies engaged in the extractives industry publish what they pay in the countries they do business with, similar moves are likely to come with these new rules concerning shell companies.

The last point is the impact of these new rules. By trying to rein in shell companies, the European Parliament is dealing with a powerful force with a strong lobby. Top bankers, oil barons, telecom giants, name it, in one way or another have connections to shell companies. Their strong lobby group will be at work to see that they beat these rules.

Should they find any trouble, these lobby groups are likely to turn to Africa. The businessmen behind the shell companies are already looking at ways of influencing policy that could turn some countries in Africa into tax havens.

The island of Mauritius has been seen as Africa’s main tax haven. However, the European businessmen will want to look further inland. Ghana and Kenya are the African countries that are being seen as potential targets. It could be easy to do that in Africa.

A push for policy change could be rolled together with a list of threats to quit the continent, and move their investments elsewhere, if the tax policies do not favour them. And yet, many African countries desperately need these investments.

Credit: The Observer