Africa: A Journey Toward an African Taxation Renaissance

Africa is known as the ‘paradox of plenty’. How can a continent so rich in natural resources be so poor?

Economic growth is predicted to increase by 4.5% across the continent this year, despite falling oil prices and the Ebola crisis. South Africa’s economy, the second biggest in Africa is expected to continue to grow by 3.5% this year; Nigeria will grow by an enviable 5.5%. However, millions across Africa are struggling. Economic inequality is on the rise, and public coffers are insufficient due to an increasing demand for public services like health; education, housing.

Recently, Thomas Pogge and other distinguished academics have written about the cost of progress. Surprisingly, history provides us with examples of countries where, if there is a balance between economic growth and public spending, it is possible to address inequality.

There is no time to waste in looking for ways to address this widening gap across Africa.

It is urgent that collectively, African nations look at the billions of dollars flowing out of Africa every year, most of which can be attributed to corporate tax dodging. In January, the Thabo Mbeki High Level Panel Report on Illicit Financial Flows (IFFs) contended that IFFs from Africa have increased from about $20 billion in 2001 to $60 billion in 2010 in the merchandise sector alone. According to the 2014 Global Financial Integrity, South Africa alone may have lost as much as US$122,145 million between 2003 and 2012 in IFFs. This is a lost opportunity of money that could have been reinvested in advancing Africa’s development and increased access to public goods for her Africa’s people.

But this is only the half of it. Multinational companies are gaining at the expense of African people through other ‘legal’ forms of corporate tax dodging, and through negotiated tax breaks. This is happening because of a lack of fair global tax rules, and behind-closed-door deals between corporations and governments, rushing to seal deals under pressure.

Africa’s astounding growth is affecting human development. And these losses in tax revenue come at a time when the role of official development assistance to Africa is declining.
Fair and progressive tax systems should be providing financing for well-functioning government programs, to enable governments to uphold citizens’ rights to basic services (such as healthcare and education), and cement trust between citizens and governments.

Establishing an effective tax system is critical if Africa is going to mobilise the resources it needs to tackle poverty and inequality. Africa is home to six out of ten of the world’s most unequal countries – South Africa, Lesotho, Namibia, Botswana, Zambia, and Central Africa Republic. Some estimates on Africa’s financing needs include US$40-$60 billion per year to finance the post-2015 development agenda.

This is not just Africa’s problem. Around the world, many lower-income countries have been subject to harmful tax practices, including transfer pricing, whereby a transfer price may be manipulated to shift profits from one jurisdiction to another, usually from a higher-tax to a lower-tax jurisdiction.

After recent revelations of how multinational enterprises (MNEs) such as Starbucks, Google and Apple deliberately structured themselves to minimize their tax bills, the OECD launched an effort to reform this base erosion and profit shifting (BEPS). The BEPS reform is expected to wind up by the end of 2015.

However, since the launch of the BEPS project, developed countries have not had a real voice or influence in the process. Just four African countries, including South Africa, as a G20 member, have been invited to participate as observers. These countries are bringing attention to the many mining corporations who are offered lucrative tax incentives which must be addressed in the BEPS Action Plan. The African Tax Administration Forum (ATAF) is a regional tax body that has been invited by the OECD/G20 to participate in the BEPS process. This should provide further scope to influence the BEPS process with an African perspective.

At the same time, the South Africa Revenue Services (SARS) is going after billions lost through wasteful incentives and trade mispricing. SARS recovered R5,8 bln over the period of 3 years between 2011-2014, 55% (R3,4bln) of which is attributed to the mining industry.

South Africa’s membership in the G20 (and its role as co-Chair of the G20 Development Working Group) provides an enormous opportunity to insist on broad inclusion of all nations in the BEPS process. In a recent conference convened by the Africa Tax Administrator Forum, South African Finance Minister Nhlanhla Nene called for “Africa to protect its own tax base, and advance domestic resource mobilisation through a common voice, a common concern and a common action plan.”

It is time that all African Finance Ministers wake up to the possibility that tax revenues for financing essential services for their citizens, or investment in small-holder agriculture, or infrastructure could come from the recovery of billions of dollars lost from corporate tax dodging and unfair tax competition. Tax breaks provided to six large foreign mining companies in Sierra Leone are equivalent to 59% of the total budget of the country or eight times the countries health budget.

It is time for a global inter-governmental body on international tax cooperation to allow for a more inclusive and coordinated approach to ongoing tax reform, beyond BEPS. All countries should be able to participate in tax negotiations on an equal footing, which guarantees one country, one vote, and where representatives will have the political mandate to speak on behalf of their governments. Simply relying on the BEPS process to re-write tax rules will not be enough to end international tax dodging.

Through the BEPS process and this new tax body, there is real potential for an African taxation renaissance.