Public corruption isn’t the only problem robbing Africa of its wealth

A narrative which is now familiar to those working in Africa or who are involved in projects relating to Africa tends to enter into all discussions related to poverty and income disparity on that continent. That narrative, that the poverty and deprivation which exist on the continent are directly attributable to pervasive and debilitating government corruption, is a powerful deterrent to many outsiders who are considering involving themselves in Africa’s economies. In order to achieve a fair reading of the issue of why the common African receives less than fair reward from the continents resources, it is fair–and necessary–to question that narrative. According to the recent Report of the High Level Panel on Illicit Financial Flows from Africa(the “Report”), a panel chaired by former South African President Thabo Mbeki, there is a persuasive argument that illicit flight of capital and resources from Africa had cost the Continent about one trillion dollars over the last 50 years. More specifically, the Panel investigated “illicit financial flows” which it identified as flows of money in violation of laws in their origin, or which were illicit by virtue of their movement or use. According to the Report, abusive “transfer pricing” (the price a local African subsidiary might sell a product to its foreign parent or affiliate) is a primary tool used by multinational corporations to illicitly shift profit across different jurisdictions by taking advantage of multi-level structuring. While a transfer pricing policy is required for the complex legal structures many companies operate through, the lack of government rules or legislation or enforcement in some instances prevents allows the abuse to foster. Without effective tools of enforcement, the international companies not only evade proper taxation, but they have a lower base rate on which to pay royalties and other profit sharing to the host government. Unfortunately, most national, provincial or state governmental bodies across Africa have so far failed to stem this gaping hole in their respective fiscal regimes. However, there are efforts to address the misuses and abuses of transfer pricing. The Africa Transfer Pricing Summit scheduled for this September was organized to provide a forum to highlight these issues and hopefully advance the discussion to close this hole through transfer pricing legislation and policies. In addition to abusive transfer pricing, the Report identified the following as methods in which some companies deprive African host countries of potential taxable cash flow: (1) trade mispricing, defined as “the falsification of the price, quality and quantity values of traded goods for a variety of purposes”; (2) misinvoicing of services and intangibles such as intra-group loans and intellectual property and management fees; and (3) unequal contracts and tax incentives between governments and the private sector, particularly in the extractive sector. Closing these gaps in revenue administration is imperative for governments as they begin to focus on launching their post-2015 development agendas.