Africa’s problem with tax avoidance

Every year African countries lose at least $50 million in taxes — more than the amount of foreign development aid. So where is it all going and how can multinational companies be held to account?
NGOs continue to raise the alarm. African countries are being cheated out of billions in tax revenues — mainly by large foreign companies in the energy and resource sectors, but also increasingly by small and medium-sized enterprises, such as safari organizers in countries such as Kenya, Tanzania, South Africa and even Egypt.

According to the Organization for Economic Cooperation and Development (OECD), the annual loses of up to $50 billion (€44 billion) have actually exceeded the amount of development aid given to Africa in the same amount of time. Meanwhile, the United Nations Economic Commission for Africa (UNECA) puts the estimate much higher at $100 billion.

Particularly concerning is the fact that this money remains urgently missing from the affected countries, says Lisa Grossmann of the German-basedNetzwerk Steuergerechtigkeit(NWSG), a network of NGO’s working to tackle tax evasion and shadow economies worldwide.

“The lack of tax revenue has a negative impact, especially in the poorest countries — starting with non-existent transport infrastructure, missing schools or hospitals and a non-functioning public service,” she told DW.

East Africa: Low tax revenue in the resource center
Take East Africa, for example. International companies extract gas, coal or rare earth minerals on a large scale in Tanzania and Mozambique, but they also pay very little in taxes in these countries. In doing so, they rely on subsidiaries in one of the world’s many tax havens.

Revelations by the International Consortium of Investigative Journalists (ICIJ) show that companies in Africa use internationally proven methods of tax avoidance. Many of the profits made in Africa are officially hidden away in offshore tax havens, where companies only exist on paper.

There are few risks involved with this approach and very little bureaucratic effort is put in towards addressing the problem. The authorities in tax havens rarely ask unpleasant questions and, above all, impose minimal or no taxes on the companies’ profits.

In Mozambique last year, the NGO Centro de Integridade Publicapublished a study which claimed the counIn particular, the large international corporations which profit from Mozambique’s oil and gas reserves barely fulfill their tax obligations — largely due to the state’s inability to accurately review their activities and balance sheets.

As a result, Mozambique lost millions of dollars in revenue. Corruption, mismanagement and weak governance only make matters worse.

Criminal activity harming the African population
Another popular tax avoidance method sees companies spending significantly more on operating costs — such as finding and exploring new deposits of raw minerals — or investing in luxury housing, thus reducing their profits and, in turn, their tax burden.

“When it comes to resources, it’s common practice for mining companies to misrepresent their profits, and many of the numbers are invented or falsified just to make sure that their tax obligations are very small,” Jörg Wiegratz, a lecturer in political economy at the University of Leeds told DW.

The paper trail would be obvious. High ranking government officials in Africa are increasingly being bribed. “The big companies pay them money and in return they are given the protection of the state actor and his authority,” says Wiegartz. “Of course there is also corruption among the authorities who should be investigating cases of economic fraud.” Limited legal resources also mean that sometimes local middlemen are prosecuted instead of the large corporations.

Businesses and branches collapse
Experts agree that even the existing tax legislation, which works well on an international level, is actually rather detrimental when it comes to global tax justice.

Companies are not yet obligated to outline where they generate their profits and where they pay taxes in each country. Aside from a few scandals which have come to light in recent years, multinational corporations can easily hide their profits away from the public eye, so that tax revenues can be bounced around between rich and poor countries.
No one can dispute the fact that Apple has significant economic activity in Bermuda,” says Grossmann. “Just as some European corporations report their profits in the Netherlands or Luxembourg, even though they aren’t economically active in these countries.”

Grossmann says long-term solutions are being considered. “One solution could be to treat the group with its many subsidiaries and branch offices as a single company under tax law,” she says.

“That single company’s big tax payments could then be split among the countries where the company is active.” This way, one can determine how many employees work in a particular country, how much turnover it has and how many resources are consumed.

Going against Europe’s double standard
In Europe too, tax avoidance is not welcome. The European Commission has repeatedly ruled in favor of civil protests which claim that US companies such as Google, Apple and Amazon do not pay enough taxes.

On the other hand, the actions of large European companies operating in Africa aren’t all that different from the actions of US companies in Europe, says Grossmann. Wiegratz agrees: “If we discover fraud — in tax matters or in other sectors — it shows us that European and German companies have a lot of power in these countries. Otherwise, they would not be able to maintain these practices.”

So how exactly do German companies operate in Africa — and how could small and medium-sized businesses contribute to better tax justice system? German companies in African are not known to cut taxes, says Christoph Kannengiesser, the chief executive of the German African Business Association.

“They are known for respecting good governance and promoting local social standards,” he told DW. Their presence is also appreciated by the people and the government. However, companies often found that African countries also have an issue with double standards. “Often their taxation system lacks transparency and they usually try to keep up with the international companies.”