By Otiato Guguyu

While President Ruto’s calls for a just financial system were praised in the European Parliament, most Western states opposed the vote towards a fairer international tax system. The global south, however, succeeded in beginning the transfer of tax decision-making from the OECD to the UN thereby emphasising the need for greater representation in combating economic injustice and illicit financial flows, by stressing the importance of a consensus approach.

Just days after President William Ruto received a standing ovation for his speech in the European Parliament calling on the West to embrace a just financial system, 23 out of the 27 European Union (EU) member states voted against the establishment of a fairer international tax system.

Despite their opposition, the global south managed to rally a landslide majority to begin the process of transferring the framework on tax decision-making from the Organisation for Economic Co-operation and Development (OECD) – a small club of rich countries where this has sat for over 60 years – to the United Nations (UN).

The vote clearly showed that the interests of the West lie in shielding their multinational companies from paying their fair share of taxes on the value they have been extracting from Africa for centuries, retaining the colonial infrastructure that has built and sustained European economies.

Colonial multinationals

The colonial project was built by multinational corporations like the British East India Company and the Imperial British East Africa Company that sought cheap labour and inputs to plunder and extract, often violently, resources from continents across the world for their shareholders in Europe.

The colonial project was built by multinational corporations like the British East India Company and the Imperial British East Africa Company that sought cheap labour and inputs to plunder and extract, often violently, resources from continents across the world for their shareholders in Europe.

Post-colonial African governments didn’t disengage from Europe; for instance, when Kenya gained its independence in 1963, it signed a series of agreements known as the Lancaster Accords that were focused on promoting the production of export crops, such as coffee and tea at the least cost, creating a global system to benefit elites in Europe.

The Lancaster Accords forced Kenyan independence leaders to commit towards continuation of colonial legislation, international treaties, and agreements that the British Crown had undertaken on behalf of the colony.

Crucially, Kenya was to renegotiate all double taxation agreements. This was to favour the repatriation of profits of colonial-era enterprises back to Europe as independent Kenya gained fiscal sovereignty.

Most of these profits were channelled into tax heavens that emerged as the British empire began collapsing after the end of the Second World War in 1945, when private interests developed an unregulated offshore Eurodollar market domiciled in the City of London, creating a system where the elite could make money without taxation. This global offshore market grew steadily through the 1960s and ’70s, eventually joining forces with other Western nations who wanted a slice of the pie of the unregulated market.

Contemporary multinationals

Today multinational companies are still finding new ways of avoiding taxes in developing countries by demanding tax concessions in exchange for investments and then exploiting low-tax jurisdictions by shifting profits out of poor countries.      

Today multinational companies are still finding new ways of avoiding taxes in developing countries by demanding tax concessions in exchange for investments and then exploiting low-tax jurisdictions by shifting profits out of poor countries.

According to the Tax Justice Network, every year, KSh100 billion (US$1.1 billion) that could have been paid in taxes is wired to the Eurodollar markets through London and its tax haven jurisdictions. These markets in turn lend billions of dollars to countries like Kenya.

According to the Tax Justice Network, every year, KSh100 billion (US$1.1 billion) that could have been paid in taxes is wired to the Eurodollar markets through London and its tax haven jurisdictions.

“The UK, the crown dependencies and the British Overseas Territories are collectively responsible for facilitating nearly 40 percent of the tax revenue losses that countries around the world suffer annually to profit shifting by multinational corporations and to offshore tax evasion by primarily wealthy and powerful individuals,” Alex Cobham, chief executive of the Tax Justice Network, said in a letter to King Charles.

“This makes the UK and its network of satellite tax havens the world’s biggest enabler of global tax abuse. Our latest estimates from the state of tax justice report put the sum of this tax loss imposed upon the world by British tax havens at over $189bn (£152bn).”

Global Financial Integrity (GFI) estimates that, on average, the annual value of trade-related illicit financial flows in and out of developing countries amounts to about 20 percent of the value of their total trade with advanced economies. Illicit flows also take the form of criminal money laundering and trafficking, as well as corruption and bribery.

To get out of this situation African countries must work towards structural transformation. According to the East African Tax and Governance Network (EATGN) “structural transformation is conceptualised as freedom from the colonial models of economic development based on extraction to an inward-looking framework that fosters local value chains for equitable development. Embedded in this is eradication of tax inequality, defined as the disparities within a regime of tax collection and how this affects allocation and/or expenditure of public finances leading to inefficient domestic revenue management (DRM),”.

Structural transformation is conceptualized as freedom from the colonial models of economic development based on extraction to an inward-looking framework that fosters local value chains for equitable development.

Race to the bottom

Donald Deya, the Chief Executive Officer (CEO) of Pan African Lawyers Union (PALU), says Western corporations pit African states against each other, forcing them to compete and give away resources for free or with minimal taxation, leading to a race to the bottom. Deya says that while this is not illegal, it is immoral, and calls on governments to enact laws that change such actions from being considered as merely illicit to being declared illegal.

“These practices are not really illegal but are immoral practices like transfer pricing, profit shifting and using hundreds of subsidiaries that trade with each other and inflating input prices while deflating output. They require us to pass laws such as beneficial ownership [disclosures],” Deya said.

As African countries compete in offering lower and lower taxes to multinationals as incentives to attract investment, they end up losing out on crucial revenues to fund infrastructure and make social investments in education, health, among other social amenities.

Having facilitated the wiring away of billions of taxes to offshore companies, the same African countries have to borrow money from the West at exorbitant interest rates, creating a cyclical debt crisis that has currently handicapped the continent and forced several African states to turn to the International Monetary Fund (IMF) for bailouts.

These bailouts have come with demands for higher taxes from citizens who are too poor to buy food or afford a roof over their heads and are sparking economic decline and lack of employment opportunities, especially for African youth. They are also creating conditions that are conducive for the unconstitutional removal of governments across the continent.

In effect, the African continent has experienced a significant increase in coups over the last three years, with military figures taking over in Gabon, Niger, Burkina Faso, Sudan, Guinea, Chad and Mali.

As a result, African politicians are beginning to realise that the tax conversation needs to shift from overtaxing their populations and instead compelling multinationals to pay their fair share by reviewing antiquated tax systems to end illicit financial flows.

African politicians are beginning to realise that the tax conversation needs to shift from overtaxing their populations and instead compelling multinationals to pay their fair share by reviewing antiquated tax systems to end illicit financial flows.

Legislative Attention to Global Challenges

When 200 legislators from 46 African countries met at the African Parliamentary Network on Illicit Financial Flows and Taxation (APNIFFT) conference in Nairobi, it was in the realisation that Africa is facing risks or challenges that transcend borders and divisions, requiring a unified front.

With the wave of military coups that have swept across West Africa, the politicians frankly admitted that the new structural adjustment programmes (SAPs) currently being imposed on the continent by multilateral lenders were setting the people against them and putting their political survival at risk. They now see all too clearly that African budgets need to be funded by taxing the global multinationals that have been extracting resources from the continent – not overtaxing poor populations into revolutions.

The legislators were in agreement that it is time to make it illegal and not just immoral to shift profits abroad by clamping down on practices like miss-invoicing, that is, declaring lower profits locally to minimise taxes and using multiple companies with similar shareholding to shift profits.

Tax avoidance (the legal but immoral practice of avoiding paying tax) and tax evasion (the deliberate, criminal nonpayment of licence fees or other charges to the government) are therefore significant problems undermining domestic revenue mobilisation efforts in Africa.

Coalition Building for Prosperity

Through APNIFFT, African parliamentarians are coming together at the national, regional, plus the continental levels to legislate and advocate against existing loopholes or bad revenue collection practices.

Hon Nancy Abisai, East African Community (EAC) Jumuiya Caucus Regional Coordinator and member of the APNIFFT Council, said it is only by building coalitions across the continent – and specifically among members of each region like the EAC – that Africa can tackle illicit flows.

Abisai said that illicit financial flows have both a technical and a political aspect, and that without the involvement of members of parliament, it is very difficult to come to any conclusion because they are the ones who push the legislative agenda.

“Illicit financial flows is a cross-border issue so it has to start with regions around you. So, first of all, as a region you must agree that you want the space to fight Illicit Financial Flows (IFFs) and now members of parliament have launched caucuses. From their national caucuses they then come together to choose a regional coordinator to help or coordinate events that happen at the national level to make sure they are speaking with the same voice as a region,” Hon Abisai said.

“[Therefore], nobody will do IFFs in Uganda and run to Kenya or to Tanzania. When we cut it off, we cut it off completely. So, the agenda is that the legislators come together to make sure that they push certain agenda around stopping IFFs within the region,” she said.

The legislators said they are looking at a coordinated legal framework starting at the national level, going to the regional level and then to the continental level, such that it will be difficult for multinationals to exploit the divisions on the continent.

“Passing legislation happens at the national level because it is legislation being passed in Nigeria and Ghana so already you have MPs from the countries working together and with the caucuses, we have even different political parties agreeing on issues,” Chenai Mukumba, Executive Director of Tax Justice Network Africa (TJNA) said.

Opportunities for Change

Ms Mukumba says that, through APNIFFT, the legislators have access to the policy options, technical capacity, and coordination to identify the many loopholes within our tax laws and fiscal frameworks to curb illicit financial flows, particularly when it concerns the private sector.

They also are in a better position to rally across the political divide and exercise their constitutional authority to demand action from the executive.

“One of the things we have asked all members to do is to go to their executives and ask for the status of illicit financial flows. So, essentially ask them to provide a report that illustrates what are the sectors of the economy that are most vulnerable to the IFFs and then use that as a basis to then determine the action agenda. This will then help them start to see what to pay attention to in order to address this issue,” she said.

Stories of Success

Tax advocacy efforts are beginning to bear fruit as witnessed in the South Sudan national caucus which stated that they had moved a motion in parliament to ensure that all companies coming into the country to mine gold must not only go through ministry of finance but must also face legislative oversight to ensure tax policy compliance in their mining activities.

Meanwhile the Burundian national caucus informed the meeting that they had advocated for a new mining code to increase transparency in the sector and had organised workshops to discuss how to raise resources more effectively from their mining sector.

South Africa’s national caucus shared that they have intentionally begun collaborating with civil society organisations and the public; their caucus has six different political parties which have agreed that IFFs should be an election issue in the upcoming elections.

Closer home, the DRC national caucus has been working closely with civil society organisations such as Conférence Épiscopale Nationale du Congo (CENCO) – Episcopal Conference of the Democratic Republic of the Congo- and one of its successes last year was the review of unbalanced mining contracts with Chinese companies. The caucus is also discussing legislation to look into shell companies that are investing in the DRC.

The Zambian national caucus informed the gathering that a third of all MPs from all political parties are members of the caucus. It is currently looking into interventions to address IFFs from the mining sector, one of which resulted in the repealing of the mines and minerals development act.

For its part, Ghana’s national caucus has begun working closely with civil society organisations. It recently called for an amendment to the Exemptions Act and also contributed to the enactment of the tobacco excise duty bill. In the future they plan to look into withholding tax regimes.

As for the Malawi National Caucus, it too is closely working with civil society organisations and one of the key areas of focus has been the publication of tax expenditure reports to help the caucus understand the true cost of the government’s tax incentives.

After a decades-long fight to move away from the OECD process that has delayed tackling tax avoidance, thanks to being beholden to tax havens and corporate lobbyists, the developing world is now unanimous in taking the fight to the United Nations to forge a legally binding Framework Convention on International Tax Cooperation.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).

By Betty Guchu

Sub-Saharan Africa’s public debt has surged in the last decade, moving from concessional to commercial loans. Kenya’s increased Eurobond issuance exemplifies the challenges posed by private sector debt whose shorter maturities hinder long-term benefits, exacerbate inequality through tax revisions, impact human rights and women’s livelihoods, and crowd out local businesses.

Source: Medium – @goswami.piyush/polyp.org.uk

Over the course of the last ten years, sub-Saharan Africa’s public debt stock has grown due to increased borrowing. The loans have shifted from traditional concessional loans obtained from bilateral (official creditors of the Paris Club) and multilateral creditors to commercial loans taken out with private creditors.

The portfolio of creditors changed between 2006 and 2020, with the majority of African nations giving up concessional loans for lending from private creditors and non-Paris Club creditors, primarily China. The percentage of debt owed to bilateral creditors fell from 28% of GDP in 2006 to 10% in 2020 among the countries eligible for the Debt Service Suspension Initiative (DSSI), which are primarily African states. During the same period, the percentage of debt owed to multilateral creditors decreased from 55% to 48% of GDP.

Due mostly to increased borrowing from private creditors, the proportion of Eurobonds held by private creditors grew from 3% in 2006 to 11% in 2020. African nations issued US$179 billion worth of bonds in 2020, up from US$67 billion in 2012. A number of reasons contributed to the change in borrowing patterns, including the fact that some nations were not eligible for concessional loans, that the use of money borrowed from private creditors was not as closely monitored, and that the terms of these loans were less stringent than those of international and Paris Club creditors. Kenya, for instance, issued US$2 billion in Eurobonds in 2014, US$2 billion in 2018, US$ 2.1 billion in 2019 and US$ 1 billion in 2021. In 2020, Eurobonds and syndicated loans accounted for 70% and 27% of Kenya’s commercial debt, respectively, according to the IMF.

In 2020, Eurobonds and syndicated loans accounted for 70% and 27% of Kenya’s commercial debt, respectively, according to the IMF.

In contrast to loans from bilateral and multilateral creditors, those from private creditors have shorter maturities, leaving governments with shorter timeframes within which to spend the costly funds before beginning to pay interest on the loans. The shorter timeframes are often not sufficient for the investments made to have spurred economic growth and, therefore, African nations such as Kenya, which have been taking out short- to medium-term loans to fund long-term mega-infrastructure projects that take a long time to yield social and economic benefits – and contribute only to a marginal increase in the tax base and therefore to the potential for revenue collection – are particularly vulnerable to the short maturity periods.

Additionally, because Eurobonds are subject to market conditions (including variations in currency values), interest rates on these bonds, which constitute a significant portion of Kenya’s private sector debt, are higher than those on other external loans. Moreover, unlike debt from multilateral and Paris Club bilateral creditors, there is no elaborate framework that guides debt relief or, indeed, the restructuring of private sector debt.

Because Eurobonds are subject to market conditions (including variations in currency values), interest rates on these bonds, which constitute a significant portion of Kenya’s private sector debt, are higher than those on other external loans.

With regard to domestic private sector creditors, the interest rates for treasury bills are also high and, therefore, attractive to local financial and non-financial institutions. This implies that the government has to make repayments above the market rates when the treasury bills mature, resulting in higher debt servicing costs.

Tax injustice and neglect of pro-poor programmes

The growing trend by African states to prefer borrowing from private creditors has had various implications on these jurisdictions, including fuelling tax injustice. In a bid to finance debt repayment, governments have resorted to reforming tax policies as a means of raising more revenue. For example, Kenya has initiated various tax measures, such as the introduction of the Digital Service Tax (DST), the expansion of the residential income tax bracket, the introduction of new Value Added Tax (VAT) rates for certain commodities and the restructuring of income tax brackets.

These changes haven’t always been forward-thinking. On the contrary, they have exacerbated inequality by placing a greater strain on taxpayers and decreasing disposable income, particularly for the poor. Moreover, rather than being utilized to pay for essential public services, tax revenues are increasingly being used to service debt. And while information on the utilisation of the funds borrowed from private creditors is limited, available data points to the funds being preferably directed to economic sectors like infrastructure and energy development rather than to health, education and social protection.

As a result of the unequal funding, it becomes more challenging to fulfil international commitments. For instance, Kenya has yet to meet the Abuja Declaration requirement to spend 15% of its budget on the health sector, or the Global Partnership for Education pledge to set aside 6% of its GDP for education.

Private sector debt and human rights

It is impossible to overstate the effects of onerous public debt on the realization of citizens’ human rights as laid out in the International Covenant on Economic, Social, and Cultural Rights and other human rights treaties. In effect, the heavy external debt loads occasioned by the preference for expensive commercial loans have a detrimental effect on the development of debtor countries and the fulfilment of human rights because they divert funds away from Same essential social services, as mentioned above.

As stated earlier, commercially acquired debt is substantially more expensive since it attracts high interest rates and has a shorter repayment period. As a result, servicing commercially acquired debt significantly diverts scarce national resources from government programmes that deliver crucial public goods and services like education, health, and social protection. This in turn hinders the growth of developing nations and limits their ability to establish the conditions necessary for the realization of human rights. As a result, human rights, including the right to education, health, adequate housing, work, and development are threatened and violated, and in many developing countries, such as Kenya, millions face poorer living conditions. Furthermore, the requirements that borrowing nations must meet in order to be eligible for debt relief frequently force governments to further cut back on social services spending, which is essential to ensuring the protection of human rights.

Private sector debt and women’s livelihoods

Costly private sector debt and the related repayment obligations affect women more than men. For example, women bear the brunt of cuts in healthcare budgets as governments put in place austerity measures and fiscal adjustment policies because, together with children, they are frequent users of healthcare facilities. Moreover, as women are the primary caregivers, a shortage of basic healthcare or other social services often leaves carrying the extra burden of caring for the young, the sick, and the elderly.

Costly private sector debt and the related repayment obligations affect women more than men.

Moreover, because they are frequently marginalized, excluded from decision-making at all levels, or do not have independent control over resources and livelihoods, women are more likely to be negatively impacted by government initiatives to raise money for debt repayment, such as higher VAT that drives up the price of commodities.

In general, a country’s private sector debt obligations place limits to government spending on gender-responsive development programmes. This in turn restricts the development of women’s livelihoods, thus frustrating efforts towards the reduction of poverty and inequality, and hindering the advancement of human rights and the achievement of sustainable development for all.

Domestic private sector debt crowding out MSMEs.

Private investment is stifled as a result of a government’s increased borrowing from regional banks, insurance providers, pension funds, and treasury bills and bonds. Studies have indicated that a surge in government borrowing from local banks may be a factor in the reduction of credit accessible to micro, small, and medium-sized enterprises (MSMEs).

In the case of Kenya, for instance, due to the higher interest rates linked to the country’s public debt stock, local financial and non-financial organizations lend more money to the government than they do to MSMEs.

Moreover, since the government is viewed as a low-risk creditor, local banks tend to favour it, with the effect that economic output is stymied as entrepreneurs fail to obtain sufficient private sector investment to start or grow their businesses. Between 2013 and 2020, the private sector’s level of access to credit and private investment decreased from 12.4% to 7.3% while the country’s domestic debt stock increased within the same period.

In general, lending to MSMEs has been shown to be hindered by domestic private sector debt even though the COVID-19 pandemic, which impacted numerous enterprises, and the development in mobile lending platforms may also have contributed to the reduction in loan amounts.

Undermining sovereignty of national development strategies and assets

Loans from commercial creditors bring with them conditionalities that compromise sovereignty in developing strategies and building assets. Indeed, it is difficulty for a country that is highly aid-dependent to take ownership of its national initiatives, and even more so when the country is heavily indebted.

It is difficulty for a country that is highly aid-dependent to take ownership of its national initiatives, and even more so when the country is heavily indebted.

Chronic indebtedness brought on by a predilection for expensive, short-term commercial loans puts borrowing nations under the control of their creditors and undermines their ability to freely determine and pursue policies favourable to their development in line with the Declaration on the Right to Development.

Moreover, private sector players who contribute to a country’s public debt portfolio hold a lot of sway over the government as a result of the conditionalities that come with the financing they provide. In the case of Kenya, this is inferred from the country’s institutional and legal framework for public finance, which gives public debt precedence over other budgetary obligations. In other words, Kenya must pay down its debt before funding other government obligations, such as providing services.

Secrecy and lack of transparency

To guarantee responsible public debt management, data on public debt must be transparent. This draws investors, decreases the cost of borrowing from outside sources, encourages accountability, and attracts higher credit ratings (as investors prefer countries where they know the stock and composition of debt). However, debt instruments driven by the private sector, particularly Eurobonds, are distinguished by their broad discretion and lack of oversight in their application.

This leaves the door wide open to corruption and mismanagement of the borrowed funds, further burdening the citizens who must pay back the debt. For instance, there have been allegations of corruption involving Eurobonds issued by Kenya and questions have been raised regarding the use to which the loans thus obtained have been put.

The engagement and involvement of multiple stakeholders in debt decisions is necessary for prudent debt management. However, there is no structure in place to direct how citizens and other non-state actors can participate in choices about debt purchases from private sector creditors and how to invest the proceeds. As a result, private sector debt continues to promote opacity and to deprive citizens of their right to participate in the management of public debt. Moreover, by excluding the participation of citizens and other non-state actors from decisions concerning debt, private sector debt continues to limit citizens from exercising their sovereignty.

To mitigate the negative implications of private sector debt and improve its management, a number of measures can be taken that include the development of laws and policies that would guarantee transparency and access of information regarding public debt, more open and accountable debt agreements, and enhancing the role of citizens in the decision-making processes concerning the acquisition of private credit.

Private sector creditors should also be challenged to recognise their contribution to the problem of public debt and encouraged to consider offering debt relief in order to expand the fiscal space for government spending on essential public goods and services.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).

By Betty Guchu

The UN is actively addressing the challenges of international tax cooperation in the digital era, highlighting the necessity to revamp existing rules. A recent UN report offers three options: a legally binding multilateral convention, a constitutive framework convention defining principles, and a non-binding multinational agenda. The UN seeks to address discontent with current tax treaties and foster inclusive and effective international tax cooperation.

Editor’s note: At the time of publishing on 28 November 2023, the resolution on promoting inclusive and effective International Tax Cooperation in the United Nations proposed by Nigeria on behalf of the African Group was adopted by the 2nd Committee of the Assembly in New York on 22 November 2023.

The Third International Conference on Financing for Development that took place in Addis Ababa, Ethiopia, from 13 to 15 July 2015 culminated in adoption of the Addis Ababa Action Agenda, an ambitious program of actions supporting the implementation of the 2030 Agenda for Sustainable Development Goals. The Addis Ababa Action Agenda was in turn endorsed by the UN General Assembly on 27 July 2015.

Among the areas of action defined by the Addis Agenda as critical to realizing sustainability through the sustainable development goals (SDGs), is the need to strengthen mobilisation and effective use of domestic public resources.

In the area of tax revenue mobilisation, in particular, the Agenda pledged to intensify global tax collaboration and called for cooperation among countries in order to enhance transparency plus implementation of suitable policies, taking into account their unique capabilities or conditions. Such policies would include multinational corporations reporting to tax authorities in each country from which they operate, providing competent authorities with access to beneficial ownership information, and gradually moving toward automatic tax information exchange among revenue authorities, when necessary, with support provided to developing nations, particularly the least developed ones.

The Agenda emphasised that international tax cooperation initiatives should have a global perspective and scope, fully accounting for the diverse needs or capacities of all nations, with a focus on 14 least developed nations, landlocked developing nations, small island developing states, plus African nations.

Reaffirming its July 2015 endorsement of the Addis Agenda, on 30 December 2022, the UN General Assembly resolved to start intergovernmental talks at the UN Headquarters in New York on how to improve the effectiveness and inclusivity of international tax cooperation by examining other options, such as the potential creation of an international tax cooperation framework or instrument that is decided upon through a UN intergovernmental process while fully taking into account current international multilateral agreements.

To this end, the Assembly called on the Secretary-General to draft a report analysing all pertinent international legal instruments, other documents, and recommendations that deal with international tax cooperation, with a focus on how to support countries in exercising their taxing rights, mobilising resources to invest in the Sustainable Development Goals (SDGs), climate action, and promoting SDG-aligned fiscal policies. The report would take into account the work of the Committee of Experts on International Cooperation in Tax Matters, the Organization for Economic Co-operation and Development/Group of 20 (OECD/G20) Inclusive Framework on Base Erosion and Profit Shifting, and among other forms of international cooperation. In his report, the Secretary-General would also recommend the way forward, such as creation of an open-ended, intergovernmental committee headed by a member state to make recommendations for strengthening the inclusiveness and effectiveness of international tax cooperation.

An advance copy of the Secretary-General’s report outlining the highly anticipated UN tax convention plans was released on 8 August 2023. The report starts by observing that, over the past century, the primary goal of international tax cooperation has been to lessen the potential harm that individual tax policy decisions made by nations could otherwise do to beneficial cross-border investment and trade. The primary strategy has been to use bilateral tax treaties to change how domestic tax laws that would otherwise apply to cross-border income flows operate. These agreements aim to balance the contracting governments’ tax systems so as to avoid unintentionally leaving income and capital untaxed while also preventing double taxation.

However, while recourse to bilateral tax treaties is common worldwide, not all nations have signed these kinds of agreements, or they have only done so with their most significant trading and investment partners. In the absence of a treaty, nations are free to tax most of the money earned within their borders; nevertheless, this freedom may come with consequences, such as double taxation, which should be taken into account.

While recourse to bilateral tax treaties is common worldwide, not all nations have signed these kinds of agreements, or they have only done so with their most significant trading and investment partners.

The report goes on to observe that the need to update the treaty-based rules that currently allocate rights to tax income or capital among jurisdictions to account for new business practices in an increasingly digital and globalised economy has become more apparent in recent years. With G20 backing, the OECD has been the main platform for finding responses to these issues. In particular, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has devised a “two-pillar solution” that mainly aims to modify the rules applicable to large multinational corporations.

The report goes on to observe that the need to update the treaty-based rules that currently allocate rights to tax income and capital among jurisdictions to account for new business practices in an increasingly digital and globalized economy has become more apparent in recent years.

However, the modifications resulting from that process would not completely resolve the broader dissatisfaction stemming from the long-held belief by numerous nations and stakeholders that the current tax treaty regulations do not sufficiently reserve taxing rights to nations that host multinational corporations and serve as markets for their goods.

It is against this background, and having consulted with member states and other stakeholders, that the report presents an analysis of the existing arrangements, identifies additional options and proposes potential courses of action.

UN norm-shaping in international tax cooperation

The Ad Hoc Group of Experts in International Tax Cooperation was established to address long-standing concerns that the current paradigms of international tax cooperation were not meeting in relation to the interests of all nations. Specifically, the OECD Model Tax Convention’s primarily resident country taxation rules were deemed inadequate for developing nations looking to enter into tax treaties. These regulations would tend to give taxing rights predominantly to the developed country in treaties between developed and developing nations, while offering benefits that are nearly equal in the case of agreements between nations with balanced capital flows.

Consequently, the task of creating and maintaining an updated model tax convention that strikes a balance between the goals of better protecting developing countries’ taxing rights and fostering an environment that is conducive to investment fell to the Ad Hoc Group of Experts in International Tax Cooperation, now the UN Tax Committee (UNTC), its successor.

Under its mandate, the UNTC develops international tax standards, issues guidelines, and suggestions on tax administration or policy, with a focus on developing nations’ needs. As a result, source nation taxation powers have steadily increased in relation to the UN Model Double Taxation Convention, surpassing the provisions of bilateral treaties that would be based on the OECD Model.

Developed under the mandate of the UN Model Double Taxation Convention, the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries is a practical guide to all aspects of tax treaty negotiations, including the goal and operation of UN Model rules. Regular updating of this manual supports the adoption of the UN Model provisions in bilateral tax treaties. Both the UN Model and the Negotiation Manual (supported by capacity building) help countries to develop and articulate their own treaty policies in negotiations by describing a wide range of viewpoints and offering a variety of options from which they can choose, according to their realities or priorities.

In general, it has been found that the UN’s efforts to promote international tax cooperation are inclusive and successful. The International Centre for Tax and Development (ICTD) reports that clauses that are present in the UN Model but absent from the OECD Model are becoming more prevalent in bilateral tax treaties.

In general, it has been found that the UN’s efforts to promote international tax cooperation are inclusive and successful.

However, the UNTC does not, in terms of procedure, satisfy the requirement of universal participation by right and without preconditions. Members of the UNTC are experts who serve in their individual capacity within the group.

The 25 members, representing various tax regimes, are therefore chosen to reflect a fair geographical distribution and are rotated every four years. This, together with the Committee’s methods of operation and multi-stakeholder participation, guarantees that a variety of viewpoints are represented in the UN guidance products. However, while the nomination process is open to all countries, they do not have the right to participate directly in the UNTC’s norm-shaping process. This lack of universal participation in the UNTC means that other procedural criteria, such as agenda-setting, are not met.

OECD tax policy and administration

The 38 member countries of the Organisation for Economic Cooperation and Development (OECD) are all upper-middle income or high-income countries of Europe and the Americas. The organisation produces a wide range of guidelines on tax policy and administration which, however, are adopted by developed countries much more than by developing ones due to, among other reasons, their complexity and lack of capacity for implementation in developing countries. Moreover, and as earlier mentioned, specifically with regards to the “two-pillar” solution being developed through the OECD/G20 to tackle the challenges of taxing the digitalised and globalised economy thereby limiting harmful tax competition, developing countries feel that key concerns have not been addressed and that “the expected benefit from the proposed reforms will be minimal, especially when compared to the cost of implementation”.

Furthermore, rules of procedure prevent developing countries from fully participating in the OECD’s agenda-setting and decision-making process. In particular, the notion of universal participation, by right and without prerequisites, is violated by the requirement that jurisdictions pay to take part in talks. They also have to agree with the current norms before being permitted to participate. In addition, the requirement for non-OECD nations to adhere to regulations created prior to their membership in the norm-shaping body is incompatible with the procedural requirement that all nations participate in the agenda-setting process.

Options for inclusive and effective international tax cooperation

The UN report concludes that the substantive regulations created by OECD initiatives are often either too complex for developing nations to implement or do not sufficiently meet their requirements and objectives. The report argues that the UN is attuned to the need to make recommendations that offer a variety of solutions suitable for nations with varying degrees of development and that, therefore, the best way to make international tax cooperation completely inclusive and more efficient would be to increase the UN’s role in tax-norm formulation or rule establishment, fully taking into consideration current multilateral and international arrangements.

The UN report concludes that the substantive regulations created by OECD initiatives are often either too complex for developing nations to implement or do not sufficiently meet their requirements and objectives.

To attain this objective, the UN report offers three options. The first would be a legally binding agreement that would address a variety of tax-related topics. This type of agreement is commonly referred to as a “standard multilateral convention”. It would be characterized as “regulatory” in that it would lay out particular guidelines that would impose obligations, such as restrictions on the use of taxing rights.

The convention would set out mandatory, preferably enforceable, obligations deemed essential for appropriate domestic resource mobilization plus the establishment of a monitoring mechanism to ensure adherence to the information reporting and exchange rules, as well as mechanisms for resolving disputes when parties fail to honour their commitments.

This option’s feasibility would depend on political agreement over the necessity of addressing the tax issues that the convention will cover globally and in a legally binding way, as well as the capacity to reach an understanding regarding the best course of action.

A framework convention, which is the second possibility, would likewise be a legally binding multilateral instrument. However, it would be “constitutive” in the sense that it would create a comprehensive framework for international tax regulation. The fundamental principles of future international tax cooperation would thus be outlined in a framework convention, along with the goals of the collaboration, important guiding concepts, and the framework’s governance system.

The fundamental principles of future international tax cooperation would thus be outlined in a framework convention, along with the goals of the collaboration, important guiding concepts, and the framework’s governance system.

Due to their flexibility, framework conventions enable parties to agree to start talks even when there isn’t a strong political consensus on particular solutions, allowing them to handle a problem piecemeal. Nevertheless, there is the risk that establishing a framework convention may put on the back burner any the legal or technical effort required to bring about meaningful change.

The creation of a non-binding multinational agenda for coordinated measures would be a third choice. In practical terms, this framework would be similar to the second option in that it would set forth the guiding principles or procedures for international tax cooperation; however, these guidelines or procedures would not be covered by binding legal agreements.

Under such an arrangement, Member States would analyse tax issues to ascertain the level or levels at which coordinated efforts would be most successful. In cases where there is political agreement that a specific issue necessitates not only global legal obligations but also coordinated actions, the General Assembly could choose to authorise the negotiation of an instrument along the lines of the first two options above.

The three options proposed by the Secretary-General’s report are, therefore, not mutually exclusive, as a framework that makes recommendations regarding domestic tax rules could co-exist with a standard multilateral convention or framework convention focussing on international tax rules, for instance.  

In response to the UN Secretary-General’s report, the European Union has already made its position known. The bloc is in support of the third option, observing that “it would be useful to develop further actions aiming at capacity building and revenue mobilisation, taxing the informal economy, and countering illicit financial flows, especially in the least developed countries, which are critical for delivering on the Addis Ababa Action Agenda and the Sustainable Development Goals over time”. For its part, the OECD has expressed “disappointment” in the report and “surprise” that the UN “had chosen to ignore favourable assessments of the current state of OECD collaboration submitted to U.N. member states for the [Secretary General’s] analysis, resulting in ‘a number of inaccuracies and misleading statements’”.

Meanwhile, on behalf of the Africa Group, Nigeria has tabled a UN resolution on establishing a legally binding UN tax convention – the strongest of the three options presented by the UN report – for voting and adoption at the UN General Assembly when negotiations begin in earnest in early 2024.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).

Somalia has been admitted as the eighth member of the East African Community on Friday November 24, 2023, just over a year after the latest entrant, the Democratic Republic of Congo (DRC) was admitted into the bloc.

Mogadishu’s admission into the bloc was approved by the region’s leaders during the 23rd ordinary summit of the heads of state held in Arusha, Tanzania, on the same day, after successful negotiations that lasted close to a year.

The outgoing chairperson, Burundi’s President Evariste Ndayishimiye said the heads of state agreed to formally admit Somalia into the bloc, after the lengthy closed-door meeting which lasted more than five hours.

Somalia first expressed interest in joining the EAC in 2012 but was turned down due to its internal troubles with Al Shabaab and lack of a stable legal and political environment at the time. 

However, Mogadishu’s hopes of joining the regional bloc were rekindled when equally troubled South Sudan was admitted in 2016, and later DRC, which also has multiple conflicts within its borders, in 2022.

A recent press release by Kenya Revenue Authority (KRA) Board Chairman Anthony Ng’ang’a Mwaura is causing a great deal of consternation within the tax community in the country.

For one, such as myself, who has had a baptism by fire in tax advocacy, the statement’s use of words interchangeably- as synonyms- without reference to relevant legislation is a mistake.

Revenue collection debates are generally a “minds” discussion as opposed to a “hearts” conversation.

This, therefore, makes the choice of words -such as refunds, exemptions, waivers, abandonments, reliefs, incentives, or payments- have very specific legal meanings for purposes of clear interpretation.

Moreover, broader public understanding is key to ensure compliance with the law or else any confusion opens an opportunity for tax avoidance and evasion.

Such incidents further complicate an existing challenge of connecting the “technical language barriers” between tax practitioners, academics, legislators, journalists, activists, and citizens.

How then can we bridge the communication gap between the niche group of legal or accounting professionals and a wider audience of interested parties that continues to grow?

Local, national, regional, continental, and global tax issues must be fused to the relevant political or policy agenda in order for them to make sense. A concept in and of itself, will not make sense if not linked to individual needs it must address.

Consequently, speaking politics intelligently must correspond to talking about policy contextually and vice versa. 

Essentially if the idea of a “tax suspension” is the beginning of translating what a “Hustler Revenue Collection Plan” is, then it must clearly be so on account of existing law.

Otherwise, the leadership and management of the KRA will come across as underhandedly perpetuating the extension of current political schisms. This goes contrary to making tax simpler and more relatable.

Tax is a representation of interests, an understanding of governance, an application of sanctions, pursuit of economic justice, and a platform for civic education.

Its communication must recognize this because it is at the heart of state formation and its transformation, hence it must not be taken so casually, especially within the context of constructing more responsible citizenship.

Subsequently, Board Chairman Mwaura’s statement will have a negative impact on policy consistency, revenue collection, institutional development, mobilization of taxpayers, and the historical record of KRA, not to mention the next quarter’s targets.

On the reliability of policy, reports have thronged the news cycle as to industry concerns on how the statement unleashed unpredictability on account of the vagueness it projected.

Meanwhile, in a country suffering from serious tax apathy such a statement further erodes citizens’ confidence in an institution that has consistently been viewed as an unresponsive and punitive government agency.

Likewise, the plans to convert KRA from an authority to a service are likely to be questioned as a disingenuous public relations exercise that is likely to gobble up massive resources without establishing any practical or beneficial change for citizens. 

The harsh economic conditions in Kenya have pushed everyone, including the government and the private sector, to be uptight with their money. Everyone wants to make more money and spend less. That is true of taxes.

Individuals and businesses often use tax minimisation strategies to reduce their tax burden and maximise profits.

While tax avoidance is legal, some view it as unethical, calling for everyone to pay their fair share of taxes.

For Kenya Revenue Authority (KRA), tax avoidance and tax evasion are two sides of the same coin. The tax agency has become increasingly sophisticated in its attempt to detect and pursue tax avoidance cases.

So, should firms and individuals make use of legal tax minimisation strategies?

Are East African countries ready to face the next crisis or are they simply keen to go back to how things were? What does a new normal mean when speaking about public finance management (PFM)? In continuing the struggle for structural transformation, economic justice efforts must work towards developing a new citizen and preparing for unpredictable or unforeseen events, more so those with extreme socio-economic and political consequences. This is because, besides known challenges posed by existing inequalities, the COVID-19 pandemic has pointed out how “unusual circumstances such as man-made disasters, natural catastrophes, disease outbreaks and warfare … depress the ability of citizens to engage in economic activity and pay taxes as well as that of governments [capacity] to collect revenue [or] provide services”.

Such circumstances therefore demand more inclusion of human rights-based approaches in economic justice efforts to champion greater fairness within existing financial architecture. Disasters should, therefore, not obliterate human rights but should heighten the need to respect, protection, and fulfilment of obligations through prioritizing expenditure on service delivery, as well as all elements of Economic, Social and Cultural Rights (ESCRs) to “boost the capacity of residents to withstand shocks” by improving coping mechanisms. Promotion of fair taxes among other broader economic justice initiatives within PFM should consequently adapt towards championing ESCRS within the context of more disruptive and unexpected incidents. Crisis is constant in the new normal.

Fiscal democracy and civil protection: Recovery, resilience, and transformation Currently, conversations on recovery are focused on tackling reduced tax collection; slowed growth; depressed formal or informal productivity; exploding unemployment; diminished remittances; persistent poverty; decline in energy access; and escalating food insecurity. This emphasis seeks to reverse the effects of various lockdown policies that placed restrictions on businesses, mobility, movement within and across international borders, [plus] public gatherings. However, it speaks mostly of a desire to return to pre-COVID levels of economic activity while vital systems in tackling the next crisis such as water, education, or health remain unaddressed. Economic justice initiatives should therefore embrace fiscal democracy and civil protection as goals or appendages in achieving the structural transformation agenda. This will then speak to the resilience, and transformation needed to ensure PFM works for Africans in good times or bad.

Tax justice champions in Africa have been challenged to expand their research, advocacy, and mobilization efforts at continental, national, and community levels to accelerate the pace of domestic resource mobilization reforms in the continent.

During the meeting in Tunis, from 21st to 23rd November 2022, under the auspices of the Scaling up Tax Justice (SCUT) project, representatives from 5 national and regional tax lobbies noted that there was the need for joint coordination at regional and sub-regional levels to effectively advocate for fair taxation, as well as the efficient administration of tax incentives and Double Tax Agreements (DTAs) in Africa.

Speaking at the meeting, TJNA Executive Director, Alvin Mosioma, noted that tax champions in Africa must recognize the interconnectedness of the fight for tax justice in all spaces.

“The legitimacy of our tax justice network is to collectively work with our members, partners, and other stakeholders in order to change the perceptions of policymakers within Africa so that our taxes can benefit our continent,” Mr. Mosioma added.

The Scaling up Tax Justice (SCUT) project seeks to scale up tax justice by establishing and strengthening national coordination mechanisms for tax justice outreach to strengthen and promote the tax justice movement and campaign against illicit financial flows (IFFs). It is being implemented in Cameroon, Senegal, Tunisia, and East Africa.

SCUT is being implemented by Tax Justice Network Africa (TJNA) and its members; Le Centre Régional Africain pour le Développement Endogène et Communautaire (CRADEC) from Cameroon, Forum Civil from Senegal, Observatoire Tunisien de l’Économie (OTE) from Tunisia and East African Tax and Governance Network (EATGN). The project, which is in its second phase, is being supported by the Norwegian Agency for Development Cooperation (NORAD).

The meeting served as an end-term review session as phase 2 of the project ends in December 2022 and sought to achieve the following objectives;

• Track implementation of activities
• Outcome harvesting sessions
• Highlight success stories

OTE Executive Director Zoé Venin noted that despite the difficult global context occasioned by the COVID-19 pandemic, the reduction of public spaces, and the debt crisis, the project has achieved great success in its second phase.

The project has been renewed for the third phase which starts in 2023.

Sustainability is a major theme across the world. This has been driven by climate change which has had devastating effects on some parts of the world.

The negative effects have had a disproportionate impact on developing countries due to their limited ability to mitigate the impact of climate change.

Climate change has been touted by some scientists as a potentially existential threat to the human population.

The world has come together through the UN to ensure coherence in the global fight against climate change.

The United Nations Framework Convention on Climate Change has been organising annual events that bring together Heads of State, ministers, negotiators, climate activists, civil society representatives and private sector players.

Africa hosted COP 27 with a focus on delivering action on several issues that are critical to tackling climate change.

By Tax Justice Network Africa (TJNA), the East African Tax and Governance Network (EATGN), and Africa Centre for People, Institutions and Society

What are tax expenditures?

When a government wishes to financially support a vulnerable sector or community, it does so in various ways.

For example, to address period poverty in Kenya by improving girls’ access to sanitary pads, the government could decide to provide free or subsidised sanitary pads to schools by allocating funds to the relevant ministries for their provision. This would be reported as a direct expenditure.

Alternatively, the government could exempt pads from value-added tax (VAT) to reduce their cost. In doing so, the government would be foregoing the tax that girls would have paid when purchasing sanitary pads. This is also an expenditure by the government, but more specifically, a tax expenditure.

Tax expenditures are the revenues foregone by a government through tax exemptions, incentives, deferrals, or allowances. Essentially, any deviation from what the actual tax rate should be, is a tax waiver.