By Brenda Osoro
Source: Nairobi International Financial Center/Sketch: Lunapic
Offshore tax havens are well-known for attracting the wealthy, including politicians and business magnates, to safeguard and manage their assets. In many African contexts, these offshore havens have been linked to the illicit accumulation of stolen public funds.
Whenever they make headlines, it’s typically due to massive tax evasion or corruption scandals or alleged impropriety involving prominent leaders worldwide such as when the “Pandora Papers” implicated Kenya’s former president, Uhuru Kenyatta.
Based on media coverage, it is easy to picture tax havens as some notorious zero-tax Caribbean paradise like the Cayman Islands or the Bahamas. These are only part of a larger global system of financial secrecy. In reality, tax havens can be found a lot closer to home.
Some argue that the governments of developing countries should not even attempt to become tax havens. Recent developments in Africa contradict this notion with an increasing number of African states considering or setting up International Financial Centers (IFCs).
These are establishments set up by means of legislation that offer investors convenience through a combination of low tax liabilities, high levels of secrecy and limited regulatory standards as an incentive for foreign investment.
Data from the Global Financial Centers Index shows the existence of as many as eight IFCs in countries such as South Africa, Mauritius, Morocco, Kenya, Nigeria, and Rwanda. All share the ambitious goal of positioning themselves as an investment hub for Africa.
Officials have touted these centers as efficient gateways for external capital inflows to Africa, potentially bringing in millions in investments, hundreds of thousands of jobs, enhanced skills, and contributing to higher GDP growth.
While IFCs can attract finance for development they also hinder resource mobilization. Legal gaps in their frameworks can and continue to be exploited for tax avoidance and illicit financial activities.
Companies often exploit these gaps by channeling their capital through IFCs, reducing their tax liabilities with no intention of these jurisdictions being the final destination of their investment benefits. This lack of genuine economic activity mirrors tax havens and can lead to an increase in easy-to-impose taxes to compensate for lost income.
Additionally, the secrecy of IFC investments attracts criminals seeking to legitimize illicit transactions and hide their ownership through ‘shell corporations,’ which exist primarily on paper with no substantial business operations.
In a bid to attract the most foreign investments into their countries, African states have been competing to undercut each other in offering a wide array of tax incentives. A phenomenon that has popularly been described as ‘a race to the Bottom.’ This game of tax competition makes it harder for countries to maintain higher tax rates, leading to ever-declining rates and revenues.
Surprisingly, research suggests that tax incentives are not a primary factor in attracting foreign investment. Infrastructure quality, low administrative costs, political stability, and consistent macroeconomic policies hold more weight as motivators for foreign investors.
While African nations strive to modernize their financial infrastructure, it is crucial to do so without compromising development efforts. Governments must address vulnerabilities and domestic inequalities that may arise from these strategies, urgently reviewing and closing any loopholes that enable tax abuse.
In an era of multiple crises and unprecedented levels of inequality, any losses in critical resources needed for recovery and development cannot be afforded.
The author is Program Assistant for the East African Tax and Governance Network (EATGN).
