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).
