By Abubakar Jimoh
Illicit financial flows deprive Africa of billions of dollars each year, more than is received in overseas development aid or foreign direct investment combined, Nora Honkaniemi of ActionAid Kenya.
She said this recently at regional annual meeting of Transparency International held in Rwanda. According to Honkaniemi, “Figures vary between 50 and 160 billion USD a year depending on what outflows are calculated and during what time period. Illicit financial flows are commonly associated with criminal activity like drug dealing, smuggling or human trafficking.
“But according to the AU High Level Panel on IFF, 60-65% of illicit movements involve multinationals and commercial transactions like corporate tax evasion and avoidance. Multinational companies can be found to be operating in Africa while contributing little in the way of taxes, depriving countries of badly needed domestic resources.
“Multinationals often defraud countries of tax revenue by using mechanisms like transfer mispricing, or by exploiting tax treaties to hide their profits in places offering very low tax rates or by abusing tax incentives. These mechanisms allow for financial secrecy, preventing taxation where taxation is due and contribute to the illicit outflow of finances from developing countries. From a development perspective impact is disastrous: these lost resources could pay for schools, hospitals and other essential services and reduce dependence on external financing.”
“Companies use tax havens and network of tax treaties and complicated structures of subsidiaries to avoid tax in the country of economic activity, by rerouting it through low tax jurisdictions to the global north where Multinational Companies Headquarters are usually located.
“Tax deals are offered to (or negotiated by) companies to encourage investment in country. The most common ‘tax holidays’ exempt companies from various taxes for a period of time, often five or ten years. Not only are these tax giveaways not necessary to attract FDI – but companies abuse incentives regimes – causing huge losses of potential tax revenue.
“Examples include foreign hotels and mobile phone companies changing their name every 5 years under new identities to continue benefitting from incentives regimes, or domestic companies hiding their identity in offshore jurisdictions and reinvesting to benefit from incentives normally only available to foreigners,” she bemoaned.
Also, speaking at forum, Antonio Pedro, Director at UNECA/SRO-EA, Kigali, Rwanda added that “at least US$1trillion leaves developing countries each year through corrupt activity that involves shady deals for natural resources, anonymous shell companies, money laundering and illegal tax evasion.”
“Redressing these challenges requires specific policies and action to increase transparency and combat corruption in financial secrecy, natural resources deals and money laundering. Action in these three key areas would increase FDI and boost GDP by 0.6% annually,” he said.