Another year, another exposé by the International Consortium of Investigative Journalists (ICIJ) revealing the gross tax avoidance practices by the ultra-wealthy and the governments that enable them. Half a decade since the publication of the Panama Papers, and later the Paradise Papers, large-scale tax avoidance by global corporations, criminals, business and political elites continues to sweep across the globe. The latest ICIJ investigation, dubbed the Pandora Papers, reveals a grim string of documents pointing to the secret wealth and dealings of world leaders, politicians and billionaires, including King Abdullah II of Jordan, former prime minister of the United Kingdom Tony Blair, Russian President Vladimir Putin, Czech Prime Minister Andrej Babiš and Kenyan President Uhuru Kenyatta.
If anything, the Pandora Papers show how the frenzy of efforts to coordinate reforms for global tax standards has yielded slow and very little progress. Tax avoidance is the use of legal provisions and planning to minimise the amount of taxes an individual or corporation owes. It typically includes claiming as many tax deductions as possible but has been increasingly achieved by tax planning arrangements such as secrecy around what they pay in taxes in different countries, shifting profits to jurisdictions that have little to zero tax rates and even less financial transparency through shell companies. These jurisdictions, known as tax havens, have come under the spotlight for the adverse effects that they create for other countries – specifically, eroding the tax bases of countries with higher tax rates.
“If anything, the Pandora Papers show how the frenzy of efforts to coordinate reforms for global tax standards has yielded slow and very little progress.”
Impact of tax avoidance on lesser developed countries (LDCs)
Tax justice scholars have argued that tax avoidance, especially by wealthy individuals and multinational corporations, erodes countries’ fiscal sovereignty. Countries are ideally free to determine their fiscal policy including tax rates by taking into account the domestic costs of inflation and other monetary adjustments that pertain to their own citizens and not just other countries. However, as capital has become more mobile with globalisation, individuals and corporations can register under other countries that offer lower taxes, thus putting pressure on countries with higher tax rates to lower their rates in attempts to attract tax revenues.
Low tax rates and the erosion of tax bases affects all countries, but benefits tax havens at the expense of others. Taxes are an essential revenue source, especially for African countries and other LDCs who largely rely on them for providing key basic and public services such as healthcare, education, utilities subsidies and social protections. In countries with high levels of inequality and poverty, these services are critical and can be the difference between life and death for those who cannot afford them.
Development organisations and campaigners have long reported on the devastating costs of tax avoidance to global development annually. Oxfam published that tax havens cost governments $427 billion each year, and in 2018, revealed that African countries had lost at least US$11 billion in 2010 from avoidance by multinational firms. Gabriel Zucman, an economist at the University of California at Berkeley, revelealed in his book The Hidden Wealth of Nations that individuals have stashed $8.7 trillion in tax havens. While many countries lose revenues to tax avoidance, African tax bases experience larger erosion as a share of gross domestic product (GDP).
In addition, tax avoidance by wealthy individuals and corporations shifts the tax burden from larger businesses to smaller and medium-sized businesses that do not have the resources to access similar sophisticated tax planning arrangements. It also shifts the tax burden onto consumption through personal income tax and value-added tax , which is particularly problematic in LDCs where small, medium and micro-enterprises (SMMEs) and informal traders make up the bulk of economic activity and are more vulnerable to significantly reduced income and insecurity – as seen in the Nigerian market traders’ tax unrests.
Stunting development: what avoidance and aid have in common
While it is common knowledge that tax avoidance undermines economic and social development, these effects are especially disgraceful in Africa. Multinationals and foreign governments from developed countries have long histories of low tax payment in Africa through unequal economic partnerships, trade terms and benefits from colonial regimes. Tax avoidance effects are more pronounced on the continent because many African countries still have 1) unequal bargaining power to effectively reform their tax regimes; 2) authoritarian incumbents who benefit from brokering special secret deals with businesses; and 3) weaker tax administration capacities to properly investigate and enforce tax compliance. The result is that Africa loses more money through unequal and outdated tax treaties and trade terms than what it receives through aid.
A joint study led by Health Poverty Action in 2014 showed that, “Out of the $192 billion being drained out of the continent, profits made by multinational companies take up the highest share ($46.3 billion), followed by costs of climate change ($36.6 billion) and tax evasion and illegal financial flows ($35.3 billion).”
When coupled with the increased tax planning strategies that continue to emerge with the pervasiveness of digital businesses, particularly multinationals, and the difficulties around ring-fencing the digital economy from the rest of the economy for tax purposes, that figure has undoubtedly multiplied. This makes foreign spending on aid seem like a distraction from the persistent exploitative relationships where wealthy nations collaborate with weaker and corrupt African governments. In his most recent publication, Expensive Poverty, Dr Greg Mills of the Brenthurst Foundation* discusses how in normalised business dealings in Africa, “corruption and bribery thrive as the operating methods in an environment characterized by weak systems of taxation and representation, patronage-drives appointments and highly transactional decision-making”. Moreover, it is more sinister when the same European Union (EU) member states that are leading the charge for global tax cooperation, such as Switzerland, the Netherlands, Cyprus, Ireland, Luxembourg, Malta, the British Virgin Islands, the City of London, and newer destinations revealed in the Pandora Papers such as the United States’ Delaware, South Dakota and Nevada, Texas, continue to become tax havens.
One might add that providing more foreign aid rather than pursuing meaningful, mutually beneficial and equal trade partnerships is not an accident. If there were any doubts about this, former British prime minister Theresa May admitted that in the post-Brexit world, Britain’s aid budget would be used to promote British trade and political interests – a train already in motion if you ask most development experts. These regimes are complicit in empowering authoritarian regimes, permitting leaders known for human rights abuses and illicit dealings to move their money around freely at the expense of their citizens. Tax justice advocate and expert, Khadija Sharife, problematises this ‘needs economy’, arguing that it “has allowed for the ordering and management of reality by experts who act within spaces of unaccountable wealth, with philanthro-capitalism framed as being without history and politics, despite monies generated through systems of inequality”.
Global action against tax avoidance – past, present and future
There has been some progress in tackling tax avoidance thanks to substantial advocacy efforts for the continent by development organisations and tax justice campaigners such as Oxfam, the African Tax Administration Forum (ATAF), Christian Aid and Tax Justice Africa, among others. Although progress has been made in terms of a broad consensus among countries about the need for a multilateral framework for tax cooperation rather than harmful competition though unilateral measures, it has been slow and exclusionary. Eforts led by the Organisation of Economic Cooperation and Development (OECD) – some of the world’s strongest and wealthiest countries – have been heavily criticised for largely catering to the preferences of the EU and its member states, leaving out the majority of LDCs which are disproportionately affected by tax avoidance.
Multilateral cooperation is fundamental for global tax reforms that effectively address the negative impacts they have on developmental outcomes in the most vulnerable countries. Tax avoidance is a collective action problem which needs coordination and uniformly, or equitably applied standards. The exclusionary manner in which the OECD pursued reforms has confirmed the suspicions of African tax experts and resulted in their sidelining, as the set of newly agreed upon laws will force multinational companies to report tax information for each EU country where they operate, but leave out most of their operations in the rest of the world. This shows that wealthy nations want to develop selective solutions to their own challenges while wanting to maintain the benefits, a move which will likely result in the further erosion of the tax bases of excluded countries and pave the way for the wealthy to continue paying less than their fair share of taxes.
Demands from African tax justice campaigners – the way forward
These inconsistencies are why African leaders and tax experts have been calling for a new global tax framework to be negotiated and decided in the United Nations (UN) and not the OECD, where all countries can participate equally. The UN Tax Committee has already made great strides in putting forward recommendations to end the race to the bottom in global tax revenue collection, including:
- Capacity strengthening of tax administrations through technical assistance and funding;
- Automatic exchange of information agreements to combat financial secrecy by corporations;
- Tax harmonisation through minimum effective tax rates;
- Domestic laws to promote more transparency from financial institutions;
- Country by country reporting by multinationals in all the countries they operate in; and
- Adoption of progressive taxation as a principle for tax cooperation and mitigating wealth inequalities
The proposals are a matter of high priority and demonstrate the importance of a coordinated global effort to tackle tax avoidance collectively. Even with global tax standards that apply to all, poorer countries remain with the short end of the stick and require further support, because while wealthier nations have higher capacities to adapt to the ever-increasing strategies of avoidance by the wealthy, many African countries cannot keep up without technical and financial assistance – which is inarguably a better and more sustainable strategy for economic development and poverty reduction than aid.
*The author is the Machel-Mandela Fellow at The Brenthurst Foundation.
The opinions expressed in this article are those of the author(s) and do not necessarily reflect the views of SAIIA.
(Main image: Getty Images)
