How western firms cheat poor countries
For generations, Africa’s future seemed intertwined with aid donations from western countries that had made it big, some on the back of Africa’s slave labour and natural resources.
But with evidence of transformative aid hard to come by, the global South changed to the refrain: “trade not aid” would fix our problems. Now there is something else, as Richard M. Kavuma writes.
In recent years, activists have argued that places like Africa, even with the unfair global trading system, can generate enough revenues to finance much of their development.
The reasons this does not happen are many, but what now appears most critical are illicit financial flows (IFF), a major subject at this year’s conference of the Financial Transparency Coalition in Tanzania. Themed Towards Transparency: Making the Global Financial System Work for Development, the conference took place at Dar es Salaam’s White Sands hotel, October 1 – 2.
At least 125 activists, academics, researchers and media practitioners from across the world discussed and digested some sobering figures showing for each dollar that goes to poor countries as foreign aid or investment, a lot more is lost to the richer countries.
Take Africa, for instance; this money is stashed away by corrupt politicians and their cronies or it is shrewdly siphoned away by multinational firms raking in the “Africa rising” profits, cheating the continent of taxes worth billions of dollars.
The numbers can sound incredible. Each year, participants heard, $50bn leaves Africa illicitly, unnoticed by tax authorities. And according to a May 2013 report by the African Development Bank (AfDB) and Global Financial Integrity (GFI), between 1980 and 2009, Africa lost as much as $1.4 trillion in these illicit flows.
“The richer world could stop the haemorrhage if it wanted,” said Steven Kayizzi-Mugerwa, the AfDB director for development research.
Kayizzi-Mugerwa and GFI Director Raymond Barker noted that in part because western aid to Africa is neither enough nor robust, the paradigm is shifting to locally-mobilised resources to finance development.
Besides corrupt leaders and cronies hiding wealth in tax havens like Switzerland, Delware, Mauritius or the British Virgin Islands, a major source of concern was corporate tax avoidance through legal but disingenuous schemes like trade mispricing or paying for brand royalties to firms operating in tax havens.
The result of these schemes is that multinationals end up cheating poor countries by concealing would-be taxable revenues. SABMiller, for instance, owns Accra Brewery in Ghana. SABMiller has faced – and denied – accusations of tax avoidance after an ActionAid report reported that in 2009 Accra Brewery paid zero corporate tax, largely because it was paying for brand royalties to Rotterdam-based SABMark, management services from a firm in Switzerland, and other supplies from Mubex, a SABMiller subsidiary based in Mauritius, increasingly acknowledged as a secrecy jurisdiction.
Capital on holiday
What do you do if you are rich and you want to have a nice time? Well, go on holiday. It would seem this is what many foreign investors do with their capital; they bring it to poor countries like Uganda and Tanzania, where it can make massive profits without having to pay taxes.
The argument has been that for poor countries to attract investors, they should, literally, sell themselves cheap to investors by offering them corporate tax holidays for up to 10 years. In Dar es Salaam, participants heard that not only have these investors created few jobs, tax holidays do not rank high on the factors that influence their decisions on where to invest.
According to research, key for investors are issues such as the size and potential of the market, infrastructure (energy and transport), political and economic policy stability, and availability of skilled labour.
But according to one report, the amount of money Tanzania gives to firms in tax holidays is nearly 25 per cent of its annual tax revenues. Yet there is suspicion that some investors ship out or sell out before they are due to become tax-eligible.
According AfDB’s Kayizzi-Mugerwa, the key to stopping the illicit flows from Africa lies in African governments acting smart and taking stern action against the culprits.
“Go after them at the local level. [Let laws] have bite! Put them behind bars,” he told the conference’s opening session.
Speaking to The Observer on the sidelines of the conference, Kayizzi-Mugerwa said: “The west does not owe us a living and we can strategise and get the movement going. It takes leadership. It takes ingenuity. It takes commitment from our side.”
His views were echoed by the American attorney Jack Blum, an advisor to the Financial Transparency Coalition and a longstanding campaigner against illicit flows.
Speaking about Africa, Blum told The Observer that change would not necessarily be driven by the donor countries – which, after all, are the same countries that gloss over the dangerous impacts of tax havens and secrecy jurisdictions like Switzerland, the Virgin Islands, Rotterdam and Delware.
“A generation of Africans who are better-educated is going to get into positions of responsibility and lead the charge,” he said.
Despite his optimism, Blum envisages progress punctuated with setbacks, “because those who are benefitting from the present system will fight back.”
In fact, for both Kayizzi-Mugerwa and Blum, the challenge is that even the educated generation may not be excluded from the present beneficiaries, who include people either in, or close to those in, power. At the same time, the international system is least conducive for a charge from the South.
At the moment, the OECD has remained the major force shaping the global financial system – and continents like Africa barely have a voice there. Some hope that as the world debates the post-2015 agenda, the IFFs will become a key issue for the more-inclusive United Nations.
Yet even there, chances of success could be limited by the powerful OECD bloc – and selfish interests in the South. During the conference, Tanzanian MP Zitto Kabwe, who chairs the Public Accounts committee, mentioned Mauritius as a worrying tax haven. Interestingly, he added, Tanzanian government also set up a company and registered it in Mauritius.
“$220m was paid by the central bank through this company. Parliament has been trying to investigate but we were told [it was] a security matter,” Kabwe said, drawing laughter.
That laughter, however, belies a sense of anger that came out at the conference – about the shadow financial system, protected by the global North, which perpetuates poverty in the South.