tax evasion in sub-Saharan Africa

Tax evasion, while a global issue, particularly hinders sub-Saharan Africa economic growth. In fact, the total amount of lost taxes exceeds the amount of foreign aid sent to the region. Tax evasion in Sub-Saharan Africa deprives governments of the ability to provide vital services, such as healthcare, education and disaster relief, to the 413 million people living below the poverty line.

By the Numbers

The Organization for Economic Cooperation and Development (OECD) estimates that Africa loses $50 billion to tax evasion annually. Some place the figure much higher; for example, the United Nations Economic Commission for Africa (UNECA) estimates that $100 billion is lost.  Compared with the total amount of foreign aid sent in 2017, $43.5 billion, the region experiences a net loss of approximately $6.5 billion, while using the more conservative OECD estimate.

The United Nations Conference on Trade and Development (UNCTAD) found that a wide financing gap exists in Africa. A financing gap refers to the difference between the amount needed to achieve Sustainable Development Growth (SDG) and actual government revenue. The UNCTAD estimates that there is a financing gap of $210 billion for key government initiatives, including infrastructure, food security, healthcare and education.

Resource Extraction Drives Tax Evasion in Sub-Saharan Africa

Multinational companies involved in resource extraction are particularly effective at paying only a small share of the taxes that they owe. Mineral and oil extraction companies are responsible for much of the tax evasion in Sub-Saharan Africa, accounting for total annual losses of up to 6 percent of African GDP. The Southern African Catholics Bishops Conference recently wrote a letter to 21 mining companies operating in South Africa; they asked each to explain their use of tax havens, the purpose of their subsidiaries, and if tax evasion was consistent with their corporate social responsibility policies.

The OECD launched the Africa Initiative Report in 2014, which includes 29 of the 46 countries in sub-Saharan Africa, as a means to combat tax evasion. The OECD hopes to increase cooperation between member countries, which will provide greater transparency. The progress being made is incremental, but most member countries are meeting the requirements set out by the OECD. The first and among the most important steps is for African countries to develop Exchange of Information (EOI) systems. EOIs allow for member countries to request relevant profit and tax information from one another. The 29 countries had a total of 23 people on EOI staff in 2014; in 2018, that number has grown to 79 staff members, prompting the OECD to describe the situation as “greatly improved.”

Tax Justice Network Africa

Tax Justice Network Africa (TJNA) is a research and advocacy organization working to promote “equitable, inclusive and sustainable development”. They point to tax evasion in Sub-Saharan Africa as a major cause of revenue loss. To stymie tax loss, TJNA calls for a more transparent global financial network; tax havens, or countries with very low effective tax rates, present an obstacle to achieve this goal. However, TJNA hopes to establish an Intergovernmental Tax Commission (ITC) in the United Nations in order to set international tax standards. The ITC, according to TJNA, would allow for greater conformity and make it more difficult for businesses to evade taxation.

A Broad Coalition

Tax evasion in Sub-Saharan Africa is a major cause of concern. However, international organizations and African countries are partnering to tackle it. If successful, Africa can expect to reap an additional $50-100 billion in annual tax revenue. While the 413 million people living in poverty will benefit significantly from higher rates of tax compliance, business can expect to benefit as well. As African economies continue to develop, businesses will have more opportunity for investment in emerging markets. Capital currently flows out of African economies. If the trend is reversed, governments, citizens and businesses will all benefit.

– Kyle Linder
Photo: Flickr

Debt Audit
Norway recently completed an audit of its debts to developing nations that was conducted by Deloitte, an international financial services company. The audit was initiated with the intention to discover if Norway’s aid to developing nations since 1970 complies with international and national guidelines. This is the first audit of its kind and is welcomed by anti-poverty advocates across the globe.

Developing countries burdened with debt is a significant contributor to global poverty and hinders the countries’ ability to introduce progressive reforms. Many of these loans impose burdensome payment plans and high interest payments. As a result, anti-poverty measures must be forsaken or cannot be effective with such a burden on public finances.

In April 2012, the United Nations Conference on Trade and Development (UNCTAD) introduced the Principles on Promoting Responsible Sovereign Lending and Borrowing. The principles are intended to protect developing nations that are borrowing money by decreasing the costs of borrowing and the number of debt crises.

So far, twelve countries have endorsed the principles. The principles include provisions that agents who work with a country’s debt are required to act in a transparent and accountable way that is consistent with their public office. In addition, the principles place responsibility on both the borrowers and lenders in debt agreements.

This is a significant change from most international debt principles, which place the burden almost solely on the borrowers.

Norway’s audit included 34 debt contracts that are held with seven countries: Pakistan, Indonesia, Egypt, Zimbabwe, Myanmar, Sudan and Somalia, which total almost $1.6 billion. Norway’s International Development Minister pointed out that while international aid may total $141 billion annually, developing countries must pay $464 billion annually to creditor nations.

While Norway has not released its intended actions in response to the audit’s findings, some of the debts did not meet standards of responsible lending. Norway is considered a responsible lender, and implementing a similar debt audit in other lending countries may produce similar findings.

The U.S. has endorsed the principles, but only as voluntary guidance. Advocacy firms for responsible lending are lobbying the U.S. to introduce legislation that would incorporate the principles in U.S. policy, providing a more consistent application of the principles.

– Callie D. Coleman

Sources: Inter Press Service, European Network on Debt and Development, UNCTAD
Photo: Empresate

UNCTAD Says Developing Countries Show Real Growth
The United Nations Conference on Trade and Development (UNCTAD) said that developing countries are now contributing much more to the global economy than ever before.

UNCTAD released the information that developing countries’ share in global value-added trade is now at about 40 percent, whereas the same figure was about 20 percent in 1990. Economists give most of the credit to transnational markets and global value chains, the chain of different countries in which a single multinational company operates.

These global value chains allow a weaker developing country to create an economic partnership with more developed economies by supplying raw materials and basic manufacturing or design. The capacity from growth comes from climbing the “chain,” by building the local economy, training workers, and producing more complex goods. People always ask for results in the mission to fight poverty, this growth is definitely evidence that economies around the developing world are growing.

These statistics, along with the rapidly decreasing statistic of people living in extreme poverty, are proof that real progress is being made as developing countries show real growth.

– Kevin Sullivan

Source: Industry Week
Photo: The Graduate Institute