Tax-free havens threaten the global economy.
As far back as the early stages of the global financial crisis in 2007, Nick Mathiason citing the African Union (AU) reported: “More than $150 billion a year is looted from Africa through tax avoidance by giant corporations and capital flight using ‘a pinstripe infrastructure’ of Western banks, lawyers and accountants.”
While this was a laudable attempt at quantifying the colossal leakage of financial capital from Africa through unethical practices by multinational corporations, the sum still falls short of the actual amount, which may never actually be quantified. That notwithstanding, the Global Financial Integrity (GFI) report estimates that sub-Saharan Africa loses more than twice as much in illicit financial outflows than it receives in aid.
Illicit outflows include different types of tax avoidance such as transfer pricing, as well as other forms of monetary transfers from different illegal activities.
According to Kevin Watkins, executive director of the Overseas Development Institute (ODI), transfer or trade mispricing is a practice that facilitates the shifting of profits to low-tax jurisdictions. He explains this practice costs less-developed countries “in excess of $550 billion annually: more than five times annual aid flows.”
The lack of transparency in the global financial system facilitates such behavior among multi- and transnational corporations. Tax havens are the favorite destinations for such illicit transfers, which otherwise could have been used to boost economic and industrial development.
The AU estimated a while ago that: “About 30% of sub-Saharan Africa’s annual GDP has been moved to secretive tax havens.” According to a GFI report, a conservative estimate for overall illicit outflows from Africa, exempting all other flows in illegal activities from 1970 to 2008, total $1.8 trillion. The 2013 Africa Progress Report, citing the GFI investigation, also puts the average annual loss to Africa from 2008 to 2010 at $38 billion — higher than development aid to this region in the same timeframe.
Summarily speaking, weaknesses in sub-Saharan Africa’s tax architecture, including a lack of institutional, human and technical capacity, weak laws, weak compliance mechanisms, policy gaps and so on, make it easy for multinational organizations to siphon much-needed capital that could have been used for development in the region.
These weaknesses make countries in Africa “highly vulnerable to aggressive tax planning and tax evasion facilitated by the extensive use of offshore companies, the high levels of intra-company trade, and the commercial secrecy surrounding foreign investment activity,” according to the 2013 Africa Progress Report. The document adds:
“Tracking value-added through a maze of interconnected companies, linked through shell companies, holding companies and other intermediaries registered in centers from the British Virgin Islands to Switzerland and London, is challenging for even the most developed tax bodies in the OECD [Organization for Economic Cooperation and Development].”
If tracking illicit transfers is difficult for the most-advanced tax bodies in developed countries, how much more difficult is it for African revenue authorities to secure tax compliance? African countries sometimes lack even the basic information and analysis of a commercial market that are necessary to assess tax liabilities of multinational corporations operating within their borders.
On an international level, the global financial system, which is largely controlled by the West, is itself very opaque and regulatory deficient, favoring the super-rich over the poor. The consequence of not checking the excesses and illegalities in the financial system has led to a loss of $50 trillion worldwide.
As a result, inequality has widened between the world’s richest and poorest inhabitants, of which much of the latter reside in Africa.
The Action Needed
As alluded to, illicit outflows from Africa are mostly stashed in tax havens. The G8 and G20, being well-aware of this problem, have the power to bring much-needed corrective measures and regulation, thus increasing transparency and promoting accountability.
However, they will fail to do so. The answer as to why lies in the fact that major countries participating in these summits are homes to flourishing tax havens. This includes the United States and the United Kingdom. In the UK, for instance: “Only two [companies in the] FTSE 100 have no subsidiaries in havens.” This shows how much patronage the tax havens enjoy.
It would seem that German philosopher Thomas Pogge was not incorrect in his book, Politics as Usual: What Lies Behind the Pro-Poor Rhetoric, when he highlighted Western nations as being in part responsible for sustaining global poverty.
The issue of tax havens needs to be revisited on a global multilateral platform (not just by the West and powerful multinationals) and we, as a global family, need to decide whether we are better or worse off without them.
If the decision is to keep tax havens, then we have to decide how to regulate them in such a way that they do not aid unscrupulous actors who have become merchants of death by impoverishing millions in Africa and elsewhere through facilitating illicit transfers.
As Jeffery Sachs succinctly put it:
“[The issue is about] stopping the abuse itself by letting very-very rich people from the US or Europe or mega companies like Apple or Google take their profits, and instead of paying the taxes that they should pay as decent citizens, put them tax free into these tax havens with the approval of the politicians of course, who use this to pay campaign contributions.”
Sachs raises a very important point to explain why we may not be able to solve this global challenge in the very near future and that is regulatory or political capture. Often, the political will to stop this crime against humanity is lacking, because the politician who is supposed to regulate the industry is captured by large corporations that sponsor political campaigns and other such activities, doing so with monies that constitute illicit outflows from Africa.
Regulatory capture notwithstanding, the world has come to a stage where we cannot ignore these illicit transfers. Though common to all nations — developed and developing alike — the burden is far-greater and more harmful to the latter, such as African countries. Intentionally perpetuating a system that facilitates such behavior is nothing short of a crime against humanity.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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