Business News of 2014-04-01

Illicit Financial Flows deprives Africa of billions of dollars

ActionAid Ghana (AAG) said Illicit Financial Flows (IFFs) was depriving Africa of billions of dollars each year, more than is received in overseas development aid or foreign direct investment combined.

It said IFFs were commonly associated with criminal activity like drug dealing, smuggling or human trafficking, adding that the United Nations High-level Panel on IFFs had been charged with developing recommendations to end this flight of much-needed capital from Africa.

A media briefing by AAG on IFFs and Tax Avoidance in Africa in connection with the just ended Africa Union Finance Ministers Meeting in Abuja which was forwarded to the GNA on Monday said Africa’s industrialization and development would be most served with domestic resource mobilization by African governments, more specifically stoppage of leakages of funds from the continent including Ghana.

It said according to the UN panel, two-thirds of illicit movements involved multinationals and commercial transactions like corporate tax evasion and avoidance, while criminal activity and bribery make up 30 per cent and five per cent respectively.

The statement said multinational companies were extracting resources or selling their goods and services in Africa while contributing little in the way of taxes.

It said such multinational companies were depriving some of the world’s poorest countries of money vitally needed to pay for schools, hospitals and other essential services.

It said multinational companies often defrauded countries of tax revenue by using mechanisms like trade or transfer mispricing or by exploiting tax treaties to stash their profits in places offering very low tax rates or harmful tax incentives.

The statement said this was also unfair on smaller domestic businesses that are typically responsible for the majority of employment in Africa.

AAG said double taxation treaties multinational companies often use the global network of double taxation treaties or agreements to avoid or reduce the tax they need to pay.

Multinational companies often take advantage of different double taxation treaties to shift profits from country to country to country, exploiting the treaties with the lowest withholding tax rates, it said.

Routing financial flows through a number of different tax jurisdictions allows companies to avoid tax on cross-border transfers whether or not there is a bilateral treaty between the country in which the income is generated and the final destination country.

This strategy, known as treaty shopping is particularly problematic when it involves a tax haven, like Mauritius, it said.

The statement said African countries should be very cautious about signing any new double taxation agreements, adding that transparency and public scrutiny is key.

It said harmful and illicit tax incentives tax havens like Mauritius are not the only shelters for illicit financial flows, stating that tax incentives provided by any domestic tax regime could also trigger the illicit movement of money from one country to another.

The statement said 8 billion is given away by governments in developing countries every year, just in corporate income tax exemptions.

It said this is enough to put every primary school aged child in school, meet all the health-related Millennium Development Goals and leave enough money for the agriculture investment needed to end hunger.

The statement called on African governments to cost their tax incentives and open them to parliamentary and public scrutiny, further urging them to cooperate at a regional level in order to counter tax competition.