Author: Kaburu Mugambi
Date: January 9, 2007
Type of article: Business News
Source: The Daily Nation - only available online by registration and paid subscription fee

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Multinationals avoid paying taxes by creating subsidiary companies

A new report by a non-governmental organisation has implicated international banks and multinationals in the plunder of public coffers in Africa. Tax Justice Network for Africa says transnationals operating in Africa avoid paying taxes in countries they are based by registering subsidiary companies. 

The report, A New African Development Struggle, says Africa’s economies are viewed as being in desperate need of external resources. “Recent estimates show that Africa is a net creditor to the rest of the world, with around 30 per cent of sub-Saharan Africa’s GDP being moved offshore,” it adds.

Tax havens and capital flight mean that Africa’s wealth is flowing to bank accounts in Monaco, Switzerland, Jersey and London, with the collusion of some of the world’s wealthiest countries and companies. Recent research estimates that, worldwide, wealthy individuals had siphoned “offshore” a staggering $11.5 trillion (Sh805 trillion), held in tax havens where they are shielded from contributing to government revenues. 

The benefits from taxing this wealth would far outweigh any realistic amount of foreign aid. If taxed at the moderate rate of 30 per cent, the resulting revenue — around $255 billion (Sh17.8 trillion) annually — could finance the United Nations Millennium Project. “Put simply, making the rich pay their due taxes could fund measures to halve world poverty,” the report adds.

Capital flight from sub-Saharan Africa, estimated at $274 billion (Sh19.1 trillion), including interest earnings, was equivalent to 145 per cent of the total debt owed by these countries by the mid-1990s. Most analysts agree that the outflows of illicit money originating in Africa tend to be permanent, indicating that between 80 to 90 per cent remain outside the continent. 

Roughly 80 per cent of Africa’s external borrowings has been captured by ruling elites and channelled offshore in the form of capital flight, according to Tax Justice Network. As a result, external debt contract by African governments and private firms with government guarantees has been transformed into private assets held in offshore accounts and companies.

Tax evasion and other forms of corruption are estimated to reduce tax revenues in some countries by as much as 50 per cent. The role of good tax policies is relatively under-researched. However, much of the reform effort surrounding trade liberalisation has had significant consequences. 

Many countries have suffered loss of revenues and economic distortions arising from the implementation of new taxation systems, according to the report. The shift towards greater use of indirect taxes has generally been regressive for poorer households, and falling government incomes have resulted in substandard schools, underinvestment in training, and inadequate infrastructure. 

Tax Justice Network for Africa says financial and trade liberalisation programmes have coincided with the increased global dominance of transnational corporations. “Many of these corporations operate out of offshore tax havens and use transfer pricing techniques to avoid tax. These trends have led to an ‘uphill’ flow of capital from South to North, further exacerbating global inequality and slowing economic growth.”  

The organisation says any strategy for tackling poverty through the mobilisation of domestic resources must include effective measures to reduce capital flight and tackle abusive tax practices.  The role of tax policy in alleviating poverty and inequality, and in financing development will be the main theme of a research workshop that will be jointly organised by the University of Nairobi, the Association for Accountancy and Business Affairs and Tax Justice Network.

From January 18 to 19, African academics, policymakers, activists and civil society groups from across the continent are expected to convene for a two-day meeting on tax, poverty and finance for development in Nairobi ahead of the World Social Forum. 

The largest means of shifting capital out of Africa is reckoned to be transfer mispricing. 

Multinational companies avoid taxes by mispricing trade transactions between different jurisdictions and subsidiaries, allowing their profits to be moved offshore without being taxed. Tax administrations of many African countries lack sufficient staff to tackle the complex transfer pricing strategies, according to Tax Justice Network for Africa. 

“The result is that no African country has raised a successful challenge to a transfer pricing arrangement, yet the practice is on the increase,” the organisation adds. In some cases, such activities also involve fraud and money laundering. 

Case studies

Last August, US-based oil major Chevron was forced to concede that it and consortium partner Petronas jointly owed the Government of Chad $450 million (Sh31.5 billion) in unpaid back taxes. Chevron reportedly agreed to pay the taxes owed.

A study of import and export transactions between Africa and the US found that between 1996 and 2005 net capital outflows to the US grew from $1.9 billion (Sh133 billion) to $4.9 billion (Sh343 billion) through the use of low-priced exports and high-priced imports.

Under investigation by the Nigerian Economic and Financial Crime Commission, the US oil services company Halliburton admitted that its officials had paid bribes amounting to $2.4 million (Sh168 million) to tax officials in return for favourable tax treatment worth more than $14 million (Sh980 million). 

Halliburton is also under investigation for making illegal payments of around $180 million (Sh12.6 billion) to offshore accounts belonging to Sani Abacha in return for contracts to build a natural gas plant in Nigeria.

In 2006 Shell Petroleum Development Corporation, after extensive denial and litigation, including a failed appeal to the Federal Inland Revenue Commissioner and the Court of Appeal, was forced to settle a disputed tax liability amounting to $17.8 million (Sh1.2 billion) owed to the Federal Inland Revenue of Nigeria.