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Africa/Global: Fighting Tax Evasion and Tax Avoidance

AfricaFocus Bulletin
April 30, 2019 (190430)
(Reposted from sources cited below)

Editor's Note

The UN Economic Commission for Africa (ECA), in its annual Economic Report on Africa, focused on financing development in Africa, highlighted the urgency to curb what it termed “revenue leaks” through tax evasion and tax avoidance, as well as through misguided government policies. Multinational corporations, corrupt officials, and financial intermediaries around the world siphon off African wealth, leaving national budgets starved for resources to invest in health, education, and sustainable economic growth.

This report, released on March 23 and available on the ECA website (; direct link, lays out specific ways in which African countries can curb these revenue leaks. But it also stresses that these are limited by the fact that so much of the diverted wealth is hidden in financial capitals outside Africa.

Less than a month later, from April 15-18, the UN forum on financing for development ( met at the UN headquarters in New York. But references to illicit financial flows from tax evasion and tax avoidance were buried in short references deep within the report. Ironically, examples of stolen wealth parked in high-end real estate or passing through global banks could be found only blocks away from the UN in mid-Manhattan.

This AfricaFocus Bulletin contains excerpts from the ECA report, as well as brief descriptions and links to two cases illustrating such illicit financial flows: a $7.1 million condominium in Trump Tower owned by the daughter of an African president and a $2.2 billion set of bank loans to Mozambique now under indictment in a New York court.

For previous AfricaFocus Bulletins on illicit financial flows and related issues, visit

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Economic Report on Africa 2019

Fiscal Policy for Financing Sustainable Development in Africa

Executive Summary


Transitioning to the Africa we want is within our reach. Africa is making steady progress in building the critical ingredients for sustainable and resilient societies, but progress towards achieving the Sustainable Development Goals (SDGs) is slow and uneven across the continent. Access to basic infrastructure such as energy, water and sanitation services is improving but falls well below the global average.

The financing needs across the continent to meet the SDGs are huge, and the financing gap is wide. Estimates of the financing needs range from $614 billion to $638 billion a year (UNCTAD, 2014). Africa’s annual financing needs for infrastructure, food security, health, education and climate change mitigation alone are estimated at $210 billion (UNCTAD, 2014). To narrow the financing gap, African countries need to enhance domestic resource mobilization, and that requires sustained improvement in the efficiency and efficacy of fiscal policy.

Key Findings

Economic growth in Africa, which moderated from 3.4 per cent in 2017 to 3.2 per cent in 2018, was supported largely by solid global growth, a moderate increase in commodity prices and favourable domestic conditions. In some of Africa’s largest economies—South Africa, Angola and Nigeria—growth trended upwards but remains vulnerable to shifts in commodity prices. At the subregional level East Africa remains the fastest growing, at 6.1 per cent in 2017 and 6.2 per cent in 2018. West Africa’s economy expanded by 3.2 per cent in 2018, up from 2.4 per cent in 2017, while Central, North and Southern Africa’s economies grew at a slower pace in 2018 compared to 2017.

Africa has made notable progress in education, health and other social outcomes. Progress in poverty reduction has been steady. The poverty rate dropped from 54.3 per cent in 1990 to 36 per cent in 2016. However, the pace of poverty reduction is also slow, and inclusive growth — leaving no one behind —remains elusive. The poverty gap, which measures the depth of poverty, remains high, at 15.2 per cent against a global average of 8.8 per cent, partly because of high income-related inequities in access to public services.

Corporate Tax Reductions Offer Little Incentive for Investments

For African countries, lowering taxes does not significantly influence investment. The Report finds that to achieve a 1 percent increase in total investment, governments could lose up to 20 per cent in tax revenue. African countries should thus avoid joining the race to the bottom and lowering taxes to attract foreign investment, since the gains will be much smaller than the revenue loss.

Base Erosion and Profit Shifting are Major Sources Of Revenue Leaks

Eliminating base erosion and profit shifting could boost tax revenue in Africa by an estimated 2.7 per cent of GDP. The main avenues of tax evasion and avoidance in the natural resources sector in Africa highlighted in the Report are the use of nonstrategic tax incentives, loopholes in double-taxation agreements, difficulties in applying the arm’s length principle effectively in regulating intra-company transactions, inclusion of fiscal stability clauses in contracts and a lack of coordination and information sharing among government agencies.

Policy options for the natural resources sector.

African countries should strengthen their oversight of the natural resources sector. They could consider a more equitable and less administratively challenging approach to assessing what share of multinational corporations’ profits to tax (for example, based on the share of sales or other variables), or they could base taxes on variables that are harder to manipulate than corporate income. At the same time, governments need to close loopholes to thwart base erosion and profit shifting.

Chapter 6: Multinational Corporations, Tax Avoidance And Evasion And Natural Resources Management


Natural resources production in Africa has expanded in the past decade. Africa’s production of 15 important metals was forecast to rise by 78 per cent over 2010–2017, more than double the 30 per cent forecast for the Americas and Asia (US Geological Survey, cited in AfDB, 2013). As Africa’s subsoil remains relatively underexplored, increased investment can only enhance discovery rates (Knebelmann, 2017).

Natural gas fields offshore of northern Mozambique have attracted investments from multinational corporations. But future government revenues are threatened by a $2.1 billion loan scam that was engineered by bankers in London and a shipping company in Abu Dhabi.Credit: Anadarko.

The natural resources sector is dominated by multinational corporations and state-owned enterprises, which are the only firms that have the ability to raise the necessary capital and manage the associated high risks (IMF, 2014a; Mullins, 2010). However, multinational corporations also have the ability to undertake complex international tax avoidance strategies that shift profits from where the underlying economic activities take place to lowor no-tax jurisdictions, a behaviour referred to as base erosion and profit shifting. This can significantly reduce fiscal revenue in countries that rely heavily on natural resources revenue (UNDP, 2017; OECD, 2015).

Multinational corporations have engaged in tax avoidance running into the tens of millions of dollars for individual companies and billions of dollars a year for individual countries (ActionAid, 2015; Africa Progress Panel, 2013, Bloomberg, 2012; Oxfam, 2015). In 2015 base erosion and profit shifting led to an estimated $240 billion annual revenue loss for countries around the world in all sectors (Solheim, 2016).

The impact of base erosion and profit shifting as a percentage of tax revenues is higher in developing countries than in developed countries (OECD, 2015, 2014). In 2013 base erosion and profit shifting cost Africa an estimated 2.7 per cent of GDP in lost revenues (Cobham and Janský, 2018). Other estimates of losses through base erosion and profit shifting ranged from 1 to 6 per cent of GDP (Moore, Prichard and Fjeldstad, 2018). Natural resources taxation will continue to present critical fiscal concerns for developing countries, particularly in resource-rich countries (OECD, 2014).

Multinational Corporations and Illicit Financial Flows

Tax Avoidance and Evasion

Tax avoidance is an elusive term. The Organisation for Economic Co-operation and Development notes that it is “generally used to describe the arrangement of a taxpayer’s affairs that is intended to reduce his tax liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow.” Defining tax evasion is more straightforward; it is “generally used to mean illegal arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities” (OECD, n.d.a).

Illicit Financial Flows

The High Level Panel on Illicit Financial Flows from Africa defines illicit financial flows as international financial transfers that are illegally acquired, transferred or used, as well as aggressive tax avoidance. Illicit does not necessarily mean illegal, but the harm that base erosion, profit shifting, aggressive tax avoidance and aggressive tax planning do to development justifies considering them illicit flows because they are morally wrong (ECA, 2018b, 2018c). Anyone who facilitates such flows (including the jurisdictions that attract them) has an obligation to act to prevent them.

Channels For Illicit Financial Flows

Multinational corporations and other economic actors in the natural resources sector may generate illicit flows in a number of ways, as discussed below.

Aggressive tax planning

Tax treaties may enable multinational corporations in the natural resources sector to structure their operations to minimize tax liabilities. One way is to set up a complex network of offshore companies to facilitate intra-company trade (Mullins, 2010). This network of offshore companies can be used to circumvent public disclosure requirements and create an avenue for tax avoidance by enabling multinational corporations to report more of their profits in low-tax jurisdictions.

Abusing transfer pricing

Multinational corporations can also manipulate the prices of goods and services traded between different parts of the multinational group in order to shift profits to jurisdictions where corporate income taxes are low. Such abuses of transfer pricing by multinational corporations can result in major losses of public revenue (Readhead, 2016).

In addition to avoiding taxes, abusive transfer pricing can also be used to enable multinational corporations to transfer funds to jurisdictions with a high degree of financial secrecy. This can allow them to use these funds to engage in corrupt transactions (such as paying bribes to government agents in exchange for favourable treatment) while avoiding detection because of the financial secrecy surrounding the part of the company dealing with the relevant financial resources (Africa Progress Panel, 2013; OECD, n.d.a).

Misclassifying the quantity or quality of extracted resources

Taxes are levied on the value of extracted natural resource, so countries have an interest in ensuring that reported quantities and qualities are accurate. Royalty rates for mineral products generally depend on their composition or quality, which may vary. Companies may take advantage of this process of royalty calculation by declaring that extracted minerals are of lower quality than they truly are. Where companies export unprocessed minerals such as ores, it may be difficult for government authorities to assess the mineral content of the exports.

Misinvoicing trade transactions

Natural resources and commodities are susceptible to the intentional manipulation of invoices of goods or services exports or imports to disguise their true value and evade taxes and customs duties. Misinvoicing and mispricing are also done to facilitate the shifting of profits to low-tax jurisdictions (African Union and ECA, 2014; Baker et al., 2014; Save the Children UK, 2015; UNCTAD, 2016).

Overvaluing deductible expenses

Another channel for illicit flows is inflating deductible expenses, again through relationships of multinational corporations with affiliates. For example, firms may inflate costs on loans and technical services acquired from related parties and overstate deductible expenses for equipment and other supplies. While under-declaration of the quantity and quality of resources affects royalty payments to the government, cost inflation usually affects income-based taxes, which are becoming more common in many countries.

Treaty shopping has reduced corporate income tax revenue by above 15 per cent in African countries that have signed a treaty with an investment hub (Beer and Loperick, 2018), a particular blow to countries with a high dependence on corporate income taxes. Mauritius, which has received attention recently for facilitating treaty shopping, took steps to address this by revising its double taxation agreements with India and South Africa in 2015. Multinational corporations in the natural resources sector can also avoid taxation in resource-rich countries by routing asset sales through low-tax jurisdictions.

Administrative corruption and illicit financial flows

Administrative corruption also contributes to the prevalence of illicit financial flows in the natural resources sector in Africa (table 6.4). Weak governance systems and lack of transparency give government officials too much discretionary power, making them susceptible to bribes or theft of natural resources or associated revenue (African Union and ECA, 2014). Officials’ discretionary power can also be used to award contracts to multinational corporations that cede or limit some taxation rights in return for bribes, thus undermining competition. Multinational corporations often encourage the corruption that facilitates illicit financial flows (ECA, 2016).

Because illicit financial flows benefit both multinational corporations and corrupt officials, it can be difficult to introduce more transparency to stop illicit financial flows in Africa. This may explain why organizations dealing with illicit financial flows are often underfunded and lack the power to prosecute cases related to illicit financial flows (African Union and ECA, 2014; and ECA, 2018c).


Stolen Wealth Hiding in Plain Sight

While UN officials debate how to find funds for financing development, stolen wealth that has already left Africa is hiding only a few blocks away in mid-town Manhattan, in high-end realestate such as Trump Tower and in records at global banks such as Credit Suisse.

While some is still deeply hidden in mazes of shell companies or misleading corporate reports, more and more is being exposed by investigative journalism and court investigations. Two prominent recent cases highlight a $7.1 million condominium in Trump Tower purchased with funds stolen for oil revenues in the Republic of Congo, and the other funds channeled through the New York office of Credit Suisse as part of a fraudulent $2.2 billion set of loans to Mozambique.

Recovering the funds is far from easy. But exposing the money trails is an essential first step, whether for doing that or for preventing similar tax evasion and avoidance in the future.

The Trump Tower condominium, it was revealed in a recent Global Witness report, was purchased in 2014 by Ecree, a New York LLC newly created by a leading New York law firm. Global Witness traced the purchase across multiple countries (; direct link: Beginning with a payment by the government of the Republic of Congo of $765 million to the Delaware subsidiary of a Brazilian firm in late 2013, through a $31 million payment from Delaware through a shell company in the British Virgin Islands to another shell company in Cyprus set up by a lawyer in Portugal, to the final transfer of $7.1 million to the New York LLC. Meanwhile, the Portuguese lawyer, who represented both the Brazilian company and the government of the Republic of Congo, had transferred ownership of the company in Cyprus to Claudia Sassou-Nguesso, the daughter of the President of the Republic of Congo.

The wealth ending up parked at Trump Tower is only a fraction of that funneled out of Congo´s oil wealth by its president and his family. Most oil sales are managed through Swiss trading companies and through the refinery managed by the president´s son (, and invesitations in France have targeted the family´s numerous holdings in that country (


In the Mozambique case, an indictment issued by a grand jury in the Eastern District of New York in December 2018 featured a multinational cast of characters ( The five named individuals indicted include the former Minister of Finance of Mozambique, a Lebanese businessman representing an international shipping conglomerate in Abu Dhabi, and three London-based bankers, employed at the time of the loans by the giant Swiss bank Credit Suisse. Mozambican civil society is challenging the legitimacy of the loans given that they were not legally approved, and the Mozambican government has filed a case in London. But the future disposition of liability will depend on court proceedings in Mozambique, London, and New York. Given the damages suffered by Mozambique in recent months, the outcome will have major impact on the country´s capacity to recover.


Actions that disrupt any part of this vicious cycle of illicit financial flows and poor governance can help to tackle illicit financial flows. African countries may wish to strategically plan for which parts of the chain to address first, focusing on those that are easier to achieve and that will make it easier to target others later. For example, if the customs authority is a pocket of efficiency in a national administration, strengthening its capacities to prevent illicit financial flows through trade may cut off the resources used by corrupt officials to prevent improvements in public transparency. This, in turn, can make it easier politically to pursue anti-corruption measures.

Challenges In Ending Illicit Financial Flows

African countries face several challenges in fighting illicit financial flows from the natural resources sector. First, many countries lack the skills and resources (including laboratories for testing the composition and quality of extracted resources) needed to verify the submissions of multinational corporations. Countries need to build capacities in this area, in some cases with international assistance. Efforts to build national administrators’ capacities in tax audit, such as the Tax Inspectors without Borders initiative, have experienced challenges. In some countries, national administrations have been sidelined, while the external auditors assigned to the project have had conflicts of interest (ECA, 2018b).

Second, in light of the complex network of offshore companies used by multinational corporations, weak public disclosure requirements and enforcement may jeopardize efforts to curb the abuse of tax provisions and illicit financial flows.

Third, the form that illicit financial flows take depends on individual country characteristics. Many government officials in Africa are unfamiliar with how such flows operate in their national context, and estimates of the extent of such flows and their sources are scarce. Learning more about them should be a priority (ECA, 2018c).

Fourth, as with natural resources taxation, there is little information sharing and coordination on illicit financial flows among relevant government agencies within or between countries. Coordination is a relatively inexpensive yet effective way to counter illicit financial flows (ECA, 2018b, 2018c; Institute for Austrian and International Tax Law, n.d.).

Initiatives To Combat Tax Avoidance And Evasion

OECD Base Erosion and Profit Shifting package The OECD’s Base Erosion and Profit Shifting (BEPS) report set out a 15-point action plan to equip governments with the domestic and international tools they need to combat base erosion and profit shifting (OECD, 2014). The report recognised that greater transparency and improved data are needed to uncover and stop the divergence between where profits are made and where they are reported for tax purposes. With multinational corporations dominating the natural resources sector, cross-border transactions between related parties abound and create multiple opportunities for abusing transfer pricing. The OECD’s BEPS (in particular Actions related to transfer pricing outcomes and value creation, and Country-by- Country Reporting) can provide a starting point for countries in Africa to deal with transfer mispricing.

Country-by-Country Reporting is a risk profiling tool that can be used to flag discrepancies between where economic activity by multinational corporations takes place and where the corporations pay taxes (OECD, 2014). Other priorities for tackling base erosion and profit shifting, such as non-strategic tax incentives, governance of tax administration and tax competition, are not included in the OECD package. African countries will therefore need to consider additional policies that are outside of the OECD BEPS package. For example, the “sixth method”, pioneered and used successfully in Argentina, calls for commodities traded within a multinational group to be priced according to publicly quoted prices to simplify transfer pricing administration and settle disputes (Grondona, 2018).

Formulary apportionment and moves away from income-based taxation While the OECD BEPS actions can be a useful starting point for African countries to reduce base erosion and profit shifting, some of the proposed solutions may be difficult to apply. Taxing multinationals on the income of their local branches or subsidiaries is inherently vulnerable to the manipulation of profits, even with the OECD BEPS package.

This suggests that there may be advantages to a shift away from income-based taxation, which may be easier to manipulate, towards taxation based on variables that are more difficult to manipulate. Given the arguments about the role of income- based taxation in balancing risk, a good approach might be to use a variable that closely tracks corporate income but is less easy to manipulate. This would seem to rule out any variable that is based on intracompany transfers (including sales and imports), particularly those for which comparable prices are not available, as these may be more susceptible to manipulation. Other variables may be less susceptible to manipulation, such as gross sales of minerals, payments to factors of production (capital, labour and land) that are located in country or domestic utility payments. Though gross sales of minerals, for example, can be manipulated by multinationals, in many cases this may be more difficult than manipulating corporate income, since the prices at which minerals are traded can be compared with global market prices.

The High Level Panel on Illicit Financial Flows from Africa and others recommend increasing tax transparency, expanding networks for the exchange of information and participating in the automatic exchange of information between countries, and ensuring the availability of ownership information to reduce illicit financial flows (ECA, 2018b; Mullins, 2010). 12 There is now a burgeoning movement towards greater transparency in tax matters which may change the way that multinational corporations operate.

To facilitate the detection of aggressive tax planning, a new global standard for the Automatic Exchange of Information for Tax Purposes, endorsed by the OECD in July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions. The standard is intended to “strengthen international efforts to increase transparency, cooperation and accountability among financial institutions and tax administrations and enable governments to recover tax revenue lost to non-compliant taxpayers. The new standard will generate secondary benefits by increasing voluntary disclosures of concealed assets and by encouraging taxpayers to report all relevant information” (OECD, n.d.b).

Noting the challenges that African countries face in the exchange of information for tax purposes, the Global Forum and its partners launched the Africa Initiative in 2014. The initiative is intended to use technical assistance and political engagement to enable African countries to take advantage of improvements in international tax transparency that can increase domestic resource mobilization and fight illicit financial flows (OECD, n.d.c). The original three-year mandate was renewed for three more years (2018–2020) at the Global Forum plenary meeting in November 2017 (OECD, n.d.d).

There is also a move towards public and centralized registers of the ultimate owners of trusts, foundations and other opaque vehicles used by multinational corporations. Advances in this effort will improve transparency in the natural resources sector and illuminate instances where “apparently unrelated parties” are engaged in base erosion.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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