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Africa/Global: Targeting Corporate Shell Games
AfricaFocus Bulletin
October 9, 2019 (2019-10-09)
(Reposted from sources cited below)
Editor's Note
“Across the world, citizens who want their governments to implement
policies to reduce inequalities, address climate change and looming
ecological disaster, provide better public services and amenities,
ensure social protection, generate quality employment and so on,
are always confronted with one question: where is the money? We are
constantly told that governments cannot afford the necessary
expenditure; that running fiscal deficits will lead to financial
chaos and crisis; and that raising taxes will simply drive away
investment. But this is not just misleading; it is simply wrong.
Governments are constrained in their resources because they tolerate widespread tax evasion and avoidance. ” - Professor Jayati
Ghosh, Jawaharlal Nehru University
This AfricaFocus Bulletin contains excerpts from a new report from
Christian Aid and allied organizations, calling for a comprehensive
rights-based definition of illicit financial flows, including both
illegal tax evasion and abusive tax avoidance that uses biased laws
and gray-area loopholes to minimize the taxes paid by corporations
and the ultra-rich. The report provides a clear argument,
supplemented by case studies from Asia, Africa, and Latin America.
The excerpts below include cases of a Irish tax treaty with Ghana
and a major Canadian mining company in Zambia, documenting how
legal avenues are structured to deprive countries of needed
revenue.
This answer to “where is the money” for public needs applies
worldwide, but is particularly relevant on the African continent,
where tax revenues are the lowest and the needs are the greatest.
As the report notes, African civil society and inter-governmental
organizations such as the UN Economic Commission for Africa have
taken the lead on pressing this case in both national and
international arenas. This latest report is a marker of how the
common-sense answer is gaining ground internationally as well.
Also included in the AfricaFocus Bulletin is an extensive and well-
crafted infographic from the Tax Justice Network making the same
case.
For previous AfricaFocus Bulletins on illicit financial flows,
visit
http://www.africafocus.org/intro-iff.php
For another recent commentary on the need for fundamental corporate
tax reform, see "No More Half Measures on Corporate
Taxes," by Joseph Stiglitz, in Commond Dreams, October 8,
2019..
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Trapped in Illicit Finance: How abusive tax and trade practices
harm human rights
September 2019
Christian Aid
[Excerpts only. For full text, including figures and footnotes,
visit
https://www.christianaid.org.uk/resources/about-us/trapped-illicit-finance-report]
Executive summary
On September 26, 2019, world leaders [gathered] at the UN General
Assembly (UNGA) in New York, for high-level talks on finance for
development. One burning question on the agenda is the financial
chasm facing the SDGs.
Adopted by the UNGA in 2015, the 17 goals offer a roadmap for
ending poverty, protecting the planet and ensuring prosperity for
all, by 2030. But with little over a decade to go, vast amounts of
public and private finance still need to be found if they are to be
realised within the timeframe. The funding gap for delivering the
goals from private sector sources alone is estimated at $2.5tn.
In this report, Christian Aid and our partners propose a simple
solution for plugging some of this funding gap: we must stop
tolerating the abusive, unethical, immoral illicit financial flows
(IFFs) that rob the poor to enrich the wealthy.
Our estimates show that IFFs cause tax losses of $416bn in the
global South. This is money that could enable governments to
deliver much-needed public services, and bring us closer to a world
where all experience dignity, equality and justice. As eminent
economist Professor Jayati Ghosh stated in the report foreword:
‘Illicit financial flows – both illegal and legal – may be the
major constraint to development and achieving human rights today’.
World leaders have previously committed to fight IFFs. At the Third
International Conference on Financing for Development (FfD) in
2015, participants agreed to ‘substantially reduce illicit
financial flows by 2030, with a view to eventually eliminating
them’. A similar commitment was made when the UN 2030 Agenda was
agreed.
However – and this is the crucial point – what has been missing
until now has been a robust definition of IFFs.
Governments of the global North insist on a legalistic definition
that would only capture flows of money universally accepted as
being illegal, eg, money laundering or corruption. However, we and
many of our partners in the global South believe what matters is
not whether flows of money or tax practices are legal, but whether
they are abusive, harmful or limit governments’ ability to deliver
on their human rights obligations. ...
That’s why Christian Aid is calling for the debate around IFFs to
shift towards a rights-based one. We want the definition of IFFs
broadened to refer to ‘cross-border flows of money that are either
illegal or abusive of laws in their origin, or during their
movement or use’. It is not about whether it’s illegal, but
immoral.
Christian Aid also believes the UN should establish structures to
define IFFs based on this rights-based definition. This would
require the UN to play a more prominent role in setting the rules
and conventions for taxing TNCs, and to expedite international tax
cooperation by establishing a UN tax body to decide on taxing
rules.
Addressing IFFs is not just about funding the SDGs – important as
this is. It is also about addressing the systemic issues that
continue to undermine poor countries’ abilities to raise revenue
and move beyond a reliance on aid. In that respect it is a stand-
alone process: one that is not just tied to the 2030 Agenda for
Sustainable Development, but which is grounded in justice and
equity.
Our estimates show that illicit financial flows strip poorer
nations of revenue losses to the tune of $416bn per year.
This is through practices including tax abuses and avoidance by
TNCs and wealthy individuals, and tax losses due to tax evasion
arising from companies who deliberately misprice goods and
commodities to minimise tax liability.
Introduction: Illicit financial flows are a violation of human
rights
An exact definition of IFFs has not been agreed internationally;
but for the purposes of this report, the term can be defined simply
as money that leaves countries where it should in fact be
contributing to development efforts and the achievement of human
rights. In other words, IFFs may be defined as ‘flows of money that
are either illegal or abusive of laws in their origin, or during
their movement or use’.
These include practices such as tax abuse, abusive tax incentives,
abusive use of bilateral and multilateral trade treaties, misuse of
double tax treaties, odious debt, abusive use of mutual arbitration
procedures, harmful tax practices, unjust investment agreements,
money laundering, trade mis-invoicing, abusive transfer pricing,
illicit money transfers, crime, bribery, the illicit drugs trade,
corruption and the ‘offshore’ trust industry.
The issue is ultimately about the power of who makes the rules and
norms in the global economy regarding these issues. For too long,
they have been decided in clubs of countries comprising mainly of,
or led by, the global North such as the G7 or the G20, or indeed
the OECD that does not take the legitimate interests of countries
in the global South adequately into consideration.
Tackling IFFs is not a new concern. For decades, the issue has been
discussed either as capital flight or in terms of tax avoidance;
and more recently, to understand the activities of
multinational enterprises,and in terms of wealth held
offshore. The novelty is grouping these practices
together within an internationally agreed definition of IFFs, along
with transnational crime and corrupt activities.
Combining these practices presents us with a fuller, more
frightening picture of how today’s global financial system is
centred on secrecy jurisdictions and corporate tax havens that
facilitate these activities, as well as corruption and
transnational organised crime. There is no way to achieve the
ambitious 2030 Agenda and the SDGs without stopping the bleeding of
hundreds of billions of dollars in IFFs.
The momentum for tackling IFFs is coming from governments, civil
society and regional bodies from the global South such as the
African Union that have long highlighted the damage caused by IFFs.
Notably, in 2015 a coalition of African organisations launched a
civil society campaign called Stop the Bleeding in a bid to
highlight the billions of dollars illicitly flowing out of Africa
each year. Many African governments, and the Group of
77 of countries in the global South in the UNGA, raise the issue of
IFFs in their interventions.
The 7th annual Pan Africa Conference on Illicit
Financial flows and Taxation, held in Nairobi on October 1-3, 2019,
sponsored by the Tax Justice Network-Africa and a wide range of
other civil society and inter-governmental institutions, focused on
the challenge of taxing digital enterprises, which require new
technologies to track and tax profits across borders.
If the definition of IFFs in the 2030 Agenda and the SDGs (an
initial draft definition is expected by the end of 2019) includes
only activities that are already illegal – such as corruption,
crime and tax evasion – there will be no mandate from the 2030
Agenda to tackle tax abuses that far outweigh these other
activities in terms of revenues lost from countries in the global
South. there is a risk that, under the guise of ‘licit’ financial
flows via tax havens, this will only exacerbate the problem.
…
Meanwhile, the secretariat of the UN Financing for Sustainable
Development Office has analysed the situation and concluded that
there is a ‘grey zone’ in which the dividing line between legal and
illegal financial flows is blurred due to a lack of resources, a
lack of access to data and discrepancies between how data are
reported to tax authorities, the media, and shareholders in private
databases.
In this report, we highlight what goes on in this grey zone and
propose the use of principles derived from international human
rights law to understand practices that constitute harmful
activities even though they may not be illegal in all jurisdictions
where a TNC has operations; where a transaction is taking place, in
terms of trade mispricing issues; or where wealth is held offshore.
The problem lies in the mismatches, misunderstandings and lack of
commonly agreed principles between the global North and the global
South in terms of international economic governance that give rise
to IFFs, as seen in Figure 1.
The definition of IFFs is being debated both within international
development frameworks and in human rights monitoring bodies. It is
an important definition, as it will determine the mandates at the
global level to monitor the financial system, national efforts to
combat IFFs in the Global South, and international development
cooperation as well as south-south cooperation. …
The first definition, which we call ‘legalistic’, is what is also
often described as a narrow definition of IFFs, used by a number of
international organisations, including the World Bank, the IMF, the
OECD and UNODC. The OECD refers to ‘a set of methods and practices
aimed at transferring financial capital out of a country in
contravention of national or international laws’.
The second definition is what we would call ‘normative’: it defines
IFFs in terms of a normative problem in how laws, rules and
regulations are actually established, rather than focusing merely
on the letter of the law. … What is considered
‘illegitimate’ is discussed through case study evidence and covers
practices such as corrupt government deals, tax abuse, abusive tax
incentives and other concerns that further expand the focus of the
discussion on IFFs.
The third definition builds on the first and second definitions, as
it tries to define a normative framework around what should be
considered ‘illegitimate’. …
This definition is supported mainly by UNCTAD, which has analysed
IFFs in terms of their economic and development losses. Under this
definition, UNCTAD considers that ‘the key criterion used is
whether such tax-motivated IFFs are justified from an economic
point of view’. If considerable tax losses are
associated with IFFs, UNCTAD considers that these serve to
undermine development outcomes that require greater fiscal
capabilities.
…
Finally, the fourth definition – as proposed by this report – also
builds on the first and second definitions, but views the issue
through a rights-based lens. The definition therefore includes all
aspects of tax abuse and tax avoidance, as these have a significant
impact on the availability of public resources for realising human
rights and upholding the rule of law. …
Source:
https://truthout.org/articles/we-could-eliminate-extreme-global-poverty-if-multinationals-paid-their-taxes/
[The remainder of the Christian Aid report includes a variety of
case studies, including in African countries. Excerpted below are
two cases, one in Ghana and the other in Zambia.]
Part one: Tax abuses by transnational corporations
TNCs are essentially companies that operate in multiple countries
and autonomous jurisdictions. As these countries and territories
have different (at times conflicting) tax and financial laws, the
international tax system is a patchwork with loopholes and
mismatches that companies (and the wealthy individuals who own
them) can exploit to pay less tax – either legally (albeit often
through abusive practices) or illegally, in the hope that they will
not get caught due to the high degree of secrecy and complexity
that characterises the international financial system.
A TNC is taxed separately for each of its legal entities in each
territory in which it operates. Thus, if a TNC has 200 different
subsidiaries and affiliates, each one of them must file its own tax
return. This separate treatment of the different legal entities of
TNCs is set out in the OECD Transfer Pricing Guidelines, even
though – for strategic purposes, and in the eyes of shareholders
who seek to profit from the activities of the entire group, rather
than those of its individual parts – the company is essentially a
single entity.These separate entities are assumed to be
trading at ‘arm’s length’ – that is, as if they were unrelated
parties – under the OECD Transfer Pricing Guidelines.
Meanwhile, human rights norms – such as the UN Guiding Principles
on Business and Human Rights and various laws on
mandatory human rights due diligence in Europe–
establish that companies should be treated as single entities in
light of their human rights obligations for their entire global
operations, including their supply chains. Corporate accountability
efforts also point in this direction, including the EU Non-
financial Reporting Directive, the US Dodd- Frank Act and the UK
Modern Slavery Act. The tax and human rights angle on treating
corporates as single strategic entities has thus far had little
impact on the cross-border tax treatment of TNCs; but it is logical
to treat companies as single taxable entities with respect to
international human rights norms.
TNCs – for good reason – pool some of their resources in shared
intra-group functions, such as financing, procurement, sales, human
resources, brands, patents and management services, which are held
in a specific subsidiary or subsidiaries and sold on to other
subsidiaries as corporate services. If these ‘transfer prices’ are
established at abusively low or high levels, they can be used for
‘profit shifting’, which often aims to reduce profits in high-tax
countries and jurisdictions and report profits from such collective
functions in low-tax countries and jurisdictions. TNCs may seek to
maximise their profits (often post-tax profits rather than pre-tax
profits) at a global level by routing trade, financing and
investment through countries and jurisdictions that present tax
advantages.
This type of behaviour is the focus of the OECD’s Base Erosion and
Profit Shifting (BEPS) project, which aimed to end such practices,
but has largely failed to do so due to a lack of agreement on how
to tax TNCs globally. At present, the UN only has an expert
committee on international tax matters, whose members are
restricted to commenting on such matters in their expert capacity
as individuals, rather than proposing plans for new rules and
regulations on the taxation of TNCs. Countries in the global South
have called for the establishment of a UN-based tax commission (or
a UN tax body) to negotiate how best to tax TNCs and improve
transparency and accountability in international tax matters.
The taxation of cross-border transactions such as interest,
royalty, dividend and other intra-firm payments is often governed
by double tax agreements (DTAs), such as the Ireland-Ghana DTA and
the Mauritius-India DTA discussed on the next few pages. The
applicable tax rates are often set at ever-lower levels in the hope
that this will increase investment, despite the lack of evidence to
support this view. …
Irish double tax agreement threatens revenue losses in Ghana
By Mike Lewis
This case study tells a political story rather than a technical
one. It shows how some governments are continuing to ignore new
international anti-avoidance standards, and the advice of their own
civil servants, in pursuing tax agreements that may create new
avenues for tax avoidance and deprive countries in the global South
of taxing rights.
DTAs can resolve tax dilemmas for companies and citizens living and
working between two countries, or investing in one country’s
economy from another. If they are incautiously or exploitatively
drafted, however, DTAs can unfairly deprive countries in the global
South of taxing rights that are vital to reduce aid dependency,
protect their citizens’ rights and develop their economies. They
can also open up new loopholes for profit shifting and other forms
of cross- border tax avoidance. In 2014, usually conservative IMF
tax policy staff advised that ‘developing countries...would be well
advised to sign treaties only with considerable caution’.
Ireland is expanding its network of DTAs. As this already
encompasses numerous agreements with developed economies, Ireland
is now particularly focused on signing new treaties with emerging
economies. Of eight treaties currently awaiting final signature
and/or ratification, five are with countries in the global South.
As part of its new Africa strategy launched in 2011,
Ireland targeted four emerging African economies for new DTAs,
including Ghana.
Ghana is the lowest-income of Ireland’s current prospective DTA
partners. A booming middle-income economy, it is also a vulnerable
one which is still a (small) recipient of Irish aid.
Over one in 20 Ghanaian children still die before their fifth
birthday; and despite major improvements, almost 4 million Ghanaian
children still live below the poverty line.Ghana’s tax
revenues also remain vulnerable: Ghana collects only around 16% of
its GDP in tax revenues, compared to 25-30% for most European
economies.
Although, from Ireland’s perspective, Ghana may be a relatively
small investment and trading partner, the new Ireland-Ghana DTA
matters greatly to Ghana, because according to Ghanaian statistics,
since 2012 Ireland has become Ghana’s largest source of FDI. By
2016 (the most recent year for which Ghanaian-reported FDI data are
available), Irish FDI constituted one-third of Ghana’s entire
reported FDI stock.Limiting Ghana’s taxing rights over
income, profits and economic activity between Ireland and Ghana may
thus have a significant impact on Ghanaian tax revenues.
Both parties signed the DTA in February 2018. Although approved by
Ireland’s Parliament in October 2018, it still requires approval
and ratification by the Ghanaian Parliament, meaning that the DTA’s
entry into force now rests on whether Ghanaian institutions find it
abusive or harmful, and request further changes to the treaty.
Imbalances of the Ghana-Ireland DTA
* The DTA will cut Ghanaian withholding tax on royalties to Ireland
from the domestic 15% rate to 8%, and on (closely related)
technical services fees from 20% to 10%. …
* The DTA will deny Ghana the right to tax capital gains from the
sale of assets in its territory (other than immovable property), if
the sale is executed through the offshore sale of shares in an
Irish holding company. This contradicts the recommendations of both
the IMF and the UN Tax Committee.Since Ireland appears,
according to Ghanaian statistics, to be the largest single source
of direct investment in Ghana’s economy, this provision could
potentially deprive Ghana of very large tax revenues when valuable
Ghanaian assets change hands.
* The DTA lacks any of the anti-avoidance provisions which OECD
member states, including Ireland, agreed in 2015 were necessary to
provide ‘the minimum level of protection against treaty abuse’. It
is therefore fully non-compliant with the OECD’s BEPS project
against tax avoidance and profit shifting, which Ireland has
repeatedly pledged to implement in full. ...
These features arguably contradict the Irish government’s own
commitments in Ireland’s international tax strategy: to support
‘improvements in domestic resource mobilisation [tax revenues] in
partner [developing] countries’, including through Ireland’s own
domestic tax policies;and to fully implement the OECD’s
BEPS project to prevent corporate tax avoidance.
…
Part two: Lost tax due to trade mispricing and trade mis-invoicing
International trade is not what it seems. Trade mispricing has
become a multibillion-dollar industry, in which trade handling
companies identify the least costly way to make a paper trail of
payments for goods, which often has nothing to do with their
physical movement. Unrelated importers and exporters utilise
offshore tax havens to route trade on paper to reduce the taxes
paid on border transactions, as they provide secrecy for practices
such as double invoicing and mis-invoicing – sub-categories of the
umbrella term ‘trade mispricing’.
When we talk about imports and exports, many think that goods flow
from one country to another relatively directly; and this is what
is shown in the international trade data maintained by the UN
Comtrade database and the IMF’s Direction of Trade Statistics
(DOTS). There are some legitimate discrepancies in the import value
reported for the same set of imports in the receiving country and
the export value in the exporting country that relate to shipments
via transit countries, regarding how goods are declared in value
(‘Free on Board’ is often used, but not by all countries).
The volumes of potential trade mispricing are absolutely eye-
watering. A representative sample of 30 African countries from 1970
to 2015 revealed that these countries lost a combined $1.4tn
through capital flight over the 46-year period; including interest
earnings lost on capital flight brought the cumulative amount to
$1.8tn.The average outflow from Africa for the years
2010 to 15 was estimated at $63bn under this methodology, lost
mainly from oil-rich African nations. …
The best estimates of tax losses due to trade mispricing come from
GFI, which has estimated that trade mispricing (encompassing both
illicit outflows and illicit inflows) in 2015 caused losses of
$940bn, based on the UN Comtrade data, while higher IMF DOTS would
show a loss of $1,690bn.Both of these figures, attempt
to estimate mismatches between the declared import price and the
export price in the same pair of countries or vice versa.
…
Zambia’s copper sector mispricing abuses
By Prof Attiya Waris
First Quantum Minerals (FQM) is Zambia’s largest mining company and
largest single taxpayer, and has been lauded as contributing more
than one-third of the Zambian government’s income.The
2015/2016 Extractive Industry Transparency Initiative (EITI) data
reveals that the Kansanshi mine provided 22% of tax revenue, while
7% was provided by another subsidiary. The main types of taxes that
FQM pays in Zambia are mineral royalties, followed by other types
of taxes. It is evident that the collection of mineral royalties is
relatively simple; the debate thus centres on the declaration of
correct production volumes and payments to governments, including
in EITI reporting.
Kansanshi Mining PLC, a subsidiary of Canadian mining and metals company First Quantum Minerals Ltd. (FQM)
FQM is listed on both the Toronto Stock Exchange and the London
Stock Exchange, and operates mining projects globally. It has a
number of local affiliates in Zambia, all with separate accounts.
The available data reveals discrepancies between the information
regarding FQM registered with the Zambian companies registry and
that held in the Orbis database. For instance, while cover
investments is shown to have been incorporated in Zambia in one
database search for FQM and Operations Ltd, in the Orbis database
there is no record of cover investments.
The Zambian Revenue Authority is reportedly accessing information
from Orbis and other proprietary company information databases in
order to improve its audits.The FQM data sheet, on the
other hand, indicates that the company is incorporated in Ireland.
These discrepancies make tax audits and tax assessments more
difficult in the absence of full country-by-country reporting under
the OECD initiative, due to the lack of information exchange with
other revenue authorities. The quickest way to facilitate full
country-by-country reporting would be to make the filings mandated
by the OECD public and available to all, including the revenue
authorities of countries in the global South.
FQM and its subsidiaries in Zambia are subject to various taxes,
from employee income taxes to VAT, mineral royalties and corporate
taxes, among others. However, the EITI disclosure for the year 2016
is not sub-divided by the types of taxes paid, so sensitive tax
information – such as corporate income tax payments per country of
operation – is unavailable.From the corporate structure
of FQM, depicted in Figure 8, we can see that its Zambian
operations involve offshore companies in the British Virgin Islands
(BVI) and Ireland.
The current lack of transparency affords abundant opportunities for
transfer pricing abuses. According to a claim before the Lusaka
High Court, between 2007 and 2014, FQM directors ordered over
$2.3bn of Kansanshi profits to be borrowed to FQM Finance Limited,
which performs treasury functions for the group.FQM
Finance then alledgedly started investing these funds from the
Kansanshi mine to grow the group without the consent of the
government- owned local minority shareholder, ZCCM-IH. According to
sources close to ZCCM-IH, its claim includes $228m in interest on
the $2.3bn, as well as a further 20% of the principal amount
($570m). FQM and the Kansanshi Mining PLC state that
they are firmly of the view that the allegations are untrue.
The proceedings are still underway in the Lusaka High Court
as of August 2019.
...
[another case] involving FQM was revealed in March 2018, when FQM
received an $8bn charge relating to unpaid import duties arising
from misdeclarations.The assessment concerned the
under-declaration and non-declaration of import duties on capital
items, consumables and spare parts for use at the Sentinel mine
from January 2013 to December 2017.Following a five-
year tax investigation, the losses were calculated at $540m, which
was found to amount to smuggling in the form of misdeclared customs
duties. In the case of smuggling charges, criminal fines may be
imposed.
The fine sought to be imposed on FQM has been duly calculated at
$2.1bn, as smuggling is punishable by a threefold fine in addition
to the assessed amount, with a further late payment charge of
$5.7bn, according to the company’s own disclosure. FQM refuted the
assessment. In July 2019 a settlement was reached for an
undisclosed amount.…
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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