Billions disappearing through tax evasion

Enormous amounts are disappearing through tax evasion. The missing tax revenue in Africa is greater than the entire amount received in development aid. A sound tax policy is a tool for global development, concludes a seminar organised the Union of Civil Servants, ST, Sweden.

By Bengt Rolfer - Freelance journalist

Enormous amounts are disappearing through tax evasion and flight of capital, not least from the developing countries. The amount of missing tax revenue in Africa is greater than the entire amount received by the continent in development aid. This is money that could be used to improve public services.

But methods exist to check tax evasion and make sound tax policy a tool for global development. This emerged at a seminar arranged by ST, the Union of Civil Servants, at the Swedish Tax Agency in Solna on 16 October entitled “Tax and global development – how do they correlate?”

So far, however, tax evasion is a growing problem. Penny Davies, policy adviser at the aid organisation Diakonia, related that the total flight of capital is increasing by 10 per cent per year. In many places it is greater than the country’s gross domestic product. In total USD 947 billion disappeared from developing countries in 2011, according to Global Financial Integrity.

“Most money disappears from medium developed countries like Russia, China and Mexico, but in relative terms Africa is the worst affected. Between seven and ten times as much money as the rich world gives in aid flows out again. That is money that could be used in a much better way and also lessen aid dependency,” she stated.

Of the total capital flight, just under two thirds constitute different forms of tax evasion. One third refers to criminal activity, while only a few percent constitutes corruption.

Multinational companies were identified as the main villain of the piece. They use a form of transfer pricing to avoid tax. Fraudulent invoices are another common method, according to Penny Davis.

She presented three suggestions on what to do about the major flight of capital. Above all it is a matter of increasing transparency.

One way is to order companies to make country-by-country reports on their operations. It would then be possible to determine a reasonable tax level for the country. At present reporting is aggregated.

Other proposals concerned public insight into who are the beneficiaries – in other words the people who are raking in the money – and increased exchange of information on tax matters between the world’s nations.

Penny Davis noted that these proposals are already being discussed in various contexts, such as within the EU and at the G20-Summits.

“Plenty is going on, but sometimes it is forgotten that the developing countries are the ones worst affected,” she said.

One of the participants was Bernard Adjei, from ST’s sister organisation in Ghana and also active in the Ghana Tax Justice Campaign. He further emphasised the image of developing countries – in particular those in Africa – as losers.

“Something has gone wrong here. Is Africa receiving aid or is it Africa that is giving the rest of the world aid?” he asked and presented figures to illustrate this upside down world: every year USD 134 billion flows into Africa in the form of aid. At the same time USD 192 billion disappears in lost tax revenue.

“There are various calculations, but most of them show that the continent is losing between USD 50 and 60 billion per year. That money could be used to increase the quality of public services,” says Bernard Adjei.

He listed several negative effects, such as lower growth and fewer jobs, a worse trend in housing and infrastructure development, poorer security and weaker exercise of power.

In Ghana the trade unions have also become involved in the Tax Justice campaign. Together with Action Aid they have compiled information on companies that cheat with pricing and declare losses to evade tax in the country.

“Taxes are regarded as a technical issue, but the trade unions have always fought for justice and we must bring pressure to bear on this matter too. I know of no greater injustice than workers having to pay higher tax than the companies,” he says.

The developed countries also have an interest in protecting their tax base. Anette Erling Jivenius, business developer at the Swedish Tax Agency, spoke about the OECD project BEPS (Base Erosion and Profit Shifting) that aims to counteract profit shifting and erosion of tax bases through international rules.

Cross-border cooperation in the tax area exists on several levels. Sweden has information exchange agreements with a number of countries. Anette Erling Jivenius stressed the importance of really applying these agreements. “We also need to cooperate at agency level,” she added.

The Swedish Tax Agency is currently conducting development projects to build up effective tax systems in Botswana, Kenya, Kosovo and Moldova.

The seminar moderator, Maud Johansson from Forum Syd, pointed out that many developing countries compete with low taxes to attract investment. Does an individual country like Ghana dare to take vigorous measures and do international rules help?

Bernard Adjei replied that as long as individual multinational companies have a higher “GDP” than several African countries together, there must be systems that put pressure on the governments.

“What is really the objective of giving these tax rebates? I am glad that the African Union has decided to stand behind these global solutions. That is what has an effect,” he says.

Penny Davis added that one central problem is that companies have much greater resources than developing countries.

“It is not a matter of equal partners in these processes. Companies have great influence and almost all of them are against country-by-country reporting. This problem is not addressed in the BEPS project,” she says.

Often the companies just follow national tax rules. Is it possible to demand more of them?” wonders Maud Johansson.

“Absolutely,” replied Penny Davis and referred to the CSR work that many companies do to appear socially responsible. “Tax has come in late as a CSR issue, but there are companies that go further than the rules prescribe.”

Bernard Adjei pointed out that companies always claim they are sticking to the rules, but that this is to a great extent a matter of morals.

“Companies come to Africa to help us and then they take the money. But well honestly – what are the rules? Are companies responsible then? This is not working. Rules are made by people and if they are not good for society they must be changed,” he said.

Maud Johansson wondered why Sweden went against rules on increased transparency at EU level. There was no representative either from the previous or the new Government. Penny Davis replied: “The previous Government was negative to this. Diakonia carried out a survey before the election and at that time most parties were positive. Now we have a new Government. It remains to be seen what will happen.

Read the original article in Swedish