East African countries could be the biggest beneficiaries of a new African Union-led push to stop illicit cash flows on the continent.
The AU and the UN's Economic Commission for Africa plan to clamp down on cheating corporations and government officials who siphoned at least $60 billion from Africa last year.
The big corporations masterminding the illicit flows are also the biggest beneficiaries of tax incentives which cost EAC countries of Kenya, Uganda, Rwanda and Burundi a combined $2.8 billion in foregone revenues, new data shows.
In its preliminary report released last week, an AU-backed taskforce led by former South African President Thabo Mbeki notes that African economies are losing $50-$60 billion annually, and the Eastern Africa region is emerging a haven for cheats, especially with the ongoing oil, gas and minerals bonanza.
The data shows that East Africa commanded at least 11 per cent of the illicit flows in Africa, coming third after North and West Africa with 28 and 13 per cent respectively. The Mbeki led-team is set to hand the final report to the AU for action.
These flows relate principally to commercial transactions, tax evasion, criminal activities (money laundering and drug, arms and human trafficking), bribery, corruption and abuse of office.
“Criminal networks involved in money laundering, drug, arms and human trafficking have the ability to infiltrate and undermine state structures and occupy influential spaces in some African countries...,” noted the AU team.
At least 70 per cent of the illicit movements involve multinationals and commercial transactions like corporate tax evasion and avoidance, said the AU panel.
However, some government officials, led by Bank of Uganda’s deputy governor Louis Kasekende have disputed the figures.
“These estimates are extremely tentative to put it mildly, because they are derived from errors and omissions in the balance of payments and discrepancies in recorded trade between bilateral trading partners (such as differences between what Uganda records as exports to Germany and what Germany records as imports from Uganda). There could be many reasons for these errors, omissions and discrepancies in trade and balance of payments data besides illicit financial transactions...,” said Dr Kasekende.
Economists from the United Nations Economic Commission for Africa (ECA) and the AU, government officials and independent analysts said illicit flows, combined with wide-ranging tax exemptions granted by governments in East Africa were denying the region the much needed funds for growth, raising questions on the effectiveness of the growing search for foreign direct investments.
“Multinationals are the biggest masterminds of these illicit flows especially in transfer pricing. When you look at all these contracts and transactions, there are intermediaries involved which makes it hard to nail down the real culprits,” said Carlos Lopes, the executive secretary of the ECA.
A meeting of African Finance ministers and central bank governors in Abuja, Nigeria which ended on March 31 agreed to work on ways of taming illicit flows and eliminating harmful tax incentives.
“The unacceptable loss from such illicit outflows far exceeds the amount of official development assistance to Africa. Halting illicit flows, at the sources and at their destinations, will help fund substantial parts of the continent’s long-term Agenda for 2063,” said Nigerian President Goodluck Jonathan during the meeting.
A petition presented on the sidelines of the forum by the East African Tax and Governance Network (EATGN) showed that big multinationals are increasingly receiving tax incentives and not paying their fair share of taxes, leaving other businesses and households to bear a disproportionate tax burden.
The team is pushing for EAC governments to abolish discretionary incentives (those given to individual companies) as well as discretionary powers vested on individual state officials to grant such exemptions.
“The revenue lost to tax incentives given to large multinationals could alleviate the tax burden on the poor while providing the public services citizens of African countries have the right to enjoy,” said EATGN.
According to the IMF, cutting down on tax breaks offers regional economies the opportunity to grow their collections and reduce the fiscal deficit — the difference between a countries’ total spending plan and its available revenues.
“To sustain economic growth and to stem fiscal pressures during the current and next fiscal year, priorities include mobilising additional revenues by reducing and simplifying tax exemption,” said the IMF in a note on the Tanzanian economy released in December last year.
Mr Mbeki said while multinationals were investing heavily in the extractive industry in most African countries, they are increasingly structuring the deals in such a way that they would benefit more from the higher commodity prices while preventing those nations from windfall profits.
“Offshore financial and banking and tax havens have multiplied over the past three decades. Through low or no taxes, lax regulations and well-defended secrecy, tax havens collectively control an estimated $6 trillion, essentially servicing a niche market,” said Mr Mbeki.
Regional countries offer attractive incentives to investors with Kenya, for example, giving companies setting up in Export Processing Zones a 10-year corporate income tax, followed by a 25 per cent corporate tax for the next 10 years, a 10-year exemption from withholding taxes, and exemption from import duties and VAT on machinery, raw materials and inputs. But governments in the region have been considering revising or removing the exemptions.
By Mwaura Kimani and Peterson Thiong’o