Illicit financial flows crippling Africa’s growth potential

While most of us struggle to pay our share of tax, many multinational corporations are avoiding this duty. Report by the High Level Panel on Illicit Financial Flows (AUHLP) from Africa indicates that Africa loses more than $50 billion (Sh4.6 trillion) annually through illicit financial flows.
Such astounding figures are a case for serious concern, given that taxation is the most sustainable source of development finance, but African tax systems still do not raise enough revenue to meaningfully reduce poverty. Africa remains a net creditor to the rest of the world.
The report of the panel, headed by South Africa’s former President Thabo Mbeki, was adopted in January at the 24th Summit of the AU. The move by AU heads of State needs to be lauded as it shows the willingness of African leaders to rein in on illicit financial flows.
Though the Mbeki panel report gives concrete recommendations towards ending illicit financial flows (IFFs), it is ostensibly clear ‘legal’ commercial activities are the largest contributors to IFFs.
Indeed, many corporations are avoiding paying a staggering amount of tax through tax incentives offered by governments and the exploitation of existing loopholes in and between national legislations.
Most of these corporations also have the financial muscle to retain the best professional legal, accountancy and banking experts, to help them perpetuate their aggressive dealings.
Despite the importance of tax for financing sustainable development and redistributing wealth, many African countries face challenges in their efforts to increase tax revenues.
And as Africa continues to labour under the yoke of poverty, the monies, which could have been used to finance development, are transferred to other countries in IFFs. The developmental impact of this is monumental and has resulted in loss of tax revenues, representing a significant threat to Africa’s governance and economic development.
Africa, therefore, needs to urgently plug the haemorrhage of outflows, retain the capital that is generated to enhance domestic resource mobilisation to sustainably finance inclusive development.
For instance, Kenya is believed to have lost as much as $1.51 billion (Sh138 billion) between 2002 and 2011 trade misinvoicing, a method of moving money illicitly across borders which involves deliberately misreporting the value of a commercial transaction on an invoice submitted to customs.
The role of IFFs and their adverse effects on economy cannot be ignored. In line with the HLP recommendations, there needs to be increased transparency of financial transactions while building the capacity of revenue authorities to detect capital movements from various jurisdictions and the manipulation, evasion, or avoidance of taxation to deal with the challenges of trade and tax-related malpractices.
The arm’s length principle, the condition or the fact that the parties to a transaction are independent and on an equal footing accepted as an international standard to avoid the abuse of transfer pricing. It is hard for revenue authorities in Africa to control the real market prices or prevent their manipulation as there is no comparable data.
Thus to deal with transfer pricing, more emphasis needs to be put on advancing country-by-country or subsidiary-by-subsidiary reporting basis as emphasised in the panel report recommendations. The writer is coordinator East Africa Tax and Governance Network and Nora Honkaniemi (Tax Justice Advisor, Action Aid Kenya)