Tax evasion in Africa is one amongst a hoard of reasons African economies lag behind. Multinational companies with a huge financial muscle often running away from their economic mandate. In order to do so, these companies make use of overt and covert means of tax evasion. Tax evasion, as opposed to tax avoidance, is the illegal non-payment or underpayment of taxes usually by making false declarations or no declaration to tax authorities. On the other end, tax avoidance is the legal practice of minimising tax bills by taking advantage of loopholes in the law or through a corporate’s participation in social responsibility schemes such as COVID-19 relief and donations.
While the distinction between these two forms is clear, the effect of both methods is usually the same. By virtue of tax avoidance mechanisms, some multinational companies benefit from hosting countries’ tax havens. These refer to a scheme associated with low tax rates or non-taxation of foreign corporations in hosting countries. However, studies have reviewed that tax evasion is the root cause of underdevelopment in the African region. Tax helps in catapulting every country’s development agendas.
Compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions play a very pivotal role for economies. These are the funds that the government uses to invest in social safety nets and development initiatives such as infrastructure, healthcare, education among others. Africa tends to suffer from underdevelopment owing to incessant tax evasion by transnational companies.
The Pandora papers, the most recent exposé by the International Consortium of Investigative Journalists (ICIJ) reveals the gross tax avoidance practices by the ultra-wealthy and the governments that enable them. Half a decade since the publication of the Panama Papers, and later the Paradise Papers, large-scale tax avoidance by global corporations, criminals, business and political elites continues to sweep across the globe. The latest ICIJ investigation, dubbed the Pandora Papers, reveals a grim string of documents pointing to the crippling consequences of tax evasion.
In Africa, the magnitude of unmet basic needs is enormous. It is estimated that 3 billion people in the developing world subsist on less than US$2 a day per person. A staggering 2.37 billion people are recorded to be without food or unable to eat a balanced diet on a regular basis. The prevalence of undernourishment is highest in sub-Saharan Africa: 24.1%. Out of the almost 60 million children not in school, 33.8 million are in this region.
Revenues from taxation are fundamental to ameliorate this dire situation. Taxes enable the state to redistribute wealth to alleviate poverty. In doing so, taxes foster equality and gender empowerment. They also provide education, healthcare, social security, pensions, efficient public transport, clean water and other public services taken for granted in developed economies. Studies in most African countries signal that billions of dollars are lost through tax avoidance by multinational corporations.
Based on figures from South Africa's tax authority, studies have estimated that firms operating in South Africa but owned by a parent in a tax haven avoid taxation "on as much as 80% of their true income." This disquieting proportion of profit-shifting is said to be pre-eminently realised from the extractive and financial sectors. During the period 2015-2022, Africa's annual loss through illicit financial flows increased from $50 billion in 2015 to more than $110 billion a year. This has been hugely blamed on non-compliance to tax laws and guidelines by multinational companies operating in Africa.
The losses being incurred by African countries owing to tax avoidance by multinational companies come despite the exploitation that the African environment suffers in the wake of these companies’ operations. The advent of climate change, which is negatively impacting African livelihoods, has worsened the situation. Globalisation has created new transactional spaces where economic activities take place without much regulation, taxation and surveillance. Behind a wall of operative secrecy, transnational companies can devise complex mechanisms to boost their profits.
The activity of offshore corporations and tax havens is therefore central to the anti-social tax practices of these influential companies. In Mozambique, the NGO Centro de Integridade Publica published a study which claimed the country has been unable to properly collect taxes for years. In particular, the large international corporations which profit from Mozambique's oil and gas reserves barely fulfil their tax obligations — largely due to the state's inability to accurately review their activities and balance sheets. As a result, Mozambique lost millions of dollars in revenue.
The nuisance of tax avoidance in Africa is being facilitated by complicit leaders, weak institutional gate-keepers and massive graft in anti-corruption bodies. High ranking government officials in Africa are increasingly being bribed and in Africa, there are limited legal resources to take up delinquent multinational companies head-on. Efforts by the African Union to negotiate tax reforms, implementation of tax laws and compliance have often met a dead end since most African countries are left behind in the dialogue.
The most recent discussions that were held under the Organisation for Economic Cooperation (OECD) for the G20 were highly exclusionary. Other African countries with a huge stake to lose through tax evasion could not weigh into the global discussions for developed and emerging economies. Is it high time that African investment be restructured by African investors in order for it to benefit Africans?
Given that foreign aid is below the amount lost through illicit financial flows in the form of tax evasions, is Africa really benefiting from the global economic existence?