Better tax policies needed to combat illicit financial flows from Africa

Capital flight due to public distrust of national tax regimes is bleeding billions of dollars of potential revenue from governments’ coffers across Africa, ministers have warned.

They called for new policies to stop the drain of resources, at a time when interest rates are high and the continent faces a debt crisis.

All too often, those who make money in Africa move it offshore, sometimes illegally, depriving governments of desperately needed revenue.

Analysts believe such tax avoidance is exacerbated when locals believe multinationals are not paying their fair share of tax, or the government wastes it.

“The emphasis on domestic resource mobilisation is very well placed, at a time when even concessional MDB or development financing as a whole is at elevated interest rates, based on the world trend,” Wale Edun, the Nigerian finance minister, told GlobalMarkets at the World Bank Group-IMF Annual Meetings in Marrakech last week.

Widespread tax reform could help to keep money in Africa, reducing reliance on overseas aid and helping governments pay for urgently needed public services. In some countries a huge percentage of government revenue is already sequestered to service debt.

UNCTAD’s Economic Development in Africa Report 2020 said Africa could gain $89 billion annually if it curbed illicit financial flows. Luckystar Miyandazi, tax and domestic revenue mobilisation adviser at the African Union Commission, said that was around 3.7% of the continent’s GDP.

“We want to finance 75% of our development,” she said. “[African Union] Commissioner Muchanga likes to say that ‘development is DIY’, and this is what Africa wants to do — we want to own our own development, we want to finance it. We have a very young, growing population. We want simplicity and stability of international financial rules. We need to close the loopholes. It is impacting our stability.”

Francis Kairu, policy officer for tax and international financial architecture at Tax Justice Network Africa, said: “The leadership on the continent has realised that unless Africa engages in a structured manner to deal with these challenges it will face major problems, especially now, with the debt crisis that is confronting a whole new continent.”

Kairu and Miyandazi both called for a more equitable tax structure for the continent and greater recognition of its unique position in the world.

An international, binding framework convention convened by the UN, covering an extensive range of issues, would be the best option, said Nairu.

When corporations and the richest avoid domestic tax burdens, the impact flows right down to ordinary people. In 2022, Nigeria deployed revenue assurance measures to the telecoms industry, a serial offender.

“That is what we are doing in Nigeria,” said Edun. “Not only ensuring that all revenues due to the government come into the government, but that expenditures are well targeted, well spent and efficiently handled, to build public trust that utilising their tax dues, or the spending of their taxes, is efficient.”

‘Tax morale’ is a major issue in development, argued Michael Lennard, chief of international tax cooperation and trade in the UN’s Financing for Development Office.

“It’s not an easy thing because in a lot of developing countries the tax system has not been trusted,” he said. “Governments have to convince people that taxation is good for the country. If multinationals aren’t seen to be paying their taxes and are making all this profit, it is legitimate for people to ask why they should pay theirs.”

This story was first reported by GlobalMarkets and is authorised for publication on ITR.