Money Talks: Africa at the G7 | Taxes | Aids

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In 2010 alone, G7-based companies cheated Africa out of an estimated $US6bn through just one form of tax dodging – trade mispricing. Africa is growing economically, but billions of dollars a year are flowing out of the continent. This deprives governments of vital potential investments in healthcare and education for all, and sustainable agriculture. If G7 leaders are serious about supporting Africa’s growth and poverty reduction, they must support ambitious commitments on tax and aid - including comprehensive reform of the global tax rules - leading up to the UN Financing for Development Conference in Addis Ababa in July.
  1 OXFAM MEDIA BRIEFING 00:01 GMT 2 June 2015 Money Talks: Africa at the G7 Summary  At their forthcoming summit in Germany, G7 leaders will meet some of their  African counterparts to discuss how they can support economic growth and sustainable development in Africa. The continent has enjoyed a recent economic boom, but countries across the continent remain blighted by poverty and inequality.  Africa is among the world‟s fastest  -growing continents, but the rich world is reaping the rewards of this growth, as billions of dollars a year flow out of Africa. This is depriving it of vital revenue that could enable it to fund healthcare and education for all, and invest at scale in sustainable agriculture. In 2010 alone, G7-based companies and investors cheated Africa out of an estimated $US6bn through just one form of tax dodging  –  trade mispricing. This is equivalent to more than three times the amount needed to plug the funding gaps to deliver universal primary healthcare in the Ebola-affected countries of Sierra Leone, Liberia, Guinea and Guinea Bissau. 1    At the same time, rich-country donors, including some G7 countries, continue to default on other vital income streams for Africa, as they break their promises on aid and on providing new and additional contributions to climate finance.   If G7 leaders are serious about supporting economic growth and sustainable development in Africa they must support ambitious and comprehensive reform of the global tax rules that allow multinational companies to dodge taxes and that fuel a „race to the bottom‟ where governments offer ever more generous tax breaks to persuade companies to locate in their country. These rules are letting multinational companies prosper, while bleeding Africa dry of vital revenue. G7 governments must seize the opportunity to make ambitious commitments on tax and aid leading up to the UN Financing for Development Conference in Addis  Ababa in July. They must recognize this period as critical in securing the changes that Africa needs to ensure long-term, sustainable, equitable growth.    2  At their forthcoming summit in Germany, G7 leaders will meet some of their African counterparts to discuss how they can support economic growth and sustainable development in Africa. The continent has enjoyed a recent economic boom. In 2014, the IMF estimated that Ethiopia was the world's fastest-growing economy at more than 10 percent. The Democratic Republic of Congo, Cote d'Ivoire, Mozambique, Tanzania and Rwanda all grew by 7 percent or above. 2   However, most African citizens are not able to prosper, as they should from this progress, since the benefits of growth are not ‘trickling down’ to the majority. Close ties between Africa’s economic and political elites mean that too much of Africa’s growth fails to reach the poorest people.  African governments have a central role in turning this situation around with a package of policy measures that set out a more equitable and sustainable path for their development. But any effort to drive forward a fairer, more sustainable agenda is being damaged by international development finance rules that are skewed in favour of rich governments and individual and commercial vested interests, in areas such as taxation, aid, private finance and climate change. Without a fundamental change in approach, an international agreement on how to finance development for the future  –  including the Sustainable Development Goals (SDGs) for the next 15 years  –  will not help to achieve African development priorities or enable African people to escape poverty. The forthcoming UN Financing for Development Conference in  Addis Ababa in July provides an opportunity for rich countries to support developing countries ’  agendas for their development by pledging to combat inequality and poverty and through proposing systemic change internationally in policy areas that affect public and private finance, such as taxation, aid and climate change. The G7 must use the summit as an opportunity to make ambitious commitments on tax and aid ahead of the UN Financing for Development Conference in Addis Ababa in July. They must recognize this period as critical to securing the change that Africa  –  and other developing countries  –  need to ensure long-term growth that is both equitable and sustainable. Africa is ‘ rising ’ , but remains blighted by inequality and poverty Over the past decade, Africa has been among the world’s fastest -growing continents  –  its average annual growth rate was more than 5 percent. 3  Global demand for natural resources, and increased commodities exp orts and tourism, along with improvements in the region’s regulatory framework and macroeconomic stability, are key factors accounting for this impressive growth. 4  Yet sub-Saharan Africa remains the poorest region in the world. Forty percent of people in sub-Saharan Africa live in extreme poverty (on less than US$1.25 per day); this is more than four times greater than the world average. 5  It is the region with the highest prevalence of people going hungry, and where  –  in contrast to global trends  –  the total number of people in hunger is still increasing. 6  Nor are future poverty trends positive for the region. The absolute number of people living in extreme poverty in sub-Saharan  Africa is projected to increase by over 50 million between 2011 and 2030, to 470 million people. 7  Women are hit hardest. In sub-Saharan Africa, they earn on average 30 percent less than men, 8  and continue to have limited access to productive resources, such as land, water and credit, and to services including healthcare, education and agricultural training and support for small-scale farmers. High levels of inequality across Africa are slowing poverty-reduction efforts. Six African countries (South Africa, Namibia, Botswana, Zambia, Central African Republic and Lesotho) are among the top 10 most unequal countries in the world (as measured by their gini coefficients). In these six countries, the richest 10 percent of the population accounts for, on average, almost half of the combined total income, while the poorest 10 percent earn just one percent. 9  Worse still, much of the income of the richest is leaving the c ontinent’s economies. The African elite have a higher level of capital flight relative to GDP than their equivalents in other parts of the world, and keep a larger proportion of their wealth abroad. 10    3 Rich world gaining most from Africa’s progress   Billions of dollars a year flow out of Africa because of the transfer of profits by foreign investors, debt repayments and illicit financial flows (commercial transactions, tax evasion, criminal activities (money laundering, and drug, arms and human trafficking), bribery, corruption and abuse of office). 11  Illicit financial flows alone make Africa a ‘ net creditor  ’  to the world; 12  a sharp contrast to its image as a region that only sucks in aid money. The common assumption that Africa loses money primarily because of bribery and corruption needs to be re-assessed. Tax avoidance tricks are allowing multinational companies to move considerable amounts of money out of Africa. A recent report by the High Level Panel on Illicit Financial Flows, led by former South African President Thabo Mbeki, found that in 2010 alone, multinational companies were responsible for around US$40bn 13  leaving the continent as a result of trade mispricing (where companies deliberately over-price imports or under-price exports between subsidiaries of the same company to evade taxes, avoid customs duties, or launder money). 14  G7-based companies and investors 15  were responsible for as much as US$20bn in taxable flows leaving the continent through deliberate mispricing.   This amounts to around US$6bn in revenue lost to national treasuries through multinational companies cheating the system. 16  This is just one of the many tricks multinational companies use to manipulate the accounts to escape paying their fair share of taxes and avoid making a long-term productive investment into the continent. Africa is being bled dry Outflows of capital from African countries because of trade mispricing have a real impact on government revenues, as the tax due on these sums is not paid. Further negative effects include the lost opportunity of that money being invested within the African continent. To put the scale of this US$6bn loss in tax revenue into perspective, it is equivalent to more than three times the amount needed to plug the funding gaps to deliver universal primary healthcare in the Ebola-affected countries of Sierra Leone, Liberia, Guinea and Guinea Bissau. 17  Such investments could improve and even save millions of lives. Many multinational companies operating in Africa take advantage of these loopholes to reduce their tax bills, while also negotiating tax exemptions from governments engaged in a race to the bottom to attract foreign investment. By using tricks like trade mispricing, multinational companies constrain the ability of African governments to tackle inequality. The loss of legitimate tax revenues to African governments is starving them of vital public finance to fill financing gaps, and to invest in the future SDGs. It is clear that the international tax system, which enables and almost incentivizes multinational companies to avoid tax, is in desperate need of wholesale reform and Africa is suffering the worst consequences of a fragmented and secretive system. Fair systems of taxation within African countries By reducing by 50 percent their ‘ tax gap ’  (the difference between expected total revenue and what is actually collected), African countries could raise an additional US$112bn per year by 2020, equivalent to four percent of the c ontinent’s GDP. 18  Rwanda provides one success story of a country strongly increasing its tax revenue, while adopting a more progressive approach to taxation. 19  Domestic revenue rose from nine percent of GDP in 1998 to 14.7 percent in 2005, and the costs of tax collection were also reduced. This achievement was attributed to strengthening administration and improvements in accountability among all stakeholders. It was also supported by foreign aid. Unfortunately, globally no more than 0.1 percent of total official development assistance (ODA) is channelled into reforming or modernizing tax administrations, public financial management or tax collection. 20  However, efforts to raise the tax-to-GDP ratio must be treated with caution. Governments must avoid the temptation to rapidly increase revenue from regressive forms of taxation, or  4 to prioritize the efficiency of the tax system over its progressiveness. Already tax systems in developing countries tend to be some of the most regressive in the world, with taxes more often penalizing the poor. For example, indirect taxes such as value-added tax (VAT), which fall disproportionately on poor people, make up on average 67 percent of tax revenues in sub-Saharan Africa. 21  A regressive tax system can offset part of the positive redistributive impact of social investment. The high price of corporate tax abuse in Nigeria   Corporate tax abuses, including royalty fraud in the extractive industry and other forms of illicit activity, led to Nigeria accounting for the largest share of total illicit financial flows from Africa (30.5 percent), worth up to 12 percent of Nigeria’s GDP . 22  Domestically, the country exercises a regressive approach to taxation that reinforces uneven wealth distribution, with poor people paying disproportionately more in tax than the wealthy. To meet tax revenue gaps, state authorities charge a variety of indirect taxes, the burden of which often falls on street vendors and small and medium enterprises (SMEs), further squeezing already low incomes. For example, Charles Ogbu is a 46-year-old owner of a fish-smoking business in Ossissa, Delta State. A father of four, his small business is undermined by multiple taxes, even as the source of his fish is threatened by the effects of climate change. Charles explains: ‘Every four days –  that is, on Nkwor market day  –  I must pay different taxes to the local government, the market authority, the development levy, security and even tax on the motorbike that I use to transport my fish. Sometimes local government people will introduce one payment, print papers, and say the money will go to Asaba, the state capital. We are tired but there is nobody to speak for us. The water where I get my fish is drying up and covered with weeds. Canoes cannot navigate easily.’    Former Finance Minister Ngozi Okonjo-Iweala acknowledges that 75 percent of registered businesses do not pay taxes. 23  While taxes should not necessarily be increased, revenue collection from income, corporate taxes and VAT must be improved. The government must reconsider its systems, which exert significant tax pressure on petty traders, market vendors (mostly women) and SMEs, while allowing big businesses and multinationals to get away with tax abuse. Corporate income tax is enormously important to developing countries. It comprises a significant share of total tax receipts  –  around 16 percent on average  –  in low-income and lower middle-income countries, compared to an average of 6 percent in high income economies. 24  Taxing companies, particularly successful multinational companies, is one of the most progressive forms of taxation. All companies must pay their fair share of taxes, according to their means. They should not be allowed to escape their obligations to the societies in which they operate and where they generate their profits. International tax systems favour corporate tax dodgers 25   It is clear that developing countries can make great strides towards more progressive and effective taxation and spending through action within their own borders, but their efforts to increase taxation will be ultimately hampered by an unfair international tax system that favours corporate tax avoidance. The potential tax revenue loss for African countries due to trade mispricing by multinational companies discussed above is just one small part of the full picture of the potential revenue that developing countries lose because of corporate tax avoidance. Companies can take advantage of a myriad of loopholes in the international tax system that enable them to minimize corporat e tax contributions by making taxable profits ‘disappear’ on paper. They can artificially attribute the ownership of assets or the locations of transactions to paper subsidiaries in secret jurisdictions with zero or low nominal tax rates, known as ‘tax hav ens’. 26  
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