Focus: Tax avoidance hurts development – workers must fight back

Abstract

10 | International Union Rights | 25/1 FOCUS | TAX AND TRADE UNION RIGHTS For decades, the development debate has been dominated by the story of foreign aid, and how it helps developing countries, especially in Africa, to eradicate poverty and improve their populations’ welfare. We have also been told that only by lowering taxes for foreign firms can we create development. But there is another story: that of illicit financial flows, and how they ensure developing countries lose more to rich countries then rich countries send in aid. The UN High Level Panel on Illicit Financial Flows, chaired by former South African President Thabo Mbeki estimated that between USD $30 billion and $60 billion is siphoned off annually from the Continent, according to a report released in 2015. These estimates are still fairly conservative: latest data suggests that could be as high as USD $80 billion. This is much more than Africa received in financial aid and foreign direct investment combined between 2003 and 20121. Trade unions and our civil society allies are working hard to tell the real story and make sure that developing countries, in Africa and across the world, can use all their resources to develop independently for the benefit of all. What is causing these outflows? What does this haemorrhage that specialists call ‘illicit financial flows (IFF)’ consist of? While there are proceeds from crime, money laundering and corruption, Thabo Mbeki concluded in 2015, ‘large commercial corporations are by far the biggest culprits of illicit outflows’, through dodgy tax policies that shift wealth offshore. Astonishingly, multinationals were responsible for over 65 percent of IFFs, well ahead of organised crime (30 percent) and corrupt practices (5 percent) Most of these flows occur when companies that are owned or controlled within the same group buy and sell to each other. Through the manipulation of the prices they ensure that profits are not made in the African country but instead in a tax haven where low taxes are paid. The problem is particularly pronounced in extractive industries, important for developing countries, which are dominated by large multinationals that control global value chains. They take advantage of their complex ownership structures and universal presence to manipulate quantities, prices - or both - but also to disguise the destinations and sources of their trade. Africa is full of examples. Zambia’s national data show that Switzerland is the top buyer of its copper, whereas Swiss trade statistics register no copper imports from the country at all. According to Nigerian authorities, the Netherlands is an important destination of its oil exports, but a substantial part of these sales does not appear in Dutch data. Timber production in Liberia and mineral production in the Democratic Republic of the Congo (DRC) and South Africa tell similar stories. Illicit financial flows are not a recent phenomenon in Africa. It is estimated that the continent has lost over $1Trillion USD through capital flight since the 1970s2. But it is getting worse. In Africa, capital flight has tripled since 2001, making Africa a net creditor to the rest of the world. In total, the continent lost about USD $850 billion between 1970 and 2008, with Nigeria, Egypt and South Africa accounting for 55 percent of illicit financial flows over this period. Lowering taxes does not increase investment There are enormous pressures from foreign investors and foreign governments to extend further tax concessions such as tax holidays, tax-free zones, investment and tax treaties, and acceptance of corporate ownership structures that facilitate tax avoidance. Such concessions are often designed to favour foreign corporations over domestic firms, with little demonstrable benefit from increased investment. In 2010, the United Nations Industrial Development Organisation (UNIDO) conducted a business survey of 7000 companies in 19 subSaharan African countries. The results suggest that tax incentive packages ranked 11th out of 12 in importance for investment decisions; and this importance has fallen over time. But the damage to the economy of the outflow is real. Africa is the most vulnerable region in the world when illicit outflows are compared to GDP. The average annual GDP loss of 5.7 percent has an outsized impact on the continent, according to Washington based Think-tank Global Finance Integrity (GFI...