Africa seeks support to deal with multinationals’ tax dodging schemes

During the United Nations Conference on Trade and Development Summit being held in Nairobi this week, African countries hope to push for consensus on how to stem tax evasion by multinationals, which reportedly deprives them more than $100 billion in revenue annually.

Fair taxation lobbies Tax Justice Network-Africa and ActionAid said East Africa is now losing $2 billion per year, down from $2.8 billion recorded in 2012.

Unctad secretary-general Dr Mukhisa Kituyi the developing world is the biggest loser in the multinationals’ tax evasion schemes.

“We need to stop what is being taken out of our countries. It is my hope that in the Nairobi meeting we will reach a consensus on how to reduce tax shifting by these companies. We want transnational corporations to pay the most taxes where they make their profits and not where they are registered in the tax havens. We are banking on the support of the developed countries to stem this problem,” Dr. Kituyi said during a television interview.

African countries are grappling with tax evasion, especially by firms that have multiple jurisdictions.

READ: Kenya enacts new law to save $110m in tax evasion

ALSO READ: Rwanda taxman moves to catch tax evaders

Africa at risk as rich nations plot new tax exemption deal

Dr Kituyi said that globalisation had allowed such corporations to have dual citizenship, which means they are able to shift the tax responsibility to tax havens.

“We want to push for a consensus on how to deal with corporate tax in the countries where the business is done and how much is due to the host countries,” Dr Kituyi said.

Yaekob Metena, ActionAid Tanzania country director, said that despite sealing many loopholes, developing countries also lose tax revenue by offering incentives to attract foreign direct investment.

“Governments continue to give tax incentives to attract foreign companies that are registered in tax havens, making it difficult to collect taxes,” Mr Metena said.

In sub-Saharan Africa, tax cheating is manifest mostly in mispricing of transactions between subsidiaries of trans-nationals to reflect lower profit, hence less corporate tax.

Claire Godfrey, a policy advisor at the international aid agency Oxfam, said that developed nations should support their developing counterparts to tackle tax dodging.

“We need to start seeing global institutions like UNCTAD and World Trade Organisation on the frontline championing the establishment of fair taxation practices,” she said.

“I think it is also time to establish a single intergovernmental body that will handle the issues of tax rules.”

According to the Tax Justice Network-Africa and ActionAid report, Kenya loses $1.1 billion annually though tax dodging, followed by Tanzania at $790 million and Uganda $370 million. Rwanda’s annual loss stands at $176 million.

The World Investment Report 2016 shows that FDI flows to Africa fell to $54 billion last year, a decrease of 7 per cent from the previous year.

Renewed investor confidence

In the East African region, FDI flows to Kenya reached a record $1.4 billion in 2015, resulting from renewed investor confidence in the country’s business climate and a booming domestic consumer market.

In 2016, FDI inflows into Africa are expected to grow as a result of liberalisation and implementation of greenfield projects that have been announced in the first quarter of this year.

Moses Kaggwa, commissioner for tax policy in Uganda’s Ministry of Finance, said that they are increasingly wiping out tax exemptions and only provide incentives to select firms.

“We have lost a lot of revenue through the repatriation of profits to tax havens. As much as we would like to attract FDI, we are now considering the incentives on a case-by-case basis to minimise the losses,” Mr Kaggwa said.

At the Nairobi conference, countries will also discuss the increasing complexity of the ownership structures of multinational enterprises.

A new report titled Investor Nationality – Policy Challenges published in the 2016 World Investment Report shows that more than 40 per cent of affiliates of foreign firms worldwide have multiple “passports,” making it easy for them to repatriate their profits to tax havens and bleed the economies of developing countries, where they make these profits.

“These affiliates are part of complex ownership chains with multiple cross-border links involving an average of three jurisdictions. These are much more common in the largest multinational enterprises, with the nationality of investors and owners of the firms increasingly becoming blurred,” the report said.

The report shows that the top 100 multinational enterprises in the Unctad Trans-nationality Index have more than 500 affiliates each, spread across more than 50 countries, with multiple hierarchical levels across up to six borders.

“We are urging policymakers to test the ownership rules in investment-related policy areas such as competition, tax and industrial development to help them improve the disclosure requirements in these companies,” Dr Kituyi said.