Tax breaks for major firms depleting African states’ coffers | Africa | DW | 10.05.2016
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Tax breaks for major firms depleting African states’ coffers

Dilapidated roads, crowded schools and poorly equipped hospitals, experts say many African countries would have enough to finance development projects if international companies were forced to pay taxes in full.

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Panama papers: Oil firm avoids tax in Uganda

The nephew of South Africa's President Jacob Zuma, the twin sister of President Joseph Kabila of the Democratic Republic of Congo or Jose Maria Botelho de Vasconcelo, Angola's oil minister, the list of top African names mentioned in the Panama Papers goes on.

In a research conducted by the British non-governmental organization, ActionAid, only 15 percent of all financial loopholes in the coffers of African state can be traced back to corruption. 60 percent are related to tax breaks given to mainly international businesses. Action Aid is leading a worldwide campaign against tax evasion and a fair tax system.

African countries lose around 43 billion euros ($49 billion) through tax evasions, according to the African Union (AU). The International Monetary Fund (IMF) believes the amount is a staggering 175 billion euros, three times higher than the amount of money flowing through development aid. "For every dollar we receive [through development aid], we loose three [through tax evasions]," Stella Agara, a Kenyan campaigner for ActionAid, told DW.

Agara thinks that money could be used for investments in infrastructure, education and health. "If we would get this revenue, nobody would think about getting aid for Africa," she said.

At the expense of the poorest

Tax evasions are often done legally. Multinational companies move profits from their subsidiary companies to countries where they pay fewer taxes. A company like Deloitte is specialized in finding loopholes in tax systems for its clients.

At a conference in China in 2013, Agara told participants that representatives from Deloitte have given more than 80 companies opportunities to evade tax in Mozambique, one of the poorest countries in the world. Nearly 50 percent of the population in the impoverished southern African nation live below the poverty line and life expectancy is 49 years.

Malawi Steueraktivistin Stella Agara

Stella Agara (standing) is teaching a class about tax rights Copyright: Mark Bushnell

As uncovered in the Panama Papers, Mossack Fonseca advised the British company Heritage Oil to register its businesses in Mauritius when it was asked to submit its tax returns after it bought an oil field in Uganda.

"They avoided $400 million [350 million euros] in taxes. This money is way more than the health care budget of Uganda," Agara added. "If this money had been used in the area of health, a number of people in Uganda would have benefited from free health care like the citizens of Denmark and the UK," she added.

Robbing Peter to pay Paul

International companies have been benefiting from tax breaks since the colonial era. In bilateral tax agreements with foreign countries, African states completely abandon their right to taxing income, capital, dividends, royalty and interests, according to ActionAid. Corporate money has been flowing untaxed for decades from the poorest countries of the world to industrialized nations. According to ActionAid, companies in Italy, Great Britain and Germany have been profiting from it.

In 2014, Uganda signed an agreement with the Netherlands to levy income tax on firms residing in the Netherlands. A decade later, half of the foreign investments from their Dutch counterpart came in, at least on paper. This was a tremendous tax loss to Uganda, but huge tax savings for the Dutch corporations.

Tax agreements are carried out on voluntary basis, but African countries are normally under enormous pressure, according to activist Stella Agara. "Some of these multinational companies like Amazon and Google have resources much more than the entire budget of a single Africa country," she said.

Agara said that "these multinational corporations are engaged in business activities including bribery to be able to push policy makers in Africa" to accept their terms. She said some of these firms promise to create more jobs and at the same time demand tax breaks or threaten to take their businesses to another country with favorable conditions for investors. "A lot of these governments bow to the pressure from multinational corporations," Agara added.

Rwanda's example

Michaela Ungerer, an advisor with the African financial governance program at the German Institute for International Development and Cooperation (GIZ) said these kinds of tax agreements are unfair, because many African finance officials are poorly trained. Many African countries not only lack financial resources, but also do not have well-trained employees with experience to handle international tax issues.

"It is important to create a competence in these countries, so that they are in a better position to negotiate international agreements to help the development of their countries," Ungerer said in a DW interview. The GIZ, in cooperation with the association of African Tax Administration Forum (ATAF), is educating local tax officials and advising African countries to create efficient tax systems.

Rwanda is a successful case study. The East African nation shows that change is possible. In 2013, Rwanda renegotiated its agreement with Mauritius and thereby regains its right to tax the income of companies from Mauritius, according to ActionAid. Other African nations are also following suit. Currently, Nigeria, Malawi, South Africa and Zambia have either cancelled their tax deals or are in the process of renegotiating them.

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