Governments urged to combat illicit money flows

NAIROBI — African governments have been challenged to implement comprehensive policies to combat illicit financial flows from the continent.

Briggs Bomba, Trust Africa’s programmes director.

This comes as figures from the United Nations show that the continent is losing at least $50 billion through illicit financial outflows every year, money which could be used to reduce poverty and improve infrastructure.
Briggs Bomba, Trust Africa’s programmes director, said African governments are lacking the commitment and political will to curb the scourge, which occurs when funds are unlawfully transferred from one country to another.
This includes revenues from organised crime, tax evasion, fraud in international trade, bribes and cross-border smuggling.
“The sustainable development of Africa depends on stopping this haemorrhage of illicit financial flows from the continent, and this requires policy changes,” he told The Financial Gazette at the ongoing Pan African Conference on Illicit Financial Flows and Taxation in Nairobi, Kenya.
Although the continent, under the leadership of the African Union (AU), has been following the issue of illicit financial flow at the highest level through the appointment of the High Panel led by former South Africa president Thabo Mbeki, several governments have failed to aggressively investigate and prosecute money launderers and companies that evade tax.
Bomba said the movement of capital using illicit means undermines the continent’s ability to mobilise domestic resources to address pressing challenges of growing inequality, poverty, healthcare, education, infrastructure, and other vital development priorities.
“Zimbabwe, which at one time held at least 25 percent of the world’s diamonds, is struggling with foreign currency, electricity and fuel shortages, partly due to continued illicit financial flows in mining, fisheries, forestry and illegal safari activities,” he added.
The southern African country is believed to have lost US$2,83 billion to illicit financial flows between 2009 and 2013 mostly through under-invoicing by multinational companies and weak legal and institutional frameworks.
Meanwhile, Logan Wort, the African Tax Administration Forum (ATAF) secretary general, said there was need for African governments to come up with measures to tax online firms and e-commerce transactions to increase their revenue streams.
“The growth in digital platforms and, consequently, digital trade has introduced challenges, which would have been considered as ‘remotely possible’ 30 years ago. Digitisation continues to provide an impetus for members to examine and re-examine both their economic positions and the manner in which they obtain their fair share of taxes,” he said.

Thabo Mbeki

“Many African countries have reported concerns about the tax challenges they face as their economies become increasingly digitalised. That digitalisation enables multinational enterprises (MNEs) to carry out business in African countries with no or very limited physical presence in that country. This makes it difficult for African countries to establish taxing rights over the profits the MNE is making from the business activities it carried out in the country. This, is in addition to profit stripping that erodes tax. African subsidiaries behave differently.”
This comes as digital platforms and the supply of digital intangibles has produced a mixed bag of risks and opportunities for revenue enhancement and mobilisation, as well as the opportunity to take advantage of digital intelligence in order to police and encourage tax compliance.
In equal measure, the growth of this sector has occasioned new, decentralised forms of currency which are no longer linked to or regulated by central banks.
Wort noted that the current nexus and profit allocation rules are not ensuring appropriate tax rights for source countries and in particular African countries.
“This is partly due to the increasing digitalisation of the global economy and the African economy which enables non-residents and in particular multinational enterprises to increasingly carry out business in a country with no or very limited physical presence in that country and to create value primarily from intangibles,” he added.
Several countries in the world such as Israel and India have introduced significant economic presence tests for creating permanent establishments as a way of addressing taxation of digital economy businesses.
Specific tax regimes for multinational enterprises have been introduced, for example, by the United Kingdom and Australia with diverted profits taxes and by the US with its base erosion and anti-abuse tax.
Turnover taxes have been introduced for targeted sectors, such as Hungary’s tax on digital advertising and Italy’s levy on digital transactions.
More recently, the European Union’s digital tax strategy proposes both interim measures and a long-term solution. The European Council has stated its preference for a coordinated tax policy response to the challenges raised by the digitalisation of the economy at the global level.
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