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Capital Flight is Holding Africa Back

By By Sobantu Mzwakali


It is has become most people’s interest to focus on how to create progress in African economies but they tend to turn a blind eye on key concepts that victimise the progress; trade mispricing and tax evasion. Sobantu Mzwakali, an activist from GUBICO in Free State, gives his view about the issue.

Africa has the potential of being financially independent or developed but it will continue to experience the hiccups as long it suffers from a stagnantly high level of Illicit Financial Flows and the continent has the highest levels proportion of assets held abroad any region in the world. In details, there is a lack of money kept in other countries that could be productively invested in Africa. It is a loss of thorough taxation.

In Cape Town at the Alternative Mining Indaba earlier this year, I met with Cephas Makunike, a Policy Advisor at Tax Justice Network based in Kenya. He said “This money is kept offshore and so escapes the tax net. Dramatically this is reducing the money available for government spending on public services and productive public investments.” In my regard this thoroughly explains how the Illicit Financial Flows undermine the development in Africa.

Africa with the high vast mineral and oil resources makes its economies to highly depend on natural resources extractions. Often a percentage of government revenue comes from extractive taxations. However, Illicit

Financial Flows make it impossible for the wealth of Africa to be fairly collected from multi-national companies. In that way wealth is not fairly redistributed to the citizens of the continent to combat all failures and predicament Africa is known of. “Revenues from corporate income taxation have not increased across sub-Saharan Africa for the last decade. They were around 1,75 % of GDP between 1995 and 2000 and reported as marginally less, at 1,6%,between 2005 and 2009.

The many and generous tax avoidance and evasions are widely understood to be a major factor in undermining the levels of Company Income Tax in sub-Saharan Africa’’ added Cephas Makunike.

It is not criminal activity alone such as bribery, corruption or money laundering that the financial outflows are linked to, but commercial tax evasion accounts for the biggest component. Trade mispricing, the common tax evasion, takes place when companies manipulate the price of export and imports to artificially depress profits and dodge tax.“The faking of profits and taxation dodging often occur within a company, so-called mispricing, but it can also happen in secret deals between unrelated companies”, said David Mahlalela, a self-acclaimed “philantropreneur” and a civilian from Welkom. In detail, this mean that a company operating in South Africa can appear to lose money or make little profit but still making money in secrecy where the is a real production and sales activity going on, and crucially no tax applied.

From the research I have made, it is clear that the Illicit Financial Flow occurs mainly in two key concepts; tax evasion and trade mispricing. It details that there are resources and minerals that are supposed to be benefiting the economy of Africa but being monopolised by first world countries. The companies involved in secrecy partnership then fake profit and dodge taxation that is monopoly in a sense that the currency only circulate amongst these selected individuals or multi-nationalists corporate in securing their own wealth. The question is, after faking prices and dodging taxation in Africa where do theses multi-nationalists bank their money and why there? In a research we did as GUBICO on tax we found out that the most of these multi-national corporations save overseas, especially Switzerland, because tax brackets there are marginally low compared to Africa. This entails that the first world countries are the tax havens. They have financial secrecy in place and taxes are levied at low rates or not at all. If capital generated from resources and minerals of Africa is banked offshore and it benefits elites then the progress in African economy will remain stagnant.

Firstly, an increase in the tax revenues in an equitable manner I think would abolish the existence of tax havens. Secondly, if companies are forced to provide their statutory accounts it will be easy to trace down their operations and banking offshore. Thirdly, creating a central register for this information to be accessed by the public would allow transparency and accountability of corporations. If this three things are put into practice then I believe that there will be a clear record of revenues from the corporate world. The government will be able to collect and allocate public services to the citizen accordingly especially even when citizens are conscious of the collections and redistributions in detail. The government should decentralise redistribution to impacted societies according their needs. Companies, especially mining ones, are notorious when it comes to tax dodging. However, it is their responsibility to pay all taxes due to countries they get their minerals from, especially multi-national corporations in Africa. Therefore, taxation is not about Corporate Social Responsibility, as there is confusion on this matter, but it is also about Ethnic and Moral Conduct of the companies. It is embedded within the CSR because the companies are using every opportunity to dodge paying tax.

  • Graphic from http://www.occupy.com/article/you-call-aid-tax-evasion-corporate-profits-are-looting-60-billion-africa
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