Corruption: A complex method of tax dodging in Africa

For a long time, corruption has been a contributing constraint to any reform efforts in both developed and developing countries. The extent of corruption in Africa is particularly shocking. Forty out of 46 sub-Saharan African countries have been unsuccessful in improving their scores on Transparency International’s Corruption Perceptions Index year after year.

Although there is international ambiguity when it comes to defining corruption, the Organization for Economic Co-operation and Development (OECD) in its 2012 corruption analysis tool defines corruption as “the abuse of entrusted authority for illicit gain”. This definition indicates that corruption goes further than the individual, government and corporation, and recognises the interrelated nature of the public and private sectors at the local, regional and global level.

In 2016, the African Governance Report IV attributed institutional weaknesses, the poor living standard of public servants and the lack of international action to the increasing levels of corruption in Africa. The report further noted that, in measuring corruption in Africa, there needs to be particular emphasis on the dynamic nature of each individual country. Hence, the proposal to strengthen systems of governance and institutions – including political ones – that help to tackle domestic and international corruption.

Slowed economic, political growth and lack of credibility of public ‘impersonal’ institutions in many African countries continue to reinforce corruption, which in turn threatens lasting democracy, good governance and the rule of law. Advancing anti-corruption, transparency and integrity requires a deeper analysis on how power, politics and institutions interact in a globalised world.

Corruption and money laundering reduce domestic revenues in many African countries by making the system vulnerable to artificial tax avoidance schemes and tax evasion. It allows some multinational corporations and individuals to exploit tax loopholes to avoid paying huge amounts of taxes. At the same time, raising domestic revenue through tax is particularly crucial not only nationally but also internationally in this era of global economic turmoil and need to finance the sustainable development goals (SDGs).

The exploitation of tax loopholes by multinationals and individuals to dodge taxation makes public expenditure revenues insufficient for the promotion of sustainable economic growth and development. This kind of tax base erosion has had a variety of fiscal effects.  It leads citizens to lose confidence in public institutions and jeopardises the ability of their governments to deliver effective public goods and services, widening inequality gaps and political polarisation.

The commercial and criminal components of corruption

 

The high level panel on illicit financial flows (IFFs) from Africa concluded that an estimated $50 billion a year is lost from the continent in illicit financial flows. Further, commercial activities – trade mispricing, transfer pricing, base erosion and profit shifting – account for 65% of IFFs. Criminal activities such as poaching, drugs, arms and human trafficking, oil and mineral theft and other forms of crime that generate money account for 30% and corruption for around 5% of illicit financial flows.

Yet, if we look at the kind of activities that contribute to each of these areas, we find that corruption is a crosscutting issue. Thus, when analysing corruption, we must look at the aggregate effects of numerous decisions by taxpayers, tax collectors, administrators, and governments – local and international – decision makers.

Corruption was found to be significantly higher in African countries that are endowed with natural resources. Incidentally,  Africa is home to a wide array of natural resources including minerals and energy deposits like oil, gas, diamond, gold and silver. The continent is known to host about 30% of the world’s reserves and to produce more than 60 different types of metals, ores and minerals.

Despite their endowment of natural wealth, the majority of the resource-rich African countries have suffered the resource curse for decades. Its consequences are poverty, the collapse of sectors such as agriculture and manufacturing, political and resource conflicts due to ‘rents’, inefficient revenue flows, income and social inequalities and environmental challenges.

High levels of corruption – such as monopoly, patronage networks with close ties to the ruling elite who have a direct stake in the sector, and discretion with accountability – are arguably the most important factors resulting in the misappropriation of natural resources in these countries.

An international response to corruption is needed

 

While focusing on the promotion of integrity, transparency and accountability at country and regional levels in Africa is imperative, strengthening international cooperation on anti-corruption is equally important.

A report by the World Bank titled “Puppet Masters” found that over 70% of the major corruption cases analysed involved international shell firms in bribery, money laundering and hiding stolen assets. This growing global interconnectedness means that international cooperation on tax matters is a more effective, sustainable approach to resolving the financial corruption problem.

African countries have a responsibility to ensure stronger and more cohesive institutional frameworks, and reinforce policy implementation for good governance and against corruption. At the same time, they should work with international partners to guarantee transparency over who ultimately owns and controls multinational corporations, to expose wrongdoing and to disrupt illicit financial flows.

Ensuring that electoral democracy, accountable, rule-based governance and demand for better quality public goods and services improve, is a pre-condition for any other action to be successful.

 

The views expressed here are those of the author and not necessarily those of ECDPM.