Tag Archives: PriceWaterHouseCoopers

On the high cost of corruption in Nigeria

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This is from the Economist:

In 2014 a respected former central-bank governor lost his job after claiming that $20 billion had been stolen. But this captures only a small share of the damage done by corruption. The much bigger question is where Nigeria could be if its politicians and officials were a little more honest.

One answer comes from economists at PricewaterhouseCoopers (PwC). They compared Nigeria to three other resource-producing countries that are somewhat less corrupt than it, though by no means squeaky clean: Ghana, Malaysia and Colombia. PwC concluded that Nigeria’s’s economy, which was worth $513 billion in 2014, might have been 22% bigger if its level of corruption was closer to Ghana’s, a nearby west African country.

By 2030, the size of Africa’s biggest economy should triple in real terms come what may. Yet if Nigeria manages to reduce corruption to levels comparable to Malaysia (itself hardly above suspicion: its prime minister recently had to explain how almost $700 million had made it into his bank account), its economy could be some 37% bigger still. The additional gain would be worth some $534 billion (adjusted for inflation), or about as much as the economy is currently worth. If it does nothing to change then the cost of corruption in Nigeria would amount to almost $2,000 per person a year by 2030, PwC reckons.

Corruption in Nigeria has inspired interesting strategies of combating the vice:naijacorruption

The full PwC report is available here.

Also, a gentle reminder that not all government money gets stolen through corruption (most estimates I have seen from leading African economies cap the figure at around 30% of budgets being lost). That means that there is still upwards of 70% of government budgets that never get spent well, or in some cases, never get spent at all.

Improving state agencies’ capacity to absorb budgetary allocations and to effectively carry out their duties is therefore just as important as fighting corruption.

Btw, Nigeria only collects about 8% of its GDP in taxes. Which is absolutely nuts.

The Anatomy of Tax Evasion in Africa

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Africa Confidential has a great piece analyzing leaked documents from PwC, the professional services firm, showing the various arrangements that enable multinational companies to evade taxes in Africa. You can read the whole piece here (gated).

  • One of the measures PwC advised multinationals to take was to create a wholly-owned Luxembourg-based subsidiary which would hold the rights to intellectual property used by the rest of the group. The rest of the group would then pay licensing fees to the Luxembourg-based subsidiary which, by agreement with the authorities, would be granted tax relief of up to 80%……
  • A second tax avoidance mechanism simply involved the companies becoming incorporated in Luxembourg. In 2010, Luxembourg concluded an agreement with several companies of the Socfin (Société financière) agribusiness group, which was founded during the reign of Belgian King Leopold II by the late Belgian businessman Adrien Hallet. The companies chose Luxembourg as their base and made an agreement under which their dividends were subject to a modest 15% withholding tax, a lower figure than those in force where their farms are located (20% in Congo-K and Indonesia, 18% in Côte d’Ivoire).
transfer-pricing

The art of hiding profits

Altogether, Socfin subsidiaries in Africa [in Sierra Leone, Nigeria, Liberia, Cote d’Ivoire, and Cameroon] and Indonesia produced 123,660t. of rubber and 380,770t. of palm oil in 2012. The combined turnover of its main African subsidiaries reached €271 mn. in 2013. The list also includes the 100%-owned Plantations Socfinaf Ghana Ltd. (PSG) and Socfin-Brabanta (Congo-Kinshasa). Socfin also holds 88% of Agripalma in São Tomé e Príncipe and 5% of Red Lands Roses (Kenya).

  • A third mechanism involves cross-border lending within a group of companies. Companies registered in Luxembourg are exempt from tax on income from interest.

According to the Thabo Mbeki High Level Panel report between 1980 and 2009 between 1.2tr and 1.4tr left Africa in illicit flows. These figures are most likely an understatement. Multinationals, like the ones highlighted by Africa Confidential, accounted for 60% of these flows.

Alex Cobhan, of the Tax Justice Network, has a neat summary of the various components of illicit financial flows (IFFs) and how to measure them. He also proposes measures that could help limit IFFs, including: (i) eliminating anonymous ownership of companies, trusts, and foundations; (ii) ensuring that all bilateral trade and investment flows occur between jurisdictions which exchange tax information on an automatic basis; and (iii) making all multinational corporations publish data about their economic activity and taxation on a country-by-country basis.

Alex Cobham blogs here.