The Anatomy of Tax Evasion in Africa

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).

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.

Taxation in Africa

Why do developing countries tax so little?

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Fig. 1: click on image to enlarge

Besley and Persson begin to provide answers in this 2014 paper:

Low-income countries typically collect taxes of between 10 to 20 percent of GDP while the average for high-income countries is more like 40 percent. In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries are poor for certain reasons, and these reasons can also help to explain their weakness in raising tax revenue.

……….low taxation may reflect a range of factors that also help to explain why low-taxing countries are poor. From this perspective, the most important challenge is taking steps that encourage development, rather than special measures focused exclusively on improving the tax system.

Click on image to enlarge

Fig. 2: click on image to enlarge

In the specific case of Africa, here is a chart from 2010 (2007) showing the tax mix in African states. We know from theory that the share of direct taxes in the tax mix tends to be a good proxy for state capacity.

But the structure of the economy appears to matter, and endogenously determines both the proportion of taxes as a share of output collected (see Figure 1 above) and whether states bother to invest in the capacity to exact direct taxes (see the extreme case of oil rich Equatorial Guinea).

Lastly, the tax story in Africa points to a positive increase in state capacity over the last 25 years. Since the early 1990s, the region’s mean tax revenue as a share of GDP has grown from 22% to more than 27%. Per capita tax collection has also been on the rise. That said, there is quite a bit of variance in these measures, with lower income countries doing considerably worse than their richer counterparts.

More here. See also here.

Update: Morten Jerven (author of Poor Numbers) just alerted me of the existence of this cool dataset on taxation and development.