By Nataliya Mykhalchenko
Tax avoidance, tax evasion, tax heavens, illicit financial flows and global tax governance are real buzzwords that have come to dominate current international political and financial domains. Tax avoidance, understood as the use of the so-called ‘loopholes’ in the tax legislation to reduce one’s tax payments increasingly tops news charts. The recent EU’s blacklist of 17 tax havens, Paradise Papers and last year’s Panama Papers are among the starkest examples. Recent waves of tax dodging scandals including those of tax evasion – the use of unlawful means to escape paying tax – pushed many governments globally towards implementing various structural changes to taxation systems. Moreover, there is a growing call towards making the ‘fight’ against the exploitation of tax regulations ‘a global effort’ and the Organisation for Economic Co-operation and Development’s (OECD), Tax Inspectors Without Borders and the Declaration on Automatic Exchange of Information are amongst the most prominent measures of this kind.
In a recent study that explored anti-fraud initiatives in nine countries on the African continent, measures to address the drainage of revenue featured strongly. What is particularly interesting is the fact that many actors, private, governmental and supranational, including those in the West, seem to be especially active in encouraging change and acting as ‘advisories’ to governments and business on the African continent. This blogpost will use the findings of the study to outline some of the interventions, paying particular attention to the actors involved. The blogpost will then look closer at the OECD’s initiative, and close with some questions and thoughts regarding the findings and the North-South dynamic that prevails.
According to one estimate, US$240bn is lost in tax revenue every year due to various forms of tax avoidance and evasion, with the majority of losses in low- and lower middle-income countries. As shortages in funding of developmental projects persist and countries struggle to meet the financial requirements needed to achieve Sustainable Development Goals (currently the investment gap in developing countries is around US$2.5 trillion), experts worldwide highlight that the tax loses are unjustifiable and if addressed, can be used to facilitate the delivery of the SDGs. In recent years, many initiatives emerged across the Global South to raise awareness of the problem, involving governments, supranational organisations such as EU, UNDP and OECD to name a few, businesses, and rights advocacy groups such as Tax Justice Network and others. Several countries in the Global South have been applauded for their efforts to keep up with the tax reform that prevails in parts of the Northern hemisphere.
Having looked at anti-fraud initiatives in South Africa, Ghana, Botswana, Nigeria, Tanzania, Kenya, Malawi, Rwanda and Zambia several trends emerge, some of which were outlined in previous blogs on roape.net. One trend that has not been discussed is the nature of the initiatives aimed at tackling various forms of tax evasion and avoidance and importantly the actors that are driving these measures. The types of initiatives aimed at addressing tax loss, range, amongst others, from education-led awareness raising campaigns on the importance of tax contributions and the harm that tax evasion and avoidance has on the health of the economy, the use of automation and digital technologies to increase tax collections and to facilitate the transfer of information on local, national and global levels, amendments in the legislation, and intercountry cooperation. The actors involved include domestic and foreign governments, businesses (consultancies and banks in particular), supranational organisations, development agencies, and advocacy and civil society groups. To explore these measures further, a number of examples will be given below, paying special attention to the actors driving and implementing such initiatives.
Who is pushing for crackdowns on tax fraud?
Private businesses, especially consultancies and banks, are active advocates for lawful taxation contributions across the studied countries. For instance, Deloitte Consulting launched the Tip-Offs Anonymous Hotline both in Botswana and Malawi aimed at deterring financial fraud, including tax evasion and tax avoidance. According to the Managing Director of the Botswana Development Corporation, ‘Tip-Offs Anonymous line is put in place as a deterrent to fraud and promotes a culture of zero tolerance towards these crimes.’ In another initiative, Tallinn-based multinational company Nortal is assisting Botswana in creating a ‘new tax management solution’ which will replace the existing system entirely. Costing around €8 million, it will provide new risk management solutions and ‘should boost overall economic growth in Botswana, reduce the tax gap and increase transparency while reducing costs.’ PricewaterhouseCoopers Ghana while commenting on the Ghana’s new 2018 budget has advised the government to implement changes to strengthen revenue collection, including, among others, the use of mobile payment technology, targeting debt management, minimising the fiscal gap, and ‘increased investment in agriculture value chains and in growth enhancing infrastructure including radical structural transformation to ensure export diversification.’
Moreover, businesses are particularly active in initiating measures to address counterfeiting and substandard produce. It is important to note that counterfeiting, tax evasion and avoidance are closely interlinked. It is more difficult to obtain the legislated amount of tax from counterfeited and unlicensed products, and in addition it has a negative impact on those brands whose products are being replicated. International firms such as Southern Graphics Systems (SGS) operating in Kenya, Sproxil in Tanzania and Bureau Veritas in all of the studied countries, offer services to business and individuals, and cooperate with governmental agencies on strengthening quality checks and identify counterfeited produce. Technology is often adopted in these measures. An interesting example is that of collaboration between the Human Development Innovation Fund, UK’s Department for International Development and the firm Sproxil. The initiative involves the introduction of Mobile Product Authentication technology to help verify counterfeit produce in pharmaceuticals and educate individuals on health risks associated with such products.
National governments have featured strongly as those pushing for strengthening of the tax regulation, so all the nine studied countries contained a government-led initiative related to taxation. To highlight the variety and scale of these initiatives a few examples provides powerful illustration: declarations of crackdowns on tax misconduct by the country’s presidents in the case of Tanzania; registering taxpayers at the district level in an effort to address the problem at grass-roots level, and the adoption of Electronic Billing Machines in Rwanda; amendments to national legislation to specifically tackle tax-avoidance as in South Africa. More aggressive measures in Nigeria whose Federal Inland Revenue Service have threated to deny access to banking facilities for those companies that don’t join taxation register.
In Ghana, measures to combat tax evasion and avoidance are initiated by a number of actors, including the Ghana Investment Promotion Council with an initiative to develop a ‘beneficiary ownership regime’ aimed at identifying owners of companies, particularly in the extractives industries. In a more recent initiative, the Ghana Revenue Authority planned to use the Point of Sale (PoS) devices to strengthen tax collection and improve monitoring of revenue. There seems to be widespread support for this measure, including from Price Waterhouse Coopers Ghana. Kenya’s efforts focused on Small and Medium Enterprises, where the Kenya Revenue Authority seeks to address the issue at grassroots level and work closely with county authorities to integrate the SMEs into the taxation system. Malawi Revenue Authority keeps up with the trend of using technology, in particular electronic payment systems to encourage tax payers and prevent evasion and avoidance.
Finally, Botswana focused on tackling tax avoidance by identifying ‘multinational tax dodgers’ and has joined OECD’s framework on Base Erosion and Profit Shifting. According to a state official, ‘Botswana is […] obliged to conform to these standards and that may mean amendment of tax legislation where necessary.’ In the words of the same official, ‘Botswana’s tax system will be put under scrutiny whether it conforms to international best practice which should in turn boost investor confidence and hence it has the potential to attract investment by credible investors.’
The involvement of foreign actors, including governmental bodies is extensive across the studied countries. UK’s DFID has been particularly active in offering assistance, having spent over £32 million on tax system improvements overseas in 2015, and £26 million in 2016. Out of the 9 studied countries, seven (Ghana, Nigeria, Tanzania, Kenya, Malawi, Rwanda and Zambia) received assistance from the British government. For example, in 2015, Ghana and the HMRC partnered with the Ghana Revenue Authority to develop their expertise on tax legislation, compliance and data privacy. This agreement is part of a wider, OECD backed ‘global standard’ for an automatic exchange of information of tax payer’s data scheduled for 2018. According to International Development Secretary Justine Greening, ‘the UK is committed to helping developing countries get their tax systems in order so that as their economies grow they are able to increasingly fund their own health and education programmes and reduce aid dependence.’
Advocacy and civil society groups are actively gaining ground in running of campaigns to raise awareness on illicit financial flows. One of the widely known organisations is Tax Justice Network (TJN) which offers research, analysis and advocacy on tax evasion and avoidance, as well as The Global Tax Alliance for Tax Justice (a spin off from TJN), which brings together civil society organisations and activists working with this issue. Numerous regional organisations such as Tax Justice Network Africa, run national and grass roots level events. Among its initiatives is the Stop Bleeding Africa Campaign which joined various stakeholders in an attempt to drive one Africa-wide response. Numerous national organisations and civil-rights activists are promoting awareness as part of this initiative, for example the recent campaign in Ghana in collaboration with Ghanaian based Integrated Social Development Centre and Tax Justice Network. Numerous international charities also do extensive work organising initiatives and raising awareness on this issue, and include amongst others Transparency International, Action Aid, and Oxfam.
As was mentioned above, OECD has been an active player in introducing measures to address leakages of tax, and some argue, has been pivotal in the setting of certain international taxation standards. Tax Inspectors Without Borders, a joint initiative with UNPD launched in 2013 is aimed at providing technical assistance to developing countries to enhance their capacity to obtain tax contribution from multinational companies. Currently, technical assistance is being offered to 18 African states, in some cases partnered with actors such as UK’s HMRC, African Tax Administration Forum, Germany’s Federal Ministry of Finance, Netherlands’ Tax and Customs Administration, the World Bank Group, the French Direction Générale des Finances Publiques (DGFiP), USAID and others.
What has come to be known as the ‘Global Forum on Transparency and Exchange of Information for Tax Purposes’ was rolled out in the 2000s and includes 148 members, both OECD and non-OECD members. The Exchange of Information on Request, and most recently the Declaration on Automatic Exchange of Information (AEOI) have been the two core initiatives. These frameworks are now regarded as the new standard and currently over 100 countries have signed up to the declaration. The core idea is to allow for easier and timely transmission of financial information (gathered by financial institutions such as banks) about a country’s residents living overseas with the aim of greater transparency and prevention of tax evasion and avoidance, while suggesting that the existence of tax heavens may come to an end. The countries can sign multilateral (there are currently 98 signatories) or bilateral agreements, as we have seen between Ghana and the Netherlands. Countries are free to chose with which countries to exchange information.
Are we on the right track?
The examples outlined above would suggest that various actors recognise the need to address illicit financial flows and implement different measures to raise awareness (even if driven by profit motives), and put in place mechanisms to prevent tax dodging and allow for greater transparency. However, what is critical to note is that a number of the actors involved in pushing for anti-tax evasion and avoidance, may themselves be culpable for similar abuses of the tax legislation. For example, Deloitte, and other accountancy firms such as PwC were acting as advisories and helped companies such as Blackstone avoid paying tax as we have seen in the Paradise Papers. Moreover, a group of consultancy firms that have become known as ‘the big four’, PwC, Deloitte, EY and KPMG, are known to use their positions to lobby for certain regulations and in some cases employees of these firms are known to take up roles at the OECD and in national governments to push for their client’s interests. Furthermore, numerous international banks were discovered to make use of tax heavens to hide their profits, such as Barclays which declared profits of €557m in Luxembourg but only paid €1m in tax.
These are just some of the examples, where the ‘advisories’, are in fact the ones making use of the loopholes in legislation, while at the same time offering advice to countries in the Global South on how to better manage their taxes (see on this phenomenon John Christensen’s analysis in David Whyte and Jörg Wiegratz’s book here). What is important to note there is that such ‘advice’ often informs policy and legislation within those countries and here, one cannot fail to notice the characteristically unequal North-South dynamic.
While OECD’s initiatives are, one might argue, an important step towards greater transparency, and have even been deemed as ‘revolutionary’, commentators are calling for scrutiny of some of the organisation’s measures. In the case of Tax Inspectors Without Borders – a joint OECD/UNDP initiative – following a review of its operation it was discovered that leadership for the three of its pilot projects in Rwanda, Ghana and Senegal originated from donor countries, which was against the original formulation of the initiative.
In terms of the AEOI (Automatic Exchange of Information) one of the main concerns is the need for reciprocity meaning that it is required for a country to be able to collect and send information if it is to receive information in return. The issue here is the lack of capacity, infrastructure and resources in some Southern countries to do this, thus this would automatically exclude them from participating in the framework at least in the immediate future. Moreover, even if a country matches reciprocity requirements, another concern within the framework is the fact that countries are able to choose with whom to exchange information and this has been compared to a dating game. For example, even if country X wants to receive information from country Y, they will only be able to do this if country Y approves. An example is the US, which is a major player on the taxation arena and a country where many tax heavens are safely hidden. The States has for a long time imposed automated exchange of information on countries where their citizens reside, without participating in turn and is refusing to take part in the AEOI.
A final aspect to mention here is the fact that the framework is reliant on financial institutions to record and verify residency information of their customers in order to transfer the requested information to the correct country. The concern is that there are ways – for example, making an investment – to gain residency in certain countries, use that information to register in a bank but not reside and conduct financial transactions in the country in question. So, fraudsters may continue to evade and hide tax in other locations without risk of being unmasked.
In this blogpost I have summarised some of the initiatives to address tax evasion and avoidance by numerous actors on the African continent and draw attention to frameworks that are presented as ‘international standards.’ The initiatives vary in type, scale, and the actors involved. It also suggests that the initiatives are underpinned by various drivers, whether commercial, political or other. There is a degree of hypocrisy on the side of some ‘advising’ actors where they are directly involved in or are facilitating financial crime. OECD’s initiative, while potentially beneficial, has loopholes and seems to disadvantage Southern countries.
While a growing body of literature is currently emerging surrounding illicit financial flows, as well as around the nature of global tax governance as a whole, there is not enough evidence to suggest that the ‘global fight’ is indeed not a ‘global flight’ driven by certain powerful entities and interest groups to avoid paying tax. Given that the issue has universal significance and undermines the development of many countries in the Global South, more research (and campaigning) is needed in order to understand the nature of these initiatives, the forces behind them, and the unequal North-South dynamic that prevails.
Nataliya Mykhalchenko graduated from the University of Leeds in 2016 with a BA in International Development. She now works in London for a company that helps education, research, healthcare, non-profits and civil society institutions. Nataliya started researching anti-fraud initiatives on the African continent in 2015 as part of a funded five week Leeds University Summer Research Internship Scheme. In 2016, supported by ROAPE, she continued her research. To date she has looked at anti-fraud measures in South Africa, Ghana, Botswana, Nigeria, Tanzania, Kenya, Malawi, Rwanda and Zambia. Nataliya’s research was linked to the ongoing work of ROAPE’s Jörg Wiegratz at the University of Leeds on the political economy of anti-fraud measures in the Global South.
Featured Photograph: HMRC offshore evasion poster February 2014.