by Judith Ugwumadu
LONDON, February 2, 2015 (TSR) – Weak governance means Africa loses more than $50bn each year in unpaid taxes and money laundering, a new report has found.
The analysis, published jointly by the African Union and the United Nations Economic Commission for Africa, concluded that a lack of financial transparency and difficulties in obtaining systematic data were exacerbating the continent’s corruption problems.
It highlighted several countries including Nigeria, Algeria and Kenya as places where government capacity for responding to illicit financial flows (IFFs) ‘was at best uneven or, as in several key instances, non-existent’.
The private sector was found to be the biggest contributor to IFFs, with large companies exploiting the lack of information and capacity limitations of governments through abusive transfer pricing, misinvoicing of services and intangibles, and use of unequal contracts.
The widespread occurrence of IFFs in Africa pointed to governance problems, specifically weak institutions and inadequate regulatory environments, the Track it, stop it, get it report argues. IFFs therefore undermine state capacity, the report noted.
African countries should obtain beneficial ownership declarations from all parties entering into government contracts, the report suggests. Transparency of ownership and control of companies, partnerships, trusts and other legal entities that can hold assets and open bank accounts were also critical to allow illicit funds to be tracked.
Furthermore, African governments should review their double taxation agreements – where a company or individual incurs a tax liability in more than one country – to ensure that they do not provide opportunities for abuse.
It said adoption of the Model Double Taxation Agreement, developed by the African Tax Administration Forum, should be considered.
UK-based charity Christian Aid said the report was ‘extraordinarily important’ and could help to shift the global debate on tax, financial transparency and corruption.
Joseph Stead, senior economic justice adviser at the charity, said: ‘From now on, it will be much harder for the [Organisation for Economic Cooperation and Development] and other rich country groupings to argue that tax dodging, corruption, money laundering and so on are not a top priority for African governments.’
This article originally appeared in Public Finance International.