Curbing tax, illicit financial flows

By Desmond Munemo

Africa is losing over US90 billion annually due to tax and financial illicit flows, a setting which has seen governments failing to provide services like health care, education and social amenities.
The revelations came at an African Union Commission’s (AU) first meeting of the Sub-Committee on Tax and Illicit Financial held in Harare last week.
The hybrid meeting of African Union delegates was convened as a resolution of the First Extraordinary Meeting of the STC on Finance, Monetary Affairs, Economic Planning, and Integration held in May 2021, to discuss matters relating to tax incentives and the implication of global tax reforms on African countries.
The meeting chairperson Mr Raymond Nazar in his opening remarks explained that, the objective of the meeting was to form common African positions to influence global debates for the continent’s benefit and to facilitate consensus-based discussions leading to developing a robust and harmonised continental tax policy on a variety of tax matters, including the new global tax rules and tax incentives.
In an interview Nazar said: “Africa is losing about a billion dollars over a period, if we don’t do anything about it, it’s going to affect our GDP growth, public debt, our domestic resource mobilisation.
“When we lose funds through illicit financial flows, you’ll not be able to provide government services like health care, education, social amenities, water and all that because the domestic revenue is being transferred to foreign countries.”
Illicit financial flows in Africa are very huge, in 2015 Thabo Mbeki’s commission reported that Africa is losing 50 billion dollars every year due to illicit financial flows.
From 2020, Africa will be losing about 90 billion every year, so the African Union is taking steps to curb the illicit financial flows and improve taxation.
Africa is one of the least regions not collecting enough tax”
He added that member states should conduct cost benefit analysis before granting tax incentives.
“They should not just grant tax incentives for the sake of it, it must be based on some research and data and check what is the net benefit when you grant a tax incentive.
“What is the benefit to you and what is the country losing and empirical evidence to prove that,” asked the meeting chairman.
According to the US-based Global Financial Integrity (GFI) 2021 report, Zimra loses millions of dollars in taxes through corruption every year and Zimbabwe has lost US$1 billion in the last 10 years through trade under-invoicing, which is just one form of tax fraud among many.
According to the 2020 Midterm Fiscal Review, taxes constituted 97, 6% of Government revenue.
The meeting held at a local hotel was officially opened by Zimbabwe’s Deputy Minister of Finance and Economic Development of the Republic of Zimbabwe, Honourable Clemence Chiduwa who said that domestic resource mobilisation is the best form of development for Africa.
He explained;
“African countries should pay attention to tax rules to ensure that multinational enterprises do not avoid taxes through aggressive tax planning.”
Citing permanent establishment rules, he added.
“African countries should have an opportunity to look at various income streams from the digitalisation of business and globalisation and should together to find solutions best suited for African economies and guide through policy discussion by the African Union.”
Mary Baine, the Acting Executive Secretary for African Tax Administration Forum said the meeting was also about assessing how best to deal with tax incentives that are considered wasteful on the continent.
“There are countries that are providing tax incentives in the hope of attracting foreign direct investments or increasing jobs and elevating some struggling sectors such as agriculture, hotel industry, and so on.
“The issue there is, are these incentives translating into actual gains for the countries, and if they are not, what should be done,” she said.
The meeting was attended by representatives of the following Member States: Algeria, Angola, Benin, Botswana, Burkina Faso, Cameroon, Chad, Cote d’Ivoire, Djibouti, Democratic Republic Congo, Egypt, Eritrea, Eswatini, Gambia, Ghana, Guinea, Lesotho, Liberia, Libya, Madagascar, Malawi, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sahrawi Republic, São Tomé and Príncipe, Senegal, Seychelles, Sierra Leone, South Sudan, Tanzania, Togo, Uganda, Zambia, and Zimbabwe.
Southern African Development Community (SADC) and the Economic Community of West African States (ECOWAS).
AFRODAD, European Union and GIZ were also in attendance as observers.
The international tax system is undergoing the most important changes to be undertaken in a century. Following an Organisation for Economic Cooperation and Development (OECD)-brokered landmark agreement on global tax reform, the world will be moving to implement the plan for a global minimum tax rate of 15% in 2022.
Members of the Subcommittee made further recommendations to the Commission that it should submit the revised draft strategy to Member States by 15 April 2022; and Member States to review the draft strategy document through their respective fiscal and tax authorities and to provide comments on the document to the Commission no later than 13 May 2022.

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