Op-Ed: It’s time to acknowledge the impact of capital flight on developing countries

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    We have known for a while now that
    Africa is a “net creditor” to the rest of the world. The amount
    of financial resources accumulated abroad through capital
    flight over the past decades vastly exceeds the resources that
    run in the other direction, including aid and debt. Between
    $30-billion and $60-billion is siphoned off annually from the
    continent, according to a report released in 2015

    by the High Level Panel on Illicit Financial Flows
    established the UN Economic Commission for Africa (UNECA),
    chaired by
    former South African president Thabo
    Mbeki. And these estimates are fairly conservative.

    What does this haemorrhage that
    specialists call “illicit financial flows”
    consist of?
    It includes, of course, proceeds from criminal activities
    of all types (drug and arms trafficking, etc) and money
    laundering resulting from corruption. But

    multinational corporations are also culprits of
    facilitating illicit financial outflows through the
    manipulation of trade transactions. Trade misinvoicing,
    transfer pricing, payments between parent companies and their
    subsidiaries, and profit-shifting mechanisms designed to
    conceal revenues are all common practices by companies seeking
    to maximise profits. Companies use tax evasion (which is
    illegal) and tax avoidance, taking advantage of legal loopholes
    of the international corporate taxation
    system.

    Capital flight is a global phenomenon. For
    years, developed countries have considered that the problem of
    illegal financial flows was primarily a matter of fighting
    terrorism, money laundering and other financial crimes.
    Recently, however, governments of advanced economies have
    scaled up efforts to combat corporate tax evasion in an era of
    high stress on national budgets. This partly explains, for
    example, the ongoing battle in Europe, where countries like
    France or Germany are tired of seeing the digital sector
    champions like Google, Apple, Facebook or Amazon escape their
    tax obligations by shifting their profits in Ireland or
    Luxembourg.

    But the impact of capital flight on the
    developing countries, particularly in Africa, is much more
    devastating. Tax revenues are already very low in Africa,
    averaging 17% of GDP, compared to about 35 of in rich
    countries. Tax authorities lack adequate resources to keep up
    with the increasingly sophisticated and aggressive strategies
    of multinationals to evade taxes, not to mention corruption
    that buys the complacency of some local
    decision-makers.

    The human and social toll of corporate tax
    abuse is gigantic. It means less funding for infrastructure,
    education, health, nutrition, protection of women’s rights or
    environmental protection programmes. Indeed, the United Nations
    has declared that illicit financial flows are a handicap to
    development financing and hence a hindrance to Sustainable
    Development Goals.

    In this context, the Independent Commission
    for the Reform of International Business Taxation (ICRICT) has
    urged the United Nations to combat tax evasion by multinational
    corporations within the broader strategy of fighting against
    illicit financial flows.

    This fight against illicit financial flows
    battle involves commitment from both states and the global
    community to improve transparency in financial systems and
    international trade, and to strengthen the capacities of
    national tax administrations. This includes forcing large
    companies to disclose the details of their activities in each
    country where they operate, to ensure that all profits are duly
    taxed in the country where the productive and commercial
    activities take place. It also means taking a close look at all
    the “enablers” who make capital flight possible, especially
    banks that help conceal the financial resources that are
    illegally siphoned out of Africa.
    DM

    Leonce Ndikumana is a Professor of
    economics and Director of the African Development Policy
    Programme at the Political Economy Research Institute at the
    University of Massachusetts. He is a Commissioner on the
    Independent Commission for the Reform of International
    Corporate Taxation (ICRICT)

    Photo: Pixabay

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