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DEVELOPMENT-AFRICA: Tax Could be The Way Out of Aid Dependence

Stanley Kwenda

JOHANNESBURG, Sep 24 2010 (IPS) - Many African countries struggle with debt and finding money for national budgets because they fail to recognise taxation as a sustainable source of funding. Moreover, multinational companies are too easily given tax breaks while siphoning off money through illegal tax evasion.

Taxation plays an important role in determining the distribution of benefits to citizens. It also acts as a connection between state and citizenry.

But, “there is no mobilisation of national resources for national development in African countries, which is why we are seeing agitation among ordinary people”, Percy Makombe, programme manager at the Cape Town-based Economic Justice Network (EJN), told IPS. EJN is a project of the Fellowship of Christian Councils of Southern Africa (Foccisa).

Attention to the tax issue has generally been lacking.

“History proves that no country will march out of poverty through aid but effective local resource mobilisation can aid development of African countries,” declares Alvin Mosioma, coordinator of the Tax Justice Network – Africa based in Nairobi.

The politically independent Tax Justice Network was launched in Britain and does research and advocacy on taxation.

It co-hosted a roundtable discussion in Johannesburg on Sep 14-15 with the African Forum and Network on Debt and Development (Afrodad) and the Institute for Democracy in Africa (Idasa) to discuss ways of using tax as an instrument to reduce Africa’s dependence on aid as a tool for development.

Idasa is an independent, non-profit public interest organisation based in South Africa while Afrodad, as a civil society organisation with several member organisations across the region, seeks solutions to Africa’s debt problem.

The majority of African governments spend large percentages of their annual budgets paying off debts while big foreign companies take money out of their countries through tax breaks or illegal tax evasion.

Multinational companies are also not properly taxed due to the lack of capacity of African authorities to put in place tax systems.

According to Christian Aid figures, the Democratic Republic of Congo received a mere 86,000 dollars from mineral rights in 2006 while Tanzania lost at least 265,5 million dollars in recent years as a result of an excessively low royalty rate.

A 2008 Christian Aid report, titled “Death and Taxes: The True Toll of Tax Dodging”, states that illegal tax evasion deprives least developed countries (LDCs) of 160 billion dollars a year. British-based Christian Aid works towards the eradication of poverty.

“The failure by multinational companies to declare profits translates into capital flight. Moreover, companies in the extractive industries enjoy far too many benefits through unnecessary tax reliefs,” argues Obert Gutu, a Zimbabwean parliamentarian.

“When a government relies on the resources of its donors it is less responsive to citizens,” Gutu adds.

Christian Aid defines capital flight as the unrecorded and untaxed illicit leakage of capital and resources out of a country. Dr Dereje Alemayehu, manager at Christian Aid East Africa, told IPS that many LDCs lose revenue due to capital flight caused by big western firms.

Alemayehu says this happens in different ways. First, through falsified invoicing, or the inflating or undervaluing of prices to increase costs and diminish tax liability.

Second, through transfer mispricing, a phenomenon in which companies sell to each other at inflated prices, inflating costs in intra-corporate financial transactions.

Third, through “round-tripping” where companies operating in a country send their money offshore and bring it back as “foreign investment” to get preferential tax treatment.

According to Malawi’s ministry of finance, the country lost 125 million dollars in tax allowances in 2008-2009 alone. The amount equals what the government spends annually on its national grain subsidy, which has over the years helped Malawi maintain a grain surplus.

“Multinationals come to invest in African countries on the back of so many investment incentives that are packed into our tax regimes,” Benjamin Chikusa, a Malawian parliamentarian, told IPS.

Malawi offers as much as a 100 percent investment allowance on qualifying expenditure for new buildings and machinery; an allowance of up to 40 percent for used buildings and machinery; and a 50 percent allowance for qualifying training costs.

Manufacturing companies can deduct all operating expenses incurred up to 25 months prior to the start of operations in Malawi and pay zero duty on raw materials used in manufacturing.

Many countries offer such incentives in anticipation of returns through personal income tax, foreign exchange earnings and employment. But to what extent do such benefits accrue in reality?

“Most of the employment benefits come in the form of low-paid jobs at a level where income taxes do not recover what has been lost through tax allowances,” says Chikusa.

Experts recommend that African countries design effective tax systems that allow them to track tax evaders beyond their borders; and that parliaments play a stronger oversight role when it comes to taxation.