Africa Loses $50Bn A Year In Illicit Financial Flows.
The Supreme Court of Zambia has just delivered a fundamental
and remarkable Judgement. It has fined Mopani Copper Mines $13 million! This is
a case in which the Zambia Revenue Authority (ZRA) has been battling with
Mopani Copper Mines and its Swiss parent company Glencoe since 2009. Glencore PLC
is a British multinational commodity trading and mining company with its
headquarters based in Baar, Switzerland.
The background is that the ZRA conducted an Audit of Mopani
Copper Mines for the period 2006 – 2009, which revealed that the transactions between
the company and its Swiss parent multinational, Glencore International AG
(GIAG) violated the Arm’s Length Standards (ALS).
An arm’s length transaction refers to a business deal or
transaction in which a buyer and seller act independently without one party
influencing the other.
Chief Justice Ireen Mambilima sitting with Justice Nigel
Mutuna and Justice Mumba Malila ruled that any tax authority would find serious
misgivings on the lack of arm’s length on the revealed transactions between
Mopani and Glencore.
The Court found Mopani liable of abusing transfer pricing
and used it as a mechanism to avoid paying full taxes due to ZRA.
TRANSFER-PRICING.
The core part of domestic revenue mobilization for any
country is taxation of its citizens and the private sector. For Zambia, its
mineral resources present an unparalleled economic opportunity to increase
domestic revenue through effective taxation of the mining sector.
Despite the tremendous wealth inherent in this sector,
Zambia has been struggling to obtain significant financial benefits through
taxes from the sector.
This is due to various factors including the volatile mining
tax regime policies but also the increasing tax-avoidance schemes perpetrated by mine houses that might
appear legal but are aggressively aimed at reducing the amount of tax payable.
Multinationals increasingly abuse transfer pricing as a
mechanism to avoid paying tax. Developing economies are now increasingly aware
of these schemes especially the abuse of transfer pricing. African governments
are now establishing robust legislative and administrative frameworks to deal
with transfer pricing issues.
For Zambia, curbing the abuse of transfer pricing, is a
development financing issue, because without adequate tax revenues, our ability
to mobilise domestic resources for development is heavily hampered.
The sensitive challenge for Zambia has been to balance the
need to protect its tax base while not seen to be discouraging or hampering
foreign direct investment in the mining sector.
Zambia has joined many African countries that have begun to
put in place, legal rules on the taxation of cross border transactions and the
latest Supreme Court Judgement will go a long way in enhancing these measures.
It should be noted that this “arm’s length principle” as
emphasised by the Supreme Court of Zambia is at the core of most global
standards on controlling transfer pricing perpetrated by multinationals.
Over the last 50 years, Africa is estimated to have lost in
excess of $1 trillion in illicit financial flows (Kar and Cartwright-Smith
2010; Kar and Leblanc 2013).
This amount excludes capital flight. Capital flight is a
large-scale exodus of financial assets and capital from a nation due to events
such as political or economic instability, currency devaluation or the
imposition of capital CONTROLS. This process could entirely be legal or licit.
To resolve the crisis of illicit financial flows and
outflows from Africa, the African Union and the United Nations Economic
Commission for Africa tasked the fourth Joint African Union Commission and
United Nations Economic Commission for Africa (AUC/ECA) Conference of African
Ministers of Finance, Planning and Economic Development held in 2011to handle
the matter.
The Conference established a High Level Panel on Illicit
Financial Flows from Africa. Illicit financial flows (IFFs) is defined as money
that is illegally earned, transferred or utilize. These funds typically
originate from three sources: commercial tax evasion, trade mis-invoicing and the
abuse of transfer pricing.
Other origins of illicit financial flows include criminal activities
such as the drug trade, human trafficking, illegal arms dealing, and smuggling
of contraband, illegal wildlife trade and bribery and theft by corrupt government
officials.
The Panel headed by South Africa’s former president, Thabo
Mbeki, established that Africa loses over $50 billion a year through tax
avoidance and fraud schemes largely perpetrated by multinational corporations
operating in Africa.
It became clear that Africa was a net-creditor to the rest
of the world, despite the regular inflow of official development assistance.
The continent continues to suffer from a crisis of insufficient resources for
development, largely caused by illicit financial flows.
The Report of the High Level Panel on Illicit Financial
Flows from Africa recommended that Africa must implement measures to radically
reduce illicit capital outflows from Africa.
The Panel recognised that the goals of ending poverty in
Africa, the goal to achieve Sustainable Development Goals (SDGs) aimed at
reducing inequality within and among nations, and the hope to give practical
effect to the fundamental objective of the right of all to development, was
attainable if African governments and its partners curbed the illicit financial
outflows.
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