The European Union should require companies operating in Africa to disclose the taxes they pay there more transparently, to ensure they contribute fairly to government revenues, French economist Thomas Piketty said on Thursday (10 September).
Africa’s fast-growing economies are attracting the attention of foreign investors looking for new markets, particularly as developed nations have seen growth slow.
But development in Africa remains hobbled by some of the world’s lowest rates of tax collection, said Piketty, who shot to fame last year with the publication of his book on wealth and inequality, Capital in the Twenty-First Century.
He said the biggest international companies, which often negotiate preferential tax deals with African governments, should be paying at least as much tax as small- and medium-sized companies, most of which are locally owned.
“As we know, this is not always the case in Europe or the US, and there are good reasons to believe in Africa it is even worse, partly because of western companies,” he told Reuters during an interview in Ivory Coast, at a forum organised by Le Monde.
Civil society initiatives, including Publish What You Pay for the extractive industries, have pushed multinational companies for more transparency in their dealings with developing countries. However, Piketty said this must be taken a step further.
“I think that it is important that the European Union enacts legislation,” he said. “We give lessons to African countries all the time about corruption, but in the end we’re not always contributing to things going in the right direction.”
The sub-Saharan African countries, among the world’s poorest, generally collect taxes equivalent to around 10 to 15% of GDP, he said. And some have seen revenues decline as trade liberalisation has led to decreased earnings from customs tariffs.
“You have no examples of countries that have become rich with 10% or even 20% of GDP in tax revenue,” Piketty said.
African countries should aim to gradually raise tax revenues to 30 to 50% of GDP, the levels typical in Europe, he said.
While European legislation could help, African governments must also play a role by reforming how they collect taxes on personal income, among other measures.
“Nobody really trusts the system very much because there is very little transparency with the data that is available. And I think if you want to improve the system, you need to be transparent about what’s working and what’s not working.”
Over the last 50 years, Africa is estimated to have lost in excess of $1 trillion in illicit financial flows (IFFs). This sum is roughly equivalent to all of the official development assistance (ODA) received by Africa during the same timeframe. Currently, Africa is estimated to be losing more than $50 billion annually in IFFs.
>> See our Infographic: Curbing IFFs: A resource for Africa
Amid a crackdown on tax avoidance, the European Union backed new rules requiring the extractive industries to disclose payments made to governments on a country-by-country basis. Updated in 2013, the Transparency Directive requires European extractive and logging companies to present a more detailed picture of the payments they make to governments on an individual country basis rather than a global total.
Large oil and gas companies had lobbied the EU legislature claiming that laws in certain countries they operate in may prevent them from disclosing all of their tax payments, putting the lives of their workers at risk. But none of the companies were able to supply any evidence to support the claim, EU sources said.
Member states had until July 2015 to transpose the directive into national legislation but most EU countries were expected to miss that deadline.