African countries lose an estimated $88.6 billion each year, equivalent to 3.7% of the continent’s economic output, in illicit capital flight, according to the UN Economic Development in Africa Report 2020 published on Monday (28 September).
The report by the UN Conference on Trade and Development’s (UNCTAD) states that curbing illicit capital flight could generate enough capital by 2030 to finance almost 50% of the $2.4 trillion needed by sub-Saharan African countries for much-needed climate change adaptation and mitigation measures.
“Illicit financial flows rob Africa and its people of their prospects, undermining transparency and accountability and eroding trust in African institutions,” UNCTAD Secretary-General Mukhisa Kituyi said in a statement accompanying the report.
The UNCTAD report calls for increased transparency and cooperation between tax administrations globally and within the continent to tackle tax evasion and tax avoidance. It also urged the African Tax Administration Forum to become a platform for regional cooperation among African countries.
Illicit capital flight and massive lost revenue from tax avoidance and evasion have been a long-running phenomenon and a major source of lost income for African treasuries. Africa lost an estimated $9.6 billion to tax havens.
However, illicit financial flows related to the export of extractive commodities ($40 billion in 2015) are the largest component of illicit capital flight from Africa.
The African Union (AU) has begun to develop its own guidelines on IFFs, with limited implementation so far.
Meanwhile, the EU continues to be proactive in fighting those IFFs that undermine its own tax base, repeatedly revising its code on anti-money laundering and revealing plans for a single EU supervisory authority, but does not prioritise these with its efforts towards international development.
The report also finds that in African countries with high levels of lost income from IFFs, governments spend 25% less than countries with low IFFs on health and 58% less on education.
“The fact remains that the funds involved [in illicit financial flows] often come from jurisdictions with scarce resources for development financing, depleted foreign reserves, a drastic reduction in collectable revenue, tax underpayment or evasion and poor investment in-flows,” said Nigerian President Muhammadu Buhari.
The report urges the continent’s governments to define an agenda for Africa in the reform of the international taxation system.
A series of bilateral double tax treaties are currently up for re-negotiation between European and African countries, and campaigners see this as an opportunity to redraw treaties and ensure that African governments can tax firms for activities taking place in their countries.
The ‘black and greylist’ of countries allegedly involved in tax avoidance published by the European Commission include a group of African countries, much to their chagrin. It has prompted complaints that the EU executive has ‘weaponised’ tax policy against developing countries.
The G77 group of developing countries has called for tax policies responsibilities to be entrusted to a new UN tax body on which they would be represented.
The Africa report comes ahead of next month’s videoconference meetings of the International Monetary Fund and World Bank, which are likely to see demands for additional financial support from the EU and G20 countries to support developing countries worst hit by the coronavirus pandemic.
Chad and Zambia warned last week that they will have to default on commercial payments and a handful of African states face debt distress as a result of the pandemic.
“Curbing IFF presents a key policy measure for governments, particularly in Africa, to generate the necessary financial resources to mitigate the impact of COVID-19-induced economic crisis,” Alvin Mosioma, executive director of Tax Justice Network Africa, told EURACTIV.
In October, the G20 major economies are likely to extend debt relief for developing countries, including Africa, affected by the coronavirus pandemic until at least the end of 2021.
[Edited by Zoran Radosavljevic]