Financing Africa’s Economic Transformation:Policy Issues, Challenges, Options

Presentation at Acord Annual Learning Forum- 2015- Naivasha

Date: October 8, 2015Alvin Mosioma, Executive Director, Tax Justice Network-Africa

Structure of presentation• Domestic Resource Mobilization :Why it matters• Challenges to DRM• Africa’s Initiative on DRM and Tackling IFF• Finance For Development Outcomes and

Limitations• Reforming International Tax Rules• CSOs Campaign on DRM and Tax Justice

DRM debate Is the debate about DRM exactly new? Not quite (Monterrey Consensus on Financing for Devt)But until Monterrey Consensus, DRM had received relatively minimal attention as a development financing strategy, especially in Africa. Monterrey thus served to highlight and focus attention on DRM in the poorest regions of the world

Monterrey outlined six key actions to finance the MDGs, namely -i. DRM (essentially tax and non-tax revenue mobilisation) and strengthening the domestic financial sectors of developing countries by encouraging development of capital markets and sound banking systems and raising financial inclusion.ii. Mobilise international financial resources, including FDI and other private funds;iii. Stimulate global trade as an engine for development;iv. Increase ODA and technical cooperationv. Adopt a sustainable external debt strategy, and vi. Address systemic issues such as coherence of the international financial and monetary architecture/system

Four important reasons to re-emphasize DRM now.i. Donor fatigue -• Donors’ failure to honour long-standing commitment to deliver

0.7% of Gross National Income as aid even in good times• A growing sense that donors’ views on the purpose of aid are

highly fluid• Austerity in the North, deep budget cuts• This trend makes enhancing alternative sources, including but

not limited to domestic revenue, a matter of urgency for African countries especially

Important reasons to re-emphasize DRM now (CONTD.)ii. Successful experiences of some developing countries highlight the importance of building strong domestic fiscal and financial systems. -- The experiences of China, India, and a number of East Asian countries have been seminal for many developing nations not least in Africa.iii. Global acceptance that external resources will not be enough to meet financing needs to achieve the SDGs.Iv In Africa, the decade-long commodity price boom (from 2002) combined with the Post-2008 multiple crises have moved the debate to the top

Importance of Taxation as a Key tool for DRM• 4Rs of Taxation• Taxes are the most stable and reliable source of domestic revenue available to countries. • Without adequate domestic resources, African nations are dependent on external financing. • The result? These countries are either not in control of how that money is spent or increasingly

unable to repay interest on loans, lose their policy space and thus trapped in circle of dependency.

• Taxation is fundamental to state building and forms the foundation of the social contract between the state and citizens. Without taxation there can be no viable state

• Therefore, raising domestic revenue through tax is crucial. Many African govts are giving away their taxing rights in the form of corporate tax incentives to MNCs and others, in a bid to attract FDIs.

• This is causing large losses in national budgets and fueling a competitive race to the bottom between neighboring countries.

State of tax mobilisation in Africa (I)• Tax mobilisation in Africa is rising (driven by resource rich

countries and resource-related taxes)• It crossed the 20% of regional GDP mark in 2009• Tax-GDP ratio is however less than 17% in more than half of

Africa’s 54 nations (AfDB, UNECA 2010)• Recent data indicate that the (unweighted) average tax-GDP ratio

for Sub-Saharan African states in 2011-2012 was below 17%.

State of tax mobilisation in Africa (II)• SSA does not have the lowest tax-GDP ratio even across developing

regions. It is higher than that of South Asia and also higher than the average for low-income countries (Source: USAID Collecting Taxes database)

Challenges to Domestic Resource Mobilisation• Mobilisation remains low despite significant effort and recent reforms in

non-resource rich sub-Saharan countries. • A mix of structural factors: - - inefficient and ineffective tax systems, - significant and unnecessary tax exemptions, - tax avoidance and Illicit Financial Flows from Africa

A joint TJN-A/Actionaid report on corporate tax incentives in West Africa. Title: “The West African Giveaway”• The report examines corporate tax incentives among countries in the Economic

Community of West African States (ECOWAS) region, with a focus on Nigeria, Ghana, Ivory Coast and Senegal.

• Key finding: That corporate tax incentives – reductions in tax offered by govts presumably to attract investment – significantly reduce domestic revenue collection and are not necessary to attract FDI.

• These generous incentives have neither created significant number of jobs since most of it has not been in sectors like manufacturing that create the most jobs

• Investment incentives – particularly corporate tax incentives – are not an important factor in attracting foreign investment…this conclusion is confirmed both by surveys of investors and by econometric evidence’

• ‘Report’s findings:• Ghana for e.g. loses up to US$2.27 billion each year. This is 3X the

country’s budgetary allocation to health

• Nigeria also forgoes US$2.9 billion a year. This is more than the Federal Govt’s budget for education

• The report shows that three countries alone (Ghana, Nigeria and Senegal) are losing up to US$5.8 billion a year.

• If rest of ECOWAS lost revenues at similar percentages of their GDP, total revenue losses among the 15 ECOWAS states would amount to US$9.6 billion a year

• These, of course, could be invested in public services such as health and education and other key infrastructure, thus supporting favourable conditions to attract better investment.

• ECOWAS countries hardly co-ordinate on these incentives, and, as the report notes: “The use of corporate tax incentives is causing a competitive race to the bottom among countries in West Africa which is detrimental to national revenue bases and regional integration.”

Recommendations of the report:• Eliminate corporate income tax holidays;• Publicly review and assess all corporate tax incentives, with costings and

justifications provided for each.• Ensure that all new incentives get parliamentary approval, are overseen by a single

well-resourced entity, and end discretionary corporate tax incentives.• Avoid “stability clauses” which lock in corporate tax incentives long term• Audit corporate tax incentives to check that the promised investment has actually

been carried out.• Agree a regional framework for co-operation on corporate tax incentives and on

their oversight; and on possible tax harmonisation to avoid a ‘race to the bottom’.

Tackling Illicit Flows From Africa• Adoption in January 2015 • African leaders adopted the final report at the 24th summit of the African Union in Addis Adaba. • They also issued a “Special Declaration”• It is the most definitive voice of African countries on the issue of IFFs from Africa

High level Panel on IFF• Chaired by Thabo Mbeki, former President of South Africa. Panel’s mandate: • Determine the nature and patterns of IFFs from Africa• Establish the level of IFFs from Africa• Assess the complex and long-term implications of IFFs for development• Raise awareness among: African govts, citizens and global partners on

the scale and effects of IFFs on development and• Propose alternative policies & mobilise support behind practices that

would reverse IFFs

IFFs drivers & enablers• IFFs are driven by a number of ‘push’ and ‘pull’ factors. • Push & pull factors:• Poor governance • Weak regulatory structures• Tax incentives• Weak capacities • Double Taxation Agreements (DTAs)• Financial secrecy jurisdictions and/or tax havens

Key findings of the report • The Panel established that Africa loses at least US$50 billion each year

through IFFs• Africa thus lost close to US$1 trillion between 1980 and 2008 through IFFs• IFFs from Africa are large and increasing. • Success in addressing IFFs is ultimately a political issue• Transparency is important for tackling IFFs.• Commercial routes of illicit financial flows need closer monitoring. • African countries depend mainly on their extractive industries.• New and innovative means of generating IFFs are emerging.• Tax incentives granted by African countries are not usually guided by cost-

benefit analyses.

Key findings of the report • There are 3 components of IFFs: (a) commercial, (b) criminal and (c) corrupt

components• Close to 65% of IFFs take place in Africa’s extractive sector

Impacts of IFFsWeakening Governance: • Weak public institutions and compromise public officials • Debasement of values and misalignment of incentives • Corruption & criminal activities, conflict and insecurityDevelopment Consequences: • Loss of multiplier effect for growth and job creation• Africa’s capital stock would have expanded by 60% & GDP per capita of 15%• Rate of domestic investment to GDP would have risen from 19% to 30%• Leveraging effect of state intervention• Infrastructure

Impacts of IFFs (II)Fiscal effects and austerity• Discourages transformation and transparency by discouraging

value creation, IFFs impact negatively on African aspirations for structural transformation.

• Strain Africa’s capacities – there is great concern over the risk African countries face in making unbalanced tax concessions.

• Undermine international development cooperation - global efforts to promote partnerships for aid effectiveness and development effectiveness are undercut by illicit financial flows

Key recommendations (I)The commercial component of IFFs• Trade Mispricing: African countries should ensure clear and concise laws

against mis-stating the price, quantity, quality or other aspect of trade in goods and services in order to move capital to another jurisdiction or avoid taxation.

• Transfer Pricing: African countries should establish/strengthen transfer pricing units of their countries of operation.

• BEPS: African countries should establish arrangements for exchange of tax information between them as well as with global partners.

• Regional integration arrangements should be used to introduce accepted standards for tax incentives.

• Institutional support for these measures: African States should establish or strengthen the independent institutions and agencies responsible for preventing IFFs.

Key recommendations (ii)The corrupt component of IFFs• IFFs be integrated as a specific component in the AU Convention on Preventing

and Combating Corruption• African states should ensure that the public can access national and subnational

budget information. • African countries should adopt best practices in open contracting to reduce IFFs

through government procurement processes. • African govts can regularly publish lists of Politically Exposed Persons (PEPs) as

well as any asset declarations filed by PEPs and information about whether the country’s laws prohibit or restrict the ability of their PEPs to hold financial accounts abroad.

FfD AgendaIssues on FfD3 Agenda• Raising new development finance through domestic resource mobilisation,

<mainly by increasing tax collection, private finance, international public finance>

• Improving international tax cooperation. <UN Tax Body> to help the poorest nations raise more tax revenues

• Reduce IFFs by 2030, with a view to eventually eliminating them. IFFs including aggressive tax avoidance, repatriation of profits and debt repayments are starve developing nations of much-needed resource

• Push to bridge the global infrastructure gap – including US$1 to US$1.5trillion annual gap in developing countries

• Set out a new social compact to provide “fiscally sustainable and nationally appropriate social protection systems and measures for all”

FfD AgendaThe real challenge to the Post-2015 Agenda/SDGs is finance• The grand aspirations expressed in the SDGs doesn’t match the funding (Means of

Implementation)• Addis Ababa Agenda in comparison to the Monterrey Consensus and the Doha Declaration, is

major retrogression• Addis Agenda in many ways undermines the FfD mandate to address international systemic

issues in tax, monetary, macroeconomic, financial and trade policies.•  FfD3 missed a golden opportunity to address structural injustices in the current global

economic system and ensure that development finance is people-centered and protects the environment.

• FfD3 failed to create an intergovernmental tax body, despite a massive push by a critical mass of developed countries & CSOs

FfD AgendaIssues on FfD3 Agenda (CONTD)• The role of the private sector in sustainable development <PPPs> • The role of ODA• Country ownership of its development policy - international systems do

have a role to play, though, through trade, monetary and financial systems, and strengthened global economic governance

• Guidelines for debtor and creditor responsibilities in sovereign borrowing and lending

• Improved data to monitor impact of development spending and progress toward goals

Global Transparency Asks• -Country by Country Reporting• Automatic Exchange of Tax Information• Public Registry on Beneficial Ownership

OECD final outcomes of the BEPS project on DRM and SDG funding -• Background of the BEPS project commissioned by G20 in 2013The G20 mandate for the BEPS project was that international tax rules should be reformed to ensure that multinational enterprises (MNEs) could be taxed ‘where economic activities take place and value is created’. This implied a new approach, to treat the corporate group of a MNE as a single firm, and ensure that its tax base is attributed according to its real activities in each country.• BEPS represents an important step towards addressing a global problemBEPS process undermined by exclusion of poorer countriesLarge contingent of paid corporate tax advisers & lobbyists & govts seeking to protect their pet tax breaks to corporations;As a consequence the outcomes are: - (a) weak;- (b) still leaves loopholes for MNCs to shift profits away from countries where the profits are made- (c) In effect depress tax revenues

OECD final outcomes of the BEPS project on DRM and SDG funding -• The outcomes are OECD’s proposal for new rules to curb tax dodging by MNCsElements of final outcomes:• Establishes a template for Country-by-Country Reporting (CbCR)• - But also significantly limits information exchange with developing nations;• - New measure will further put developing countries at a disadvantage =

home country tax authorities of MNCs mostly in the OECD will receive this information, while host countries will not;

• - But unnecessarily imposes an arbitrary reporting threshold of US$75m turnover

Elements of final outcomes (CONTD):

• FAILURE of the BEPS Project to comprehensively address the problem of corporate tax avoidance:

• Reveals a lack of political will to tackle tax avoidance at its root

• Reason why a UN Tax Body is still important requirement <a key CSO demand at FfD3>

- to serve as a new global institutional forum for setting rules on taxing MNCs that meet the needs of all countries and not only interests of OECD member states and their MNCs.

CSO Campaign Effort:• TJN-A has been instrumental in initiating/advancing four key

initiatives as part of efforts to widen the conversation: • African Parliamentary Network on IFF and Tax (APNIFFT)• Africa Media Training and Award Scheme• #Stop the Bleeding IFF Campaign

#Stopthebleeding Campaign• Members of the Interim Working Group

#Stopthebleeding Campaign• Launched in June 2015Main objectives• To push for implementation of the recommendations of the Mbeki

Panel report • Mobilise one million voices behind the demands Standing

behind demands (Call to Action declaration)• Provide a unified African campaign on IFFs – involves an

Interim Working Group of six Pan-African orgs:

#Stopthebleeding Campaign• Global launch in Addis Ababa July 2015 during

FfD3

#Stopthebleeding Campaign• Global launch in Addis Ababa July 2015 during FfD3

#Stopthebleeding Campaign• Nairobi launch June 2015

•

#Stopthebleeding Campaign HOW TO GET INVOLVED?• Sign up to the Call to Action declaration at

www.stopthebleeding.org • Sign the physical register• Use the following Twitter handles:  @TaxJusticeAfric and

@stop_IFFs. • Use the hashtag: #StopTheBleeding• Visit, like, post and repost the following pages:  Tax

Justice Network Africa page - https://www.facebook.com/TaxJusticeNetworkAfrica?fref=ts  and

• Africa IFF Campaign (Stop the bleeding) page -  https://www.facebook.com/africa.iff.campaign

ASANTE SANA!!!

ALVIN MOSIOMAEXECUTIVE DIRECTOR-TAX JUSTICE NETWORK-AFRICA