Africa at the crossroads: geopolitics and power, the global roadmap for tax justice

by MMC
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African countries lose billions of dollars every year to illicit financial flows. Léonce Ndikumana examines what can be done to combat capital flight through tax evasion.

The recent inclusion of the African Union in the G20 recognizes a fact that traditional geopolitics has been reluctant to accept: Africa has become a powerful force propelling global transformation.

African countries are facing several crises at once, from terrorism to coups. Six members are currently suspended from the African Union due to institutional failures. The shadow of genocide has returned to Darfur. The continent bears a disproportionate share of the effects of multiple recurring and cumulative shocks – shocks linked to climate change, health pandemics such as Covid-19, wars in Ukraine and the Middle East – with limited financial and technical adaptation capacity .

According to the Afrobarometer investigatorthe wind of growing discontent with democracy is blowing across the African continent.

On another front, Africa faces a financial gap of $1.2 trillion until 2030 to finance its SDGs, according to the African development bank.

This is why it is so discouraging that the continent is losing $89 billion dollars per year to illicit financial flows, with tax evasion by mining multinationals estimated to cost sub-Saharan Africa up to 100 million euros. $730 million per year. Much more than it receives in development aid.

Harmful tax practices

Harmful tax practices drain resources needed for development. Africa’s average tax revenue was 16% in 2020, half of the OECD’s 33% and five percentage points below Asia and the Pacific. That year, the continent’s largest economy, Nigeria, had a tax-to-GDP ratio of just 5.5%.

Capital flight, a pathology of the African economy, aggravates both poverty and inequality. This also generates feedback effects on destination economies in the West: financial instability, corrosion of the rule of law and tightening of the urban real estate market.

In Angola, capital flight almost doubles public health spending. From 2000 to 2018, the country lost $4.2 billion per year, while annual healthcare spending was $2.3 billion. During the same period, South Africa, dubbed “the most unequal country in the world”, lost $15.7 billion a year to capital flight, almost half of what it she had invested in health ($27.4 billion). And Ivory Coast could have doubled its public health budget ($1.6 billion) if it had retained the $1.1 billion lost each year due to capital flight.

These are hospitals that are not built, medical supplies, vaccines, antibiotics that could not be purchased. Recent improvements in African economies have been offset by setbacks due to financial hemorrhaging facilitated by transnational looting networks. The amount of African private wealth acquired illegally or illegally transferred abroad is approximately three times greater than the stock of its external debt. This makes Africa “a net creditor” to the rest of the world.

This money must come home. And it must not be automatically transferred back abroad, directly into the hands of the financial institutions that hold Africa’s bloated debt.

Put an end to illegal financial flows

The need to put an end to illicit financial flows to tax havens is essential to any political strategy aimed at strengthening democracy, fighting poverty, tackling climate change and consolidating human rights. They arise largely from tax avoidance strategies long used by multinational corporations. As G20 leaders could no longer ignore the public outcry over these harmful practices, discussions were initiated at the OECD in 2013.

However, it was not until 2015, with the creation of the Inclusive Framework, that African nations were invited to the discussions. But less than half of African countries participated in these negotiations in which American and European bureaucrats fought over who could claim the biggest piece of the pie.

A decade later, the result is far from global solidarity. For emerging economies, and Africa in particular, it was a wasted effort. This even threatens to worsen the current regional fiscal situation. The proposed minimum tax rate, very low, of 15% – as opposed to the 25% that we advocate at ICRICT, the independent commission for tax reform chaired by Joseph Stiglitz and Jayati Ghosh of which I am a member – and the formula imbalance in deciding which country has the right to tax the profits of digital companies, has led to disappointment.

Almost no revenue allocations are paid to countries that need them most. The G7 countries – which represent barely 10% of the world’s population – would keep 60% of the revenue generated by the new minimum tax.

The new tax convention is a bad deal for Africa

African countries will soon be invited to ratify a multilateral convention to implement this new inequitable reallocation of tax rights. It could take years before this new convention begins generating revenue for Africa, and with the United States reluctant to ratify it, the convention may never be implemented. Overall, it’s a bad deal. Africa should not sign it and should start considering unilateral measures, such as digital services taxes, to ensure that digital multinationals start paying their fair share.

The deal is so bad that at the United Nations General Assembly in September, Nigeria, on behalf of the African Group, demanded the start of new intergovernmental negotiations, this time under the auspices of the United Nations.

Could this herald a fairer outcome for African countries? It is unlikely that OECD countries will suddenly become more benevolent. This is why South-South solidarity is essential to thwart attempts to obstruct UN negotiations.

Global geopolitics favors this.

The Cold War between the United States and China, the instability aggravated by the war in Ukraine and the Middle East, the polarization of international relations, the EU’s attempt to forge a new partnership with Africa and the competition between actors to gain allies. in the countries of the South or not losing them to competitors, are all factors that create a potentially favorable environment to advocate for true multilateralism in tax matters.

Latin American countries from Colombia to Brazil have also made clear their frustration with the OECD deal. Perhaps we can find a common position to move forward together at the United Nations.

African countries have demonstrated that regional cohesion and leadership can lead to new dynamics of tax reform. Their new seat at the negotiating table can help shape a new agenda at the G20, which will include tackling illicit financial flows, from ending tax avoidance by multinationals to ensuring that offshore wealth flows into havens taxes are correctly taxed.

A united Africa and South-South solidarity can strengthen a truly inclusive and democratic development agenda.

As the core global institutions of the rules-based order lose their relevance, developing countries, by speaking with one voice, can address current power imbalances in international negotiations in favor of fairness and of inclusion and in defense of democracy.

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