7 Talking Points from the Tax and Good Governance in Africa conference
22 January 2016
Posted by: Author: Alicja Majdanska
Majdanska (Vienna University of Economics and Business)
Tax and Good Governance in Africa conference focussed on the crucial steps to
minimise the illicit financial flows out of Sub-Saharan Africa
The event, held in October, was organized by the WU Global Tax Policy Centre
in cooperation with the African Tax Institute from the University of Pretoria’s
Faculty of Economic and Management Sciences. The
conference comprised 51 participants which included 28 senior level
participants from Africa, particularly from the project’s three focus countries
Ghana, Nigeria and South Africa. Other participants were from Kenya, Mali,
Morocco, Sierra Leone, Tanzania, Togo, Zambia, and Zimbabwe.
Participants represented tax authorities, financial
intelligence units, governments, business, and academia. Key topics included
the definition and magnitude of illicit financial flows, cooperation between
tax administrations, financial intelligence units (FIUs), and law enforcement
agencies at national and international levels. The relationship between tax
administration and taxpayers,with a special focus on multinationals (MNEs),
also received attention.
"Illicit financial flows” (IFFs) are at the heart of discussions regarding
revenue mobilisation in developing countries. There is wide consensus that IFFs
suppress economic development. G20 Leaders, the Organisation for Economic
Cooperation and Development (OECD) and the United Nations have devoted resources
to determine methods to deter, trace, and minimise illicit financial flows. The
issue was also raised at the third international conference on Financing for
Development in the Ethiopian capital, Addis Ababa. Reducing illicit financial
flows has also become an action point of the Sustainable Development Goals
adopted by the United Nations in September 2015.
Illicit financial flows are perceived as resulting from incompetent
governance, outdated legislation, inadequate enforcement of existing laws and
the opaqueness of institutional systems. It is argued that underfunding of tax administrations,
together with the lack of cooperation
between law enforcement agencies all help the flows to to flourish.
Taxation, however, can serve as an impetus for good governance. It fortifies
the social contract by increasing the level of accountability that citizens
demand from leaders.
The October-conference focussed on the crucial steps to minimise the illicit
financial flows out of Sub-Saharan Africa. The geographical focus was not only on
the Tax and Good Governance project’s focus countries namely Ghana, Nigeria,
and South Africa, but also on other areas of the African continent.
The conference addressed seven key issues.
Tax and Good Governance Project – the General Framework
The project’s directors, Professor Jeffrey Owens and Rick McDonell, say
the disturbing impact of illicit financial flows on developing countries is well
Illicit activities are recognized as a scourge that is stripping scarce
revenue resources from developing countries, precluding investments, and
rendering foreign aid ineffective.
Widespread corruption, tax crimes, and money laundering are among the primary
obstacles hindering sustainable development on the African continent. This is
exacerbated by onerous administrative burdens, inadequate legal and
institutional frameworks, and political instability.
2. Tax crimes
and other illicit flows
Illicit financial flows are at the
core of the Tax and Good Governance Project.
Defining and quantifying illicit
financial flows remains contested. The conference discussed the methodologies
used to define and quantify this. It appears there are four favoured methods of
measuring illicit financial flows.
The first is the "hot money” method,
which records IFFs through net errors and omissions in payment balances. The
second is the "dooley” method, which relies on the privately held foreign
assets reported in the balance payments that do not generate investment income.
The third method, the World Bank’s "residual” method, estimates IFFs as the
difference between the source of funds (external debt and foreign direct investment)
and the use of funds (current account deficit and reserves). The fourth, the "trade
mispricing” model, assesses IFFs by searching for disparities between the over-invoicing
of imports and under-invoicing of exports after adjusting for ordinary price
difference. In the last model, imports are generally recorded after adjusting
for the cost of insurance and freight while exports are usually value
None of the methods are perceived as sufficiently
reliable. Estimates on the number of these activities vary significantly.
According to the United Nations Economic Commission for
Africa(UNECA), Africa is annually deprived
of more than US$50 billion through illicit financial flows whereas, according
to a number of non-governmental organisations , Sub-Saharan Africa lost approximately
US$68.6 billion in 2012 alone.
financial flows still lack a commonly accepted definition. Uncertainty about
the classification of abusive tax schemes as illicit activity illustrates this point.
uncertainty in respect to the definition and scale of illicit financial flows,
participants at the conference concurred that these flows undermine domestic
resource mobilization and require urgent action.
Exchange of knowledge on how to collectively
manage corruption, money laundering, or tax crimes is extremely relevant. Cooperation
between agencies should not only be on a a national level, but also on an international
level. This should include cooperation between developing countries, and interaction
between developed and developing countries.
Voters need to understand
the correlation between corruption, inadequate governance and the illicit flow
of profits. Tax
administration law enforcement agencies and the judiciary need to increase the
skills base to deal with the issues.
between taxpayers and tax authorities
At the conference the emphasis was on transparency, a critical element in the relationship between
taxpayers and tax authorities.
However, there are concerns about the impact of the need for
transparency and the protection of taxpayers’ rights. In particular, the
current debate pertains to the problem of how to ensure the confidentiality of
Tax authorities must realise as long as they insist on transparent
behaviour from taxpayers, they too should offer the same level of transparency.
Decisions should be adequately explained. Inadequate dialogue may only
enhance non-compliance by taxpayers and abuse of power by tax authorities. Taxpayers
need to understand their errors and why they are being penalised. There is a
need for certainty in the application of the law.
Against this background, a cooperative compliance model offers several solutions.
It facilitates dialogue between tax authorities and taxpayers and promotes
In this model, taxpayers disclose their tax affairs and tax authorities
are transparent about the manner in which they assess them. Tax authorities are
required to be receptive to the ongoing discussion regarding tax issues and
providing advance rulings on tax issues. Mediation and other alternative
dispute resolution methods are also proposed as measures which could enhance
dialogue between taxpayers and tax authorities.
Real change in the relationship between taxpayers and tax administrations
also requires the engagement of the judicial system. Judges who decide on tax
cases require proper training.
The conference was addressed on these issues by Judge Bernard Ngoepe, the
Tax Ombudsman of South Africa; Nina Olson, the United States Taxpayer Advocate,
and Judge Dennis Davis who is serving as a judge of the High Court of South
at the national level
body developing and promoting policies to combat money laundering and terrorist
financing, the Financial Action Task Force, recommends that inter-agency
cooperation should involve tax and customs administrations, anti-money
laundering and anti-corruption authorities, law enforcement agencies, public
prosecutors and financial resources.
It was noted that all three focus countries (Ghana, Nigeria and South
Africa) have established the institutions necessary to combat illicit financial
flows. However, it was also noted that the institutions needed strengthening,
as they were scarcely resourced. It does
appear as if these institutions do not cooperate with each other. Some tax authorities
often do not understand the relevance of the data they possess and how it can
be used to investigate illicit flows.
The discussion concluded that there is a need to create an interface
between the tax administration, FIUs, and law enforcement agencies. Technology
can assist to streamline the exchange of data and increase cooperation.
at the international level
Due to the cross-border nature of financial flows, international
cooperation cannot be ignored. International cooperation has been endorsed by
the Financial Action Task Force, and by the OECD Tax Crime Forum.
At the conference the European experience of international cooperation
The move from the exchange of information on request to the new standard
of automatic exchange of information is a major step towards combatting illicit
financial flows. It will have an effect on the availability of data and will
result in the creation of databases that can accommodate the "bulk” of
In the European Union legal framework, the exchange of tax rulings that has
a cross-border element will assist with the deterrence of tax dodging.
The changes will require adequate information technology solutions and
sufficient protection of confidential taxpayer information.
Several legal instruments are available for mutual assistance in administrative
proceedings (for example, exchange of information, recovery of assets).
Nevertheless, the framework does not yet operate effectively in a Sub-Saharan
context. Appropriate legal and institutional frameworks, political will, and
increased capacity is required. In many African countries, these conditions do
the relationship between tax administrations and taxpayers
between tax administrations and taxpayers in Africa leaves a lot to be desired.
Tax administrations are accusing - particularly multinational entities (MNEs)
of entering into aggressive tax planning schemes. They have faced a cascade of
allegations regarding abusive tax
behavior. MNEs have been perceived as being particularly negligent of their moral
obligation to pay tax. The reputational loss they have suffered in the aftermath
has been enormous.
However, the behaviour
of tax administrations also calls for more stringent scrutiny. In a survey
conducted by PwC in a number of African countries, delays in issuing tax
assessments, as well as delays in obtaining clarifications and responses to
relevant tax issues are common practice. Tax audits are burdensome, and
preparation and submission of tax returns demands a considerable amount of
time. The lack of transparent guidelines from the tax administration is an
additional challenge that taxpayers face in surveyed countries. Both the tax
administration and the MNEs have obligations to fulfill in order to improve the
overall quality of their relationship.
contribution of MNEs in developing countries is substantial. According to
UNCTAD, the contribution represents approximately 14 per cent of revenue for
the governments of African countries.
Once again the
cooperative compliance model was presented as a solution to cultivate trust, cooperation,
and mutual understanding in everyday relationships. However, the model will
need some adjustment to fit the African context. There is a need for further research
the structuring of such a model in developing countries.
Do We Go?
The conference was the first leg of the Tax and Good Governance Project.
It provided the opportunity to discuss future steps required to minimize illicit
One suggestion was to establish a network of contacts in each country to
facilitate ongoing discussion on the project’s progress. Substantive research on
the project’s focus areas is also required. A survey on the existing legal and
institutional frameworks in the three focus countries is also required.
An established research agenda will focus on two areas: the way tax
administrations interact with multinationals and the way tax administrations
cooperate with law enforcements agencies. The research work will be
followed by workshops which should
contribute to raising awareness of the risks implied by illicit financial flows
and methods to counter these illicit activities. The project’s outcomes will be
presented in the next high-level conference which is planned in Pretoria on
14-15 July 2016.
1 UNECA (2015) Illicit Financial Flow
Report …, op. cit., p. 90.
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This article first appeared on the January/February 2016 edition on Tax Talk.