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7 Talking Points from the Tax and Good Governance in Africa conference

22 January 2016   (0 Comments)
Posted by: Author: Alicja Majdanska
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Author: Alicja Majdanska (Vienna University of Economics and Business) 

The 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Illicit financial flows are perceived as resulting from incompetent governance, outdated legislation, inadequate enforcement of existing laws and the opaqueness of institutional systems.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. 

1.  The 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 documented. 

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 free-on-board.1

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. 

Illicit financial flows still lack a commonly accepted definition. Uncertainty about the classification of abusive tax schemes as illicit activity illustrates this point. Despite 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. 

3.  Relationship 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 exchanged information.

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 trust.

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 Africa.

4.  Cooperation at the national level 

The inter-governmental 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. 

5.  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 was discussed.

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 taxpayers’ information. 

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 not exist. 

6.  Changing the relationship between tax administrations and taxpayers 

The relationship 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. 

The fiscal 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. 

7.  Where 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 financial flows. 

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. 


Footnote:

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.




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