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The New African | Deals and Dirty Tricks Bleeding Africa Dry – Tax Me If You Can!

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Posted September 29, 2013 by Ugandan Diaspora News Team in Africa ~ 9,330 views

     

minerals
If there is a richer, undeveloped continent on my world map, I can’t find it. Yet, by almost every conceivable measure of development, Africa is left trailing behind other continents. Why is that? Simple: the rape of the continent is happening faster, more violently and with less resistance today than at any time in its history. The great wealth of Africa is being lost and squandered, day by day, week by week, year by year, by the failure of governments to manage their resources competently and the greed of ruthless and predatory companies that exploit this weakness. It is not a case of blaming the governments or the companies – they are both complicit – but, too frequently, African governments do not have competencies equal to the companies that have huge legal resources to draw up agreements.

In 2010, Africa’s exports of oil and minerals (€252 billion) were worth roughly seven times the international aid (€36 billion) given to the continent. How can it be that the nations that provide the raw materials that fuel the entire global economy – like DRCongo – are poor, whilst those with none – like Japan, Singapore or many European countries – are rich? Who are the real creditor and debtor nations here, and why?

The answer is not entirely straightforward. But one of the principle causes of Africa’s hamstrung development is illicit financial flows (IFF). What are they and what can be done about them? According to the United Nations, Global Financial Integrity, the World Bank and others, IFFs are monies that are illegally earned, transferred, or utilised. Somewhere at its origin, the movement or use of these monies broke laws and hence they are considered illicit. Around two-thirds of IFF are estimated to be the consequence of tax avoidance – mainly using trade mispricing. Around a third of IFF are also estimated to be the proceeds of crime. This obviously has very serious results for debtor nations. They drain hard currency reserves, increase inflation, impede tax collection, prevent investment, and undermine free trade.

“Trade mispricing” (also known as transfer pricing or re-invoicing) involves routing a sale within a multinational company via a low tax jurisdiction to ensure the margin (and thus the profit for accounting purposes) is incurred where taxes are lowest and not where they are highest. Whilst there is nothing wrong with, say, Acme (Chile) Ltd selling metals to Acme (Mexico) Ltd which makes cars to sell to Acme (US) Ltd and then on to the US public, these transactions are not free market transactions, so they are open to abuse. Given that they are internal transactions, Acme’s management are under pressure to limit the profits made in the US, say, where taxes are high, and increase them in Mexico, say, where Acme (hypothetically) benefits from tax breaks.

To get to know the real scale and importance of this issue, which may seem arcane, it is pertinent to point out that an estimated 60 to 70% of all global trade is internal to multinational corporations. This figure takes on even more importance if juxtaposed with figures showing the size of the global economy to be $60 trillion in total, of which $21 trillion is hidden offshore ($9 trillion of the $21 trillion comes from developing countries), and an estimated $854 billion (some authorities quote it as much as $1.8 trillion) was lost to Africa between 1970 and 2008 due to capital flight. The same figures show that the top five African nations hit by illicit outflows between 1970 and 2008 were Nigeria ($89.5 billion), Egypt ($70.5 billion), Algeria ($25.7 billion), Morocco ($25 billion), and South Africa ($24.9 billion).

Winners and losers

Who benefits from the status quo in the extractive sector? They are those that have been named in the press. In 2012, the top 40 miners made profits of $133 billion. Other resource-thirsty developing nations, like China, also benefit – the lion’s share of copper, iron ore, and so on is destined for China. Basically, those who grasp the mantle of the commodities’ value chain are the biggest winners. The losers are those nations that fail to add value to their exports. If you merely export your raw diamonds, say, at the market price, you are no better off than just buying them at the market price. This is the reason the centre of the global diamond industry is Antwerp in Belgium (which produces no diamonds) and not Gaborone (Botswana, which produces a lot of diamonds). It is also the reason why Botswana is now investing heavily in the domestic diamondcutting and polishing industry. Some 50% of the value in diamonds is added between the wholesale and retail stages – in a value chain that sees exporters of raw diamonds pick up a $9 billion share of a $57 billion industry (in 2002 dollars).

By way of comparison, consider who would sell their house and give the selling agent 80% of its value? But that is exactly what African countries exporting raw diamonds and other minerals are doing! Exporting raw materials during a period of rising commodity prices will produce growth, but it will not be broad-based growth that creates jobs, and transfers technology and skills. In other words, it will not produce genuine development. And this is what Africa, as a whole, has witnessed. This was one of the reasons referred to by the Mo Ibrahim Foundation’s selection chairperson, Salim Ahmed Salim, when he was explaining why no African leader was worthy of the Foundation’s 2012 governance prize: “The economy has been moving forward relentlessly. However, economic development does not give us a reason to be a little complacent about participation and the human rights of people.”

Getting away with it

Worse still are the egregious examples that approach larceny in Guinea and DRCongo. The mountains of Simandou in Guinea contain a deposit of iron ore that is perhaps even more significant than that in Pilbara, Western Australia (the backbone of that country’s prosperity). Yet, despite the government of Guinea having entered into a mining agreement with Rio Tinto in 2003, no ore has yet been mined from there. Apparently unsatisfied with the pace of Rio Tinto’s progress, half the project was taken away from the company in July 2008. Then, in December 2008, two weeks before the death of President Lasana Conté, it was transferred to Beny Steinmetz Group Resources (BSGR). The site was subsequently sold 18 months later to Brazil’s Vale for an alleged $2.5 billion. No doubt BSGR pulled off the sale of the century using nothing more than shrewd business acumen, as they claim, but whatever happened, Guinea lost a massive amount of value in the process.

As Mo Ibrahim has said publicly: “Are the Guineans who did that deal idiots, or criminals, or both?” BSGR refutes these inferences. “Allegations that there was anything improper about the manner in which BSGR obtained its mining rights in Guinea are entirely baseless and motivated by an ongoing campaign to seize the assets of BSGR,” the company insists.

However, BSGR allegedly paid a considerable commission to Mamadie Touré, when she was the wife of the then President Lansana Conté, in return for her taking “all necessary steps” to secure the Simandou rights. The American FBI arrested Frederic Cilins, who has been charged under the Foreign Corrupt Practices Act with “tampering with a witness”; “obstruction of a criminal investigation”; and “destruction, alteration, and falsification of records in a federal investigation”.

The government of Guinea says that Cilins is an agent of BSGR, a claim the company denies, although it does not dispute he was a partner in Pentler Holdings, a stakeholder in BSGR Guinea Ltd. Whether or not the dealings are criminal or not, they are the consequence of a certain set of circumstances that need to change.

How is this possible?

There is a vast gulf in capacity between government negotiators and their corporate adversaries. As such, asymmetries in expertise and information are a serious problem. Add to that a lack of transparency and the spectre of bribery and corruption arises. For instance, whether Dan Gertler and his associated companies legitimately or illegitimately acquired mines from the government of DRCongo that he quickly resold to the mining giant, ENRC, for a vast profit, the fact remains that, according to a report by Kofi Annan’s Africa Progress Panel, DRCongo is millions of dollars out of pocket. In fact the report claims that just five natural resource deals – involving the $275.5m sale of apparently undervalued state assets – cost DRCongo $1.36 billion in lost revenues between 2010 and 2012. Three deals involve ENRC, who are being investigated by the Serious Fraud Office in London (amongst other matters related to the company’s dealings elsewhere).

ENRC told the press that: “All acquisitions made by the company since its IPO [flotation] have followed appropriate regulatory and board best practice and were cleared by a committee of nonexecutive directors, led by our former executive chairman Mehmet Dalman, alongside the professional advisers whose approvals for these transactions is mandatory.”

There is also the question of rents. Rents and profits are one and the same to accountants, but the difference is that the latter are earned and the former are not. You do not give away rents, unless you are a fool, you tax them. As Professor Paul Collier puts it: “Spectacular ‘profits’ from resource extraction are likely to be rent-seeking: companies acquiring the natural assets of poor people. Such behaviour demonstrates not exceptionally high business talent but exceptionally low corporate ethics.”

But as New African’s mole deep inside academia, points out: However marvellous it would be to see an end to the prodigiously suspect deals, such as those described in Congo and Guinea, the problem merely mutates. He cites remarks made to him by a senior World Bank official about deals in West Africa and the Sahel, which on the surface, appear respectable – i.e., which offer fair value for the assets in question – yet the complex contracts contain various “poison pill” type arrangements that mean they effectively rip off their hosts. For example, the arrangements make provision for tax breaks or other concessions that may apply under certain circumstances. Given the asymmetry in legal expertise between the parties, these deals may be disastrous for host nations, in the detail if not the headline price paid.

“These are excellent proposals,” says Professor Ronen Palan. “But the devil is in the detail. Country-by-country accounting is essential.”

The new players

What hope is there that the new kids on the block will be any kinder? Note that on his first visit to Africa, China’s new President Xi Jinping struck a deal with DRCongo that would see China provide $9 billion in infrastructure spending, in return for vast quantities of resources. Were independent valuations made of what was being sold? Do they stand up to scrutiny? Were they even made public to allow such scrutiny?

A similar deal was struck between the China International Fund and Guinea’s military junta in 2009, under which the former would pay the country $7 billion for all of Guinea’s unexploited resources, which was cancelled by Guinea’s newly democratic government in 2011. Guinea also then introduced a progressive new mining code that granted the government an automatic 15% stake in companies, with the option of purchasing up to 20% more at the market rate. Angola and Nigeria too are awash with cash but where are the improvements to living standards? Meanwhile, it cannot be a coincidence that these countries come 157th and 139th out of 174 nations in the Transparency International Corruption Perceptions Index 2012. Our mole says: “This is certainly one of the top three issues facing Africa today. I’m not very optimistic about it being addressed for two reasons. In the short term, the incentives for African leaders themselves haven’t changed and won’t change much within existing political systems. Also, most of the countries that have evolved and industrialised are those that have been the hardest to deal with – especially the extractive industries in places like Angola, Nigeria, Guinea, etc.

“In order to tackle these problems in the West, the China factor is massively important. Rivalry with emerging powers may prevent progress. Arguments [against IFF] by Western governments will likely harm their own companies and interests and benefit the Chinese; will they want to see Exxon losing out to CNPC?” It would seem that the new BRICS development bank will not do much good either. Africa does of course need infrastructure and lots of it. But whilst the competition with the World Bank is good news, the fear is the new bank will operate similarly to China’s Exim bank, with massive externalities, further facilitating the swift extraction of resources and capital from Africa, without providing for sustainable development.

What’s being done?

This truly is an international problem. In fact IFF can pop up in the most unlikely places. In 2009, according to Antonio Maria Costa, head of the UN Office on Drugs and Crime, “Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities… There were signs that some banks were rescued that way.”

The US Dodd-Frank Act is a step towards greater transparency and the EU has passed similar laws compelling companies to Publish What You Pay (as the NGO of that name calls for) since transparency is key to preventing corruption. The US’s Foreign Account Transparency Compliance Act (FATCA) will require foreign financial institutions to report directly to the Internal Revenue Service information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest. At an EU meeting in the run-up to the forthcoming G8 meeting at Lough Erne this month (June), Belgium, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK all signed a statement in favour of developing a new global standard for the automatic exchange of information to tackle tax evasion, along the lines of FACTA. The UK, France, Germany, Italy and Spain have already initiated a pilot automatic exchange of tax information among themselves that could serve as a model. The Cayman Islands has said that it will also join the pilot.

African countries too are taking a stand. Ghana’s Petroleum Revenue Management Act mandates quarterly disclosures of payments and production figures. Liberia has made the voluntary Extractive Industries Transparency Initiative (EITI) requirements a legal requirement. Zambia, which estimates it is losing some $2 billion a year (or 10% of GDP) to tax avoidance and transfer pricing, is launching a crackdown. The country earns 20% of its exports from copper but only 0.5% of its tax revenues.

For instance, Konkola Copper Mines earned $301 million in profits in 2006-2007, yet allegedly paid only $6.1 million in taxes.A review in Zambia found that between 2005 and 2009, a total of 500,000 copper mine workers were paying a higher rate of tax than major multinational mining firms. The government aims to increase the share of government revenues from 5% to 20% over the next few years. Also focussed on Zambia, a report by Action Aid estimates that since the UK-listed Associated British Foods (ABF) took over the local firm, Illovo Sugar, the government has allegedly lost some $17.7 million in revenues to the company’s use of tax loopholes – an allegation denied by ABF.

Elsewhere, Tanzania is insisting on a 30% corporation tax for mining firms. The minister for energy and minerals, Prof Sospeter Muhongo, told the press: “If we manage to hold shares, as was achieved in the government’s deal with TanzaniteOne, we cannot be cheated any more, but get more strength to collect what we actually deserve. Depending only on royalties and tax cannot boost us much.”

Continental action

Action at the regional level in Africa could be key, if nations effectively unionise to prevent beggar-thy-neighbour strategies lowering standards. It is certainly a good idea but the question is one of capacity. Collective action would increase their bargaining power but given that even the EU struggles with harmonising external tariffs, progress will be hard-won. Efforts such as those in Tanzania, Guinea, Zimbabwe and elsewhere to take equity stakes and thus share dividends, certainly offer advantages over taxes and royalties.

As Dr Emmanuel Nnadozie, director of the macroeconomic policy division at the UN Economic Commission for Africa (UNECA), puts it: “Awareness of the problem is just not high enough. The shift in language from talk of ‘capital flows’ to the more direct IFF is a positive step.”

He points to the example of Botswana, which has negotiated some shrewd deals – no doubt a reference to the country’s canny handling of the De Beers sale to Anglo American. He takes pride in developments in Guinea, which has benefited from support from UNECA, as well as from the George Soros Foundation. According to Dr Nnadozi: “This is not just an African problem, look at Starbucks and Amazon in the UK. Tax and trade need transparency.” As to the question of dodgy deals such as those in Guinea and DRCongo, he would not be drawn on specific cases but commented in general: “As far as UNECA is concerned, the process that we are undertaking now will lead us to solutions. We need to examine the problems from different angles. Our work was requested by AU finance ministers, with a view to specific steps [being taken, and resulting in] finished consultations by the end of the year.” But going from recommendations to policy will be challenging.

Unilateral Approach

One of the world’s leading authorities on tax havens, their origins and evolution, is Professor Ronen Palan. He told New African: “The most interesting development in the battle against tax havens has originated in the US and is now being followed by some European countries. The approach is no longer to try and change the behaviour

of the tax havens – which is what the OECD approach is about – but instead an approach I call ‘nimby’ (Not In My Back Yard).

“Through FACTA, the US basically insists that any financial entity that seeks to have any business either in, or with, a US entity must provide extensive information on ownership, profits, etc. Registration in a tax haven is no longer an excuse; or rather, entities that do not wish to provide this information on the grounds that they are prevented by the laws of, say, the Cayman Islands, simply will not be able to do business in the US.”

Unilateral actions have been employed with some success before but they depend on the clout of the nations involved. For instance, many vessels sail under the Liberian flag to benefit from that country’s regulatory regime, but the US insisted that all vessels entering its ports abide by certain codes and regulations relating to maintenance and labour standards. This worked successfully, but whether such methods would work for Angola, Nigeria and the other bulk export nations is a different matter.” Prof. Palan continued: “The international rules that are being imposed could benefit Africa as well [but] there is still the issue of corruption and political will.

NGOs will be able to access information on the extractive industries in the future with greater ease and this should be of help.” But Africans should not get mad: they should get even. Nothing will change without public opinion demanding it does. Either they do nothing and stop complaining, or do something and shape the future they want to see. Africans should demand that corruption be made easier to prove and its proceeds harder to conceal. The continent can take a cue from The Georgists, the followers of Henry George (1839-1897). Using poetry, they admonish: “The land, the land/The ground on which we stand/Why should we be beggars/With the ballot in our hand?”

Source — The New African Magazine


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Ugandan Diaspora News Team

Ugandan Diaspora News Online is an independent, non political news portal primarily aimed at serving Ugandans who work and reside outside Uganda. Our aim is to be a one stop shop for everything Ugandan and the celebration of our Ugandan heritage.

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