The Effect of the Use of International Tax Systems on Developing Countries: An African Perspective

1. Tax Justice, Poverty and Development The Effect of the Use of International Tax Systems on Developing Countries: An African Perspective

2. An African Approach to: Paying Tax and Receiving Benefits Avoiding and Evading Taxes State Failure to Provide Benefits Tax Havens Advantages of Tax Havens Users of Tax Havens Effects of Tax Havens 19/11/09 Attiya Waris, University of Nairobi, Kenya 2

4. 1. Paying Taxes and Receiving Benefits The French Declaration on the Rights of Man 1789 13. A common contribution is essential for the maintenance of the public forces and for the cost of administration. This should be equitably distributed among all the citizens in proportion to their means. 14. All the citizens have a right to decide, either personally or by their representatives, as to the necessity of the public contribution; to grant this freely; to know to what uses it is put; and to fix the proportion, the mode of assessment and of collection and the duration of the taxes. 19/11/09 Attiya Waris, University of Nairobi, Kenya 4

5. Tax revenue and tax expenditure State Resources International Donors (Aid and Loans) Government Business Taxation International Trade State Expenditure Infrastructure Health Education Social Security Defence Housing Judiciary Parliament Executive 19/11/09 Attiya Waris, University of Nairobi, Kenya 5

6. 2. Avoiding and Evading Taxes • Two sets of Accounts (official and unofficial) • Unreported earnings • Goods and services without receipts: • 45-50% misreporting by 10% in South America • 60% misreporting by 11% in Africa • Payments in foreign jurisdictions • 'Gifts' • The informal sector (shadow economy) 19/11/09 Attiya Waris, University of Nairobi, Kenya 6

8. 2. How Multinationals avoid and evade taxes • tax holidays: Ghana 3-10 years in EPZ • Tax incentives/ subsidies: agricultural products • Economic Processing Zones (goods only) : China’s pledge of 10 billion dollars in concessional loans to African states Around 950 Chinese companies have set up operations in Egyptian free zones, representing a total investment of nearly 300 million dollars (17th November 2009) 19/11/09 Attiya Waris, University of Nairobi, Kenya 8

9. 2. How Multinationals avoid and evade taxes • Industrial Processing Zones (goods and services) • Use of Tax havens: Mauritius • Freedom of Information and Confidential agreements • Use of legal loopholes/tax planning/exemptions: Tanzanite in Tanzania • Corruption

10. 2. Comparing FDI v Profits Leaving Africa • 1995-2003 US$ million loss • DRC 1,150 • Nigeria 1,603 • Botswana 4,678 • Angola 3,592 • Cameroon 156 • Kenya 50

11. 2. Case Study: Unilever Case Arms length pricing Transfer pricing Decision: Application of OECD Guidelines Whether in the absence of specific guidelines from the Kenya Revenue Authority the OECD (The Organization for Economic Co-operation and Development) guidelines and the methods prescribed there under for the calculation of an arm’s length price are proper basis for the determination of an arm’s length price as required under section 18() - when the Act provides no guidelines, other guidelines should be looked at a tax payer is entitled to demand that his liability to a higher charge should be made out with reasonable clarity, before he is adversely affected 19/11/09 Attiya Waris, University of Nairobi, Kenya 11

12. 2. Impact on African Countries of Avoidance and Evasion Less disposable revenue available to states World Bank’s Stolen Assets Recovery Programme states that cross-border flow of the proceeds from criminal activities, corruption and tax evasions amounts to between US$1 trillion to US$1.6 trillion per year worldwide It places at more than $480 billion the amount leaving Sub-Saharan Africa as capital flight, with Kenya contributing Growth of informal unregulated economy (43% of GDP in Africa shadow economy v 16% in OECD countries) Corrupt leaders US$ 40 billion annually 19/11/09 Attiya Waris, University of Nairobi, Kenya 12

13. 3. State Failure to Provide Benefits • Poor policies • Foreign imposed policies (WB, IMF) • Loan Conditionalities • No independent contextualised policy development • Globalisation and trade liberalisation 19/11/09 Attiya Waris, University of Nairobi, Kenya 13

14. Poverty Share

15. 1   India: 41.01 % of world's poor  2   China: 22.12 % of world's poor  3   Nigeria: 8.03 % of world's poor  4   Pakistan: 3.86 % of world's poor  5   Bangladesh: 3.49 % of world's poor  6   Brazil: 1.82 % of world's poor  6   Ethiopia: 1.82 % of world's poor  8   Indonesia: 1.49 % of world's poor  9   Mexico: 1.43 % of world's poor  10   Russia: 0.99 % of world's poor  11   Ghana: 0.78 % of world's poor 

16. 11   Nepal: 0.78 % of world's poor  13   Colombia: 0.76 % of world's poor  14   Kenya: 0.72 % of world's poor  15   Mali: 0.71 % of world's poor  16   Madagascar: 0.68 % of world's poor  17   Burkina Faso: 0.62 % of world's poor  18   Mozambique: 0.61 % of world's poor  18   Tanzania: 0.61 % of world's poor  20   Niger: 0.59 % of world's poor 

17. 3. Fiscal Dilemmas in Developing Countries Globalisation: Debt, Aid and Trade Regionalism (EAC Draft Common Market Protocol finalised 20/11/09): Withholding tax 5% Royalties, Dividends 10% Corruption Illicit fund flows Public Finance Collection and Distribution Human Rights and Social Welfare Participation 19/11/09 Attiya Waris, University of Nairobi, Kenya 17

18. 3. EPAs Under EPAs Region Loss of Customs Revenue SADC 19% Cariforum 14% LDCs (8% of total revenue ) 38% 19/11/09 Attiya Waris, University of Nairobi, Kenya 18

19. 4. Tax Havens • Tax efficiency=denying sovereign governments their income • Allen Kagina Customs Commissioner Rwanda noted capital flight, presence of tax havens and the continent’s dependence on foreign assistance and indebtedness as some of the most pressing issues of the revenue sector. “Billions of dollars leave the African continent each year. Between 1961 and 2004, these outflows are estimated at around 7.6 per cent of the annual GDP of the region and in effect make African countries net creditors of donor countries,” 19/11/09 Attiya Waris, University of Nairobi, Kenya 19

20. 5. Users of Tax Havens • Ordinary citizens with a certain income level • Scared citizens (unstable state) • Foreigners (expatriat workers) • Tax evaders: Corporations • Criminals (drug dealers) • Corrupt persons 19/11/09 Attiya Waris, University of Nairobi, Kenya 20

21. 6. Effects of Tax Havens • Fiscal drain from one state to another • Bloating of economies • Instability of economies • Encouraging corruption/criminal activity • Poverty 19/11/09 Attiya Waris, University of Nairobi, Kenya 21

22. 7. What is African civil society saying Protect the innocent: not our crisis Ensure current crisis doesn't undermine efforts to address the food, energy, and climate crises: however their funding is also drying up Allow poor countries to engage in the regulatory reform process Enable African countries to engage in the institutional reform process 19/11/09 Attiya Waris, University of Nairobi, Kenya 22

23. 8. Recommendations Support the debt campaign Asking for more direct income redistribution schemes from the natural resources.   Strengthening public finances Accountability, responsibility and transparency Equity in redistribution 19/11/09 Attiya Waris, University of Nairobi, Kenya 23

24. Recommendations Constitutionalisation of participation Financial crisis: break the globalisation trend Develop more regionalism Selective decoupling of economies Pay taxes but demand re-distribution 19/11/09 Attiya Waris, University of Nairobi, Kenya 24

25. Tack för eruppmärksamhet