Missing billions

In spite of being rich in commodities such as gold, diamonds, gas, copper and rare earth minerals, many African countries are among the poorest in the world. One reason is tax dodging by international corporations, particularly in the commodities sector. To pay as little tax as possible in resource-rich countries, these companies take recourse to illegal as well as legal - though morally dubious - methods.

Nico Beckert

TAX evasion by international oil, gas and mining companies costs resource-rich countries billions of dollars in lost tax revenue every year. According to estimates by the United Nations and the World Bank, the total sum is in the double-digit billions.

Non-payment of taxes has serious social, economic and political consequences. The countries affected lack the money for basic public services. According to the World Health Organisation (WHO), investing an annual $8.7 billion in healthcare in 46 African countries would save the lives of 4 million children a year. And $5.2 billion per year would be enough to pay for the teachers needed to allow every child in Africa to go to school.

Tax evasion and avoidance thus have an enormous impact. Governments of countries like Zambia, the Democratic Republic of the Congo, Chad, Niger or Liberia spend less than $6 billion a year. While it is true that some African leaders embezzle part of their countries' revenue, corruption committed by politicians and civil servants makes up only a tenth of the amount that African countries lose due to tax avoidance by corporations, according to the research organisation Global Financial Integrity.

Because of lost tax revenues, countries struggle to develop sustainably and build strong economies. To promote entrepreneurship and create jobs, countries need basic infrastructure that includes roads, electric power, schools and research facilities. They must also be able to grant loans to encourage investments and new businesses. Without tax revenue, governments cannot provide these things and thus have to depend on outside help. According to numbers collected by the policy watchdog Global Policy Forum, the revenue lost is comparable to the amount of official development assistance (ODA) that sub-Saharan Africa receives.

It will be next to impossible to meet the Sustainable Development Goals (SDGs) if tax evasion and avoidance continue unchecked. According to UN estimates, between $750 million and $1.3 billion in public spending will be needed each year to implement the 2030 Agenda for Sustainable Development worldwide. ODA will certainly not cover the entire cost.

Trickery and deceit

Multinational corporations and the natural resource sector use many tactics to avoid paying taxes. Even when negotiating mining contracts, companies use their negotiating power, their knowledge of contract clauses or plain bribery to ensure that they are exempt from certain taxes either entirely or for a long time.

Another trick is what is known as transfer mispricing. The company sells the commodity it has extracted to a subsidiary in a tax haven for far less than the market price. This means that the company makes little profit in the country where the commodity is produced and pays very little tax accordingly. On the other hand, little tax is incurred in the tax haven where the profit was shifted to - the country's low tax rates are what makes it a tax haven after all. If such no- or low-tax countries did not exist, companies would have fewer opportunities to evade and avoid taxes in commodity-rich countries. Dishonest practices are also used to avoid paying value-added taxes, excise taxes, licence fees and dividends.

Double-taxation agreements can be used to avoid taxes as well. They spell out which country an international corporation will be taxed in: for instance, the country where its corporate headquarters are located or the country where it earns its profit. While the objective of these agreements is to avoid taxing a company twice, many were designed in a way that disadvantages poorer countries.

The use of double-taxation agreements to dodge taxes is not illegal, but it is extremely dubious in moral terms. The international non-governmental organisation ActionAid has demonstrated as much with the example of an Australian mining company that operates in Malawi. In order to avoid taxes in Malawi, the company made use of a tax treaty that existed between Malawi and the Netherlands. It established a subsidiary, with no employees, in the Netherlands and sent its Malawian money there. The tax rate in the Netherlands was zero percent, so the money could flow without deductions on to the company's headquarters in Australia. Over six years, the company saved $27.5 million it would otherwise have had to pay Malawi's tax authority.

This case is not an exception, and the sum in question is comparatively low. According to the Dutch NGO SOMO, an oil company once tried to dodge tax payments of more than $400 million in Uganda. After lengthy court proceedings, Uganda was at least able to collect a portion of that amount.

Many of the affected countries are demanding that their interests be taken into account when it comes to the taxation of international companies, particularly in the mining sector. At the International Conference on Financing for Development in July 2015 in Addis Ababa, a group of 134 developing countries insisted that an intergovernmental commission be created at the UN level to give them a greater say in international negotiations on tax matters. However, many Western countries rejected the request, so nothing came of it. So far, international decisions concerning tax issues are still primarily being taken by members of the G20 in the context of the Organisation for Economic Co-operation and Development (OECD), an umbrella organisation of rich nations.                        

Nico Beckert is a freelance journalist and campaigner on commodities issues at Haus Wasserburg in Vallendar, Germany. This article is reproduced from D+C (Development and Cooperation) magazine (January 2018,

Battling tax evasion

IN recent years, there have been multiple initiatives at the international level to fight tax evasion and avoidance with greater transparency and new standards. Both the US and the EU passed rules that require commodities companies to disclose tax and other payments they make to governments. In the US, however, industry lobbies resisted the implementation of the measures, and in early 2017, the US Congress decided to completely halt enforcement of the transparency rules.

The EU Accounting Directive has been criticised for only addressing illegal corruption. Critics contend that it does little to prevent more subtle cases of legal, but morally questionable, tax avoidance. The relevant data is still being concealed. Non-governmental activists believe that greater public pressure is needed to ensure proper behaviour as well as more rigorous investigation of corporate practices.

At the moment, the European Parliament and the European Commission are debating what information companies should be required to disclose and which companies would be affected. The Commission's proposal does not go as far as the Parliament's. Like the Accounting Directive, which only applies to the commodities sector, it would do little to remedy the unsatisfying current situation.

With regard to double-taxation agreements, so-called anti-abuse rules have been proposed. However, NGO activists and members of the European Parliament feel that these proposals do not really address the problem. The reason is that it will be very difficult for commodity-rich countries to prove that companies have taken advantage of loopholes. To apply the anti-abuse rules of double-taxation agreements, governments would have to provide such proof.

In order to stop transfer mispricing, donor governments' bilateral development agencies are training staff of tax authorities in commodity-rich countries to look for the signs. Detecting the practice is not easy. But NGOs do not think these measures go far enough. They want the OECD to adopt an entirely new approach called 'unitary taxation'. It would apply to the entire profits of a corporation, including those of all its subsidiaries. According to a formula that would be determined at the international level, all countries in which the company is active would then be entitled to tax a specific share of the profit. Unitary taxation would help to ensure that companies are taxed on the basis of their actual value and profit. The approach would also help to stem tax avoidance. - Nico Beckert/D+C (January 2018)

*Third World Resurgence No. 326/327, October/November 2017, pp 11-12