In developing countries, and particularly in the sub-Saharan region, the scale of unmet basic needs is enormous. An estimated 3 billion people in the developing world live on less than US$2 a day per person.
About 2.37 billion people are deprived of food or unable to have a balanced diet on a regular basis. The prevalence of undernourishment is highest in sub-Saharan Africa: 24.1%. Of nearly 60 million children out of school, 33.8 million are in this region.
Tax revenues are fundamental to changing this dire situation. Taxes allow the state to redistribute wealth to reduce poverty. They also provide education, health care, social security, pensions, efficient public transport, clean water and other public services taken for granted in developed economies.
But in both developed and developing countries, tax revenues are being sapped by the ability of some of the wealthiest taxpayers – including many transnational corporations – to effectively opt out of the corporate tax system. They do this through a combination of ingenious (and legal) deals in tax havens and huge government tax breaks.
These practices have received much attention from researchers. However, broader accounts of their impact on developing countries are relatively rare. In a recently published article, we therefore sought to explore the effect of tax avoidance on development in Africa, with a focus on Nigeria and Zambia.
Using publicly available evidence, we show that tax havens and offshore financial centers, shaped by globalization, facilitate the sophisticated tax regimes of highly mobile transnational corporations. The effect of low-tax jurisdictions (“tax havens”) hampers the social and economic development of poorer states.
We advocate radical reform. This should close loopholes that allow tax evasion and evasion by transnational corporations. It calls for stronger legislation and institutional structures.
Forms of tax evasion
Tax evasion is used to describe all the means – tax evasion, tax evasion, corruption and offshore accounts – that companies and wealthy individuals employ to reduce their tax bills. They lobby governments for tax breaks and lower corporate tax rates, exploit murky loopholes in tax laws or shift profits to tax havens.
Globalization has created new transnational spaces where economic actions take place without too much regulation, taxation or surveillance. Behind a wall of secrecy, companies can devise complex schemes to increase their profits. The activity of offshore companies and tax havens is therefore at the heart of the anti-social tax practices of corporations and elites.
A 2015 report by the United Nations Conference on Trade and Development estimated that profit shifting by multinational corporations costs developing countries $100 billion a year in lost corporate income tax. Another report, by researchers from the International Monetary Fund, estimated that developing countries could lose up to US$213 billion a year due to tax evasion. In addition, Oxfam has estimated that developing countries lose between US$100 billion and US$160 billion a year due to corporate tax avoidance.
Resource-rich African countries easily fall prey to aggressive tax planning and tax avoidance enabled by offshore companies. As the United Nations Conference on Trade and Development in 2020 pointed out, high volumes of intra-company trade, secrecy concealing foreign investment activities and treaty loopholes make African countries vulnerable to ‘tax evasion. Sub-Saharan African governments lack the human, financial and technical resources to stem this wealth drain.
Zambia and Nigeria
Zambia and Nigeria provide examples of tax avoidance practices among transnational corporations, made possible by tax havens.
Zambia, a country rich in natural resources, derives little profit from foreign companies extracting its mineral wealth. For example, in 2011, five companies producing copper worth US$4.28 billion paid only US$310 million in taxes to the government. This represented 11% and 19% of production for 2010 and 2011 respectively. In fact, only one or two mining companies reported positive profits. Others have reported questionable validity losses, according to the UK-based non-governmental organization War on Want and the Zambia Extractive Industries Transparency Initiative.
As a result, the country loses about $3 billion a year in tax revenue, an amount equivalent to one-eighth (12.5%) of its current annual GDP.
War on Want has accused Vedanta, a copper producer operating in Zambia, of evading taxes through mispricings. This is when related companies or divisions trade with each other at prices that are unrelated to the market, to avoid being liable for tax. Vedanta has 29 subsidiaries operating in the “secret jurisdictions” of Mauritius, the Netherlands, the British Virgin Islands and Jersey. Zambia’s tax system allows the company to pay less tax when it spends money on physical assets or makes losses. It paid just US$11,111 against profits of US$221 million in 2011-2012.
Similarly, Associated British Foods was accused in 2015 of not paying any tax in Zambia, despite its local subsidiary, Zambia Sugar, making a profit of $123 million. According to the War on Want report, this cost Zambian public services $27 million, enough to send 48,000 children to school. The revenue lost in tax havens was 10 times the amount given to Zambia each year by the UK in the form of education grants.
Nigeria provides another example. The Shell Group, through its subsidiary, Shell Petroleum Development Company of Nigeria, had entered into a special sharing agreement with another subsidiary, Shell Petroleum International Mattschappij BV (SPIM). Services and expenses were charged to the group so that it made no profit for eight years, between 1992 and 1993. It cost Shell £20.09 million ($44.75 million) in tax revenue. This is published in the Nigerian Revenue Law Report, 1998-1999 Shell Petroleum International Mattschappij BV v Federal Board of Inland Revenue, Appeal no. FHC/L/CS/1A 96, Volume 1. This is not unusual; it is one case among many others.
Why does the exploitation continue?
In the era of globalization, developing countries have been encouraged to deregulate and privatize their economies to attract foreign investment. The flow of foreign direct investment into Nigeria from transnational corporations increased from US$0.59 billion in 1990 to US$2.14 billion in 2000 and US$2.31 billion in 2019. This represented respectively 1.09%, 1.64% and 0.52% of GDP. Zambia attracted US$0.12 billion in 2000 and US$1.11 billion in 2017.
However, as our survey reveals, opening up economies to the outside world can have the opposite effect to that intended. Rather than attract the lucrative foreign investment so desperately needed, countries in sub-Saharan Africa have opened their economies to interested multinationals.
Globally, between 50 and 60 tax havens give refuge to more than 2 million companies, including thousands of banks and investment funds. Among Fortune 500 companies, nearly three-quarters have subsidiaries in offshore tax havens.
As long as small independent nations derive financial benefit from their declaration of tax havens, poor nations will be exploited.
There is an urgent need to crack down on tax practices that exhaust countries with impoverished economies and to give poor countries a real voice in tax negotiations.
It seems likely that if the gaps in tax laws are not addressed, the rule of law and effective tax administration will not be strengthened in Africa. Consequently, the continent could continue to lose billions of dollars due to the activities of transnational corporations and their subsidiaries.