Tax avoidance and International Development: An Elephant in the Room

Following the Panama Papers, Aaron Cohen-Gold examines the need to put international tax avoidance at the heart of the development agenda.  

The Panama papers revealed many secrets. The tax affairs of the Cameron family; the hypocrisy of the Icelandic President; the gross behaviour of select Multi-National Companies (MNCs); and the complicity of British territories in tax avoidance schemes worth hundreds of billions of dollars a year.

But one revelation, conveniently overlooked, encapsulates the tale of global inequality better than any other: the sheer number of African businessmen, officials and Western MNCs willingly cheating the world’s poorest continent out of billions of dollars. Consider Uganda, where oil and gas companies diverted $400 million of tax through offshore accounts in Mauritius; or the corrupt Tanzanian ring of officials and businessmen who leaked $120 million of tax from national energy providers; or Kenya’s second most senior judge, linked to 11 different companies in the British virgin Islands worth over $100millions dollars. All this on a continent where 414 million people live on less than $1 a day.

Those on the political right use such observations to call for disengagement from Africa; they question why we should provide aid to a continent being plundered, often most ruthlessly, by its own leaders. On a purely economic plain, divorced from the very real social, health and economic benefits of aid, their frustration is justified.

Matthew Straubmuller / Creative Commons License

Matthew Straubmuller / Creative Commons License

Though estimates vary – often due to a lack of government data – almost every African country loses more than 5% of its GDP in illicit financial flows; indeed, several African countries leak almost 20% of their annual GDP through avoidance and evasion schemes.  For perspective, a similar rate in Britain would mean the annual loss of more than $500bn – enough to fund our NHS five or six times over.

Rather than withdraw from the African continent, the entire world has a responsibility to act for two reasons. Firstly, as a recent UN report discovered, developing countries lose roughly £100bn of tax every year through offshore financial hubs – many of which exist in places like Panama, Ireland, and the British virgin islands. Put simply, as the African Union recently lamented, all the money that leaves Africa illegally ends up somewhere else in the rest of the world.  It is not, in other words, purely an ‘African problem’ from which we can disengage; it is the institutions, countries and laws of the wider world that facilitate this gross injustice. Indeed, the average African tax rate wouldn’t need to be so high on ordinary Africans if the wealthiest paid their fair share and if the world invested in effective tax-monitoring systems in Africa. This is fundamental to the sustainable development of African states. 

Secondly, while the holes in Africa’s financial system threaten to drown ordinary Africans in poverty, it also threatens to render our enormous investment in foreign aid and international development unsustainable. In 2014, a UN Sponsored investigation found that at least twice as much money seeps out of Africa every year through tax avoidance, evasion and criminal activities than enters the continent through foreign aid. Focusing only on offshore tax havens, for every $1 gained through aid programmes, Africa loses $1.30 through offshore trading. In macro terms, the developed world is financing its own tax inequalities – while Africans and African states are plunged into ever-deeper poverty. To be clear, this does not mean that we should cease giving aid. We should do the opposite and invest in the future of ordinary Africans even more. But we can no longer afford to do so without tackling the tax elephant in the room.

Emergency aid, vaccinations and educational programmes are clearly invaluable – and Britain has much to be proud of in this area, particularly in its work under the last Labour government. But unless we empower governments in poor and developing countries to collect the taxes they are owed – without which governments can only borrow more debt to finance public services – we will impose a glass ceiling on the enormous benefits of grass-roots development projects. A healthier and increasingly aspirational population won’t want to remain in countries plundered by global inequalities – they will, as Europe can testify, seek a better life elsewhere. It is for this reason that the UN General Assembly recently described reform of the world’s finance and tax laws as the number one means of implementing the promises in last year’s Sustainable Development Goals.

allispossible.org.uk / Creative Commons License

allispossible.org.uk / Creative Commons License

In turn, this necessitates two conclusions. First, if we are serious about tackling global poverty and inequality – and if we want to successfully develop the world’s poorest countries – international tax reforms have to be at the centre of the world’s agenda. Second, and this cuts to the heart of an issue currently in the minds of many Britons, no one country – not even one continent or free trade area – can tackle this problem in isolation. Indeed, no single problem in today’s world exists in a bubble; we already recognise that poverty rates are intricately connected to conflict, terrorism, corruption, health, and education levels. The same principle should now be applied to how we view international tax avoidance and evasion.

The world of 2016 is interconnected; inequalities are now produced on a global scale. Whether in relation to war, migration, tax or terrorism, this demands more international cooperation than ever before. In the interests of international development, tax avoidance should now form the centre of this discussion. It is in all our interests – especially for those of us committed to social justice – to ensure that we learn this lesson from Panama sooner rather than later.

 

 


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

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