The question gets asked often: How can Africa be so poor when it receives so much aid?
The answer is simple. The world economic system sucks more out of the continent than it puts in. And tax evasion by Canadian firms plays a significant role in this impoverishment.
The May report, Honest Accounts 2017: How the World Profits from Africa’s Wealth, concludes that more wealth is extracted from the continent than enters it. In 2015, African countries received $162 billion in aid, loans, remittances and foreign investment but lost $203 billion through tax avoidance, repatriation of profits and climate change costs caused by others.
(The report ignores the structural imbalance in the terms of trade that sees the bulk of the value of tea, coffee, cocoa and many other commodities produced on the continent captured by distributors, marketers, retailers, etc., outside Africa while a higher share of the value of imported buses, phones, computers, etc., is captured by producers outside the continent.)
On top of the $32 billion corporations repatriated in profits, Honest Accounts found that $68 billion was lost to illicit capital flight, mostly multinational corporations evading taxes. Their findings align with a 2015 UN Economic Commission for Africa/African Union panel that found companies are illegally moving about US $40 billion a year out of the continent. The Washington, D.C.-based Global Financial Integrity Forum found that between 1970 and 2008 “total illicit financial outflows from Africa, conservatively estimated, were approximately $854 billion. Total illicit outflows may be as high as $1.8 trillion.” Three per cent of this total was thought to be bribes to government officials or theft of public funds. Fifteen per cent of all illicit outbound transfers were found to be money derived from drug smuggling, counterfeit goods, racketeering and other common criminal activities. The vast majority of the illicit funds, up to two-thirds of the total, were cross-border commercial transactions designed to reduce or eliminate taxes. Most of this money consisted of corporations shifting goods and profits between jurisdictions to reduce or eliminate their tax bill.
Often called “transfer pricing” or “trade misinvoicing,” multinational corporations artificially adjust the price of goods sold between their subsidiaries or partner companies in order for profits to end up in low (or no) tax jurisdictions while costs appear in high tax countries where they’re deducted from a company’s tax bill. Author Alain Deneault describes transfer pricing thusly: “First, the corporation creates one or more subsidiaries in a tax haven. Then, it maintains business relations with the subsidiary as if it were an independent party. Transactions are always designed to benefit the subsidiary, because money earned by the offshore entity will not be taxed. In other words, the goal is to establish bogus operations with the subsidiary in order to record a large proportion of the company’s earnings in offshore accounts, removing them from taxation in countries where the corporation has real and substantial activities.”
Canada has helped build the global offshore financial system that enables transfer pricing. Deneault details the work of Canadian politicians, businessmen and Bank of Canada officials in developing taxation and banking policies in a number of Caribbean financial havens in his book Canada — A New Tax Haven: How the Country That Shaped Caribbean Tax Havens Is Becoming One Itself.
Resource companies are some of the leading culprits in misinvoicing. With commodity prices constantly in flux and their products entirely for export, mining companies are well placed to abuse countries’ limited means of investigating false invoices and transfer pricing. Half of all internationally listed mining companies operating in Africa are based in Canada and in Canada in Africa: 300 years of aid and exploitation, I detail more than half a dozen examples of Canadian mining firms publically accused of tax avoidance.
In one of the best-detailed examples, a series of reports suggest that Canada’s largest mining firm, Barrick Gold, short-changed Tanzanians of tens, if not hundreds, of millions of dollars. A 2003 Alex Stewart Assayers audit concluded that mining companies overstated their losses by US $502 million between 1999 and 2003, which cost the Tanzanian government $132.5 million. The audit also suggested that $25 million in royalties went unpaid.
Another report titled “A golden opportunity: How Tanzania is failing to benefit from gold mining” found that between 2003 and 2008, foreign mining companies exported US $2.5 billion in gold from Tanzania with only $110 million reaching the government in royalties and direct taxes. As Tanzania’s top gold producer during this period, Barrick consistently declared losses in order to pay minimal corporation tax. With many subsidiaries, including ones in notorious tax havens such as the Cayman Islands and Barbados, Africa Barrick Gold (now called Acacia) made it diffi cult for Tanzanian tax collectors to trace exactly what the country was owed.
Last year, a Tanzanian tribunal ruled that Barrick organized a “sophisticated scheme of tax evasion” in the East African country. As its Tanzanian operations delivered over US $400 million profi t to shareholders between 2010 and 2013, the Toronto company failed to pay any corporate taxes.
Transfer pricing deprives African governments of the tax revenues required to build schools, hospitals and other vital infrastructure. And tax avoidance by Canadian fi rms is one reason two-thirds of Africans continue to survive on less than US $3.10 a day.
This article first appeared in Canadian Dimension