Monday, September 27, 2010

Tax Could be The Way Out of African Aid Dependence

Last week we blogged the Declaration on Tax Justice issued by participants at a civil society round table in South Africa. In this article for IPS, Stanley Kwenda picks up on the theme of tax and development and, citing TJN-Africa and its partners, argues that tax could be the way for African countries to break free from their aid dependence.

Noting that tax is both a source of revenue and a mechanism for connecting citizens to states, and vice versa, Kwenda points out that attention to tax policy has "generally been lacking." But, as TJN-Africa's Alvin Mosioma points out: "History proves that no country will march out of poverty through aid, but effective resource mobilisation can aid development of African countries."

Citing the experience of Malawi, which offers extensive tax subsidies to attract external investors, Kwenda interviews Benjamin Chikusa, a Malawian parliamentarian, who comments that:

"Multinationals come to invest in African countries on the back of so many investment incentives that are packed into our tax regimes . . . Most of the employment benefits come in the form of low-paid jobs at a level where income taxes do not recover what has been lost through tax allowances."

The Malawian Ministry of Finance estimates the cost of these tax subsidies to multinational companies at USD125 million annually, representing about 9 per cent of total government revenues. TJN argues that the case for subsidising multinationals in this way is weak in almost all circumstances, but in the case of Malawi the need to subsidise foreign direct investment suggests that globalisation simply hasn't delivered on its promises.

Furthermore, as Christian Aid's Dereje Alemayehu comments, poorer countries in Africa also lose from capital flight and tax evasion:

"First, through falsified invoicing, or the inflating or undervaluing of prices to increase costs and diminish tax liability. Second, through transfer mispricing, a phenomenon in which companies sell to each other at inflated prices, inflating costs in intra-corporate financial transactions. Third, through 'round-tripping' where companies operating in a country send their money offshore and bring it back as 'foreign investment' to get preferential tax treatment."

Current tax regimes are failing to deliver either development or justice to most African countries. For decades they have been under pressure from western-based international financial institutions to subsidise western business and increase consumption taxes to compensate for revenue shortfalls. The outcomes have been disastrous in terms of increased aid dependency and mounting external debt. As Kwenda concludes, radical rethink is required:

"Experts recommend that African countries design effective tax systems that allow them to track tax evaders beyond their borders; and that parliaments play a stronger oversight role when it comes to taxation."

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