April 2, 2014
By Natalia Alonso, Oxfam’s EU Head of Office and Javier Pereira, Action Aid’s Europe Advocacy Coordinator
The EU must seize an important opportunity this week to strengthen its ties with its neighbours to the south. At the centre of the Fourth EU-African summit in Brussels is the idea of cooperation, finding common ground on concerns that affect both regions. If that is indeed the aim, then one issue in particular should be at top of the agenda – how to tackle illicit financial flows. This is a scourge for everyone around the table.
Illicit financial flows are a problem which affects every country regardless of their global economic standing. A huge part of it is companies exploiting loopholes, pushing their profits off-shore in order to pay less tax. There are few countries which aren’t affected by the practice, whether it is Starbucks and Apple dodging millions in the UK or Associated British Food in Zambia. This is the reason the G20 asked the OECD, a think tank dominated by rich countries, to look into the problem and find constructive ways to tackle it.
Illicit financial flows are a big deal for the developing world too. Each year around $950 billion worth of money is drained from some of the world’s poorest countries, leaving gaping holes in their economies, hampering development in the process. This is seven times the volume of global overseas aid, making the figure not just morally reprehensible but self-defeating in the fight against poverty.
Sub-Saharan Africa is being particularly hard hit. If Ethiopia could capture just 10% of the money that loses each year through corporate tax dodging, it could enroll 1.4 million more children in school. African nations are losing nearly 2 per cent of their gross domestic product (GDP) as a result of companies fiddling the books through ‘trade mispricing’. If G20 nations were hit as hard by corporate tax dodging as Africa, they’d have a $1.2 trillion hole in their budgets.
We think it is promising that the OECD has paid such close attention recently to reforming global tax rules. But for any new measures to be truly effective it is vital that the countries that are most impacted are the same ones that be consulted the most closely. It is difficult, however, to imagine these reforms will have a global reach when only one African nation, G20 member South Africa, currently has a seat at the negotiation table.
The OECD’s proposals deal with the issue from the perspective of developed countries. There is little recognition being given to the priorities and needs of the developing world. Look at the recent agreement on a new international standard: the automatic exchange of information. This is a genuinely progressive decision that will allow the 20 wealthiest countries to automatically share tax information. How troubling therefore that poor countries will not receive any information that can help them fight tax dodgers because they cannot produce the required information themselves. This will result in a two-speed system: whilst most developed countries will have the capabilities to trade important tax information, those countries who stand to gain the most from the practice will be left in the dark.
Europe and Africa should also promote together greater transparency on who owns companies and where they pay their taxes, seriously assess the impact of tax incentives and remove those that are detrimental, and create a real global space to discuss tax reforms where poor can voice their needs.
A fairer tax system should also include innovative taxes, like a Financial Transactions Tax that 11 European countries agreed to implement this year. Part of the revenue should be spent on the fight against poverty and climate change, as a concrete engagement for the EU-Africa relationship.
The European Union is a key partner to Africa, so it is vital that any policies decided upon in the EU or the OECD are truly inclusive and work to the benefits of all. Accepting that this truly global problem needs a global solution is the first step.