Busting tax fiddles

In recent years international lawyers and accountants have built a web of corporate opacity which has enabled tax avoidance and corruption on an alarming scale. Private financial wealth sitting on tax havens has grown to around US$ 21 trillion, of which $9trillion is from developing countries. Some minuscule jurisdictions, such as the Cayman Islands, have become the legal home to trillions of dollars of corporate assets, offering the unbeatable attractions of zero taxation plus secrecy. Some industries are now dominated by them: half the world’s shipping is registered there.

Though corporate opacity is hugely profitable it is manifestly not in the global interest. It has developed as it cannot be curbed by actions at the national level. It needs high-level political co-operation between the major economies. The most practical forum is the G8 and this year the issue is on the agenda.

Tax avoidance thrives on exploiting over 700 independent tax jurisdictions, each of which can be the location for ownership of a company. Competition between them has created tax havens. When combined with the web of reciprocal tax treaties intended to avoid double taxation, we arrive at what Pascal Saint-Amans, head of taxation at the OECD, refers to as “double non-taxation”.

The simplest form of tax avoidance is transfer pricing: a subsidiary in a high-tax jurisdiction sells its output to one in a lower-tax jurisdiction at a price below its true value. G8 countries limit this through scrutinising the prices used for intra-corporate transactions, but it remains an acute problem in Africa, where tax authorities lack capacity.

When I discussed with the Zambian tax authority why the copper companies were paying so little tax despite the high world price of copper, its officials explained there were few accountants in Zambia and that they all worked for companies. The G8 can help Africa tackle this sort of corporate abuse, partly by providing guideline price information internationally. Corporate opacity not only assists tax avoidance, it is the key vehicle for corruption. In Africa, and elsewhere, corruption is a huge impediment to decent governance.

African leaders point out that it takes two to tango: the bribing foreign company and the bribed official. But corruption takes three players: the briber, the bribed and the facilitator. Corrupt money is laundered through fake companies and untraceable bank accounts. The lawyers and bankers who facilitate these transactions are not based in Lagos and Bangui; they are in London and Berlin.

African governments are impotent to address money laundering but the G8 could close it down. Corporate opacity is not inadvertent: it is the cumulative achievement of some of the most brilliant professional minds on the planet. These people should hang their heads in shame. In the advanced economies their actions are undermining the tax base. Yet worse, their actions bleed the world’s poorest societies of tax revenues and facilitate the mass looting of the public purse. The resource booms of the current decade are Africa’s decisive opportunity: if the history of plunder were to be repeated, it would be a tragedy of awesome proportions.

That is why we need a top-level push from the G8. Even once launched, it may take years to bust corporate opacity. But only leadership can get it started. SA has shown leadership on the continent and beyond in addressing some of these issues; it has one of the best revenue services there is and the second most transparent budget in the world. It will be the collective actions of many that will drive the change so desperately needed across the world.