Tax Fraud, Evasion and Avoidance

Published on 2nd August 2011

The post economic crisis outlook internationally has been market by uneven growth, threats of double dip recessions in some countries, increasing inflation in China, a raging debt ceiling debate in the United States and an ever unfolding debt crisis in Europe.

Africa has largely been spared but uncertainty continues to effect domestic and international markets. The African continent have seen a strong rebound after the tumultuous global financial and economic crisis in late 2008 and 2009 as was evidenced by the continent’s average growth rate of 4.9% for 2010, up from 3.1% in the previous year. Moreover, positive and strong growth of around 5.8% is forecast for the continent for 2012. However, this is still short of the average annual growth of around 6% in the pre-crisis years.

The geo-political landscape continues to change and we are starting to see Afropessimism being replaced with Afro-optimism for a host of very good reasons - increasingly democratic and transparent political and economic systems are being developed on the continent whilst much good work is currently underway to ensure greater regional integration.

The recently signed agreement to launch negotiations on an expanded free trade agreement between COMESA, the EAC and SADC is just one example of these trends. This proposed tripartite FTA, which it is also referred to, will become the continent’s biggest FTA comprising 26 countries spanning from Cape Town to Cairo with an estimated market potential of US 1 trillion dollar.

As an investment destination, Africa is now a recognised growth market and with a market of nearly one billion consumers and host to some of the fastest-growing economies in the world, Africa is the newest frontier for both the West and the East. With the bounty of resources and opportunities on the continent, investment, trade and business ventures are bound to increase. However, with this increase in economic activity, the challenge that we as Heads and senior officials of revenue authorities face is to ensure that the profits generated thereby are fairly, effectively and efficiently taxed to ensure that our Governments have sufficient revenues through which to implement their programmes aimed at the eradication of poverty in our respective countries.

As illustrated above, we are living in very interesting financial and economic times. And because globalisation has made us as interconnected as we are, these economic developments, in one way or another, greatly affect and determine what decisions tax administrators make and how we carry out our mandates.

A huge challenge for tax administrations, particularly for those requiring significant development as ours do, is stemming the revenue leakage from our economies. This leakage occurs as a result of the activities of tax havens, illegitimate shifting of profits to jurisdictions where lower rates apply through transfer pricing manipulation and by resorting to a host of sophisticated and advanced tax planning and avoidance measures.

Data on revenues lost to developing countries from tax fraud, evasion, avoidance and to tax havens is, for the most part, unreliable and estimates vary greatly. A fact sheet recently compiled by the European Network on Debt and Development puts the illicit capital flight from developing countries at anything between US$500 billion and US$800
billion per annum, with commercial tax structuring contributing about 64% thereof, criminal activity 35%, and corrupt money passing hands around 5%. Additionally, figures provided by the 2010 Global Financial Integrity Report indicate that developing countries are losing US$98 billion to US$106 billion per annum due solely to re-invoicing. This represents an estimated 4.4% of the developing world’s total tax revenue.

Most estimates on revenues lost also exceed, by some distance, the level of aid received by developing countries. Simply put, it is estimated that for each US Dollar that comes to the developing countries in terms of aid, more than seven US Dollars return to developed countries through illicit proceeds.

Therefore, it is in our interests that we do everything in our power to counter the practices of tax evasion, avoidance and fraud and discuss the impact of tax havens on tax revenues.

In order for us to work together to address tax fraud, evasion and avoidance, there has to be coordination of minds and resources, and the ATAF Work Plan is precisely geared towards providing the necessary space for our members. This can be seen, for example, in the establishment of our working groups on Transfer Pricing and the Exchange of Information & Tax Treaties, respectively, and our ongoing Capacity Development Programme, through which our tax officials engage with their African peers and international experts on a range of issues relevant to their daily work.

By Mr Oupa Magashula
African Tax Administration Forum (Ataf) Chairperson and South African Revenue Service Commissioner.

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