They come, they see and – due to relaxed tax and finance laws, or legal firms that have perfected the art of tax avoidance – they conquer a lot more than they invest in Africa. These are multinational companies that find loopholes in the legislation of the continent’s poorest countries and are able to dodge paying tax by channelling their profits to tax havens or “reinventing” themselves elsewhere.

The end-result is countries that are left poorer for lacking either resources to fight these companies or the political will, or due to outright state capture that hampers appropriate action.

However, African countries have started to mobilise through the African Union (AU) and, if its efforts succeed, avoiding tax and impunity from punishment will only get harder with time.

Transparency International (TI) recently named oil company Heritage Oil and Gas Ltd – one of the companies exposed in the Panama Papers – as having dodged the payment of more than $400-million in Uganda by “artificially redomiciling from the Bahamas to Mauritius”. Heritage reportedly did this after selling off its 50% stake in Uganda’s oil fields to Tullow Uganda.

The company denies this and says the redomiciling process, which is not illegal, was done for other reasons and prior to the Tullow deal.

Heritage is listed on the London Stock Exchange and has operations in Nigeria, Ghana, Tanzania and Libya, among other countries. The redomiciling was reportedly done with the help of Mossack Fonseca, the law firm at the centre of the Panama scandal. Ugandan tax authorities have gone after Heritage over the matter, but whether the battle will be won remains to be seen.

The looting of Africa

In its highly celebrated report last year, the AU high-level panel on illicit financial flows shocked all but civil society organisations and anti-corruption agencies that have been calling for the end of the looting by multinational companies.

The paper revealed about $50-billion is illicitly channelled out of Africa every year.

“Illicit financial flows are … of concern because of their impact on governance,” reads the report, the foreword of which was penned by former South African president Thabo Mbeki, head of the panel.

“Successfully taking out these resources usually involves suborning of state officials and can contribute to undermining state structures, since concerned actors may have the resources to prevent the proper functioning of regulatory institutions.”

Double taxation laws make tax avoidance easy for companies that try to leave operations without paying the tax required by the countries within which they are based. According to TI, it was a “double tax agreement” between Uganda and Mauritius that allegedly helped Heritage Oil to avoid paying taxes on their sale to Tullow.

In the case of South Africa, in 2012 alone, more than R300-billion left the country in the form of illicit financial flows, according to a report compiled by Oxfam. Advocacy group describes the effect of this as the equivalent of 1 300 Nkandla security upgrades.

The organisation further challenges Finance Minister Pravin Gordhan to sign on the dotted line to enforce legislation that requires companies to do project-level reporting in countries of their business.

“Governments should be able to exchange financial information freely and encourage co-operation and compliance between tax administrators. There should be no excuse for tax avoidance,” says Amandla in a campaign statement.

Beneficial ownership cannot remain a secret

Some of the recommendations by the AU panel include:

  • Beneficial ownership information being provided when companies are incorporated or trusts registered. Such information to be updated regularly and placed on public record.
  • Beneficial ownership declarations being required of all parties entering into government contracts. False declarations to result in robust penalties.
  • African countries reviewing their current and prospective double-taxation conventions. SA has the largest and most sophisticated financial sector on the continent. Although it is relatively well-regulated, its size and deep insertion into global financial markets make it particularly vulnerable to those seeking to transfer acquired assets to offshore tax havens illicitly.

South Africa’s Financial Intelligence Centre Act is currently under review, with the process having been opened for public input in February. As one of the organisations that submitted recommendations, Corruption Watch suggested a clearer definition of beneficial ownership. The watchdog body said the definition should take into consideration the natural person(s) who ultimately owns or controls the legal person or arrangement. “Within (the current) framework, control is often defined based on the holding of a certain percentage of shares or voting rights or property … .”

To use the Heritage Oil example, that would mean every person who stands to gain from it moving assets from the Bahamas to Mauritius would be named.

Reprieve for those who hide their assets

Responding to the Panama Papers leak, the South African government declared that “the world is systemically narrowing the scope for those who want to hide their offshore assets and avoid paying their taxes due to the South African fiscus”.

It added that it was “in the interests of all those hiding their assets to come clean and disclose, and the government offers such persons a way to legitimise their financial affairs before they are caught out”.

A form of reprieve offered through a special voluntary-disclosure programme was proposed in the 2016-17 budget to make it easier for noncompliant individuals and firms to disclose assets held and income earned offshore.

A window period of 1 October 2016 to 31 March next year is pending the approval of Parliament, to allow for the current rules of the disclosure programme to be relaxed to encourage companies and individuals to come clean.

According to Gordhan, the South African Revenue Service is preparing the local financial sector for the implementation of the common reporting standard that was endorsed by the G20 in 2014.

Officials will review different jurisdictions’ confidentiality frameworks and their implementation before the automatic exchange of information under the common reporting standard begins.

TI concludes that had real public country-by-country reporting been in place for European Union companies’ operations abroad, complex tax arrangements such as the one employed by Heritage could have come to light through regular reporting requirements rather than through leaks.

Country-by-country reporting would require a multinational company to give, as part of its regular financial reporting, a breakdown of which countries it has operations in; what its taxes are in each of these; the cost of doing business there and how much profit it made.

This sort of reporting would also make it clear for citizens in those countries what the company has done for their development, if anything, and it would also reveal how much it transfers to tax havens throughout the world and why.

• First published in Business Day

Image courtesy of