Funding development in African countries is often hampered by ineffective tax collection. One of the reasons for this is complex forms of tax evasion known internationally as 'illicit financial flows': money illegally earned, transferred, or utilised. Globally, the vast majority of this money (83%) is from complicated forms of commercial tax evasion.
Tax evasion is theft and a criminal offense, tantamount to money laundering. Its impact on developing countries like South Africa is immense. It steals revenues meant for socio-economic growth and development, such as schools, health facilities, roads and other strategic infrastructure. It also encourages a culture of corruption and undermines the legitimacy of governments.
All evidence points to this problem increasing. Because governments have cracked down on money-laundering via banks, illegal activities have moved to trade. Only 2% of consignments globally are checked, making it easy to avoid detection.
Everyone agrees Africa is losing large amounts from illicit financial flows. But estimating an amount is difficult, given the clandestine nature of commercial tax evasion.
New research by GEG Africa, using UNCOMTRADE data, has for the first time analysed trade mispricing for 5 African countries: South Africa, Nigeria, Zambia, Egypt and Morocco. The results run to billions of dollars, and indicate large discrepancies. There are various reasons for this, ranging from reporting differences in trade flows, incomplete customs data, classification variations and misdeclaration. Thus, the numbers below need to be interpreted with care, as explained in a new briefing. But they do point to a pervasive problem that needs to be tackled.
|2013 (US $)||2014 (US $)|
|Nigeria||14,004 million||5,827 million|
|South Africa||68,839 million||68,114 million|
|Morocco||9,296 million||0,371 million|
|Zambia||7,465 million||6,790 million|
|Egypt||15,604 million||12,338 million|
- What do recent cases tell us about the extent of illegal flows of money out of South Africa? What should South Africa do to curb this?
- What steps are being taken globally and in Africa to reduce the billions being lost each year, especially from developing countries?
- Which sectors in Africa are most vulnerable and what can be done to resolve this?
Expertise and resources available
The author of this new research, Ms Kathy Nicolaou, is available for comment and interviews. Contact Ms Fortunate Xaba to arrange, on +27 (0)11 339-2021 or firstname.lastname@example.org.
The research papers and related analysis are available from the GEG Africa website:
- Briefing: Trade Mispricing for Five African Countries
- Paper: Illicit Financial Flows Estimating Trade Mispricing and Trade-Based Money Laundering For Five African Countries
Other related material:
- How Africa lost over $862.6b to illicit financial flows
- Stakeholders Meet to Advance Efforts to Reduce Illicit Financial Flows
Background and definitions
Tax evasion usually comes in the form of abusive transfer pricing or trade mispricing. It is used to hide revenues, profits, or investment returns from authorities by transferring them across borders into lower tax destinations or tax havens.
Abusive transfer pricing: The abusive of legitimate trade transactions between related parts of a multinational corporation, with the intention to evade tax. This can be done through over- or under-invoicing goods and services, creating fictitious and phantom invoices, or re-invoicing to commit VAT fraud. One example is the mis-pricing of African diamonds from Angola and the DRC amounting to $ 3.5 billion using intra-company valuations, shell companies and tax havens, in Dubai and Switzerland.
Another is that Mopani Copper Mine in Zambia exported all of its copper to related companies at below-market prices, resulting in a zero profit and corporate tax.
Trade mispricing: When tax evasion in the form of invoicing over- or under-invoicing of goods and services takes place between apparently unrelated companies. One example is the allegations that Lonmin Mines in South Africa paid ZAR 2 billion to subsidiary companies in Bermuda as well as management fees to the UK Lonmin company, in order to avoid paying tax in South Africa (according to a study by the Alternative Information and Development Centre). Another is that MTN, Africa’s largest cellular phone company, sent vast sums offshore in “management fees”, as a means of aggressively avoiding taxes which has caught the attention of African Authorities (from Mail & Guardian/AmaBhungane 2015 investigation).
Interpreting the new data: This new analysis is of the absolute value of inflows and outflows added together, which would largely cancel each other out. Also, it is not clear who is the perpetrating culprit: if there is trade mispricing between South Africa and China of $35 billion, who is to blame? Generally speaking, tax evasion figures are likely under-estimates of illegal activities, because estimations only look at goods, not services. They also miss out on intra-country transactions. And finally, there has been an assumption that trade mispricing flows from developing countries to developed countries. For South Africa and other countries, this under-estimates trade mispricing with developing countries like China, South Africa’s largest trading partner.
About Global Economic Governance Africa
The Global Economic Governance Africa project is a partnership between SAIIA, DNA Economics and Tutwa Consulting. Funded by the UK's Department for International Development (DFID), its focus is on strengthening the influence of groupings within and outside South Africa working for pro-poor outcomes through the institutions of global governance. Read more on www.gegafrica.org.
For more information or to arrange for interviews please contact:
Ms Fortunate Xaba,
SAIIA Communications Assistant
Tel: +27 (0)11 339-2021