The Panama Papers are not only about corruption, criminals and politically exposed persons. They have also raised the world’s interest on the broad issue of tax evasion by multinational companies, prompting action from multilateral organizations such as the African Tax Administration Forum and the IMF.
Shifting profits to tax havens has huge consequences for countries that lose tax revenues—even powerful ones. A recent report by Oxfam shows, for instance, that the U.S. is losing billions in corporate taxes owed by its companies.
Multinational corporations are using sophisticated global tax loopholes to transfer vast amounts of profits out of high-tax jurisdictions and reduce their own effective tax rates. Because of their transnational nature, subsidiaries of multinational corporations buy and sell to each other, using what are called “transfer prices.” These transfer prices can often be manipulated to generate more profits in some countries than in others. Certain jurisdictions (other than Panama) play a big role in global tax evasion, using various methods to reduce what companies pay in the countries in which many of their activities are carried out. For example:
The Netherlands is a popular location for registering patents, and receiving dividends, royalties or interests from loans from abroad. These income streams are not taxed and the large network of bilateral tax treaties signed by the Netherlands grant Netherlands-based companies similar exemptions in source countries.
Mauritius, which also does not tax dividend income, is competing with the Netherlands in Africa by aggressively negotiating bilateral tax agreements and marketing itself as an offshore tax haven. Countries like Uganda that are developing their oil sectors might find too late that such bilateral treaties have serious consequences in terms of lost tax income once production is underway.
Bermuda and the Cayman Islands have become specialized in "captive insurance," which is on the list of scams of the U.S. Internal Revenue Service: corporations from multinationals to small businesses set up a subsidiary in a low tax jurisdiction that charges other subsidiaries around the world for internal insurance, at internally fixed prices. Oil companies like Shell have used this loophole aggressively.
This complex global system can leave tax administrations at a loss. Even highly modern, professionalized institutions are struggling to address the issue. At the Dakar workshop, administrators discussed the very dire state of available tools to combat global tax evasion. Countries such as Senegal, Mauritania, Mali, Togo and Burundi have weak institutions and a consistent lack of coordination between customs and tax directorates, police forces, judicial departments, industry regulators, trade authorities and public tender regulatory bodies. They do not have dedicated expertise on transfer pricing. Governments lack the political will to enforce tax compliance, which they see as a deterrent to foreign investment. They struggle to build and manage secure taxpayer information databases, which are prerequisites for accessing the growing international collaboration on tax information exchange.
Extractive industries are a prime target for African tax administrations: they generate substantial revenues, they concentrate a relatively small number of taxpayers and they are comparatively simpler than the telecom or banking sectors.
Next month, NRGI will publish a detailed study of the obstacles to implementing transfer pricing rules in the mining sector, which will hopefully be a key step in fighting tax avoidance where it is the most needed.