- by Advocate Prateek Bhati
Introduction
Globalization has brought unprecedented growth for various economies and resource utilization across the world. Multinational Corporations (“MNCs”) have exploited all these opportunities, developing complex systems of subsidiaries and joint ventures across multiple jurisdictions in different countries. These conglomerates are, therefore, the backbone of the global economy, making up a large portion of international trade and investment. It has benefited international trade and commerce, but it has also created significant challenges for tax authorities as these subsidiaries of MNCs do intra-company transactions across the world. These transactions often allow MNCs to shift profits from high-tax countries to low-tax jurisdictions.
They are also, however, a big challenge for national tax authorities, especially in developing countries like Africa where the blow caused by transfer pricing and profit-shifting tends to be hard-hitting. By transferring prices, these MNCs can shift profits from higher-tax countries to low-tax countries or even tax havens and hence reduce the liability of taxes imposed on their overall income. This practice is legal within the bounds of existing tax laws and international treaties. Still, it can be highly exploitative, especially for resource-rich developing nations that rely heavily on corporate tax revenues to finance public services and infrastructure development.
Even concerted international efforts to stop them, such as in the OECD's Base Erosion and Profit Shifting (“BEPS”) project, African countries cannot do much to stop revenue erosion. In response to the widespread adoption of aggressive tax practices across MNCs, the OECD initiated a project known as BEPS that focuses on closing loopholes in global tax laws to enable the shifting of profits of MNCs into low-tax jurisdictions. The BEPS project is a 15-point action plan that provides governments with domestic and international instruments for addressing base erosion and profit shifting. Most of these countries have weaknesses in regulatory capacity and resources to handle adequate audit work on complex intra-company transactions and therefore, some lose massive revenue. A large number of African governments generally give harmful tax breaks and incentives to attract foreign direct investment, like Mozambique which gives to exemption from corporate taxes in the initial years of operation to attract investment in coal and natural gas projects.
Subaltern Internationalism and Tax Justice
To address the above-mentioned challenges, it is essential to examine the concept of Subaltern Internationalism and its relationship with global taxation frameworks. Subaltern Internationalism refers to the collective efforts of marginalized or underrepresented countries to challenge dominant global powers and systems, advocating for more equitable and just international policies. In the context of global taxation, Subaltern Internationalism seeks to curb the private exercise of extraterritorial jurisdiction by MNCs, which often leverage their global presence to minimize tax liabilities.
The Fifth Principle of Subaltern Internationalism ("PSI") is particularly relevant to the issue of tax justice. It enunciates a very basic principle, which is that MNCs should not be able to avail themselves of extraterritorial jurisdictions and avoid the regulatory reach of host countries. This is so because, through transfer pricing, as well as the voluntary codes of conduct adopted by many of them, MNCs avoid tax payments in the host countries, thus directly contributing to the loss of revenues suffered by developing countries.
The Flow and Scale of Tax Avoidance
Illicit financial flows from Africa only indicate how deep the problem is. According to the AU/ECA HLP, since 2000, Africa has lost approximately 50 billion dollars per year. Most of these losses were due to commercial transactions. The UNCTAD further reports that approximately $100 billion in losses is laundered across multinational tax avoidance every year. This figure in third-world countries is approximated to be close to 50 percent of the total corporate income tax revenue. These huge losses not only reflect upon the financial burden that African nations are placed under, but also depict the failure of their tax systems. It is a universal agreement that taxation is the most durable development finance. However, tax systems in Africa have yet to become highly developed and therefore unable to raise the revenue that would make a difference in fighting poverty or any other support to businesses. These systems are further deteriorated by MNC’s complex schemes of tax evasion, such as transfer pricing rules used to send profits away from developing countries.
Most of these abuses are evident in extractive industries such as natural resources dominated by MNCs. For many African countries, natural resources have been a source of wealth; however, these countries mostly don't benefit from all the yields that come from these resources because MNCs refuse to pay taxes. MNCs use complex pricing schemes to extract the wealth out of the raw material-rich African countries all while paying as little taxes as possible.
MNCs will overprice goods and services sold to subsidiaries in high-tax jurisdictions or underprice exports to affiliates in low-tax jurisdictions to “profit-shift” to those tax havens (Africa). However, the ability of African tax authorities to regulate, audit, and contest these transactions remains hampered by confines. Thus, the continent is exposed to crippling revenue losses. Most African governments also award destructive tax breaks, perverse incentives, and tax holidays in ways that continue to lure foreign investment at the expense of domestic tax revenues.
All that money lost every year through tax avoidance and evasion could be spent on important public services and infrastructure. But it ends up in the bank accounts of MNCs, and African governments continue to rely on foreign aid and loans for development purposes. But behind all this will be the economic muscle of the MNCs, which enables them to hire the best legal, accounting, and banking wizards that make aggressive tax planning possible. All this is legal, facilitated by a network of international tax treaties; however, in the long term, it is crippling for the developing countries.
Conclusion
The OECD BEPS initiative appears to isolate the African countries from the decision-making process and seems to favour more results in the interest of the developed countries. This inequity in the tax system of the world allows the African countries to continue their revenue loss. In this regard, African governments need to collaborate with other third-world nations and strive to gain more voice in taxation discussions at the world level. African countries should take measures, apart from the BEPS process, to protect themselves from both base erosion and profit-shifting.
The BEPS process has been criticized for marginalizing the interests of developing countries. It notably focuses on highly critical concerns to richer nations, such as taxation of digital products, while not touching any issues that are of particular interest to developing countries, for example, how tax rights in international transactions fall within the division between source and residence countries. This imbalance has therefore made it impossible for African countries to benefit from the BEPS process since their issues and concerns are always drowned out by the interests of more affluent OECD member countries. They are sometimes pressured to adopt OECD standards without having a seat at the decision-making table. This lack of representation hinders African countries from effectively addressing their specific tax challenges.
The BEPS actions proposed so far, while useful, offer no guarantees of significant reforms for developing nations. The OECD has made it clear that its proposals do not seek to change the existing balance of tax rights between residence and source countries, a key issue for many African nations. As such, the BEPS process, while an important global initiative, has failed to fully address the unique challenges faced by African countries in combating base erosion and profit shifting.
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