The emotion was palpable at the United Nations two weeks ago, when, to the sound of traditional Ghanaian songs, the General Assembly bowed to the memory of Kofi Annan. A true global leader, the man who was Secretary-General of the United Nations from 1997 to 2006 and co-recipient, with the UN, of the Nobel Peace Prize in 2001, symbolizes the struggle to improve the lives of the poorest and most marginalized people throughout the world in the eyes of many Heads of State.
Kofi Annan fought to make the world a better place for everyone, a place where resources are shared equally both at the national and the international level. This has enabled him to create the framework for focusing on poverty, culminating in the Millennium Development Goals (MDGs), which have now been succeeded by the Sustainable Development Goals (SDOs), a set of 17 measures that nations around the world have pledged to put in place by 2030.
But Kofi Annan was not blind. He knew the implementation of this ambitious program in terms of education, poverty eradication, gender equality, and the fight against climate change, among others, requires funding, something in which developing countries are sorely lacking, particularly in Africa.
International aid is insufficient, in addition to being a clear limitation to the sovereignty of nations. We now also know that the poorest countries are losing precious resources every year through what economists call “illicit financial flows”. These include transfers resulting from criminal activities of all kinds (e.g. trafficking in drugs, arms and goods), but they most of all consist of tax resources diverted by multinationals. Africa loses between $30 and $60 billion every year, according to very conservative calculations by the United Nations Economic Commission for Africa and the African Union. This is much more than the amount of international aid received.
This manipulation is the result of a scheme that allows multinationals to declare their profits in the country that suits them – the one that will tax them the least, or not at all – and not where the real economic activities and value creation take place. They do so by presenting their subsidiaries as independent companies, and by charging transactions between them in a fanciful way to benefit the one located in a tax haven.
The most shocking feature of today’s corporate-tax-avoidance schemes is that they are legal, the result of an international tax system that is as unfair as it is obsolete, and in the elaboration of which developing countries have never been involved. Whether in the name of colonialism, neo-colonialism, or the misnamed “free” trade, rich countries have historically shaped the global financial system and the international tax system by themselves to serve their own interests. In Africa, it is the extractive industries sector that is the most striking symbol of this permanent hold-up.
The human and social consequences of tax abuses by multinationals and elites are enormous. 90% of a country’s income is considered to be derived from taxes. Lower tax revenue means less funding for infrastructure, education, health, nutrition, protection of women’s rights and environmental protection. In the end, it means considering that development for all is only a utopia.
Take Goal 4 for sustainable development, to reduce the under-five mortality rate by two-thirds by 2030. Without changing the allocation of multinational companies’ profits and therefore the resulting taxes, it would take Cameroon 135 years to achieve this, according to a report by the research organization Global Financial Integrity (GFI). If illegal financial flows were eliminated, this time limit would fall to 35 years. In the case of Mauritania, the time needed to achieve this objective would be reduced from 198 to 19 years, whereas in the Central African Republic it would change from 218 to 45 years.
Kofi Annan considered the international taxation system a critical component of financing for development, equity, and economic justice. The Independent Commission for the Reform of International Corporate Taxation (ICRICT), of which I am a member, has been trying, since its creation three years ago, to contribute to his legacy by proposing concrete solutions. Multinational corporations should be taxed as single enterprises, and each country where the company operates or sells goods should tax only that part of the profits attributable to the company’s economic activity in that country.
Like Kofi Annan, we are also convinced that developing countries, and in particular Africa, must contribute directly to the debate on the reform of the international tax system. It is not acceptable to continue, as the G20 – the club of the world’s 20 richest countries – is proposing today, to test new rules without having been able to debate them. Africa wants development, and for that to happen, it must get a seat at the table, and make its voice heard.
By Léonce Ndikumana
Léonce Ndikumana is Professor of Economics and Director of the African Development Policy Program at the Institute for Research in Political Economy (PERI) at the University of Massachusetts at Amherst and a member of ICRICT.