African countries are making limited and uneven use of the exchange of information between tax authorities, to combat tax evasion and illicit financial flows.
This is the finding of the Tax Transparency in Africa 2023 report, a progress report by the Africa Initiative — a programme established in 2014 in a bid to ensure that African countries are equipped to exploit the latest improvements in global transparency.
The exchange of information on request between tax authorities assists in determining the tax payable by an individual or entity, especially when there is a cross-border element to their activities. It also involves disclosing beneficial ownership, banking and accounting information. Tax authorities are able to access taxpayers’ information held in other countries.
Estimates of illicit financial flows in Africa vary but the report notes that it is generally accepted that they surpass aid flows and investment in volume. In 2019 the AU Commission estimated that the amount of illicit financial flows from Africa ranged between $50bn and $80bn annually while the 2020 estimate of the UN Conference on Trade and Development (Unctad) was $86.6bn annually or 3.7% of African GDP.
Illicit financial flows through money-laundering in SA attracted the attention of the Financial Action Task Force, which found that its regime for combatting it was not robust enough and placed the country on a greylist.
The report notes that successfully tackling tax evasion and illicit financial flows through tax transparency and the exchange of information will generate more revenue for economic development and the provision of public services by African countries.
The report was launched at the 13th meeting of the Africa Initiative in Cape Town where finance minister Enoch Godongwana and Sars commissioner Edward Kieswetter spoke, as well as director of the OECD centre for tax policy and administration Manal Corwin, among others.
Corwin noted that progress in the exchange of information in Africa was significant but there was still a lot to do, a sentiment shared by Kieswetter.
“Because the opacity and secrecy surrounding the origin and destination of illicit financial flows is at the heart of the issue, transparency has emerged as one of the effective tools for combating illicit financial flows,” the report says.
“Transparency removes the veil of secrecy and renders the use of legal persons and/or arrangements in transactions facilitating illicit financial flows less attractive by enabling the identification of the legal and beneficial owners of legal entities or arrangements.”
Transparency also provides access to banking information and accounting records, which is fundamental to identify the origin and destination of the illicit financial flows.
“Increased transparency therefore makes it easier for national authorities to track down individuals and/or companies involved in illegal activities and to enforce their laws.”
The report says that in 2022, a survey of 38 African countries showed that four — Kenya, SA, Tunisia and Uganda — had identified €66m in additional taxes due to the exchange of information, while one of the five African countries engaged in the automatic exchange of financial account information reported the identification of more than €10.6m in additional revenues thanks to data exchange. The total of €76.6m in additional revenue raised by the five countries is the highest amount since the establishment of the African Initiative in 2014.
Total revenues identified by African countries as a result of exchange of information on request, other offshore tax investigations, automatic exchange of financial account information, related voluntary disclosure programmes and the use of data automatically exchanged amounted to at least €1.69bn since 2009.
But the report notes that the four countries accounted for about 86% of all requests for information sent, with two countries alone accounting for over 75%.
“A significant number of African countries are not yet effectively using available exchange-of-information infrastructure to enhance their efforts for domestic resource mobilisation. This calls for new strategies by African tax authorities to establish a culture of exchange of information and ensure that it becomes a tool to promote tax compliance,” the report says.
The report highlights the negative effect that the low number of exchange-of-information relationships between African jurisdictions may have on the African Continental Free Trade Area (AfCFTA), which aims to eliminate trade barriers on the continent as they won’t have the means to combat any cross-border tax evasion that may arise as intra Africa trade increases.
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