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Firms siphon Sh6tr annually from Africa

BUSINESS
By MOSES MICHIRA AND GRAHAM KHAJILWA | Sep 17th 2015 | 3 min read
By MOSES MICHIRA AND GRAHAM KHAJILWA | September 17th 2015
BUSINESS

More than two third of the funds stolen from Africa are siphoned by companies, former South African President Thabo Mbeki has said.

Former South African President Thabo Mbeki, who is currently chairing the High Level Panel on Illicit Financial Flows from Africa, addresses the press at a city Hotel in Nairobi. The delegation discussed ways of curbing illicit financial outflows. (PHOTO: PIUS CHERUIYOT/STANDARD)

A probe done by the High Level Panel of Illicit Financial Flows from Africa, chaired by Mr Mbeki, now recommends that governments invest in capacity of their tax collection agencies to catch the cheats and repatriate the funds.

“We must invest in capacity to ensure the funds are returned for development,” he said.

In total the continent losses about Sh6 trillion every year, mostly through tax avoidance. Kenya lost more than Sh160 billion in illicit finance flows in the eight years to 2011, the panel reported. Corruption and other economic crimes only account for only a third of the revenue losses.

Kenya is among the worst hit by the illegal flows of cash. Mbeki is in Nairobi attending the first regional meeting after a previous one that brought together African Heads of State in Addis, Ethiopia that took place in January. He said the next step for his panel will include repatriating the lost revenues which he said were critical in funding Africa’s development. “We would not need to beg anybody for aid,” he said.

Theft by government officials was found the smallest in terms of the three sources of cross-border illicit financial flows. “The role of illicit finance flows and their adverse effect on the country’s (Kenya’s) GDP cannot be ignored,” the former South African President said.

While there are no exact timelines when the repatriation would begin, Heads of States and the African Union were told that African gross domestic product would be at least 16 per cent higher were it not for illicit financial outflows based on conservative estimates.

Weak national and regional capacities impede efforts in effectively addressing illicit financial flows in the continent, such as the lack of accurate data and up-to-date information, inadequate understanding of the various mechanisms used, and absent or ineffective legislative, regulatory and institutional frameworks.

Mbeki’s meeting comes amid increased push globally to criminalise tax evasion, where companies use creative and aggressive measures to cut their tax liabilities. In Kenya, civil societies have asked Parliament to join the push to end tax evasion through new laws that would compliance from international trade and boost revenue collection for the State.

Deflate earnings

Tougher laws would criminalise tax avoidance and spell harsh penalties for offenders. Such pieces of legislation could help agencies like the Kenya Revenue Authority raise revenues from corporations, after a bid to establish a tax body under the United Nations failed last month.

Developed countries including US and UK were successful in blocking debate on the proposal of UN-backed tax body in the global meeting held in Addis Ababa in mid-July, which meant that the Organisation for Economic Co-operation and Development (OECD) would continue to provide rules on international trade.

Poor countries have claimed that the OECD, which draws its membership from 34 rich nations, had developed guidelines that helped large corporations avoid paying taxes. Transfer pricing is the most abused method employed by multinational corporations to deflate earnings in some countries while shifting the profits to other countries.

In such cases, costs could be inflated in one jurisdiction at the expense of another which could be having friendlier taxes, widely referred to as tax havens. Several Kenyan firms have for instance set up phony subsidiaries in countries like Mauritius and the United Arab Emirates where corporation tax in zero.

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