$122Bn In Illicit Capital Left South Africa In 5 Years

$122Bn In Illicit Capital Left South Africa In 5 Years
Africa is a net creditor to the rest of the world

AFRICANGLOBE – Huge sums are flowing out of Africa through illicit means, robbing the continent of capital sorely needed for development. This destructive situation has been going on for decades.

“Africa has been a net exporter of capital since the 1970s and perhaps even the 1960s,” says Ecobank’s head of research, Edward George.

This is no better reflected than by SA’s experience. In a study called “Illicit Financial Flows from Africa”, US-based advocacy group Global Financial Integrity (GFI) puts illicit capital outflows from SA at a staggering US$122bn between 2004 and 2012 — with 2012 coming in at $29,1bn.

SA’s illicit outflows dwarf legitimate capital inflows. Foreign direct investment (FDI) in 2014 came in at $5.8bn while foreign aid brought in $1.26bn, according to the Organisation for Economic Co-operation & Development (OECD). SA’s legitimate outbound FDI in 2014 was $6.9bn, reports the UN Conference on Trade & Development. It left overall net capital inflows at only $160m.

On a smaller scale, the situation is the same in other African countries. In Africa, among those hit hard by illicit capital outflows in 2012 were Nigeria ($7,9bn), Zambia ($4,3bn), Côte d’Ivoire ($2,2bn) and Botswana ($1,9bn).

In total, GFI data shows Africa experienced illicit capital outflows of $68.6bn in 2012. Estimates are based on World Bank and IMF economic models, notes GFI.

The belief that illicit capital outflows are the work of sinister criminal syndicates has been turned on its head. “Large corporations are by far the biggest culprits responsible for illicit outflows,” former SA president Thabo Mbeki told the African Union Assembly in Addis Ababa in January. Mbeki is chairman of the high-level panel on illicit financial flows from Africa.

Confirming Mbeki’s concern, the GFI puts international transactions by multinational companies as the source of 60%-65% of illicit outflows. Criminal activities such as smuggling and drug trafficking make up 30%-35% of illicit outflows and bribery and embezzlement only 3%.

At the heart of illicit capital flows by multinational companies are flows within companies. They have plenty of scope for manipulation of flows through transfer pricing. More than 60% of world trade takes place within multinational companies, notes the OECD.

In an ideal world, transfer pricing within a company would occur at an arm’s-length price as if it were a transaction on the open market. It is the basis of SA transfer pricing rules.

But it is not an ideal world. Abuse of transfer pricing by companies results in profit shifting to the most tax-beneficial jurisdictions and a resultant loss of tax income (tax base erosion) by countries where they earn their profits.

Particularly open to abuse is transfer pricing of intangible items such as service fees, management fees and royalties. It could be a big problem for SA. In its first interim report on base erosion and profit shifting (BEPS), released in December 2014, the Davis Tax Committee headed by Dennis Davis noted that outflows of this nature from SA had jumped from R43,6bn in 2008 to R205bn in 2011.

The world’s 20 biggest economies — the G20 — went to war against transfer pricing abuse in July 2013 with the launch of the BEPS action plan under the auspices of the OECD. SA is at the forefront of developments as a member of the OECD BEPS committee.

However, the SA Revenue Service (Sars) so far appears only to have scratched the surface of transfer pricing abuse. Over the past five years, R20bn in assessments has resulted in collections of R5bn, Sars acting spokesman Luther Lebelo revealed.

Sars is picking up the pace. There are 33 cases in audit and three cases each exceeding R1bn due for assessment, says Lebelo.

No companies have been named and there have been no court cases in SA.

Sars is also set to become better equipped for the task at hand. Among the steps taken, says Lebelo, Sars has modified the company income tax return to obtain more detailed transfer pricing information.

Amendments have also been proposed in the draft Taxation Laws Amendment Bill to regulate the obtaining of information held offshore and extend the period Sars has to revisit an assessment that incorporates a transfer pricing issue.

But Sars appears seriously under-resourced in its fight against BEPS. Its BEPS unit has a staff of 20 compared with over 200 in the equivalent UK unit, Davis told parliament in April. “It is ridiculous that we have so few people.”