Despite African growth, tax dodging widens inequality-report

by Luke Balleny | | Thomson Reuters Foundation
Wednesday, 26 February 2014 15:16 GMT

Ugland House (R), which houses the office of the Cayman Islands' largest law firm and is the registered office of 18,000 companies, on Grand Cayman Island, an offshore finance centre. Picture handout dated September 25, 2009. REUTERS/Alan Markoff

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Tax dodging by companies and the rich is widening the gap between rich and poor in many African nations, a damaging rise in inequality that is largely hidden by the continent's strong economic growth

LONDON (Thomson Reuters Foundation) – High economic growth rates in a number of African countries mask widening inequality between a wealthy minority that is growing richer and the poor who, in many cases, are becoming poorer, a new report said.  

The report by campaign group Tax Justice Network (TJN) – Africa and international development agency Christian Aid highlights poor tax policy, tax evasion and the growth of illicit financial flows from Africa as key factors in the increasing inequality on the continent.

“Inequality has been exacerbated by the growth model in many countries which has seen a concentration of income,” TJN-Africa spokesman Alvin Mosioma said in a statement.

“It also reflects the inability of governments to tax the proceeds of growth, either because so much is given away in corporate tax breaks, or has escaped offshore into tax havens,” Mosioma added.

“Until tax dodging is tackled effectively, nationally and internationally, and illicit finance flows from the continent halted, economic inequality will continue to rise,” he said.

The report, ‘Africa rising? Inequalities and the essential role of fair taxation’, is based on an investigation into inequality in: Ghana, Kenya, Malawi, Nigeria, Sierra Leone, South Africa, Zambia and Zimbabwe and finds it to be particularly prevalent in at least six of those eight countries.

Between 1986 and 2010, the share of total income earned by the richest 10 percent increased by 75 percent in Nigeria and 50 percent in Ghana, and income inequality in Zambia hit its highest level since records began, the report said.

While the governments of sub-Saharan countries should take some of the blame for the inequality in their countries, many of the problems they face are not of their own making, the report said.

Much of the wealth produced by the elite in the countries studied escapes offshore to tax havens where it cannot be taxed, the report said. Countries that are rich in natural resources are particularly vulnerable because the natural resource sector is “known to be rife with tax-dodging techniques,” it added.

The report also criticised multilateral organisations - the International Monetary Fund (IMF) in particular - which it says push ‘the tax consensus’, a belief that corporation taxes and to a lesser extent income taxes should be reduced, and consumption taxes such as value added tax (VAT) increased. While reduced corporation tax may help attract foreign business, increased consumption taxes raise the cost of everyday items for the country’s poorest citizens.

Yet there are a number of actions that the governments of sub-Saharan countries could take to help reduce inequality, the report said.

“The personal income tax (PIT) systems lack equity as the bulk of the burden is on employees. The self-employed rarely pay tax,” the report said.

“The visible lack of equity erodes citizens’ trust in the system,” it added.

Income tax thresholds in some countries are too low, the report said, citing the examples of Zimbabwe and Malawi where people who are too poor to buy a basket of basic goods for their family are still eligible to pay income tax.

 The report also highlighted the poor tax collection records of Kenya and South Africa.

“In Kenya only 100 HNWI (high net worth individuals) are registered with the tax authority even though the country has 142 Kenyan shilling billionaires, whose net worth exceeds $30 million each,” the report said.

“Apart from the non-declaring billionaires, there are likely to be a further 40,000 HNWI in the country who are avoiding tax,” the report added.

Another factor that the report says has increased inequality in sub-Saharan Africa is corporate tax incentives, particularly in the resource sector, which the report says “few would now argue in favour of... unless very carefully targeted in pursuit of clear industrial policy or social and environmental goals.”

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