Unprecedented economic growth in a number of African countries is going hand in hand with soaring inequality, which national tax systems are failing to address, according to a new report.
Report authors, Tax Justice Network-Africa and international development agency Christian Aid, say the surge in inequality is not simply the result of the rich getting richer.
Instead, there is clear evidence that in many cases growth is taking place at the expense of the poor, who are becoming increasingly impoverished.
As a result, progress in human development has been disappointingly limited given the volume of wealth created during a decade of high growth across the continent
The report, ‘Africa Rising? Inequalities and the essential role of fair taxation’, says tax is one of the most potent tools governments have to address inequality, but tax systems in many African countries currently do not fulfil that function.
Instead, taxes have been introduced that disadvantage the poor, while tax systems that could be used to redistribute wealth more fairly are being undermined by tax dodging and illicit finance flows facilitated by off-shore secrecy.
The report investigates income inequality in eight sub-Saharan countries, Ghana, Kenya, Malawi, Nigeria, Sierra Leone, South Africa, Zambia and Zimbabwe, and examines the ability of the tax systems in each to raise money to address poverty by taxing companies and individuals with higher incomes.
Alvin Mosioma, spokesperson for Tax Justice Network, Africa, says the findings showed inequality is becoming a problem that should be of ‘huge concern’ to most of the governments concerned.
‘Inequality has been exacerbated by the growth model in many countries which has seen a concentration of income,’ he said. ‘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.
‘Until tax dodging is tackled effectively, nationally and internationally, and illicit finance flows from the continent halted, economic inequality will continue to rise.’
He added that a forthcoming report from the African high level panel on illicit financial flows from Africa, chaired by former South African president Thabo Mbeki, would present a key opportunity to recommend practical ways to address the problem*.
‘The panel has been looking at the scale of illicit wealth leaving Africa and investigating what can be done. This could not be more critical. Speaking with a unified African voice would have a huge impact in advocating for global change,’ he said.
Sophie Powell, Christian Aid’s Africa policy and advocacy manager, said: ‘African governments at present are finalising their position on the framework that should succeed the Millennium Development Goals at the end of 2015. They and other governments globally must prioritise the building of fair taxation systems to address inequality at its core.’
‘At present, while discussions on tax reform take place among the G8, G20 and OECD, it is still far from certain whether developing countries in Africa and elsewhere will be included in, or benefit from, the changes being discussed.’
The report examines the relationship between the national taxation systems in the countries examined, and international taxation issues.
The key problems it identifies include:
- A reliance in many parts of Africa on natural resource extraction, a sector the report says ‘is known to be rife with tax dodging techniques.’ In addition, it adds, it is more likely in such undiversified economies that wealth will be diverted by elites into tax havens.
- Weak tax authorities with limited expertise and resources to tackle tax abuse. Poor enforcement means the continent’s high net worth individuals often evade tax.
- The damaging impact of the tax consensus, led by the International Monetary Fund (IMF), which has focused, on reducing corporate, and to a lesser extent, personal income tax while expanding the base of both consumption and value added tax – both of which hit the poor hardest.
- Corporate income tax reduced because of both tax dodging, and through tax exemptions proffered by governments that mistakenly believe tax breaks will attract sustainable investment.
- Governments have struggled to introduce new taxes on income, wealth and property, often because of the resistance of the private sector, and elites, to reform.
- Major shortcomings in personal income tax systems, which place an unfair burden on employees, leaving higher earning, self-employed people rarely paying tax.
- Income tax thresholds are too low and do not protect the poor.
The report identifies tackling financial secrecy and tax havens as key to reform. ‘If countries in Africa cannot tax income and wealth correctly, they will shift the tax burden onto the poor,’ it says.
‘While individual governments must be held accountable for their policy choices, the international community must shoulder a lot of the responsibility for increasing economic inequalities and for the short comings of tax systems and public finances in sub-Saharan Africa.’
* Note: I have contributed to this report
I first addressed this issue in 2009 for the TUC, and again earlier this year.
We should tax these properties back into use by massively increasing the council tax charge on them. Some would still sit vacant. But many fewer would.
Tax can be a good thing. This is an occasion when it could definitely deliver.
If you want to rename national insurance and make it an ‘earnings tax’ it must be applied to all earnings
According to The Telegraph, a Taxpayers' Alliance campaign to have national insurance renamed Eranings Tax is likely to be successful.
A number if, inevitable thoughts follow on. The first is that this is, despite all the claims, not a tax. There is still a contributory principle in national insurance, for example, in pension rights. Given how keen the government is on that idea I wonder how this renaming helps them.
Second, if this is to be called an Earnings Tax the obvious question to ask us why then only earnings are taxed. Why should unearned income such as rents, dividends and interest not be taxed?
And third, the question as to why such large scale avoidance of the tax is permitted in the case of small limited companies.
I happen to believe in national insurance. But if others don't that's their right. But given that we cannot do without the £100 billion or more it raises a year (whatever the TPA thinks, or claims, or is deluded about) then renaming the tax requires that fundamental questions on its equity must be answered.
And there is an answer, which is to apply it to all investment income in excess of the annual NIC lower earnings limit each year except, as is the case for earnings, for pensioners. Many of the abuses and inequities would then disappear.
But I somehow don't think that is what those supporting this move have in mind.
I am amused to note that RBS has finally decided the time has come for it to get its core business right.
I am also a little worried it has taken so long. This was what I suggested the strategy of a nationalised RBS should be way back in October 2008 as it was being de facto nationalised.
The real question to ask is why it has taken so long to realise that this was the glaringly obvious thing to do all along?
I think the time has come to end any debate on whether or not Chris Moyles knew what his tax avoidance scheme involved. He unambiguously did. I know because of this report in the Daily Telegraph in 2012:
The former Radio One star Chris Moyles requested that a tax tribunal grant him anonymity in a battle with HM Revenue & Customs over a “marketed tax-avoidance scheme”, according to the Times.The appeals would normally be held in public, but Mr Moyles's lawyer argued that the publicity could damage his career if he were exposed as a tax avoider. “If it were to become public knowledge that he availed himself of a tax avoidance scheme, his career might be damaged and his earning capacity reduced,” Judge Colin Bishop said is reported to have said, summarising Mr Moyles's arguments. “He is already the focus of media interest for other reasons, much of it hostile.”
There is no suggestion Mr Moyles has avoided tax.
I think the last line now looks like history, but let's consider the rest of the implications of this case, which Moyles lost.First, Moyles by this time knew HMRC did not agree with the scheme with which he was involved. He must have known – because the application to have his case heard in private was made in his name – that the issues were contentious and that if he was found to be in the wrong his reputation would suffer.Someone must have told him he could settle his case. But Moyles decided to proceed – and took the risk of being found out. He must have known all the consequences. No one can say is not not competent enough to have appraised himself of all these risks.So Moyles knew he was avoiding. He must have known he could back out of the scheme and settle his tax bill with interest and, maybe, penalties (but these would have been modest given the legal advice he had received). And he could have avoided a lot of publicity.He didn't. The only obvious conclusion is that he put more emphasis on avoiding tax than saving face.It was his choice. But one he must have knowingly made.
Update: Alexi Mostrous of The Times has asked me to point out he first found the case referred to by The Telegraph
Attached to some version so the tax tribunal hearing decision that ruled that Chris Moyles had unsuccessfully sought to avoid paying tax was this diagram which shows what supposedly happened:
The supposed trade in cars is right in the middle. The Tribunal ruled there was no such trade.
All the rest are arrangements to create a massive supposed fee for arranging a loan – a fee of £1 million in this case.
SG Hambros is a Channel Islands bank. The money involved never left that bank.
The ‘bare trust’ and its ‘trustee’ (a functionary in the words of the ruling) were in the Channel Islands, clearing doing nothing more than lending their name to a sham arrangement.
The weirdly named boxes are all British Virgin Island companies.
The aim was to create what was called a manufactured dividend on a loaned stock which, it was claimed, was greater than that due if a dividend had been paid and so was a fee for arranging a loan (here £1 million) that was then, it was claimed, capable of offset for tax against trading income.
It was ruled there was no trade.
It was also ruled that there was no manufactured dividend as the payment made clearly did not relate to any reasonable dividend due.
And it was ruled there was no right to tax deduction on the supposed fee.
At every level the scheme failed. But the diagram shows the lengths such shenanigans go to. I doubt Moyles had a clue what was going on, but I do suspect, very much that he knew what the aim was.
Many are saying on this blog and elsewhere that the arrangements in the Moyles case were tax evasion, not avoidance. I think what the case actually proves is how meaningless the distinction between those two is, and how nebulous the concept of legal tax abuse has become. As I have already said, an alternative approach to the creation of deliberate tax risk is now needed.
What is do think useful is to share the key paragraph of the decision, which is as follows:
I think when a decision involves the phrase “as though by magic” the Judge is getting as close as he can to saying this scheme has crossed a boundary. That may be one of credibility. It may be something more. He did not say.
What I say is that even if the General Anti-Abuse Rule would have dealt with this case the fact that it has no penalty provisions within it renders it useless to deal with the consequences. I argued for such penalties throughout my involvement with that rule.
I also argued for a broadly based general anti-avoidance principle based on motive and not outcome. This case proves the need for that.
It’s time to get real on this issue.
I gave not redacted full decision in what will now inevitably be called the Chris Moyles tax case. I have read parts. It seems that this Guardian summary is fair:
Moyles, who billed himself as the “saviour of Radio 1″ before he quit as presenter of the breakfast show in 2012, claimed to have run up £1m of losses selling £3,731 worth of used cars. He tried to offset the claimed £1m loss in the 2007-08 financial year against tax he owed on his other income, including an estimated £700,000 salary from the BBC, which is funded by licence fee payers.
What happened was that Moyles was sold a tax avoidance scheme, apparently by one adviser but which was created by another adviser. About 450 were sold the scheme. Supposedly the people in question traded in second hand cars. As a result it was claimed they borrowed money. Costs relating to those loans were artificially inflated using arrangemnts that involved BVI companies. The whole arrangemnt lacked any commercial substance according to the tax tribunal decision now made. The losses have now not been allowed for tax purposes and tax will be due.
Moyles will suffer considerable embarrassment as a result if this, and so he should. He went out of his way to save tax and his instincts must have told him the scheme was artificial. He should have realised that this had to be abusive. He has revealed his own greed and that he believes his own self interest comes above any obligation to the society of which he is a member. People won't like that.
But the truth is that it is the advisers who are most at fault here. A now notorious firm of advisers created these schemes and others sold them. Moyles was foolish but these advisers knowingly created and sold tax risk with the intention of undermining the tax revenues of the UK. I believe that this should be a crime.
The creation of tax risk – a knowingly uncertain tax position created with the main or sole aim of securing a gain – can be defined. The taking of advice on the risk is the evidence of intent. It is quite distinct from the taking of advice to mitigate risk in a commercially existing situation, which is an entirely reasonable thing to do. There is no risk of confusion. And the process of sale – whether externally to clients or internally by the creation of structures within a group if companies – is identifiable. This makes all the triggers for a crime prosecution achievable.
I would hope the whole tax profession would support the creation of such a crime; we can do without people creating and selling such risk.
Late last year I published an analysis of the rapidly declining average declared income of the UK's self-employed people. The trend was profoundly marked in all available data, just as the same data showed considerable increases in the number of self-employed people in recent years.
There are three basic explanations for this trend. One is that those earning anything above modest sums from their own endeavours now incorporates a company to avoid and maybe even evade tax and as a result the average earnings of the remaining self-employed has fallen. This would make sense if average tax paid per small company was increasing, but it isn't. Nor do the trends in the number of trading companies probably justify such a proportionate claim over recent years, although they definitely did a decade ago. I will be publishing more on this soon.
Second, it is possible the self-employed know the risk of being investigated by HMRC is so low their rate of tax under declaration (and HMRC already estimate more than 40% do under declare) has risen significantly. I think there is a significant chance that this is true, but is not enough to explain the trend.
And third, the income of the self-employed may really be falling rapidly. This, I think is the most likely cause, especially given the current supposed rapid increase in the number of self-employed people who should really be placed in the ranks of the despairing who are being incentivised to move off unemployment statistics by declaring themselves to have this status irrespective of actually having any real income to justify it.
This is an illusion that can be played for a while but the one thing these people will not do is pay tax on non-existent income. That is one of the best available explanations for the shortfall in government tax income in January, one of the two months in the year when the self employed pay their taxes (the other is July).
You can manipulate unemployment stats to pretend growth is shared but cash talks. And here it is being loud and clear: these self-employed people are almost certainly no such thing and are struggling in poverty in the absence of any other prospect of any sort of support from a state that officially no longer cares.