Rwanda’s current efforts to tackle the problem of tax avoidance among some multinational corporations are part of a well understood malady affecting the region and Africa at large. According to the African Union’s High Level Panel on Illicit Financial Flows, the continent lost in excess of US$50bn annually between 2000 and 2008. The level of illicit financial outflows from Africa exceeds the official development assistance to the continent, which stood at $46.1bn in 2012. Illicit Financial Flows (IFFs) generally involve hiding wealth from a country’s tax authorities, and may involve the transfer of money earned through illegal activities such as corruption, as well as transactions involving contraband goods and criminal activities. The AU High Level Panel on Illicit Financial Flows formally came into being in February 2012, and was established by the UN Economic Commission for Africa (UNECA) and the African Union to address the problem of IFFs on the continent. Some of the effects of illicit financial outflows are self evident, and involve the draining of foreign exchange reserves, reduced tax collection, canceling out of investment inflows and a worsening of poverty. It is for this reason it should be of interest see what turns up from the audit Rwanda has just commissioned to look into recent merger and acquisition deals involving some foreign companies in the country. Rwanda, like most developing countries, is more dependent on taxes levied on companies rather than those derived from personal incomes. But taxation is not just about raising money; it is in the process of raising money that accountability is strengthened and the state apparatus is built. And, since the state is anchored in law in its utility towards the general good of the citizen, illicit financial outflows not only undermine the rule of law, but stifle trade and worsen macroeconomic conditions. Therefore, illicit flows not only minimize the revenues needed for improving governance institutions, but also negatively affect growth-enhancing investment such as infrastructure development. They erode legitimacy of economic activities and thus thwart vital economic development. Specifically, taxation enables the state to ensure universal access to basic goods and services, such as food, housing, water, health services, education and social protection. Taxation is, therefore, about development and has been summarized in what are known as the 4 ‘R’s; that is, Revenue, Representation, Redistribution, and Re-pricing. Revenue from taxation provides funding for basic services and strengthens the relationship between state and citizen through representation. This accounts for the first two ‘R’s. Redistribution challenges inequality through progressive taxation and provision of social safety nets. Re-pricing increases the cost of goods and services which do not reflect social and economic or environmental realities. Rwanda is only a microcosm of a larger picture. If the loss of capital can be tamed and the money retained in the continent, most African countries could have paid off their outstanding external debt and still held surpluses for economic development and service provision. Some estimates suggest that over the last 50 years, Africa is estimated to have lost in excess of $1 trillion in illicit financial flows. This sum is roughly equivalent to all of the official development assistance received by Africa during the same timeframe. Thus, the resource needs of African countries for social services, infrastructure and investment underscore the importance of stemming IFFs from the continent. But IFF are a global problem, and the macroeconomic conditions they worsen “are facilitated by some 60 international tax havens and secrecy jurisdictions that enable the creating and operating of millions of disguised corporations, shell companies, anonymous trust accounts, and fake charitable foundations. Other techniques used include money laundering and transfer pricing (see “Report of the High Level Panel on Illicit Financial Flows from Africa” released early this year).” Therefore, though Rwanda’s efforts may appear local, they are regional in as much as they are global in scope.
