The Journal on Financing for Development developed under the leadership of Lyla Latif brings to the fore central issues around fiscal studies highlighting how and why fiscal laws and policies matter as an instrument of governmental and societal power, social change and development needs.
I am very honoured by this tribute, and grateful to everyone involved for their efforts in organising it. I count myself very lucky to have survived for so long and still feel relatively fit, so that I can continue enjoying an intellectual life that I do not regard as ‘work’, because I do not need to be paid, so I can do what I please. I am also fortunate because I was able to use my career in academia to gain some understanding of what became a hot political topic, taxation of multinationals. This put me into a perhaps unique position to try and bridge the wide gap between the often simplistic level of public debates and the recondite knowledge of specialists on the issue. These are some reflections about my experience of trying to combine a broad political commitment with the arduous but rewarding work of trying to understand how the world works, and to help change it.
Copyright (c) 2024 Financing for Development
Formulary Apportionment for the Extractives Industry - How Should Resource Rents be Taxed.
In contrast to the current transfer pricing (TP) regime with its arm’s length requirement, unitary taxation using formulary apportionment has for many decades been suggested as a more appropriate alternative for allocating income of multinational entities to jurisdictions for the purposes of taxing rights. The concept and application of unitary taxation and formulary apportionment is neither new nor novel, with inter-jurisdictional regimes having been in place around the world for many decades. Scholars such as Sol Picciotto (1992, 2013a, 2017) have long advocated for formulary apportionment at a global level while noting the difficulties that potentially arise in determining appropriate formulary apportionment allocation keys, as well as ensuring that countries of the Global South are not net losers from its application. The same scholars also emphasise that while formulary apportionment at a global level is the gold standard, there are many benefits to a more gradual move towards formulary apportionment within the current international tax regime. Through the recent work of the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN), there has been a proposed shift towards formulary apportionment with a focus on ensuring profit allocation is to jurisdictions where economic activity occurs. Economic activity is reflected in the allocation keys that make up the formula and their respective weightings. The biggest challenge to introducing formulary apportionment is global agreement on these allocation keys and their weighting. There are numerous examples of formulas used in domestic regimes as well as proposals at a global level. Generally, formulas consist of a combination of factors such as capital and labour that reflect the origin or source jurisdiction and sales that reflect destination jurisdiction. These formulas, however, may not be suitable for countries in the Global South, especially those that are resource-rich, where such an application results in a large proportion of income being allocated to jurisdictions other than the source country because the formula relies heavily on sales at the destination. Picciotto (1992, 2013, 2017) has, in several papers, noted the exploitation of natural resources, especially the extraction of minerals, oil and gas, as being critical to the economic development of countries in the Global South, with the main benefit being the tax revenue generated. Corporate income tax, however, is generally found to be disappointingly low, with resource rent taxes producing much higher tax revenues. The above observations lead to two questions in designing a regime that adequately captures the value of natural resources for source countries. The first is whether the extractives industry should be subject to a corporate income tax regime that adopts formulary apportionment using the traditional three-factor formula or should include a fourth ‘resource rents’ factor. Second, the question arises of where the roles being separate but complementary charges should be imposed. Both questions address the overarching issue of whether the corporate income tax regime should capture a greater proportion of income from the extractives industry or the income should be captured through alternative means. This article builds on the work of Picciotto and others who have previously highlighted the tensions around a formulary apportionment regime for the extractives industry and, in doing so, focuses on source jurisdiction entitlement concerns in the Global South. It addresses the questions outlined above and considers the arguments for and against a fourth factor or allocation key, such as a production volume factor or a source-based sales factor that modifies any general apportionment formula and reduces the significant emphasis on sales at the destination and the role of separate charges. The article ultimately suggests that while economic rents should be taxed separately outside the corporate income tax regime, reform of the corporate income tax system based on unitary taxation and formulary apportionment that addresses the fundamental flaws in the current regime should be undertaken. However, the article also recognises that this top-down approach is one that is difficult to attain and that a pragmatic bottom-up approach, which is being witnessed in the current international tax reform arena, may also benefit resource-rich countries, especially those in the Global South.
Extractive Industries Transparency Initiative (EITI)
The Theories of the State and the Internationalisation of the State as a Framework for the Discussions on International Taxation.
The reproduction of global capital requires the construction of supranational legality, an internationalisation of the State. Furthermore, the participation of States in this world system is characterized by competition among States to attract capital, with tax incentives playing a central role. The discussion on the theories of the State can then serve as a framework to understand current discussions on international taxation. Since 1991, Picciotto has been proposing - with a growing movement of followers in the academic faculty and/ or civil society - unitary taxation as an alternative to the arm's length principle that has been transposed into most national tax regulations since the beginning of the 20th century. Such proposal arose at a time of intersection between his contributions to the discussions on the theories of the internationalisation of the State and his first study on international business taxation. Following several other OECD proposals from 1998 onwards, in 2018, the G20/OECD’s Inclusive Framework on BEPS proposed a unified solution to tax the digital economy, along with a proposal to combat base erosion of the taxable income and the transfer of profits. Both proposals are based, conceptually, on the principle of unitary taxation. This article discusses the challenges of international taxation within the framework of the debate on the internationalisation of the State. Both ends of this discussion draw heavily on Picciotto's academic work.
The High Road and the Low Road - What Should be the US Reaction to the end of Pillar One.
The likely failure of Pillar One of the Base Erosion and Profit Shifting (BEPS) 2.0 effort raises the question of what the United States (US) may do in response. One possible response to the revival of unilateral measures such as Digital Services Taxes (DSTs) and withholding taxes is to deny them foreign tax credits and possibly engage in other retaliatory measures. However, these measures are unlikely to persuade other countries not to tax US Multinational Entities (MNEs) and, in the long run, may be more likely to harm the US economy by increasing double taxation of US MNEs and reducing trade. One other option is for the US to adopt Pillar One unilaterally along the lines of the Indian fractional apportionment proposal. A recent empirical study suggests that this will lead to a revenue gain of over $7.6 billion per year, much of which is derived from US MNEs selling into the US products manufactured in low-tax jurisdictions such as Puerto Rico based on intellectual property (IP) developed in the US. This may be a much better result and would be based on and justified by the global consensus on the principles of Pillar One.
Base Erosion and Profit Shifting (BEPS) 2.0
Unitary Taxation - A Fit for Purpose International Tax Architecture for Transnational Corporations.
The Pandora Papers were a timely revelation of years of persistent, nefarious actions of some Transnational Corporations (TNCs). The outcome of this leak, coupled with dissatisfaction towards the “Arm’s Length Principle”(ALP) and the impetus from scholars’ efforts in the field of international taxation and tax justice activists, legitimise the current discourse around unitary taxation. There is no doubt that the current international taxation framework reeks of 20th century relics. Upon this premise, Prof Sol Picciotto doubled down on a unitary taxation approach for TNCs. Central to his work is the need to rethink the traditionally structured Corporate Income Taxes (CIT), which did not respond to the proliferation of TNCs. Notably, his role and contribution in this field are nearing success and are similarly being validated through the “Unified Approach “ being enshrined in Pillar One of the Organisation of Economic Cooperation and Development’s (OECD) Two-Pillar solution. With the inadequacies of the current tax regime being exploited by devious TNCs through: the creation of holding companies in tax havens under aggressive tax planning schemes, debt shifting and manipulation of transfer pricing (TP), we appreciate the departure from the ALP towards a system that taxes genuine economic activity, despite its political implications and general difficulty in implementation. With developing countries gravely affected by the ALP approach, which treats transnational corporations as separate entities, it goes without saying that the unitary approach presents real benefits for developing countries. This paper seeks to rely on Africa’s extractive sector and the specific Kenyan experience relating to transfer pricing amongst TNCs as a case study to demonstrate need for a unitary taxation regime.
Organisation of Economic Cooperation and Development (OECD)
The Inspiration Behind this Special Issue.
Sol Picciotto is a living legend in the tax justice movement. Almost every single activist involved has heard of him and most likely read some of his work. I myself came across his writings almost immediately after joining the movement and was fortunate to meet him shortly afterwards. Sol’s writings have the uncanny ability to go straight to the essence of the issue. Indeed, he is most famous for his consistent and prescient articulation of global formulary apportionment (GFA), which has today become the basis of the Two Pillar solution. GFA underlies profit allocation under Amount A and also the Under Taxed Payments Rule (UTPR) of the GLOBE Rules. This is directly the result of Sol’s ceaseless campaigning pointing out the deficiencies of the Arm’s Length Principle, and I for one am very glad that he is seeing his dream come true. As we all know, we are living through a historic period of reform in the international tax system, and this is only the beginning.
I happened upon Sol’s name when reading some now forgotten article in Tax Notes International about a decade ago. At the time, I had been writing and communicating on my own with people at the OECD who had just started up the initial BEPS process. I had the personal satisfaction of being listened to (including an hour’s phone discussion), but definitely no satisfaction from seeing any of my golden thoughts reflected in the mid-2013 BEPS Action Plan. After about a half year of corresponding on a few tax and other matters, Sol introduced the BEPS Monitoring Group (BMG) to me and asked whether I might be interested in joining the group. Being retired (though periodically teaching in a Tax LLM program as an adjunct), I responded: Due to my retired status and our periodically being out of touch with things when we take off on our bicycles, I'm not sure how dependable I can be or how much I can contribute, but I am very happy to help out when I can. That started my active participation in some high percentage of the BMG’s output over the past decade. Prior to joining the BMG, as noted above, I had been involved individually corresponding and speaking with the OECD about the BEPS project’s direction.
RESOLVING THE DEBT SUSTAINABILITY ISSUES FROM A LEGAL AND INSTITUTIONAL PERSPECTIVE: A KENYAN CASE STUDY
The paper argues that the promulgation of the Constitution of Kenya 2010, the enactment of the enabling domestic laws,1and the medium-term debt management strategies prepared by the Kenyan Ministry of Finance has not helped much in terms of transforming the management of public debt in Kenya. The paper attributes this to a set of inter-related factors, mainly the failure by Parliament to enforce legislative measures. The paper further observes that failure by Parliament to objectively conduct oversight in the process of public debt management has led to the adoption of public debt policies which undermine human rights. In addition, it is indicated that the country loses significant revenue through illicit financial flows, which if the loopholes facilitating such are sealed, could steer the country towards a sustainable public debt.
Copyright (c) 2022 Financing for Development
Achieving Social and Economic Sustainability using Islamic Social Finance: A Kenyan Case Study
Poverty continues to remain a social and economic challenge in Kenya. This paper examines whether Kenya can progress towards social and economic sustainability by recourse to Islamic social finance instruments, such as zakah (Islamic wealth tax) and waqf (charitable endowment), to alleviate poverty. The objective is to seek alternative sources of revenue for the government, which can be mobilized locally without relying on foreign debt to channel these resources towards supporting access to finance for people living in poverty. Structured questions were disseminated through an online survey to gather data on the practicability of proposing Islamic social finance to achieve social and economic sustainability in Kenya. Key among the findings is the estimation of zakat paid by Muslims in Kenya, which is approximately USD234.1 million dollars (0.2% of the GDP). A substantial amount can be utilized towards mitigating government budget deficits. However, before Islamic social finance can be properly leveraged as an alternative source of revenue for the government, there is a need first to raise awareness among Muslims and policymakers about the enormous potential of these instruments for social development within Kenya.
Is Africa’s Fiscal Space Undermined by Debt related Illicit Financial Flows?
Fiscal activism relates to the extent to which African governments can generate revenue to meet their financing needs. It is, therefore, a priority policy issue at all levels of governance both domestically and globally. Usually, every government is exposed to revenue shortfall which undermines their efforts and planning towards securing a sustainable socio-economic environment which is buttressed by efficient political frameworks and strong financial sectors. To guard against fiscal limitations, governments borrow. However, unchecked borrowing, borrowing utilised for non-economic activities that do not result in returns, but which are instead diverted towards private use and borrowing that results in the creditor looking at a debtor state as a pathway towards monetising the debt and earning more out of what is loaned, goes against the very idea of fiscal activism. A government borrows so that it has enough to run the state and its society. Consequently, this paper argues that debt can have the effect of supporting the African fiscal base, but it can also undermine the fiscal space by eroding it. This happens when debt creates an enabling environment for illicit financial flows to thrive or sneak into a country’s legal system. To explain this, the paper discusses how much of the African debt has been aggravated by historical injustices in the form of colonial and odious debts, emergence of vulture funds, lack of thin capitalisation rules, debt to equity swaps, lack of fiscal transparency and accountability for resource backed loans all which culminates into an environment that fosters opportunities for illicit finance or untaxed gains made out of manipulating the debt and the legal framework within which it operates.
THE TENSION AROUND THE RIGHT TO INFORMATION VERSUS NON-DISCLOSURE CLAUSES IN LOAN CONTRACTS
Most African countries are crumbling under the weight of foreign debt. Yet these governments rely on debt as their largest financial portfolio,1 as is the case even with developed economies. However, the problem lies in the way debt portfolios are structured. One of the big conversations around the topic of debt management is the lack of transparency - and in particular, non-disclosure clauses in government loan contracts. Against this backdrop, is the right of a state’s citizenry to access public information, especially, concerning debt agreements entered by the government on behalf of and for their benefit. This paper delves into the legal framework underpinning the right to information, the status of implementation of this right in African countries and why access to information is important for the citizenry, governments, lenders, and all other debt stakeholders. The paper also discusses the limitations on the right to information and how those limitations have and can be used by governments to justify retention of non-disclosure clauses in loan contracts. Further, the paper demonstrates how it is not enough to have access to information laws because poor or inconsistent implementation of these laws jeopardises citizens’ access to information. To better understand why lenders and borrowers favour disclosure over transparency, this paper considers the various forms that non-disclosure takes and the practice of different lenders in this regard. It goes on to give examples of the consequences of non-disclosure and the potential benefits of voluntary and proactive disclosure by governments, including some good practices from a few African states. The paper concludes by proposing a framework for disclosure by African governments, their creditors, and other stakeholders.
The Impact of Foreign Debt on Economic and Social Rights: A Case Study on the Right to Health in Kenya, Nigeria and Zambia
While economic and social rights (ESR) are recognized in national and international law, their enjoyment in some African countries is constrained. This results out of corruption and mismanagement of available funds and is further impacted upon by foreign debt, which plays a substantial role in limiting access to resources needed to fund government services. The link between government services and human rights is evident particularly with respect to ESR. For example, the right to health can progressively be achieved if a government invests adequately in the healthcare sector by ensuring availability of adequate healthcare workers to cater for patients. Countries that take on significant foreign debt direct a large part of government resources towards its servicing which then reduces spending on essential public goods and services. This paper studies Kenya, Nigeria and Zambia to understand whether there is a connection between the amount of funds allocated to ESR, specifically the right to health, and the amounts spent servicing foreign debt. External debt has conditions attached which further erode progress towards implementing ESR. The primary remedies to address growing foreign debt discussed in this paper include restructuring the debt and ensuring the proper management of available resources. If the adverse impact of foreign debt is not recognized, the realisation of ESR will continue to be constrained in Africa.
PUBLIC PARTICIPATION IN FISCAL DECISIONS ON FOREIGN DEBT
This study reviews the legal framework on public participation in six Sub-Saharan African countries to establish whether public participation impacts the state’s decision on accruing external debt. The need for public participation in fiscal decisions related to debt is crucial since it acts as a check against potential future welfare implication of debt piling, default risk and any macro-economic implications posed by debt. Although several African countries have recorded remarkable progress in legislations aimed at promoting public participation, recorded scores do not reflect a remarkable growth in public participation. Therefore, this paper addresses whether the lack of public participation in fiscal policy making has implications for fiscal decisions on debt. The paper argues that with public participation being a fundamental right, it is recommended that African countries should act beyond legislation to actual and effective implementation of public participation in fiscal decisions. Moreover, authorities in Africa should embrace open and inclusive public participation to offer the public and civil society a chance to submit their inputs when government policies are formulated, to enhance fiscal transparency, accountability, and better fiscal outcomes.
RESOLVING THE DEBT SUSTAINABILITY ISSUES FROM A LEGAL AND INSTITUTIONAL PERSPECTIVE: A FOCUS ON EAST AFRICA
This paper examines debt sustainability in eastern Africa. Four objectives guide the investigation focused on these countries. First, to carry out a situation analysis of debt sustainability. Second, to review the legal and institutional perspectives which promote debt sustainability. Third, to assess public debt composition, and fourth, to review the measures that have been undertaken to enhance public debt sustainability. Generally, the argument is made that public debt is sustainable in Uganda, Kenya, Tanzania and Rwanda. But these countries are exposed to risks such as foreign exchange, refinancing risks and liquidly risks, which may negatively impact on their debt sustainability.
Special Drawing Rights And Its Impact On Economic Justice, Towards Reconstructing The New African Economic Order
Foreign debt continues to undermine Africa’s progress towards the attainment of human rights. Consequently, this research paper considers whether funds accessible through Special Drawing Rights (SDR) can be allocated towards African States facing revenue shortfalls instead of relying on foreign debt. It also looks at how SDR can support reconstruction of a new economic order in Africa. The paper finds that SDR allocation offers some sort of financial relief to African States who are members of the International Monetary Fund. The paper argues that a huge SDR allocation has the potential to support reconstruction of a new economic order in Africa. To achieve this, African States should continue to push for a fairer SDR allocation system, redistribution of unused SDRs to debt distressed African nations and formation of a Resilience and Sustainability Trust that will offer unconditional and cost free loans. In the meantime, there is a need for strong domestic reforms and debt restructuring even on humanitarian basis since financing by the international community seems to be a challenge.
Education for Sustainable Development? An Analysis of Financing Wetland Conservation in The Wetlands of Kenya
Financing education is the future towards environmental protection including wetlands. The focus of this paper is to assess if there is conservation education in various wetlands sites of Kenya, and, to evaluate the key challenge facing conservation education in Kenya. This is because the Kenyan wetlands are degrading fast due to exploitation from surrounding communities. The theoretical framework used in this paper is the Network Theory of Castell which focuses on the programming which in this case is finance, the switch which is education and the nodes which are the policies. The research was undertaken in Kenya’s three Ramsar sites in the rift valley namely Lakes Nakuru, Naivasha and Bogoria. Primary data was collected from a sample size of 461 community household respondents and 10 site officials on the three sites. Household respondents were given questionnaires while the officials were interviewed. Descriptive statistics was used to get the analyses. The results indicated that education levels were very low in the case study sites explaining wetland degradation due to low levels of funding. The study concludes that the communities living around the wetlands need to have high levels of education and the focal point of Kenya Wildlife Service needs to work closely with the international organisations to get funding to implement the wetland and education policies on the ground.
Taxing Times for Development: Tax and Digital Financial Services in Sub-Saharan Africa
Digital Financial Services (DFS) present a unique opportunity for ensuring sustainable economic growth of Sub-Saharan African (SSA) countries. Arguably, taxing DFS provides SSA countries with additional revenue with which to eliminate extreme poverty and even improve gender balance. Since a DFS regime for SSA countries also has the potential to attract investment this article considers the impact of taxes and tax-like payments imposed on the DFS industry in SSA and the region’s economic development. It is argued that the taxation of the mobile sector in SSA which represents the evolution of DFS is heavily disproportionate. This is demonstrated by comparing the sector’s earnings in total revenues which are significantly larger than the share the sector contributes to the domestic state’s GDP. The article, therefore, examines multiple “small taxes” and tax-like charges affecting providers and consumers of DFS in SSA and analyses such practices from the perspective of specific principles of a good tax policy, such as the principles of equity, neutrality, simplicity and certainty. It explores the utilization of these principles to form part of a DFS tax regime by examining several African states approaches to taxing DFS, questioning whether DFS tax resonates with the taxation principles. The article recommends improvements in DFS tax policy design. The principles of good tax policy, as well as practical experience of some SSA countries, make it possible to crystalize the tax policy recommendations made for enabling the development of DFS and ultimately, sustainable economic growth. The article proposes taxing DFS in a simpler, more convenient and effective manner where possible given the potential positive socio-economic impact the technology might have.
Tax Financed Digital Cash Transfer Schemes for Social Protection in Kenya
There are two forms of social protection in Kenya; the contributory scheme enforced under formal employment and non-contributory schemes which are financed by taxes. This paper focuses on the latter and specifically, tax-financed social assistance schemes in the form of digital cash transfers. The aim of these schemes is to address poverty and reduce vulnerability to economic, social, natural and other shocks and stresses amongst the marginalised by providing them with regular cash flows. While these social assistance schemes have been critical in improving the lives of the most vulnerable in Kenya – majority of whom are excluded from the contributory schemes that are suited for those in formal employment – none of them is large enough to adequately address the numbers of people in need. Moreover, they continue to face policy, administrative, programmatic as well as evidence-related/knowledge challenges that impair their efficiency and effectiveness. Therefore, a need arises to assess these tax-financed cash transfer schemes to better understand and present an accurate reflection of the current state of affairs. In so doing, this paper provides recommendations for Kenya’s tax-financed social benefits schemes in order to improve coverage, address poverty and reduce vulnerability.
Broadening Nigeria’s Tax Base: Focusing on The Taxation of Digital Transactions
In taxing digital transactions, the Nigerian government purposes to widen its tax base and strengthen its domestic revenue mobilisation capacity. Arguably, this additional tax could provide the country with adequate sources of revenue with which to finance development and go beyond relying primarily on its oil tax revenue. Although the digital financial services industry in Nigeria is among the continent’s largest and fastest growing sector, its tax contributions are minimal. This article explores the Nigerian approach to taxing digital transactions, investigating why the industry yields low taxes and to recommend proposals that offer the Nigerian government practical steps to leverage on the potential of imposing this type of tax.
Demand Elasticities of Excisable Goods in Kenya: Estimation Using Almost Ideal Demand System
Excise taxes are an important source of revenue in most developing countries including Kenya. Between 1980 and 2018, excise taxes constituted a significant proportion of revenue in Kenya, yielding an average revenue contribution of 3.1 percent of GDP. Over the years, imposition of excise duty has been expanded from products considered harmful to society to include financial services as part of revenue raising measures. However, this expansion of excisable goods and services may distort consumer behaviour, resulting in low tax revenue generation. This paper estimates the price elasticity of demand of various excisable goods and services in Kenya. Price elasticity of demand, which is the responsiveness of change in quantity demanded of a good or service with respect to a change in its price, is essential in the formulation and design of tax policies as it helps in assessing who ultimately bears the tax burden. Using the 2015/16 Kenya Integrated Household Budget Survey data and employing Deaton’s Almost Ideal Demand System model, demand elasticities for tobacco, alcoholic products, financial services, and petroleum products are estimated to assess the responsiveness of their quantity demanded with respect to a change in their prices. From the analysis, alcohol, soft drinks, petroleum products and financial services are all price inelastic. However, tobacco is price elastic with an elasticity of -1.046 while cigarettes have an elasticity of -0.920 which tends to 1, thus approaches unitary elasticity. Therefore, if the policy objective is to increase excise tax revenues, then commodities with lower price elasticities of demand should bear a larger tax burden. However, levying of higher excise duty should be applied with caution as any increases in excise tax rates may result in undesirable outcomes and therefore, should not be guided by the concept of elasticity alone.
A Constitutional Moment in Cross-Border Taxation
To show why the taxation of cross-border transactions has remained largely unaltered across a century of upheaval, this article reveals a steady hand in control. To explain how those complex rules have changed—and could change in more profound ways—it does the same. Demonstrating how cross-border taxation has been shaped by the preferences and the intellectual habits of the United States, it highlights an unexpected opportunity for marginalized states to seize control of its future.
THE LEGAL AND TAX ARCHITECTURE OF COLLECTIVE INVESTMENT FUNDS IN MAURITIUS
Mauritius is a small island nation in the heart of the Indian Ocean that is effectively an Offshore Financial Centre (OFC). The Global Business regime in particular which benefits from low effective tax rates and an extensive double tax agreement (DTA) network has led to Mauritius being deemed to be a gateway to investment in Africa and Asia. Whilst this has facilitated significant investment into those regions it has also created the opportunity for harmful tax practices that see tax being levied in jurisdictions where there is little or no substantive economic activity. Collective Investment Vehicles (CIVs) have also taken advantage of the regime and established themselves in Mauritius in order to ensure that minimum tax is paid on investments made. The OECD's Base Erosion and Profit Shifting project has, however, had an impact on the Global Business regime. This article explores the legal structure of CIVs in Mauritius as well as the tax regime governing them. It also analyses the ways that the Global Business regime has been abused, the changes the regime has been subjected to following the BEPS project and the impact if any that the amendment are likely to have on the CIV industry and to Mauritius status as an OFC.
Collective investment vehicles, OFC, tax avoidance
DEBT, ACCESS TO INFORMATION AND ILLICIT FINANCIAL FLOWS: AN ANALYSIS BASED ON THE MOZAMBIQUE HIDDEN LOANS CASE
The debt crisis in Africa is threatening the continent's ability to finance sustainable development. As of 2018, many African countries were in a debt distress. One such country was Mozambique, where state-owned enterprises had been used to secretly take out loans which led to a financial and development crisis for the citizens. The ‘hidden loans’ case, where citizens sought to challenge the validity of these loans, has brought to light the connection between debts taken out by state-owned enterprises - whose fiscal portfolio is not being captured in national budgets - with the lack of access to financial information in many African countries, a situation with the potential to facilitate illicit financial flows (IFFs) through state-owned enterprises. Against this background, this case study analysis seeks to examine the issues arising from the Mozambique hidden loans case by viewing them in the context of debt, access to information and IFFs. This brief analysis seeks to demonstrate that there is a need for data around state-owned enterprise borrowings to be made publicly available to prevent the use of these entities as vehicles for the facilitation of IFFs. The analysis will proceed by setting out a brief summary of the case in the background section. The next section will then delve into issues around borrowing by state-owned enterprises, access to financial information and IFFs. A famous Liberian proverb states that one should not measure the timbers for their house in the forest. This analysis adopts an approach inspired by this proverb - taking out different aspects of the case in order to examine them and build a general standpoint.
Debt, access to information, illicit financial flows
THE ‘IRON’ TRIANGLE, HEALTH ACT, 2017, AND THE COST OF UNIVERSAL HEALTH COVERAGE AGENDA IN KENYA
The ‘iron’ triangle concept emphasizes on three ingredients for proper policymaking in healthcare; namely access, quality and cost. Achieving the three however, is no mean fete. As such the Kenyan Health Act, 2017 while it remains the main framework to achieve universal health coverage (UHC) in Kenya, may fail to meet its targets. The key weakness in the Act on moving towards UHC is on cost. It is not clear under the Act who will pay for the cost and where the sources of revenue are going to come from. The commitment to the 2001 Abuja Declaration that required African States to commit 15% of the total national budget to finance health has not been achieved, further exacerbating the already dire financial situation. While the Act is strong on access and quality, the two may not be adequately achieved until the issue of healthcare cost is also properly articulated and reflected in the national health legislation. This article, therefore, seeks to analyse the issue of health care cost in the context of a developing country and how the same can be expressly addressed in the national health legislation starting with the 15% Abuja Commitment being entrenched into the law. Health financing as a topic is especially important in developing countries as financing of education because many users of health care in developing countries are poor and cannot afford to pay for the services from their own income leading to poor health outcomes and stunted development.
Universal health coverage, Kenya Health Act, 2017, health finance, Abuja Declaration, 2001.
CENTRALITY OF CRITICAL THINKING TO VALUE CREATING EDUCATION FOR HUMAN AND NATIONAL DEVELOPMENT
The transformational role of education in human endeavors cannot be overemphasized. The basic function of education is to develop, in a holistic way a well-balanced, self-functioning and responsive individual who can spur development and transform society. The emphasis on the intellectual development of the human person is premised on the need to produce an individual capable of translating what is learnt into pragmatic programs as to be able toimprov e conditions under which humans live. This article explores the need for education in the critical faculty as the best avenue to the inculcation of skills, dispositions and traits definitive of value creating education for human and national development. By development we mean human ability to holistically partake in the collective contribution to the welfare of the society; informed by a conscious resolve to live, in harmony with others, a meaningful and satisfactory life. This view is premised on the understanding that knowledge in the critical faculty transforms individuals from dependence to independence, consumers to producers; and more importantly, into innovative, critical, creative, judicious, and projective entities with requisite abilities to navigate critical challenges that impedes national development.
Critical thinking, value-creating education, development, finance
TAX BASE EROSION AND CORPORATE PROFIT SHIFTING: AFRICA IN INTERNATIONAL COMPARATIVE PERSPECTIVE
Each year, base erosion and profit shifting cost governments worldwide between US$100bn and US$600bn, which undermines financing for development and deepens inequality. This article examines how African nations in comparison to other countries contribute to and counter base erosion and profit shifting by multinational companies through analysis of the lowest available corporate income tax rates, tax exemptions, transparency provisions, anti-avoidance measures, and double tax treaty networks. To do this, the article draws on the ≥’/Corporate Tax Haven Index dataset produced by the Tax Justice Network in 2019, in which the legal framework and practices of 64 jurisdictions including nine African countries are assessed to measure the risks of tax avoidance, base erosion and profit shifting, profit misalignment, and the race to the bottom in corporate income taxation. The findings show that, on average, African countries contribute much less to the problem of tax avoidance than EU and OECD member states and their dependencies. In contrast, however, African countries offer more profit-based tax incentives, including tax holidays and economic zones, in a bid to attract foreign direct investment but often with unintended consequences. Further, transparency and anti-avoidance measures are not as robust in African countries as in the EU and OECD, which signals space for policy improvements to curb corporate tax abuse. The Corporate Tax Haven Index also reveals the distortions introduced in academic studies and development policy that rely on the highest statutory corporate tax rates and disregard reductions that may be extended to a company based on the business size, sector, location, or other factors.
tax havens, tax incentives, illicit financial flows
REVISITING THE 2019 CASE OF TAX JUSTICE NETWORK- AFRICA versus CABINET SECRETARY FOR NATIONAL TREASURY & 2 OTHERS
The main focus of this review is on the 2019 ruling of the High court of Kenya: the case regarding the Double Taxation Agreement (DTA) between Kenya and Mauritius. This review explores how the decision on the constitutionality of the Kenya- Mauritius DTA by the Kenyan High Court has broad impacts on the ability of Kenya to mobilize the requisite resources required for development. The review delineates the role that tax treaties play in financing for development investigating both the positive and negative effects on countries ability to mobilize resources that countries should potentially consider as they enter into these agreements. The review explores specific provisions of the Mauritius-Kenya DTA revealing that in fact Kenya stands to lose plenty of taxable revenue if such a treaty were to enter into force. Lastly, the review delves into a critique of the decision of the Kenyan High court in this particular case setting out other best-case scenarios that the court could have explored in order to render the agreement unconstitutional.
A COMMENTARY ON AIRBNB AS A DIGITAL BUSINESS MODEL: REGULATION AND TAX CHALLENGES FOR EAST AFRICA
This article sets out to discuss two key issues. The first relates to how digital business models can be leveraged for domestic resource mobilisation and the second issue, related to the first, discusses the interplay between digitalisation and tax avoidance. Airbnb and Booking.com are relied on as the case studies from whence these two issues are discussed. Arguably, despite the growth in online business models within East African states, such growth has not been commensurate with the revenue collected from online businesses. Given the increasing popularity of mobile apps among East African customers, online businesses have been able to increase their market share and directly collect income through their smart phone apps compatible with mobile money transfer. This article advances the view that those online businesses not only pose taxation challenges for the East African community but also reflags the need for more capacity building for East Africa’s revenue authorities.
Digitalisation, Airbnb, taxation, data protection.
REFLECTIONS ON THE IMPLICATIONS OF THE FOURTH INDUSTRIAL REVOLUTION (FIR) ON TAXATION
This article highlights the implications of the technologies driving the Fourth Industrial Revolution (FIR) on the taxation profession. The FIR is among the current issues of discussion across the world both, in general, and on the technologies that drive it. The FIR has been discussed in various places and contexts. These include in the 2016 World Economic Forum (WEF) and recently at Davos 2020. Technologies that drive this revolution include but are not limited to advanced robotics, artificial intelligence (AI), the internet of things (IoT), virtual and augmented reality, predictive analytics, autonomous/driverless vehicles including drones; sensors and automatic identification as well as corporate/enterprise wearables and additive manufacturing (AM).
Fourth Industrial Revolution, taxation, digitalization, technology.
DIGITALISATION AND THE CHALLENGES FOR AFRICAN ADMINISTRATIONS
While assessing the recent reforms in the area of digital taxation within the African countries, the article revisits the question of whether there is need for tax policies and further infrastructure to manage and collect Africa’s own share of the much-needed revenue in this era. The article did a country by country analysis of proposals, public announcements and legislation implemented on digital taxation of direct and indirect tax in the digitalised economy by African countries. The article then benchmarks the proposal, public announcements and legislation implemented so far by African countries with the work of the international organisations. It considers the implications of digitalisation for taxation in different tax authorities in Africa. The digital age is transforming everything, the nature of markets and products, how to produce, how to deliver and pay, the scale of capital to operate globally, and human capital requirements. It is also boosting productivity, exposing companies to new ideas, technologies, new management and business models, and creating new channels of market access and all of this at relatively low costs. The digital economy is key to finance sustainable development through increase in tax revenue collections. The provision of social protection, infrastructure and basic services such as education and health care is crucial for development. Sustainability requires that the means to finance these public goods and services should come, as much as possible, from the government’s own resources, that is, tax revenue. This explains the close link between taxing the digital economy and using the revenue to finance development. The specificities of the digital sector and the required tax legal landscape in the African States is also assessed. The article makes policy recommendations for further tax reforms in order to manage revenue collection in the digitalised economy.
Development, digitalisation, finance, tax administration.
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