ATAF Statement on the Panama Papers
7 April 2016
The revelations this week on what is known as the Panama Papers has huge implications for tax and the debate on illicit financial flows from the African continent.
The Panama Papers are a leak of 11.5 million files from the database of the world's fourth largest offshore law firm, Mossack Fonseca. The scale of the Panama leak is unprecedented and provides further evidence of the enormity of the tax lost through tax evasion. It further demonstrates the great need for African countries to take more action to counter the losses they are suffering due to tax evasion through individuals illegally moving funds out of African countries.
The papers reinforce the findings on tax lost through Illicit Financial Flows in the report of the High Level Panel on Illicit Financial Flows (IFFs) led by former President Thabo Mbeki. That report estimated a tax loss in Africa of more than US$ 50 billion annually from IFFs. The African Economic Outlook report, jointly published by the African Development Bank, the Organisation for Economic Co-operation and Development (OECD) and the United Nations Development Programme estimated that Africa lost an annual average of US$ 60.3 billion, or around 4% of GDP, in IFFs between 2003 and 2012. During the same period, official development aid (ODA) and foreign direct investment (FDI) averaged US$ 42.1 billion and US$ 43.8 billion respectively.
The African Tax Administration Forum (ATAF) welcomes the leaking of the Panama Papers as the data will assist tax authorities in Africa to identify cases of tax evasion by their taxpayers. The papers also highlight the need to significantly improve domestic resource mobilisation in Africa through more effective domestic tax and financial regulation.
Key to African tax authorities being able to effectively tackle tax evasion is their ability to access financial account information held in other jurisdictions. As a result, ATAF has consistently driven activities aimed at developing capacities among African countries to share taxpayer information through the appropriate legal tools. This is being facilitated through the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum has added the automatic Exchange of Information (AEOI) standard whereby the tax administration in one jurisdiction will automatically provide financial account information to other jurisdictions. ATAF is actively supporting the work of the Global Forum, particularly on a project called the African Initiative that will assist in building sustainable exchange of information (EOI) capabilities in Africa.
The Panama Papers provide insight into the various forms of tax planning used by individuals or corporates. Some illicit financial flows stem from inappropriate profit shifting using various mechanisms including treaty shopping and abusive transfer pricing. Treaty shopping is often used to avoid withholding taxes on the transferred funds (many African countries use withholding taxes to try and protect their tax bases). Funds can also be shifted through excessive payments for interest, royalties and services between two related companies located in low tax jurisdictions.
Tracing and mapping where illicit funds are banked is a question of collection of data and collaboration among various agencies and jurisdictions. To be effective, all such data and other information gathered need to be linked and cross referenced. Many countries have sophisticated computer systems that enable government officials to build a picture of those evading their taxes. ATAF is providing practical support to its members through its EOI Project to help them establish EOI units in their tax authorities, including developing the necessary legal instruments and information technology.
In this regard, ATAF has developed various instruments to assist members to enhance their EOI mechanisms. These include:
- The ATAF Agreement on Mutual Assistance in Tax Matters (AMATM), which goes much further than merely exchanging tax information between the contracting parties; it also makes provision for information to be exchanged either on request, spontaneously or automatically and allows for joint investigations and audits.
- The development of the ATAF Model Agreement on the Avoidance of Double Taxation (DTA) which represents an important step forward in addressing African concerns in the process of formulating a continental approach to the future negotiation of DTAs, and provides a sound basis for those member countries with limited experience in this field.
African countries also need to ensure that they have the appropriate legislation to effectively address such tax evasion. That might include:
- Setting the appropriate level of financial penalties for those hiding assets offshore, possibly including taking part of the evaded asset as a penalty;
- Civil penalties on those who enable tax evasion in addition to those imposed on the tax evader;
- Publicly naming of both tax evaders and those who enable tax evasion;
- A strict liability criminal offence for offshore evasion so it is not possible to plead ignorance in an attempt to avoid criminal prosecution; and
- Statute of limitation has to be taken into account when enquiring for data, in particular in respect of taxes.
We encourage our members to carry out an assessment to ensure their countries have the legislative powers and resources for the appropriate criminal offences and levels of penalties. This would allow them to take tough action against the small minority who try to cheat the system by hiding their money in offshore accounts. We urge African governments to invest more money in compliance and tax evasion work focusing particularly on wealthy individuals and corporates.
Countries might wish to consider requesting the International Consortium of Investigative Journalists (ICIJ) to share the leaked data directly with them. Countries also need to build the necessary capacity and skills in their tax authorities to expose and act on any financial wrongdoing. We encourage our members to carry out an assessment to ensure they have the legislative powers and resources with the appropriate criminal offences and levels of penalties in order to take decisive action.
ATAF will continue to monitor the data that is released and provide regular updates on our website. ATAF will also provide member countries with technical assistance on, for example, reviewing legislation and building effective regimes to address this type of aggressive, and often sophisticated, tax evasion. We will provide a platform for the sharing of best practice among our members and on the actions being taken by other tax authorities around the world. Finally, we will coordinate media activities of members to use the momentum for the creation of better tax compliance in the respective taxpayer communities.
African Tax Administration Forum
For more information contact:
Tel: +27 12 451 8806
Mob: +27 83 271 6033