By Betty Guchu

As Kenya aims to rationalize and harmonize tax expenditures, the lingering question is whether its fiscal performance will lead to a standing ovation or calls for a script rewrite.

Source: State Department for Investment Promotion/ Sketch: Lunapic.com

Tax incentives are deductions, exclusions, or exemptions from taxes that are due to the government. They are employed as incentives to draw money flows into desired economic sectors or areas, or to make particular investments. Thus, tax incentives lower a person’s or a business’s tax liability while costing the government money. They may be cost-based, meaning they lower the cost of capital, or profit-based, meaning they minimize income taxes.

Profit-based incentives include tax exemptions, tax holidays, tax deferrals, tax allowances, special economic zones, and financing incentives, while cost-based incentives include investment allowances, tax credits and investment tax credits.

The government agency in charge of assessing, collecting, and accounting for all revenues in Kenya is the Kenya Revenue Authority (KRA). In accordance with the Income Tax Act, the Authority offers fiscal (tax) incentives in collaboration with other regulators and facilitators, including the Capital Markets Authority (CMA) and the Export Processing Zones Authority (EPZA – for the granting of EPZ incentives), among others.

The total amount of money that the government forfeits as a result of providing tax incentives is known as tax expenditures. Over the past five years, tax expenditures have averaged KSh383.9 billion, which is nearly equal to the KSh382.6 billion allotted to counties in the 2020–21 fiscal year and nearly half the KSh651 billion earmarked for debt payments in the same fiscal year.

Over the past five years, tax expenditures have averaged KSh383.9 billion, which is nearly equal to the KSh382.6 billion allotted to counties in the 2020–21 fiscal year and nearly half the KSh651 billion earmarked for debt payments in the same fiscal year.

This has led some economists and development professionals to argue that, given the limited budgetary space the government has had to operate in over the last five years, money lost through tax expenditures could be used to pay down debt and could also greatly boost the resources available to county governments.

In effect, while the budget has expanded, resource needs have grown even more. Yet the provision of basic public goods and services, such as health, education, and other social amenities like water, electricity, and roads, has been restricted in favour of debt servicing, pensions, and salaries. Late revenue disbursements to the counties have made the situation worse.

The provision of basic public goods and services, such as health, education, and other social amenities like water, electricity, and roads, has been restricted in favour of debt servicing, pensions, and salaries

Kenya’s public debt portfolio has grown dramatically over the past ten years due to borrowing to cover fiscal deficits; it went from KSh1.4 trillion in June 2011 to KSh8.2 trillion in December 2021. According to projections from the Parliamentary Budget Office (PBO), the entire amount of debt outstanding is expected to surpass KSh10 trillion by the end of 2024, with debt servicing accounting for 65% of all revenues received during the 2023–2024 fiscal year.

Transparency of Tax Expenditures

A comprehensive set of laws, regulations, and guidelines mandate that the Treasury guarantee the openness of tax expenditures. In reality, however, there is a level of opacity that prevents public scrutiny and encourages abuse of tax expenditures. Moreover, there are no provisions in the current tax expenditure legislation for situations in which it may be determined that the recipients have violated the requirements to qualify for tax exemptions.

The Treasury has consistently disregarded the law’s requirement that it disclose information on tax expenditures to the public on a regular basis.

Furthermore, the Treasury has consistently disregarded the law’s requirement that it disclose information on tax expenditures to the public on a regular basis. The tax expenditure data currently available only goes back to 2017, leaving out information for earlier fiscal years.

The Treasury published the first ever Tax Expenditure Report on Kenya’s tax expenditures for the 2017-2020 period in September 2021. The report is insufficiently detailed, providing only the total amount of revenue that the government has conceded as a result of the preferential tax schemes. Some stakeholders contend that rather than being a proactive step to improve openness, this was mostly done to comply with IMF requirements.

Access to comprehensive data about the recipients of tax expenditures and the criteria used to grant incentives is likewise severely lacking in transparency. This restricts scrutiny and makes it more difficult to conduct a thorough analysis of the costs and benefits accrued.

There are also challenges in accessing information about the requirements that the various taxpayers must meet to be eligible, and the steps taken in the event that businesses or other entities do not fulfil the requirements on the basis of which the incentives are offered—such as the creation of jobs, among other things.

Essentially, a prudent framework for tax expenditures needs to include procedures for disclosing information on the number of taxpayers who meet the requirements for each tax expenditure and the specific eligibility criteria. For example, the Corporate Income Tax (CIT) tax expenditure requires companies to fulfil certain conditions such as offering employment opportunities to residents in the area in which they set up.

It becomes more difficult to hold businesses that profit from tax benefits accountable without the disclosure of such information. The lack of this kind of data also makes it more difficult to evaluate the costs and benefits of tax expenditures in making future-oriented tax expenditure policy decisions.

Accountability of Tax Expenditures in Kenya

The Treasury has continuously neglected to conduct assessments of the various tax expenditures, despite the government providing the goals and specific policy objectives of the numerous preferential tax schemes. Therefore, without knowledge of how well specific preferential tax policies have performed in the past in terms of achieving goals, it is difficult to comprehend the rationale offered by the government for their continued implementation.

The reviews that have been conducted have largely involved altering the composition and structure of the tax expenditures without evaluating their efficacy. As a result, it is possible that some tax expenditure decisions made by the government have been implemented without the necessary accountability as required by law and could be resulting in net revenue losses.

Moreover, the laws governing tax expenditures do not provide for sunset clauses and there is currently no data available concerning expiry dates for many existing tax expenditures in Kenya. This leaves room for the abuse and manipulation of incentives to benefit entities with close relationships at the highest levels of government decision-making.

Furthermore, even in cases where expiration dates seem to exist, there has been a propensity to renew or modify current incentives without following the proper procedures.

The end result is a framework for tax expenditures that, in particular, permits foreign corporations to come into the country, attract incentives, and repatriate benefits over extended periods of time without facing scrutiny or legal repercussions should they fail to comply with the requirements.

Tax Expenditure Efficiency and Equity

Assessing the equity of tax expenditures is necessary to determine who benefits from them – whether the preferential tax treatments give more economic advantages to the wealthy than to the poor, or whether they make the tax system as a whole more or less equitable.

However, estimating the impact of investment incentives requires data regarding the identities of the beneficiaries and the tax benefits they receive. These data needs are unachievable, particularly for developing countries like Kenya where weak governance results in a lack of government accountability and openness, information asymmetries, and restricted public participation in policymaking.

In general, the tax expenditures incurred by the government of Kenya seem to benefit the middle and upper classes more than the lower-income groups, especially the very poor. Furthermore, it appears that corporations benefit more from tax expenditures incurred under the VAT than small and medium enterprises. And even among corporations, multinational corporations tend to attract more incentives than local businesses.

Moreover, manufacturing, finance, insurance, and construction appear to benefit more from tax expenditures than agriculture, the largest employer and a significant contributor to the country’s GDP and overall economic growth.

A review of the 2021 Tax Expenditures Report shows that the government has lost a significant amount of money as a result of tax expenditures in the manufacturing, agricultural, construction, banking, and insurance sectors. Returns in terms of growth, employment creation and other connected benefits such as export growth appear not to be commensurate with the tax expenditures incurred.

The report shows, for instance, that tax expenditures have been steadily rising for the manufacturing sector; in the period between 2017 and 2019, the sector received KSh33.1 billion in tax expenditures on average. However, the sector’s share of GDP has been declining over time, falling 1.7% between 2016 and 2020.

A second Treasury report published in November 2022 is similarly a summary of tax expenditures for 2021. The figures show an 18.3% increase in total tax expenditures, from KSh267.1 billion in 2020 to KSh316 billion in 2021. Figures published by the Treasury in October 2023 record an increase to KSh393.6 billion in 2022.

The Treasury attributes the rise in total tax expenditures between 2020 and 2022 to increased expenditures across the various tax heads brought on by an expansion of economic activity. The report also says that a review of various tax laws has also resulted in the introduction of new tax incentives.

Specifically, the government introduced a 150% capital allowance to encourage investment, eliminated import duties to allow the importation of food items into the country to protect Kenyans from the high cost of food due to the drought and rising commodity prices, and introduced insurance relief for NHIF contributions.

While the 2022 report notes that “there is a need to have an elaborate framework for monitoring and evaluating the impact of tax expenditure in the economy”, this does not yet seem to be in place, with the 2023 report concluding that  “the Government will continue to rationalize and harmonize the tax expenditures with the aim of removing redundant tax expenditures while enhancing those intended to promote investments” and confirming only that the Treasury is automating tax exemption procedures in order to reduce processing times and increase efficiency.

Evaluating the costs and advantages of tax expenditures in order to make future-focused tax expenditure policy decisions will remain challenging in the absence of a strong framework.

Evaluating the costs and advantages of tax expenditures in order to make future-focused tax expenditure policy decisions will remain challenging in the absence of a strong framework. Yet, thus far, the reviews that have been carried out have entailed making changes to the structure and composition of tax expenditures without assessing their effectiveness.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) Project in collaboration with Tax Justice Network Africa (TJNA).

By Brenda Osoro

Source: The Star Kenya/Sketch: Lunapic | President William Ruto meets World Bank President Ajay Banga

In the delicate dance between economic development and public debt, Kenya finds itself at a critical juncture, grappling with the consequences of imprudent debt management.

Debt, when not managed wisely, can be a double-edged sword, a fact starkly illustrated in Kenya’s current economic situation.

The Kenyan government has racked up substantial debt to the tune of Ksh10.25 trillion, surpassing its Ksh10 trillion ceiling. This has created immense pressure to service it which in turn has led to some rather expedient and potentially detrimental decisions.

One such decision involves the government’s push to increase taxation. In June 2023, lawmakers approved the passing of the Finance Bill 2023, containing a number of deductions.

With these changes, including a doubling of the VAT on petroleum products from 8% to 16%, a rise in income tax for individuals earning more than Ksh 500,000, the introduction of a 1.5% housing tax, and a 2.5% medical insurance tax, many Kenyan citizens now find themselves allocating nearly 40% of their income towards various taxes and levies.

Since then, hardly a month has gone by without some new form of tax proposal.

Desperate to meet debt servicing demands, the government has cut development spending and increased taxes without adequate regard for their regressive impact.

This has disproportionately affected low and middle-income households, deepened socioeconomic disparities, and stifled domestic enterprises. When the private sector struggles to thrive under the weight of excessive taxation, economic growth suffers.

In a desperate bid to manage the ever-increasing debt load, the government has chosen to take out new loans to pay off existing debt, a short-term solution that perpetuates the cycle and leads to unsustainable debt levels, creating a precarious financial future.

While it’s essential to understand the domestic factors that have led Kenya into its current debt quagmire, the International Monetary Fund (IMF’s) involvement cannot be ignored.

The IMF often plays a significant role in shaping a country’s economic policies and offering financial support in times of crisis. However, the conditions attached to such financial support can have far-reaching consequences for a nation’s economy.

In Kenya’s case, the IMF’s involvement has come with specific conditions, including austerity measures and fiscal reforms, as prerequisites for loans or financial aid.

The pressure on the government to meet IMF-imposed conditions often leads to further cuts in public spending, particularly in crucial areas like health and education, which have long-term impacts on the well-being and development of the nation.

As Kenya’s longstanding association with the IMF dates back to 1964, one cannot help but question why – despite the purported significance and substance of the reforms advocated by the institution- tangible transformation remains elusive.

In fact, while billions continue to be lost to needless tax expenditures and corruption, the allure of easy money from the institution has created false comfort and killed innovation in improving the tax regime and related policies.

In general, there has been a notable lack of political will to pursue fiscal reforms that create just tax policies because of easy access to debt.

Kenya’s debt crisis is a cautionary tale that underscores the severe consequences of imprudent debt management and external influences, such as those exerted by the IMF.

It is imperative for the country to strike a balance between securing necessary financial resources and maintaining fiscal responsibility, charting a course towards sustainable growth and development that doesn’t come at the cost of its citizens’ well-being.

The author is Program Assistant at the East African Tax and Governance Network (EATGN).

By Leonard Wanyama

Source: Standard Kenya/Sketch: Lunapic.com

Lately, whenever taxes are mentioned in conversation, a good portion of the time is taken to offer each other a shoulder to lean on among other forms of psychosocial support.

This is because mere mention of the Kenya Revenue Authority (KRA) actions unleashes a barrage of emotions with every single person having something to say about how paralyzing current measures are.

Even school children are beginning to write poems about how troublesome taxes have become. Also, there is glaring behavioral change as individuals try to stretch their shillings and cents.

You may have noticed shopkeepers aggressively asking you to avoid paying using till numbers because they prefer you send cash to their personal lines.

Maybe you’ve also noticed that Kenyan sensibilities of being offered free bags or packaging as an after-sales service have now since long gone because it costs too much for traders.

Consequently, the tax burden is reducing productivity and lowering consumption. Fewer jobs mean less people to tax and minimal consumption means that the economy will contract further because uptake of business wares or services is decreasing.

Most pundits have been trying to explain this pain using the Laffer Curve theory that describes the relationship between tax rates and the amount of revenue collected by governments.

Present discomfort, to them, is illustrative of how the current administration is pushing the limits of revenue collection to the breaking point because higher tax rates result in lower revenues.

This is because the promise of expanding tax bases that would have reduced rates due to a wider revenue resource pool, have been replaced with higher tax rates squeezing every cent possible out of people’s pockets despite no increased incomes in the context of a sluggish economy.

Accordingly, this therefore beats the purpose of self-financing the country’s service delivery thereby showing why the government keeps resorting to debt acquisition that is part of punishing expenditures locking the country in an almost fruitless cycle like the cursed King Sisyphus of Ephyra in Greek mythology.

Yet, while indeed KRA has missed its targets, the fact that its revenues have grown by KES 45.3 billion confirms that Kenya does not have a tax collection problem but mostly a public expenditure challenge.

Listening to the Controller of Budget, Dr Margaret Nyakango, at the National Dialogue Committee it is very clear that across government – be it the executive, the judiciary, or the legislature- there is a problem of moral hazard in how public finances are managed.

Basically, this means that in decision making or implementation various officials and institutions engage in risky behavior that is not in the public interest because they bear no risk for the economic consequences of their actions.

This systemic bad faith therefore explains how KRA officers can begin to harass passengers at airports without thinking of implications to tourism or why the Energy and Petroleum Regulatory Authority (EPRA) can disregard a court order suspending implementation of the Finance Act 2023.

It explains why duty bearers may not realize that costly mobile money transaction fees on account of taxation hinder essential services and even jeopardize government digital services by discouraging citizens from using them.

Multiple extraction of funds from people’s purses that do not correspond to the services available to them then begins to break the social contract between the individual and the state.

Government cannot continue to spend beyond its means. Tax governance efforts, that is, prevention of avoidance and evasion of taxes should consider a civic education approach to support ongoing capacity building efforts.

This is so that even as current efforts develop new knowledge, improve skills, change existing bad practices, and inform policy makers, there is greater personal awareness plus responsibility for socio-economic implications of tax actions.

The author is Regional Coordinator of the East African Tax and Governance Network (EATGN). Follow on X @lennwanyama.

By Brenda Osoro

Source: Nairobi International Financial Center/Sketch: Lunapic

Offshore tax havens are well-known for attracting the wealthy, including politicians and business magnates, to safeguard and manage their assets. In many African contexts, these offshore havens have been linked to the illicit accumulation of stolen public funds.

Whenever they make headlines, it’s typically due to massive tax evasion or corruption scandals or alleged impropriety involving prominent leaders worldwide such as when the “Pandora Papers” implicated Kenya’s former president, Uhuru Kenyatta.

Based on media coverage, it is easy to picture tax havens as some notorious zero-tax Caribbean paradise like the Cayman Islands or the Bahamas. These are only part of a larger global system of financial secrecy. In reality, tax havens can be found a lot closer to home.

Some argue that the governments of developing countries should not even attempt to become tax havens. Recent developments in Africa contradict this notion with an increasing number of African states considering or setting up International Financial Centers (IFCs).

These are establishments set up by means of legislation that offer investors convenience through a combination of low tax liabilities, high levels of secrecy and limited regulatory standards as an incentive for foreign investment.

Data from the Global Financial Centers Index shows the existence of as many as eight IFCs in countries such as South Africa, Mauritius, Morocco, Kenya, Nigeria, and Rwanda. All share the ambitious goal of positioning themselves as an investment hub for Africa.

Officials have touted these centers as efficient gateways for external capital inflows to Africa, potentially bringing in millions in investments, hundreds of thousands of jobs, enhanced skills, and contributing to higher GDP growth.

While IFCs can attract finance for development they also hinder resource mobilization. Legal gaps in their frameworks can and continue to be exploited for tax avoidance and illicit financial activities.

Companies often exploit these gaps by channeling their capital through IFCs, reducing their tax liabilities with no intention of these jurisdictions being the final destination of their investment benefits. This lack of genuine economic activity mirrors tax havens and can lead to an increase in easy-to-impose taxes to compensate for lost income.

Additionally, the secrecy of IFC investments attracts criminals seeking to legitimize illicit transactions and hide their ownership through ‘shell corporations,’ which exist primarily on paper with no substantial business operations.

In a bid to attract the most foreign investments into their countries, African states have been competing to undercut each other in offering a wide array of tax incentives.  A phenomenon that has popularly been described as ‘a race to the Bottom.’ This game of tax competition makes it harder for countries to maintain higher tax rates, leading to ever-declining rates and revenues.

Surprisingly, research suggests that tax incentives are not a primary factor in attracting foreign investment. Infrastructure quality, low administrative costs, political stability, and consistent macroeconomic policies hold more weight as motivators for foreign investors.

While African nations strive to modernize their financial infrastructure, it is crucial to do so without compromising development efforts. Governments must address vulnerabilities and domestic inequalities that may arise from these strategies, urgently reviewing and closing any loopholes that enable tax abuse.

In an era of multiple crises and unprecedented levels of inequality, any losses in critical resources needed for recovery and development cannot be afforded.

The author is Program Assistant for the East African Tax and Governance Network (EATGN).

By Otiato Guguyu

Kenya faces predicted economic challenges due to high debt. The International Monetary Fund (IMF) proposed fiscal consolidation which includes increased taxes and privatization has been criticized for causing job losses and exacerbating corruption.

Source: getimg.ai

I worked as an intern at the Institute of Economic Affairs (IEA) in the early 2010’s presentations for the institution’s annual budget analysis which had begun tracking the roots of the economic nightmare Kenya finds itself in today.

Kwame Owino, the Chief Executive Officer (CEO) of the Institute for Economic Affairs (IEA), has for over a decade tried to warn the country that running huge fiscal deficits will end up in ‘premium tears’ because the rate at which debt has been growing would eventually make it impossible for the government to function.

Owino was largely ignored, sometimes facing online accusations of belonging to the wrong tribe – the Luo – thereby assumed to be advancing the anti-government criticism of his fellow tribesman Hon. Raila Odinga who had lost in the elections that brought the Jubilee administration to power.

The Derailed Kenyan Express

A decade later, Kenya is exactly where Owino had predicted it would be and he is surprised that people are still having conversations about the debt, a train that left the station long ago and has since crashed.

“I do not talk about debt anymore,” he says, referring to a decade of trying to explain that taking huge commercial loans to fund vanity projects like the Standard Gauge Railway (SGR) would come back to haunt us.

“People can say what they say about David Ndii but he is just right. I am not sure we [economists] managed to pass the message across but somehow it did not get through. We are already in the structural adjustment program; we have been in here since COVID-19. It is like the train has crashed and people are surprised, looking outside, and seeing ambulances and fire fighters. That’s the IMF,” he said.

Ndii has been administering shock therapy to Kenyans on X, formerly twitter, for them to come to terms with the realities of structural adjustment. He recently tweeted:

“Ni maskio hamna ama ni nini? [Is it that Kenyans have no ears?] We are implementing the solution. It is called structural adjustment, IMF programme, austerity, call it what you like. It is painful. There are still plenty of people who lived through the last one in early 90s. Ask them. Choices have consequences.”

Structural Adjustment Reloaded

For Kenya to qualify for the IMF bailouts, the government has had to restructure the economy either by cutting spending or by increasing taxes to attain a primary balance – the difference between revenue and expenditure excluding debt payments. The government has chosen to increase taxes and sell parastatals to raise money for debt repayment.

For Kenya to qualify for the IMF bailouts, the government has had to restructure the economy either by cutting spending or by increasing taxes to attain a primary balance – the difference between revenue and expenditure excluding debt payments.

In a December 2021 country report, the IMF says that “the multiyear fiscal consolidation plan highlighted in the 2021 Budget Policy Statement (BPS) and substantiated by the FY 2021/2022 Budget is premised on a more conservative approach to revenue projections and a commitment to additional policy steps to increase tax revenues and control expenditures under the Extended Fund Facility/ Extended Credit Facility (EFF/ECF) program with the specific objective of anchoring debt sustainability”.

Kenya received the first budgetary support loan from the IMF in May 2020, soon after COVID-19 was reported in the country. The government has since imposed value-added tax (VAT) on petroleum products and Liquid Petroleum Gas, increased capital gains tax, imposed excise duty on data and airtime, Sim cards, bank transactions, bank loan fees, scrapped home ownership tax exemptions, increased excise duty on alcohol, and pledged to adjust excise duty every year in line with inflation.

Kenya has also committed to increasing charges on water and privatizing the most important commodity on earth. The government also plans to privatize scores of state-owned enterprises and will charge toll fees on public roads. The government has also started deducting civil servants’ salaries to fund pensions, is raiding paychecks for a housing levy, and has increased social security and health insurance contributions.

The government is also going after appropriation-in-aid (A-I-A) – fees, fines and levies on government services – with the aim of increasing collections by 35 percent immediately and by 70 percent in just two years. This means that all government services will cost more, from school fees, applications for identity cards and passports, marriage certificates, etc.

The Kenyan shilling has also been devalued, taking a 23 percent plunge in just one year, lighting an inflationary fire on an economy already doused with high energy prices and the aftershocks of a drought and a pandemic.

The Kenyan shilling has also been devalued, taking a 23 percent plunge in just one year, lighting an inflationary fire on an economy already doused with high energy prices and the aftershocks of a drought and a pandemic.

No Country for Old Considerations

The result has been a total collapse in demand and a plunge in sales that has brought in its wake losses for small business and loan defaults as the contagion spreads.

The Federation of Kenya Employers (FKE), which has been conducting a survey on employers to determine the impact of the increased tax costs on jobs, says that preliminary results show that between October 2022 and November 2023, Kenya lost 3 percent (70,000) of the jobs in the formal private sector and 40 percent of employers have reported that they are planning to reduce employee numbers in order to meet the increasing costs of operating in Kenya.

The private sector has come out to demand that the government review some of the taxation measures in order to protect jobs and businesses and avoid an economic collapse.

The private sector has come out to demand that the government review some of the taxation measures in order to protect jobs and businesses and avoid an economic collapse.

CEO of the Kenya Bankers Association (KBA) Dr. Habil Olaka says that the IMF has asked Kenya to move towards fiscal consolidation which could either mean more taxes, cuts in spending or a mix of the two. In his view, the government should carefully look out for policy alternatives rather than just simply resorting to harmful taxation.

“It is an issue of balancing act (…) I do not think the IMF conditions are cast in stone. What they are telling the government is to move in a certain direction which they can do by increasing revenue or controlling costs,” he said.

Olaka also said that the private sector is calling out how the current policies are negatively impacting business, with the private sector staring at an economic crash. They hope the government can heed their concerns and give them breathing space for them to remain operational. The government should also communicate predictable strategies so they can align their plans accordingly.

The Flipside

Kwame Owino, however, says that while structural adjustments are viewed negatively from the point of view of job losses and the economic pain they cause, it is the only way to significantly alter the economy and render it sustainable. Kenya has spent itself into unsustainable debt with most of the resources bled out through poorly managed state companies.

The country needs to cut expenditure below tax estimates including support to parastatals, and to sell the profitable ones to raise money to dig itself out of the debt hole. The sale of state corporations will allow the private sector to grow and run the economy.

Further, Owino observes that structural adjustments are not new; under the Marshall Plan in post-War Europe, the Asian economies after the 1997 debt crisis, and African states in the 1990s, SAPs helped countries to rebalance their books and find new ways to grow their economies.

Libertarian at heart and a hard-nosed economist, the IEA boss is convinced that the outrage over the proposed sale of the Kenyatta International Convention Centre (KICC) and the Kenya Seed Company, among other parastatals, is misplaced because it costs taxpayers more to keep them running than if such conference services or seeds were provided by the private sector.

These liberal ideas – which I first came across in Francis Fukuyama’s End of History and the Last Man at the IEA library – may have just run their course. Three decades ago, just as communism was crumbling, Fukuyama’s 1989 book seemed almost prophetic as communism collapsed and private capitalists’ markets emerged on top.

A capitalist society would be the end of all human political struggle and global markets led by the private sector would solve all problems as governments stepped back to allow the markets to produce efficiently.

Today, his views could not be further from the truth, as globalization is facing its own undoing and the liberal idea that we can outsource supplies has been debunked by the hording of COVID-19 vaccines and supply chain dislocations.

While Kenyans need greater state support to cushion them against bruising inflation, subsidized education and healthcare, neoliberal theorists want the country to spend 70 percent of their taxes on loan payments while eliminating all tax subsidies.

According to the East African Tax and Governance Network (EATGN), in as much as the government has the right to require that citizens pay their taxes diligently and faithfully as per the law, the government also has a duty to provide goods and services such as security, health, schools, infrastructure, and water.

This in essence means applying a human rights-based approach to taxation – the principle that the provision of goods and services by the state is not an act of benevolence but a duty.

“For instance, being hungry (needing food) does not bestow a responsibility on the government to provide for you. But when your ability to provide food for yourself is compromised to the extent that hunger is endangering your life, then the government has an obligation to intervene. Failure to do so constitutes a violation of your right,” observes the EATGN.

Experiments of Cyclical Failure

It should be noted that the IMF is prescribing a painful solution for a problem it helped create.

“Despite following the IMF’s advice for decades, 19 of Africa’s 35 low-income countries are in debt distress or facing a high risk of debt distress. Most countries are now facing an acute cost of living crisis and rising debts, largely owing to external factors such as Covid, the war in Ukraine and rising global interest rates, over which they have had no control,” Action Aid said in a recent report, Fifty Years of Failure: The IMF, Debt and Austerity in Africa.

Kenya’s debt accumulation was prompted by the Fund following the 2008 crisis when the West printed cheap money that was looking for investment opportunities.

In effect, after the 2008 economic crisis, the IMF encouraged African countries to borrow the cheap capital to kick-start their own economies by boosting infrastructure spending. Having received bailout funds at low interest rates, Western bankers went in search of highly rated investments, with most settling on African sovereign bonds that combined high yields with the relative safety provided by government gurantee.

Prior to 2008, only South Africa and the Seychelles had issued Eurobonds. Over the next decade, however, 21 sub-Saharan African countries including Kenya had issued several Eurobonds denominated in dollars.

When the IMF held a meeting with Kenyan officials to discuss the global financial crisis and later met with the Deputy Prime Minister – the then Finance Minister- Uhuru Kenyatta in 2009 to solidify the loan agreements, it urged Kenya to issue a Eurobond to fund its infrastructure ambitions.

“The authorities were considering staff’s proposal to move to a fiscal anchor of total public debt (including domestic and external), in light of increased external borrowing opportunities. Concerning a planned sovereign bond issue, the authorities agreed that its size, costs, and maturity profile needed to be carefully evaluated in order to mitigate potential risks,” reads the IMF Article IV 2009.

However, when the money began flowing into African bureaucracies riddled with runaway corruption and a lack of capacity to absorb the huge loans, it inevitably led to an explosion of procurement fraud, ‘tenderpreneurship’ and vanity projects that are now turning into white elephants with little or no returns for the debt-funded investments.

In Service of Entrenched Policy Orthodoxy

The IMF has returned a decade later to take credit as the saviors of these troubled economies, taking little or no responsibility for its role in creating the mess.

Kenyans first need to understand what the IMF’s role is. This Bretton Woods institution is the multilateral lender of last resort that helps countries that cannot meet their international trade or debt obligations to ensure the stability of the international market. The Fund gives you money when no one else can, and at a cheaper rate since it is meant to stabilize the economy rather than earn interest.

During the release of the 2023 third quarter results of the KCB Bank Group where he now sits as board chairman upon his retirement, Dr Joseph Kinyua – a government insider of 44 years and an IMF guy – tried to explain that the Fund is jointly owned by Kenya and the other member countries.

A highly regarded economist with experience at both the Treasury and the Central Bank of Kenya (CBK), shaping policy across four presidencies, Kinyua is also associated with the IMF, having served as an economist for the multilateral lender between 1985 and 1990.

He said that, unlike the Eurobonds that are lent to governments by commercial banks, the IMF and World Bank are lenders that are owned by governments and hence are not driven by the profit motive – any income they make is put back in the kitty to support member countries.

Kinyua said the IMF and World Bank loans are long-term, sometimes giving a country up to 40 years of repayment, as well as a grace period of about 10 years during which the principal is not repaid. The loans also come at very low interest rates compared to the market prices.

“The interest rate – going back to the time I was a young man working for the IMF – has never changed; it is half a percent and on the World Bank side it is about 1 percent,” Mr Kinyua said.

“Kenyans need to know those two institutions are your own institutions, they are owned by governments and the Kenyan government is a shareholder,” he said.

However, this money does not come without strings attached; the fund will require you to restructure your economy so that you deal with the challenges that brought you to the IMF’s doorstep in the first place.

It has therefore come with the IMF’s typical orthodox approach of one-size-fits-all policy recommendations which prescribe fiscal austerity by cutting spending and raising taxes in line with the Fund’s free-market ideology.

Trouble in Hight Tide or Low Tide

The structural adjustment is, however, being implemented at the worst possible time, when global risks are elevated and Kenya is just recovering from a pandemic, the longest drought in four decades and facing a destructive El Nino season that has left common folks staring at starvation.

The structural adjustment is, however, being implemented at the worst possible time, when global risks are elevated and Kenya is just recovering from a pandemic, the longest drought in four decades and facing a destructive El Nino season that has left common folks staring at starvation.

Even Kwame acknowledges that even though the IMF’s policies may be well intentioned, they could create lasting damage as consumption collapses, losses spread, defaults rise, and companies liquidate.

Owino says that he has witnessed cases of parents unable to afford school fees and people literally sleeping hungry. The government is not even able to pay examiners and the breakdown of the education sector is showing with the crisis of confidence in the credibility of the exams recently administered.

He posits that despite the IMF’s aversion to subsidies, a targeted food stipend for poor homes that have suffered almost 30 percent inflation should have been pursued rather than eliminating transfers and subsidies, then offering tax cuts to importers or deal makers.

“The IMF has given Kenya about 35 conditions; that’s a lot and it is very difficult to keep government focused on all these goals. A criticism to their approach is that they are simply doing too much too fast,” Mr. Owino said.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).

By Fadhel Kaboub

Climate finance requires a minimum of $2.4 trillion of transformative grant-based investment and transfer of technology for climate adaptation and mitigation by 2030. We are nowhere near that target at the end of COP28. Climate finance is a climate debt owed by the historic polluters of the Global North to Global South countries that are on the front lines of climate change. The Global North is in default and is refusing to pay its debt.Subscribe

If you owe me $100, you are supposed to pay me. Instead, you give me a $10 loan with conditionalities to control how I use my money. You give me another $10 in exchange for having control over my forests (aka carbon markets). You invest another $10 in green electricity that I must export to you on favorable terms. You outsource another $10 worth of low value-added added manufacturing to produce cheap consumer goods for you. None of this should count as climate finance. It is a climate debt default green-washed with neocolonial debt traps.

We can stop paying our debt too

If a Global South country defaults on its external debt, the Southern District of New York court will allow Wall Street private banks to confiscate any financial assets that country has in the US banking system including export revenues that pass through the US banking system. We need to establish a climate debt court in the Southern District of the Globe, staff it with the most qualified legal minds from the Global South, and start prosecuting climate debt cases using legal precedents that have been used to impoverish and abuse the people of the Global South.

We are owed at least $2.4 trillion in climate finance by 2030, so we need to withhold and confiscate the equivalent of that debt in cash and in-kind until the debtors come forward and pay their debts in the form of unconditional grants and transfer of technology. Unfortunately, the Global South has yet to build an unbreakable united front. Instead, we see countries settling for bilateral deals that amount to financial crumbs and structural traps. This must change now before COP28 goes down as yet another failed climate finance event for the Global South.

The biggest blind spot of COP28

The debate about reforming the global financial architecture to create a fit for purpose climate finance model is encouraging, but it needs to recognize that the financial architecture is a subset of a global economic architecture that also includes the international trade, investment, and taxation architecture. We are making some progress on transforming the global tax architecture thanks to a recent Global South victory at the United Nations general assembly voting overwhelmingly for a UN Tax Convention.

We are also finally having a serious discussion about transforming the global financial architecture. At COP28, Colombia, Kenya, and France announced the establishment of an independent expert review on debt, nature and climate. The expert group will examine the way sovereign debt is limiting the fiscal space needed to take climate action, decarbonize the economy, and protect nature. This is, of course, a promising initiative to help redesign the global economic architecture.

However, this leave the rules of international trade and investment as the main blind spot in the COP28. There is no mention of the World Trade Organization (WTO), no mention of unfair bilateral trade agreements that are unfavorable to the Global South, no mention of reforming the Trade-Related Intellectual Property Rights (TRIPS) in the context of transfer of technology for climate action on adaptation and mitigation, no mention of the need to overhaul the Investor-State Dispute Settlement (ISDS) mechanism or Investment Court System (ICS) through which Global South countries can be sued by foreign investors if the State takes action that interferes with the investor’s (extractive) business plans.

By Otiato Guguyu

Kenya is deploying paramilitary-trained tax collectors, Revenue Service Agents (RSAs), to implement aggressive anti-tax evasion measures. RSAs clashes with traders in informal areas have set the stage for a non-conducive business environment. Meanwhile the Government’s International Monetary Fund (IMF) induced taxation faces legal battles, while hindering economic growth and affecting democratic practice. The East African Tax and Governance Network (EATGN) advocates for civic education for a transparent tax system.

Source: Wepik.com

Popularly known as Kanjo, Nairobi City Council askaris -wardens or marshals- are often mean looking, violent men who unleash brutal force when clamping down on tax-evading street hawkers. They prowl the city in rundown pick-up trucks with no glass windows, bundling into their ramshackle vehicles hawkers selling wares without licences, extorting out of them up to KSh1 billion annually according to media estimates.

The altercations with hawkers are sometimes fatal. Hawkers have been forced to rely on petty criminals who organise protection rackets, using knives and sometimes guns to repel the county tax collectors.

The government now wants to enter into this space with its own national paramilitary-trained door-to-door tax collectors, and it is fast learning an ancient lesson in taxation.

Distance Decay

Distance decay is a concept that describes how the relationship between two entities generally weakens the greater the distance between them becomes. In Kenya, certain geographies like informal settlements and remote rural areas virtually lie outside the control of the state.

The Kenya Revenue Authority (KRA) has therefore come face to face with this concept when it released into the streets of Nairobi some 1,400 Revenue Service Assistants (RSAs) in matching uniforms and badges who had received paramilitary training at the Kenyan Defence Forces (KDF) Recruits Training College (RTC) in Eldoret.

One trader at Imenti House in Nairobi says that when the RSAs – whom he described as very young boys and girls – showed up, at first everyone thought they were Kanjo and they all fled. There exists an unwritten law that when stall-owners are not within their premises, Kanjo askaris do not go in. Blissfully unaware, the RSAs committed a transgression, sparking a heated exchange that nearly turned violent as they were muscled away by the battle-hardened Nairobi traders.

Imenti House – situated along Tom Mboya Street and easily accessible to the state’s security agencies – has one of the largest concentrations of small retailers selling consumer products like electronics and clothing in compartments divided by Perspex walls into tiny retail shops.

Further down in Nairobi’s downtown, all the way to Grogan, is different territory altogether which the taxman’s new recruits will find even harder to penetrate.

Another challenge is that the RSAs are pursuing small businesses under the assumption that they understand tax procedures. The KRA is sending letters and notices demanding the use of digital collection systems among traders some of whom have no formal education or access to technology, such as the KRA’s Electronic Tax Invoice Management Systems (eTIMS) platform.

In a letter seen by Business Daily, the KRA’s Domestic Taxes Department is demanding from a small trader a sales audit and bank statements going back five years yet most small businesses keep no records given the informal nature of their transactions.

Right to Tax

Taxes are easier legislated than collected given that it requires individuals and businesses to voluntarily agree to cede a portion of their hard-earned money for the greater benefit of the collectivity.

Taxes are easier legislated than collected given that it requires individuals and businesses to voluntarily agree to cede a portion of their hard-earned money for the greater benefit of the collectivity.

Before the modern state, taxes were merely the means by which monarchs and rulers extracted the wealth they needed to live on from people they had violently subjugated. The Biblical Prophet Samuel puts it thus:

This will be the manner of the king that shall reign over you: he will take your sons, and appoint them unto him […] And he will take your daughters to be perfumers, […] And he will take your fields, and your vineyards, and your olive-yards, even the best of them, and give them to his servants. And he will take the tenth of your seed […] And he will take your men-servants, and your maid-servants, and your goodliest young men, and your asses, and put them to his work. He will take the tenth of your flocks; and ye shall be his servants.

After wars had been waged over the geographies within which to extract these taxes, modern states were forged on a new idea that the individual would voluntarily pay taxes in exchange for the state providing the secure, legal and economic condition that would facilitate the growth of private wealth.

Taxation sparked revolutionary movements including the Magna Carta, the Boston Tea Party that led to the American Revolution, the French Revolution and the Yellow Vest Revolution. In Kenya, punitive taxation policies were in part the reason the Mau Mau rose against the British.

Modern democracy bestows sovereign powers on the people. Bound by a social contract, people are willing to obey the elected government only if it provides security and if its policies improve our lives and enhance our welfare. Through representatives in Parliament and in the Senate, the citizenry creates a binding legal system that they adhere to in order to enhance their welfare and wellbeing.

Most modern constitutions carry a variant of the concept of “no taxation without representation”. In the modern era this means “no taxation without public consent”.

The fact that in a democracy tax may be levied only by parliament – whose members are elected by the people to serve as their agents – means that tax is the product of collective consent to pay the price for the public goods and services provided by the elected government.

Taxes Written in Washington

What happens then, when tax measures are written in Washington? Kenya has agreed to an International Monetary Fund-driven structural adjustment programme that requires the government to, among other measures, review all service charges, fees and licences, and increase the rate and coverage of excise duty and value-added taxes while eliminating the social safety nets provided by subsidies.

Kenya has agreed to an International Monetary Fund-driven structural adjustment programme that requires the government to, among other measures, review all service charges, fees and licences, and increase the rate and coverage of excise duty and value-added taxes while eliminating the social safety nets provided by subsidies.

These taxes have been forced through parliament as miscellaneous amendments and annual amendments through the finance law. This has hit businesses hard, forcing different segments to fight back arguing lack of consultation, discrimination, and in certain cases double taxation.

Private sector lobbies including the Kenya Bankers Association (KBA), the Kenya Association of Manufacturers (KAM), Kitengela Bar Owners Association, the Retail Trade Association of Kenya, and the Kenya Flower Council, as well as civil society and individual activists, have all sued the government regarding some of the IMF tax measures and won. However, the IMF is having none of it and the government has been forced to appeal, reform and reintroduce the taxes in order to meet set targets.

For instance, when parliament introduced the minimum tax at the rate of one percent of gross turnover, Justice George Odunga found that the government’s plan to impose the tax on corporate sales, even when a company reports losses, was illegal.

The Kenyan authorities promised the IMF that they would resolve the court case and introduce new supplementary measures to the tax if they lost the appeal. Having lost the appeal, the taxman has gone to the Supreme Court to defend the government’s right to tax small businesses.

When the High Court slammed the brakes on the 1.5 percent housing levy having found it to be discriminatory as it targeted only salaried workers, the government again insisted it would appeal the ruling. “I know the court has said we should go and read history of the law and make it aligned appropriately. That, we are going to do,” President William Ruto said.

Split with Private Sector

Confusing tax measures have rendered the business environment unpredictable and unfriendly. This is because the government is in one contradictory stroke trying to encourage local production while simultaneously increasing the cost of doing business through the imposition of multiple taxes and statutory deductions.

As the government tries to impose on businesses to pay taxes without question, the friction between the state, the private sector and the general population is increasing because of seeing this as a predatory move rather than a beneficial one.

The Federation of Kenya Employers (FKE), for example, says the government is sidelining them from decision making, deliberately excluding their representatives during negotiations on labour issues, even as it ignores their appeals against rising the cost of statutory deductions.

“We are facing some challenges regarding our right to representation on tripartite boards. The system of Labour administration should encourage consultation, co-operation, and social dialogue with the most representative organisations of employers and workers. The changes in law should not target weakening tripartism, for example by removing employers from Tripartite boards, committees, and forums,” Jacqueline Mugo, the chief executive officer (CEO) said in a statement.

CEO Dr Habil Olaka of the KBA said that the increase in taxes is being perceived as going against the tenets of taxation as espoused by Adam Smith who argued that “a good tax” should be certain and not arbitrary, as convenient as possible for the taxpayer, efficient, fair and equitable. This, he said, is forcing the private sector to fight in court.

For much of post-colonial Africa, the principles of good taxation are seldom discussed. Like the police, the taxman wields arbitrary power over the citizens thus hindering the development of “deep democracy”.

For much of post-colonial Africa, the principles of good taxation are seldom discussed. Like the police, the taxman wields arbitrary power over the citizens thus hindering the development of “deep democracy”.

Coercive Taxation

For those who are not organised into trade lobbies or have the financial muscle to go for litigation, the answer has been to organise into informal protection units – precursors to rising centres of rival political authority and, often, criminal protection rackets.

Following the altercation at Imenti House and having received a lesson in how not to collect taxes, the RSAs left and have not returned since. “We called a few of them and tried to engage them after the scuffle and explained to them that they have not educated people to understand their demands before just showing up. Some of these stalls are run by hired help most of whom are uneducated and cannot even understand what they are demanding,” the source said.

According to the East African Tax and Governance Network (EATGN) unless both taxpayers and the government understand the rights and obligations of either party in order to cultivate an environment in which citizens play their role as a moral obligation while governments diligently use revenue with probity and accountability, the process becomes coercive.This understanding is useful for educating citizens on their taxation rights and obligations as well as creating a platform for dialogue with governments on a meaningful and fruitful relationship in which expectations on both sides are met.

“Educating the public about its rights should logically stimulate demand for tax justice while voluntary and complete payment of taxes would translate into higher revenues for the government, and presumably better services. This model puts the citizen at the centre of taxation not only as a source of revenue but also as a campaigner for justice in line with EATGN’s vision of ‘a fair, transparent, accountable and citizen-driven tax system’ as part of economic justice,”.

Educating the public about its rights should logically stimulate demand for tax justice while voluntary and complete payment of taxes would translate into higher revenues for the government, and presumably better services.

But as the state seeks to enter spaces in which it has invested very little in terms of services and where it scarcely has authority (including in the informal sector), it will face resistance from communities which perceive it as an agent of extraction for the global elites who do not serve their interests. This delegitimises the state’s authority as traders turn to criminal protection to keep state officers at bay and creates new avenues for corruption or violence.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).

By Otiato Guguyu

While President Ruto’s calls for a just financial system were praised in the European Parliament, most Western states opposed the vote towards a fairer international tax system. The global south, however, succeeded in beginning the transfer of tax decision-making from the OECD to the UN thereby emphasising the need for greater representation in combating economic injustice and illicit financial flows, by stressing the importance of a consensus approach.

Just days after President William Ruto received a standing ovation for his speech in the European Parliament calling on the West to embrace a just financial system, 23 out of the 27 European Union (EU) member states voted against the establishment of a fairer international tax system.

Despite their opposition, the global south managed to rally a landslide majority to begin the process of transferring the framework on tax decision-making from the Organisation for Economic Co-operation and Development (OECD) – a small club of rich countries where this has sat for over 60 years – to the United Nations (UN).

The vote clearly showed that the interests of the West lie in shielding their multinational companies from paying their fair share of taxes on the value they have been extracting from Africa for centuries, retaining the colonial infrastructure that has built and sustained European economies.

Colonial multinationals

The colonial project was built by multinational corporations like the British East India Company and the Imperial British East Africa Company that sought cheap labour and inputs to plunder and extract, often violently, resources from continents across the world for their shareholders in Europe.

The colonial project was built by multinational corporations like the British East India Company and the Imperial British East Africa Company that sought cheap labour and inputs to plunder and extract, often violently, resources from continents across the world for their shareholders in Europe.

Post-colonial African governments didn’t disengage from Europe; for instance, when Kenya gained its independence in 1963, it signed a series of agreements known as the Lancaster Accords that were focused on promoting the production of export crops, such as coffee and tea at the least cost, creating a global system to benefit elites in Europe.

The Lancaster Accords forced Kenyan independence leaders to commit towards continuation of colonial legislation, international treaties, and agreements that the British Crown had undertaken on behalf of the colony.

Crucially, Kenya was to renegotiate all double taxation agreements. This was to favour the repatriation of profits of colonial-era enterprises back to Europe as independent Kenya gained fiscal sovereignty.

Most of these profits were channelled into tax heavens that emerged as the British empire began collapsing after the end of the Second World War in 1945, when private interests developed an unregulated offshore Eurodollar market domiciled in the City of London, creating a system where the elite could make money without taxation. This global offshore market grew steadily through the 1960s and ’70s, eventually joining forces with other Western nations who wanted a slice of the pie of the unregulated market.

Contemporary multinationals

Today multinational companies are still finding new ways of avoiding taxes in developing countries by demanding tax concessions in exchange for investments and then exploiting low-tax jurisdictions by shifting profits out of poor countries.      

Today multinational companies are still finding new ways of avoiding taxes in developing countries by demanding tax concessions in exchange for investments and then exploiting low-tax jurisdictions by shifting profits out of poor countries.

According to the Tax Justice Network, every year, KSh100 billion (US$1.1 billion) that could have been paid in taxes is wired to the Eurodollar markets through London and its tax haven jurisdictions. These markets in turn lend billions of dollars to countries like Kenya.

According to the Tax Justice Network, every year, KSh100 billion (US$1.1 billion) that could have been paid in taxes is wired to the Eurodollar markets through London and its tax haven jurisdictions.

“The UK, the crown dependencies and the British Overseas Territories are collectively responsible for facilitating nearly 40 percent of the tax revenue losses that countries around the world suffer annually to profit shifting by multinational corporations and to offshore tax evasion by primarily wealthy and powerful individuals,” Alex Cobham, chief executive of the Tax Justice Network, said in a letter to King Charles.

“This makes the UK and its network of satellite tax havens the world’s biggest enabler of global tax abuse. Our latest estimates from the state of tax justice report put the sum of this tax loss imposed upon the world by British tax havens at over $189bn (£152bn).”

Global Financial Integrity (GFI) estimates that, on average, the annual value of trade-related illicit financial flows in and out of developing countries amounts to about 20 percent of the value of their total trade with advanced economies. Illicit flows also take the form of criminal money laundering and trafficking, as well as corruption and bribery.

To get out of this situation African countries must work towards structural transformation. According to the East African Tax and Governance Network (EATGN) “structural transformation is conceptualised as freedom from the colonial models of economic development based on extraction to an inward-looking framework that fosters local value chains for equitable development. Embedded in this is eradication of tax inequality, defined as the disparities within a regime of tax collection and how this affects allocation and/or expenditure of public finances leading to inefficient domestic revenue management (DRM),”.

Structural transformation is conceptualized as freedom from the colonial models of economic development based on extraction to an inward-looking framework that fosters local value chains for equitable development.

Race to the bottom

Donald Deya, the Chief Executive Officer (CEO) of Pan African Lawyers Union (PALU), says Western corporations pit African states against each other, forcing them to compete and give away resources for free or with minimal taxation, leading to a race to the bottom. Deya says that while this is not illegal, it is immoral, and calls on governments to enact laws that change such actions from being considered as merely illicit to being declared illegal.

“These practices are not really illegal but are immoral practices like transfer pricing, profit shifting and using hundreds of subsidiaries that trade with each other and inflating input prices while deflating output. They require us to pass laws such as beneficial ownership [disclosures],” Deya said.

As African countries compete in offering lower and lower taxes to multinationals as incentives to attract investment, they end up losing out on crucial revenues to fund infrastructure and make social investments in education, health, among other social amenities.

Having facilitated the wiring away of billions of taxes to offshore companies, the same African countries have to borrow money from the West at exorbitant interest rates, creating a cyclical debt crisis that has currently handicapped the continent and forced several African states to turn to the International Monetary Fund (IMF) for bailouts.

These bailouts have come with demands for higher taxes from citizens who are too poor to buy food or afford a roof over their heads and are sparking economic decline and lack of employment opportunities, especially for African youth. They are also creating conditions that are conducive for the unconstitutional removal of governments across the continent.

In effect, the African continent has experienced a significant increase in coups over the last three years, with military figures taking over in Gabon, Niger, Burkina Faso, Sudan, Guinea, Chad and Mali.

As a result, African politicians are beginning to realise that the tax conversation needs to shift from overtaxing their populations and instead compelling multinationals to pay their fair share by reviewing antiquated tax systems to end illicit financial flows.

African politicians are beginning to realise that the tax conversation needs to shift from overtaxing their populations and instead compelling multinationals to pay their fair share by reviewing antiquated tax systems to end illicit financial flows.

Legislative Attention to Global Challenges

When 200 legislators from 46 African countries met at the African Parliamentary Network on Illicit Financial Flows and Taxation (APNIFFT) conference in Nairobi, it was in the realisation that Africa is facing risks or challenges that transcend borders and divisions, requiring a unified front.

With the wave of military coups that have swept across West Africa, the politicians frankly admitted that the new structural adjustment programmes (SAPs) currently being imposed on the continent by multilateral lenders were setting the people against them and putting their political survival at risk. They now see all too clearly that African budgets need to be funded by taxing the global multinationals that have been extracting resources from the continent – not overtaxing poor populations into revolutions.

The legislators were in agreement that it is time to make it illegal and not just immoral to shift profits abroad by clamping down on practices like miss-invoicing, that is, declaring lower profits locally to minimise taxes and using multiple companies with similar shareholding to shift profits.

Tax avoidance (the legal but immoral practice of avoiding paying tax) and tax evasion (the deliberate, criminal nonpayment of licence fees or other charges to the government) are therefore significant problems undermining domestic revenue mobilisation efforts in Africa.

Coalition Building for Prosperity

Through APNIFFT, African parliamentarians are coming together at the national, regional, plus the continental levels to legislate and advocate against existing loopholes or bad revenue collection practices.

Hon Nancy Abisai, East African Community (EAC) Jumuiya Caucus Regional Coordinator and member of the APNIFFT Council, said it is only by building coalitions across the continent – and specifically among members of each region like the EAC – that Africa can tackle illicit flows.

Abisai said that illicit financial flows have both a technical and a political aspect, and that without the involvement of members of parliament, it is very difficult to come to any conclusion because they are the ones who push the legislative agenda.

“Illicit financial flows is a cross-border issue so it has to start with regions around you. So, first of all, as a region you must agree that you want the space to fight Illicit Financial Flows (IFFs) and now members of parliament have launched caucuses. From their national caucuses they then come together to choose a regional coordinator to help or coordinate events that happen at the national level to make sure they are speaking with the same voice as a region,” Hon Abisai said.

“[Therefore], nobody will do IFFs in Uganda and run to Kenya or to Tanzania. When we cut it off, we cut it off completely. So, the agenda is that the legislators come together to make sure that they push certain agenda around stopping IFFs within the region,” she said.

The legislators said they are looking at a coordinated legal framework starting at the national level, going to the regional level and then to the continental level, such that it will be difficult for multinationals to exploit the divisions on the continent.

“Passing legislation happens at the national level because it is legislation being passed in Nigeria and Ghana so already you have MPs from the countries working together and with the caucuses, we have even different political parties agreeing on issues,” Chenai Mukumba, Executive Director of Tax Justice Network Africa (TJNA) said.

Opportunities for Change

Ms Mukumba says that, through APNIFFT, the legislators have access to the policy options, technical capacity, and coordination to identify the many loopholes within our tax laws and fiscal frameworks to curb illicit financial flows, particularly when it concerns the private sector.

They also are in a better position to rally across the political divide and exercise their constitutional authority to demand action from the executive.

“One of the things we have asked all members to do is to go to their executives and ask for the status of illicit financial flows. So, essentially ask them to provide a report that illustrates what are the sectors of the economy that are most vulnerable to the IFFs and then use that as a basis to then determine the action agenda. This will then help them start to see what to pay attention to in order to address this issue,” she said.

Stories of Success

Tax advocacy efforts are beginning to bear fruit as witnessed in the South Sudan national caucus which stated that they had moved a motion in parliament to ensure that all companies coming into the country to mine gold must not only go through ministry of finance but must also face legislative oversight to ensure tax policy compliance in their mining activities.

Meanwhile the Burundian national caucus informed the meeting that they had advocated for a new mining code to increase transparency in the sector and had organised workshops to discuss how to raise resources more effectively from their mining sector.

South Africa’s national caucus shared that they have intentionally begun collaborating with civil society organisations and the public; their caucus has six different political parties which have agreed that IFFs should be an election issue in the upcoming elections.

Closer home, the DRC national caucus has been working closely with civil society organisations such as Conférence Épiscopale Nationale du Congo (CENCO) – Episcopal Conference of the Democratic Republic of the Congo- and one of its successes last year was the review of unbalanced mining contracts with Chinese companies. The caucus is also discussing legislation to look into shell companies that are investing in the DRC.

The Zambian national caucus informed the gathering that a third of all MPs from all political parties are members of the caucus. It is currently looking into interventions to address IFFs from the mining sector, one of which resulted in the repealing of the mines and minerals development act.

For its part, Ghana’s national caucus has begun working closely with civil society organisations. It recently called for an amendment to the Exemptions Act and also contributed to the enactment of the tobacco excise duty bill. In the future they plan to look into withholding tax regimes.

As for the Malawi National Caucus, it too is closely working with civil society organisations and one of the key areas of focus has been the publication of tax expenditure reports to help the caucus understand the true cost of the government’s tax incentives.

After a decades-long fight to move away from the OECD process that has delayed tackling tax avoidance, thanks to being beholden to tax havens and corporate lobbyists, the developing world is now unanimous in taking the fight to the United Nations to forge a legally binding Framework Convention on International Tax Cooperation.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).

By Betty Guchu

Sub-Saharan Africa’s public debt has surged in the last decade, moving from concessional to commercial loans. Kenya’s increased Eurobond issuance exemplifies the challenges posed by private sector debt whose shorter maturities hinder long-term benefits, exacerbate inequality through tax revisions, impact human rights and women’s livelihoods, and crowd out local businesses.

Source: Medium – @goswami.piyush/polyp.org.uk

Over the course of the last ten years, sub-Saharan Africa’s public debt stock has grown due to increased borrowing. The loans have shifted from traditional concessional loans obtained from bilateral (official creditors of the Paris Club) and multilateral creditors to commercial loans taken out with private creditors.

The portfolio of creditors changed between 2006 and 2020, with the majority of African nations giving up concessional loans for lending from private creditors and non-Paris Club creditors, primarily China. The percentage of debt owed to bilateral creditors fell from 28% of GDP in 2006 to 10% in 2020 among the countries eligible for the Debt Service Suspension Initiative (DSSI), which are primarily African states. During the same period, the percentage of debt owed to multilateral creditors decreased from 55% to 48% of GDP.

Due mostly to increased borrowing from private creditors, the proportion of Eurobonds held by private creditors grew from 3% in 2006 to 11% in 2020. African nations issued US$179 billion worth of bonds in 2020, up from US$67 billion in 2012. A number of reasons contributed to the change in borrowing patterns, including the fact that some nations were not eligible for concessional loans, that the use of money borrowed from private creditors was not as closely monitored, and that the terms of these loans were less stringent than those of international and Paris Club creditors. Kenya, for instance, issued US$2 billion in Eurobonds in 2014, US$2 billion in 2018, US$ 2.1 billion in 2019 and US$ 1 billion in 2021. In 2020, Eurobonds and syndicated loans accounted for 70% and 27% of Kenya’s commercial debt, respectively, according to the IMF.

In 2020, Eurobonds and syndicated loans accounted for 70% and 27% of Kenya’s commercial debt, respectively, according to the IMF.

In contrast to loans from bilateral and multilateral creditors, those from private creditors have shorter maturities, leaving governments with shorter timeframes within which to spend the costly funds before beginning to pay interest on the loans. The shorter timeframes are often not sufficient for the investments made to have spurred economic growth and, therefore, African nations such as Kenya, which have been taking out short- to medium-term loans to fund long-term mega-infrastructure projects that take a long time to yield social and economic benefits – and contribute only to a marginal increase in the tax base and therefore to the potential for revenue collection – are particularly vulnerable to the short maturity periods.

Additionally, because Eurobonds are subject to market conditions (including variations in currency values), interest rates on these bonds, which constitute a significant portion of Kenya’s private sector debt, are higher than those on other external loans. Moreover, unlike debt from multilateral and Paris Club bilateral creditors, there is no elaborate framework that guides debt relief or, indeed, the restructuring of private sector debt.

Because Eurobonds are subject to market conditions (including variations in currency values), interest rates on these bonds, which constitute a significant portion of Kenya’s private sector debt, are higher than those on other external loans.

With regard to domestic private sector creditors, the interest rates for treasury bills are also high and, therefore, attractive to local financial and non-financial institutions. This implies that the government has to make repayments above the market rates when the treasury bills mature, resulting in higher debt servicing costs.

Tax injustice and neglect of pro-poor programmes

The growing trend by African states to prefer borrowing from private creditors has had various implications on these jurisdictions, including fuelling tax injustice. In a bid to finance debt repayment, governments have resorted to reforming tax policies as a means of raising more revenue. For example, Kenya has initiated various tax measures, such as the introduction of the Digital Service Tax (DST), the expansion of the residential income tax bracket, the introduction of new Value Added Tax (VAT) rates for certain commodities and the restructuring of income tax brackets.

These changes haven’t always been forward-thinking. On the contrary, they have exacerbated inequality by placing a greater strain on taxpayers and decreasing disposable income, particularly for the poor. Moreover, rather than being utilized to pay for essential public services, tax revenues are increasingly being used to service debt. And while information on the utilisation of the funds borrowed from private creditors is limited, available data points to the funds being preferably directed to economic sectors like infrastructure and energy development rather than to health, education and social protection.

As a result of the unequal funding, it becomes more challenging to fulfil international commitments. For instance, Kenya has yet to meet the Abuja Declaration requirement to spend 15% of its budget on the health sector, or the Global Partnership for Education pledge to set aside 6% of its GDP for education.

Private sector debt and human rights

It is impossible to overstate the effects of onerous public debt on the realization of citizens’ human rights as laid out in the International Covenant on Economic, Social, and Cultural Rights and other human rights treaties. In effect, the heavy external debt loads occasioned by the preference for expensive commercial loans have a detrimental effect on the development of debtor countries and the fulfilment of human rights because they divert funds away from Same essential social services, as mentioned above.

As stated earlier, commercially acquired debt is substantially more expensive since it attracts high interest rates and has a shorter repayment period. As a result, servicing commercially acquired debt significantly diverts scarce national resources from government programmes that deliver crucial public goods and services like education, health, and social protection. This in turn hinders the growth of developing nations and limits their ability to establish the conditions necessary for the realization of human rights. As a result, human rights, including the right to education, health, adequate housing, work, and development are threatened and violated, and in many developing countries, such as Kenya, millions face poorer living conditions. Furthermore, the requirements that borrowing nations must meet in order to be eligible for debt relief frequently force governments to further cut back on social services spending, which is essential to ensuring the protection of human rights.

Private sector debt and women’s livelihoods

Costly private sector debt and the related repayment obligations affect women more than men. For example, women bear the brunt of cuts in healthcare budgets as governments put in place austerity measures and fiscal adjustment policies because, together with children, they are frequent users of healthcare facilities. Moreover, as women are the primary caregivers, a shortage of basic healthcare or other social services often leaves carrying the extra burden of caring for the young, the sick, and the elderly.

Costly private sector debt and the related repayment obligations affect women more than men.

Moreover, because they are frequently marginalized, excluded from decision-making at all levels, or do not have independent control over resources and livelihoods, women are more likely to be negatively impacted by government initiatives to raise money for debt repayment, such as higher VAT that drives up the price of commodities.

In general, a country’s private sector debt obligations place limits to government spending on gender-responsive development programmes. This in turn restricts the development of women’s livelihoods, thus frustrating efforts towards the reduction of poverty and inequality, and hindering the advancement of human rights and the achievement of sustainable development for all.

Domestic private sector debt crowding out MSMEs.

Private investment is stifled as a result of a government’s increased borrowing from regional banks, insurance providers, pension funds, and treasury bills and bonds. Studies have indicated that a surge in government borrowing from local banks may be a factor in the reduction of credit accessible to micro, small, and medium-sized enterprises (MSMEs).

In the case of Kenya, for instance, due to the higher interest rates linked to the country’s public debt stock, local financial and non-financial organizations lend more money to the government than they do to MSMEs.

Moreover, since the government is viewed as a low-risk creditor, local banks tend to favour it, with the effect that economic output is stymied as entrepreneurs fail to obtain sufficient private sector investment to start or grow their businesses. Between 2013 and 2020, the private sector’s level of access to credit and private investment decreased from 12.4% to 7.3% while the country’s domestic debt stock increased within the same period.

In general, lending to MSMEs has been shown to be hindered by domestic private sector debt even though the COVID-19 pandemic, which impacted numerous enterprises, and the development in mobile lending platforms may also have contributed to the reduction in loan amounts.

Undermining sovereignty of national development strategies and assets

Loans from commercial creditors bring with them conditionalities that compromise sovereignty in developing strategies and building assets. Indeed, it is difficulty for a country that is highly aid-dependent to take ownership of its national initiatives, and even more so when the country is heavily indebted.

It is difficulty for a country that is highly aid-dependent to take ownership of its national initiatives, and even more so when the country is heavily indebted.

Chronic indebtedness brought on by a predilection for expensive, short-term commercial loans puts borrowing nations under the control of their creditors and undermines their ability to freely determine and pursue policies favourable to their development in line with the Declaration on the Right to Development.

Moreover, private sector players who contribute to a country’s public debt portfolio hold a lot of sway over the government as a result of the conditionalities that come with the financing they provide. In the case of Kenya, this is inferred from the country’s institutional and legal framework for public finance, which gives public debt precedence over other budgetary obligations. In other words, Kenya must pay down its debt before funding other government obligations, such as providing services.

Secrecy and lack of transparency

To guarantee responsible public debt management, data on public debt must be transparent. This draws investors, decreases the cost of borrowing from outside sources, encourages accountability, and attracts higher credit ratings (as investors prefer countries where they know the stock and composition of debt). However, debt instruments driven by the private sector, particularly Eurobonds, are distinguished by their broad discretion and lack of oversight in their application.

This leaves the door wide open to corruption and mismanagement of the borrowed funds, further burdening the citizens who must pay back the debt. For instance, there have been allegations of corruption involving Eurobonds issued by Kenya and questions have been raised regarding the use to which the loans thus obtained have been put.

The engagement and involvement of multiple stakeholders in debt decisions is necessary for prudent debt management. However, there is no structure in place to direct how citizens and other non-state actors can participate in choices about debt purchases from private sector creditors and how to invest the proceeds. As a result, private sector debt continues to promote opacity and to deprive citizens of their right to participate in the management of public debt. Moreover, by excluding the participation of citizens and other non-state actors from decisions concerning debt, private sector debt continues to limit citizens from exercising their sovereignty.

To mitigate the negative implications of private sector debt and improve its management, a number of measures can be taken that include the development of laws and policies that would guarantee transparency and access of information regarding public debt, more open and accountable debt agreements, and enhancing the role of citizens in the decision-making processes concerning the acquisition of private credit.

Private sector creditors should also be challenged to recognise their contribution to the problem of public debt and encouraged to consider offering debt relief in order to expand the fiscal space for government spending on essential public goods and services.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).

By Betty Guchu

The UN is actively addressing the challenges of international tax cooperation in the digital era, highlighting the necessity to revamp existing rules. A recent UN report offers three options: a legally binding multilateral convention, a constitutive framework convention defining principles, and a non-binding multinational agenda. The UN seeks to address discontent with current tax treaties and foster inclusive and effective international tax cooperation.

Editor’s note: At the time of publishing on 28 November 2023, the resolution on promoting inclusive and effective International Tax Cooperation in the United Nations proposed by Nigeria on behalf of the African Group was adopted by the 2nd Committee of the Assembly in New York on 22 November 2023.

The Third International Conference on Financing for Development that took place in Addis Ababa, Ethiopia, from 13 to 15 July 2015 culminated in adoption of the Addis Ababa Action Agenda, an ambitious program of actions supporting the implementation of the 2030 Agenda for Sustainable Development Goals. The Addis Ababa Action Agenda was in turn endorsed by the UN General Assembly on 27 July 2015.

Among the areas of action defined by the Addis Agenda as critical to realizing sustainability through the sustainable development goals (SDGs), is the need to strengthen mobilisation and effective use of domestic public resources.

In the area of tax revenue mobilisation, in particular, the Agenda pledged to intensify global tax collaboration and called for cooperation among countries in order to enhance transparency plus implementation of suitable policies, taking into account their unique capabilities or conditions. Such policies would include multinational corporations reporting to tax authorities in each country from which they operate, providing competent authorities with access to beneficial ownership information, and gradually moving toward automatic tax information exchange among revenue authorities, when necessary, with support provided to developing nations, particularly the least developed ones.

The Agenda emphasised that international tax cooperation initiatives should have a global perspective and scope, fully accounting for the diverse needs or capacities of all nations, with a focus on 14 least developed nations, landlocked developing nations, small island developing states, plus African nations.

Reaffirming its July 2015 endorsement of the Addis Agenda, on 30 December 2022, the UN General Assembly resolved to start intergovernmental talks at the UN Headquarters in New York on how to improve the effectiveness and inclusivity of international tax cooperation by examining other options, such as the potential creation of an international tax cooperation framework or instrument that is decided upon through a UN intergovernmental process while fully taking into account current international multilateral agreements.

To this end, the Assembly called on the Secretary-General to draft a report analysing all pertinent international legal instruments, other documents, and recommendations that deal with international tax cooperation, with a focus on how to support countries in exercising their taxing rights, mobilising resources to invest in the Sustainable Development Goals (SDGs), climate action, and promoting SDG-aligned fiscal policies. The report would take into account the work of the Committee of Experts on International Cooperation in Tax Matters, the Organization for Economic Co-operation and Development/Group of 20 (OECD/G20) Inclusive Framework on Base Erosion and Profit Shifting, and among other forms of international cooperation. In his report, the Secretary-General would also recommend the way forward, such as creation of an open-ended, intergovernmental committee headed by a member state to make recommendations for strengthening the inclusiveness and effectiveness of international tax cooperation.

An advance copy of the Secretary-General’s report outlining the highly anticipated UN tax convention plans was released on 8 August 2023. The report starts by observing that, over the past century, the primary goal of international tax cooperation has been to lessen the potential harm that individual tax policy decisions made by nations could otherwise do to beneficial cross-border investment and trade. The primary strategy has been to use bilateral tax treaties to change how domestic tax laws that would otherwise apply to cross-border income flows operate. These agreements aim to balance the contracting governments’ tax systems so as to avoid unintentionally leaving income and capital untaxed while also preventing double taxation.

However, while recourse to bilateral tax treaties is common worldwide, not all nations have signed these kinds of agreements, or they have only done so with their most significant trading and investment partners. In the absence of a treaty, nations are free to tax most of the money earned within their borders; nevertheless, this freedom may come with consequences, such as double taxation, which should be taken into account.

While recourse to bilateral tax treaties is common worldwide, not all nations have signed these kinds of agreements, or they have only done so with their most significant trading and investment partners.

The report goes on to observe that the need to update the treaty-based rules that currently allocate rights to tax income or capital among jurisdictions to account for new business practices in an increasingly digital and globalised economy has become more apparent in recent years. With G20 backing, the OECD has been the main platform for finding responses to these issues. In particular, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) has devised a “two-pillar solution” that mainly aims to modify the rules applicable to large multinational corporations.

The report goes on to observe that the need to update the treaty-based rules that currently allocate rights to tax income and capital among jurisdictions to account for new business practices in an increasingly digital and globalized economy has become more apparent in recent years.

However, the modifications resulting from that process would not completely resolve the broader dissatisfaction stemming from the long-held belief by numerous nations and stakeholders that the current tax treaty regulations do not sufficiently reserve taxing rights to nations that host multinational corporations and serve as markets for their goods.

It is against this background, and having consulted with member states and other stakeholders, that the report presents an analysis of the existing arrangements, identifies additional options and proposes potential courses of action.

UN norm-shaping in international tax cooperation

The Ad Hoc Group of Experts in International Tax Cooperation was established to address long-standing concerns that the current paradigms of international tax cooperation were not meeting in relation to the interests of all nations. Specifically, the OECD Model Tax Convention’s primarily resident country taxation rules were deemed inadequate for developing nations looking to enter into tax treaties. These regulations would tend to give taxing rights predominantly to the developed country in treaties between developed and developing nations, while offering benefits that are nearly equal in the case of agreements between nations with balanced capital flows.

Consequently, the task of creating and maintaining an updated model tax convention that strikes a balance between the goals of better protecting developing countries’ taxing rights and fostering an environment that is conducive to investment fell to the Ad Hoc Group of Experts in International Tax Cooperation, now the UN Tax Committee (UNTC), its successor.

Under its mandate, the UNTC develops international tax standards, issues guidelines, and suggestions on tax administration or policy, with a focus on developing nations’ needs. As a result, source nation taxation powers have steadily increased in relation to the UN Model Double Taxation Convention, surpassing the provisions of bilateral treaties that would be based on the OECD Model.

Developed under the mandate of the UN Model Double Taxation Convention, the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries is a practical guide to all aspects of tax treaty negotiations, including the goal and operation of UN Model rules. Regular updating of this manual supports the adoption of the UN Model provisions in bilateral tax treaties. Both the UN Model and the Negotiation Manual (supported by capacity building) help countries to develop and articulate their own treaty policies in negotiations by describing a wide range of viewpoints and offering a variety of options from which they can choose, according to their realities or priorities.

In general, it has been found that the UN’s efforts to promote international tax cooperation are inclusive and successful. The International Centre for Tax and Development (ICTD) reports that clauses that are present in the UN Model but absent from the OECD Model are becoming more prevalent in bilateral tax treaties.

In general, it has been found that the UN’s efforts to promote international tax cooperation are inclusive and successful.

However, the UNTC does not, in terms of procedure, satisfy the requirement of universal participation by right and without preconditions. Members of the UNTC are experts who serve in their individual capacity within the group.

The 25 members, representing various tax regimes, are therefore chosen to reflect a fair geographical distribution and are rotated every four years. This, together with the Committee’s methods of operation and multi-stakeholder participation, guarantees that a variety of viewpoints are represented in the UN guidance products. However, while the nomination process is open to all countries, they do not have the right to participate directly in the UNTC’s norm-shaping process. This lack of universal participation in the UNTC means that other procedural criteria, such as agenda-setting, are not met.

OECD tax policy and administration

The 38 member countries of the Organisation for Economic Cooperation and Development (OECD) are all upper-middle income or high-income countries of Europe and the Americas. The organisation produces a wide range of guidelines on tax policy and administration which, however, are adopted by developed countries much more than by developing ones due to, among other reasons, their complexity and lack of capacity for implementation in developing countries. Moreover, and as earlier mentioned, specifically with regards to the “two-pillar” solution being developed through the OECD/G20 to tackle the challenges of taxing the digitalised and globalised economy thereby limiting harmful tax competition, developing countries feel that key concerns have not been addressed and that “the expected benefit from the proposed reforms will be minimal, especially when compared to the cost of implementation”.

Furthermore, rules of procedure prevent developing countries from fully participating in the OECD’s agenda-setting and decision-making process. In particular, the notion of universal participation, by right and without prerequisites, is violated by the requirement that jurisdictions pay to take part in talks. They also have to agree with the current norms before being permitted to participate. In addition, the requirement for non-OECD nations to adhere to regulations created prior to their membership in the norm-shaping body is incompatible with the procedural requirement that all nations participate in the agenda-setting process.

Options for inclusive and effective international tax cooperation

The UN report concludes that the substantive regulations created by OECD initiatives are often either too complex for developing nations to implement or do not sufficiently meet their requirements and objectives. The report argues that the UN is attuned to the need to make recommendations that offer a variety of solutions suitable for nations with varying degrees of development and that, therefore, the best way to make international tax cooperation completely inclusive and more efficient would be to increase the UN’s role in tax-norm formulation or rule establishment, fully taking into consideration current multilateral and international arrangements.

The UN report concludes that the substantive regulations created by OECD initiatives are often either too complex for developing nations to implement or do not sufficiently meet their requirements and objectives.

To attain this objective, the UN report offers three options. The first would be a legally binding agreement that would address a variety of tax-related topics. This type of agreement is commonly referred to as a “standard multilateral convention”. It would be characterized as “regulatory” in that it would lay out particular guidelines that would impose obligations, such as restrictions on the use of taxing rights.

The convention would set out mandatory, preferably enforceable, obligations deemed essential for appropriate domestic resource mobilization plus the establishment of a monitoring mechanism to ensure adherence to the information reporting and exchange rules, as well as mechanisms for resolving disputes when parties fail to honour their commitments.

This option’s feasibility would depend on political agreement over the necessity of addressing the tax issues that the convention will cover globally and in a legally binding way, as well as the capacity to reach an understanding regarding the best course of action.

A framework convention, which is the second possibility, would likewise be a legally binding multilateral instrument. However, it would be “constitutive” in the sense that it would create a comprehensive framework for international tax regulation. The fundamental principles of future international tax cooperation would thus be outlined in a framework convention, along with the goals of the collaboration, important guiding concepts, and the framework’s governance system.

The fundamental principles of future international tax cooperation would thus be outlined in a framework convention, along with the goals of the collaboration, important guiding concepts, and the framework’s governance system.

Due to their flexibility, framework conventions enable parties to agree to start talks even when there isn’t a strong political consensus on particular solutions, allowing them to handle a problem piecemeal. Nevertheless, there is the risk that establishing a framework convention may put on the back burner any the legal or technical effort required to bring about meaningful change.

The creation of a non-binding multinational agenda for coordinated measures would be a third choice. In practical terms, this framework would be similar to the second option in that it would set forth the guiding principles or procedures for international tax cooperation; however, these guidelines or procedures would not be covered by binding legal agreements.

Under such an arrangement, Member States would analyse tax issues to ascertain the level or levels at which coordinated efforts would be most successful. In cases where there is political agreement that a specific issue necessitates not only global legal obligations but also coordinated actions, the General Assembly could choose to authorise the negotiation of an instrument along the lines of the first two options above.

The three options proposed by the Secretary-General’s report are, therefore, not mutually exclusive, as a framework that makes recommendations regarding domestic tax rules could co-exist with a standard multilateral convention or framework convention focussing on international tax rules, for instance.  

In response to the UN Secretary-General’s report, the European Union has already made its position known. The bloc is in support of the third option, observing that “it would be useful to develop further actions aiming at capacity building and revenue mobilisation, taxing the informal economy, and countering illicit financial flows, especially in the least developed countries, which are critical for delivering on the Addis Ababa Action Agenda and the Sustainable Development Goals over time”. For its part, the OECD has expressed “disappointment” in the report and “surprise” that the UN “had chosen to ignore favourable assessments of the current state of OECD collaboration submitted to U.N. member states for the [Secretary General’s] analysis, resulting in ‘a number of inaccuracies and misleading statements’”.

Meanwhile, on behalf of the Africa Group, Nigeria has tabled a UN resolution on establishing a legally binding UN tax convention – the strongest of the three options presented by the UN report – for voting and adoption at the UN General Assembly when negotiations begin in earnest in early 2024.

This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).