Tax And Transparency: Why The G8 Agenda Matters

Paul Collier - 29th May 2013

Paul Collier situates the G8 within the context of fiscal austerity and the persistent need for transparent government.

At its best, the G8 can provide the coordinated action that helps the poorest countries to catch up. Historically, the main focus of such action was on aid, but the fiscal context is now profoundly different. While G8 governments have no spare money, many poor countries have the prospects of serious money from recent natural resource discoveries. Extra aid is currently neither politically feasible to G8 countries nor strategically central to poor countries. What really matters is whether the resource discoveries lead to a repeat of history in the form of the resource curse.

Repeating history is the default option: the resource curse happened because of strong forces of self-interest. But it is not inevitable; social learning frees us from historical traps. Within many poor countries there has already been remarkable social learning concerning how to harness natural resources for sustained prosperity. The economic policies that help to avoid problems such as Dutch disease, and the governance that guards against the plunder of natural wealth are both better understood.

This social learning is fundamentally a domestic process, being played out in each resource-rich poor country. It would be impertinent and hence counterproductive for the G8 to preach about these internal struggles. The recent record of the G8 on policy and governance has cost it the privilege of preaching. But there is much that the G8 can do to put its own house in order in ways that help poor countries to govern resource extraction more successfully. Europe has just made an important contribution by making the reporting of all payments by resource extraction companies to governments mandatory, which Newai Gebre-ab, chair of the African Progress Forum, describes as ‘very, very important to Africa’. But mandatory reporting is not enough. In recent years international lawyers and accountants have built a web of corporate opacity that has enabled tax avoidance and corruption.

Tax avoidance is particularly damaging to poor countries because they need to capture a substantial share of the profits generated by resource extraction through their tax systems. In doing this they face a massive asymmetry between the capacities of corporate accountants whose job is to minimize the tax bill, and their own ill-paid officials whose job is to police the tax code. Further, in order to capture the large rents that are a distinctive feature of resource extraction, poor countries need higher corporate taxation than is appropriate for the sectors that dominate G8 economies. The G8 itself faces problems of tax avoidance, but those of poor countries are an order of magnitude more severe.

The simplest form of tax avoidance, widespread in African resource extraction, is transfer pricing, by which a subsidiary in a high-tax jurisdiction sells its output to one in a lower-tax jurisdiction at a price below its true value. The G8 can do a lot to help Africa tackle this sort of corporate abuse. Mis-pricing can be contained by scrutiny. Africa suffers because its tiny jurisdictions cannot realistically each build the necessary capacity. The remedy is to provide guideline price information internationally. The OECD wants to create such a database, and the G8 could give it political impetus. International companies operating in Africa would be required either to use these guideline prices, or to report and justify deviations.

Corporate opacity is also the key vehicle for corruption. In Africa, and other poor regions, corruption is a huge impediment to decent governance. African leaders point out that it takes two to tango: the bribing foreign company as well as the bribed official. Honest African leaders and officials face overwhelming difficulties in enforcing legislation because corruption is difficult to prove and its proceeds are easy to conceal. But Africans who say ‘it takes two to tango’, though right in spirit are wrong in detail. Corruption takes three players: the briber, the bribed, and the facilitator. Corrupt money is laundered through fake companies and untraceable bank accounts. The lawyers and bankers who facilitate these transactions are not based in Lagos and Pretoria; they are in London and Paris. African governments are impotent to address money laundering, but the G8 could close it down. Fake companies, which conceal their true ownership (‘shell companies’), are the major vehicle for bribes. The true ownership of companies must become a matter of public record, with clear responsibility for the accuracy of information, and standardized, electronic databases.

Europe has more voices in the G8 than the rest of the world combined. The European Parliament’s enactment of mandatory reporting is already an important step in the journey to transparent governance. We should now use our voices in the G8 to break the corporate opacity that has so handicapped Africa.

Paul Collier has been assisting the British Government with the G8 agenda. A fuller version can be downloaded from the website of Prospect Magazine. This blog also appears on Social Europe Journal.