Australian investments in Africa must be seen to be transparent to create the long-term partnerships needed for generating the best returns.
Mining has played a central part in Australia’s journey to become one of the wealthiest countries on earth. But with Australia’s economic growth slowing, many miners are looking for prospects elsewhere. With significant natural resources and increasing political stability, Africa offers excellent opportunity.
Many Australian companies will be prospecting for business this week when they meet African governments at the “Africa Down Under” mining conference in Perth. Managed correctly, foreign expertise and investment also represents enormous opportunity to improve the lives of millions in Africa.
Long-term partnership will be key to generating the best returns. Australian investments in Africa must be seen to be fair.
In May this year, I launched a report – Equity in Extractives – on Africa’s oil, gas, and mining sectors. Subsequently discussed by global and African leaders, the report showed how tax and transparency issues prevent Africa from enjoying its fair share of mining revenues. One single tax avoidance technique – transfer pricing – costs the continent more than it receives in either international aid or foreign direct investment.
Meanwhile, increasing internet access and the return of many well-educated Africans from overseas are helping to boost awareness of tax avoidance issues. And Africa’s tolerance is declining. For companies, this will likely emerge as a hot reputational issue that may ultimately impact access to mining resources.
Amazon, Google and Starbucks have already found to their cost how oversized tax avoidance has become a major reputational headache. Not only is our global tax system broken and unfair, it also affects us all.
Some companies, such as Rio Tinto, have shown impressive effort to become more transparent with their tax payments. Other Australian companies, including the small and medium-sized, may wish to enhance their reputations and long-term relationships in Africa, their “social licence to operate”, by taking the initiative on tax and transparency issues.
Such behaviour could bring competitive advantage when African governments prove more keen to work with companies that pay fair tax.
Whoever is elected in Australia’s national election on September 7 will have excellent opportunity to build the country’s reputation on these issues when Australia takes leadership of the G20 group later this year.
G20 leaders have already committed to discuss global tax reform when they meet in Russia next week, but sub-Saharan countries are seriously under-represented in negotiations to reform the global tax system. And Australia would do well to ensure that global tax reforms benefit Africa too.
Three reforms, in particular, are crucial.
The first is to tackle transfer pricing, the practice by which a company mis-prices the cost of its products in order to understate its tax liability. Between 2008 and 2010, transfer pricing alone cost Africa an average $US38.4 billion ($42.9 billion) every year. This amount is more than the average annual $US29.5 billion worth of international aid to the continent for the same period.
Second, the G20 must enforce transparent beneficial ownership. The extensive use of tax havens, shell companies and multi-layered companies actively facilitates corruption by hiding the flows and recipients of major financial transactions. Many anonymous shell companies are registered in tax havens in G20 countries. G20 countries should demand full disclosure of the beneficial ownership of registered companies on open public registers. In this way, citizens groups and journalists alike, as well as law enforcement authorities, can follow the money and help to root out corruption.
The third key reform is to link African tax authorities into global reforms. Tax authorities in all regions struggle to prevent the erosion of tax bases, but Africa struggles more than most. Automatic information exchanges must also extend to African tax authorities, who would benefit from capacity building to tackle tax evasion and illicit transfers of wealth.
Africa and Australia have common interest in creating a predictable and fair global business environment. This is particularly important for the people of Africa, who expect their fair share of the wealth beneath their soils and waters.
What Australian companies may lose by accepting to pay fair taxes and investing in their host countries’ economies, they will regain many times over through the benefits of a predictable, rule-based and transparent business environment and long-term, positive partnerships.
Published in: Australian Financial Review
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Chaired by Kofi Annan, the former Secretary-General of the United Nations, the Africa Progress Panel (the Panel) includes distinguished individuals from the private and public sectors, who advocate on global issues of importance to Africa and the world.
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