Public Country by Country Reporting: The Big Break for African Tax Transparency  

With this week’s United Nations “High-level Dialogue on Financing for Development,”, illicit financial flows are high on the international tax agenda, and the related need to mobilize taxes to finance development is back on the front burner. 

Illicit financial flows (IFFs), aggressive tax planning, and high levels of tax evasion and avoidance are highly detrimental to the ability of any nation, including African nations, to mobilize the tax revenues that are necessary for its development. These activities would not thrive without tax secrecy. 

As in the rest of the world, financial and fiscal opacity has had a significant negative impact on the African economy. In 2020, the United Nations Conference on Trade and Development (UNCTAD) estimated in its Economic Development for Africa Report that Africa loses $88.6 billion annually from IFFs and emphasized that curbing this phenomenon could halve Africa’s Sustainable Development Goals (SDGs) financing gap, which was estimated to be about $200 billion per year. The figure has since ballooned to $1.3 trillion given the adverse impact of the COVID-19 pandemic on African economies.

What these figures show is the heavy economic loss Africa suffers due to the absence of financial transparency. Transparency in this context imposes an obligation on governments to ensure the public availability of legal, beneficial ownership, tax, accounting, and banking information, as well as access to that information and its effective exchange with foreign partners. While there is a consensus that tax transparency, if implemented, will result in a more effective tax system, there remains some disagreement on how far governments and other stakeholders should go. Public country-by-country reporting by corporations could be the breakthrough African countries need to close the revenue gap, or at least significantly reduce the information paucity.

Country-by-country reporting (CbCR) requires large multinational companies to break down their corporate taxes, profits and other tax-relevant information for every country where they operate. A confidential version of CbCR has been available to certain tax authorities under the Organization for Economic Cooperation and Development’s (OECD) international tax framework since 2016, and has been touted by the OECD as one of its major tax achievements. CbCR has been enacted via legislation in more than 100 jurisdictions, and is facilitated by more than 3300 bilateral relationships for information exchange and at least 134 countries involved in the annual OECD peer review. While this indicates progress toward more robust exchange of CbCR information globally, Africa does not have the same track record of success with the implementation of CbCR, nor is there an expansive exchange of information framework to provide actionable information across jurisdictions on the continent. The Tax Transparency in Africa 2023: Africa Initiative Progress Report (TTiA), a report jointly published by African Union Commission, the African Tax Administration Forum and the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes notes that, while African countries have made some progress in strengthening their exchange of information frameworks, more work is needed.

When it comes to financial accounts, according to the TTiA, only five African countries are exchanging information automatically on a reciprocal basis, with five more African countries committed to implementation within the next three years. Additionally, of the nine African countries that have been subject to full peer review by the OECD’s Global Forum, only one African country has achieved overall ‘compliance’, four are largely compliant, and the remaining four are only regarded as partially compliant.

The outcome of the limited improvement in automatic exchange of financial information on the African continent as noted in the TTiA, is such that only four African countries were able to identify additional revenue amounting to EUR 76.6 million: the largest amount discovered in a single year since the OECD introduced its Africa Initiative launched in 2014. Sadly, this puts only a small dent in Africa’s overall financial development needs, although it is a useful contribution to the bottomline.

The generally low buy-in of African nations to these tax transparency initiatives, although slightly improved in recent years, is deserving of more attention and, particularly, warrants more widespread consideration of public CbCR. Public CbCR is a tool for increasing corporate transparency and enhancing public scrutiny of major multinationals by making public tax data that would otherwise be exclusively released to tax authorities through OECD processes. While increased African participation in the OECD’s confidential CbCR regime is desirable, securing such participation has been an uphill task. A public CbCR regime is one way to overcome these challenges. African nations passing and implementing their own public CbCR laws would be a daunting challenge, however, even though the benefits would be considerable. Africa could still reap benefits, though, if public CbCR regimes are enacted in major market jurisdictions such as Australia and the United States. 

Some of the benefits of  public CbCR framework for Africa include:

  1. Overcoming the utility barriers of existing CbCR standards: one of the major barriers to the efficacy of confidential CbCR reporting is the time and technical skill required to gather, request, exchange, and analyze information. Some of these issues are a product of very slow administrative, legislative and legal processes in African nations. With public CbCR, this long process is eliminated, thus giving each tax authority direct access to available information. It may also circumvent the capacity constraints developing countries face which make it difficult for African tax authorities to engage constructively with CbCR reports. This is particularly so if public CbCR is implemented by major market jurisdictions like the United States and Australia, where the majority of large multinationals operating in Africa are headquartered. That would immediately increase access by African tax authorities given that all they have to do at that point is to utilize the information that has become publicly available.
  1. Public shaming to address Africa’s fiscal endemic made possible by the lack of tax transparency: corruption, IFFs, and money laundering are at alarming proportions in some African nations. The adoption of public CbCR in Africa and major market jurisdictions would go a long way to directly spotlight these activities and potentially reduce their appeal, increase public attention and incentivize more government enforcement. 
  2. Enhanced investor confidence: one of the biggest obstacles to development in Africa is financing. With corruption and corporate governance concerns thriving in secrecy, which, among other factors, reduces investor confidence in the market, public CbCR will increase transparency in surrounding the activities of MNEs and allow shareholders to effectively evaluate risks taken by any given corporate entity. 

One of the biggest benefits of public CbCR for Africa is its potential to address access barriers to confidential CbCR information with little or no legislative action by any African nation.

Even in the midst of arguments around the exposure of sensitive commercial information, risks to competitiveness, and increased costs for multinationals in the form of possible compliance burdens, African tax experts favor the adoption of public CbCR, and this is for good reason: the overarching benefits of transparency far outweigh these costs. Claims that public CbCR risks exposure of confidential or market sensitive information is, in some sense, making a mountain out of a molehill, as CbCR does not require publication of special formulas or market secrets, but rather of basic tax and financial information. In any case, to the extent a company has any sensitive operations, such as operations concerning national security, such information could be exempted from reporting. 

Lao Tzu said it best when he said that the journey of a thousand miles begins with one step. In this case, there are very strong arguments for why that step should be public CbCR: it looks very much like a grand solution to a major problem with high likelihood of return in Africa and beyond.