Mining company Lonmin has featured prominently in the media recently, defending itself against allegations of tax evasion through “transfer pricing”. But it is hardly alone in this: many food, extractive, logging and other companies have been criticised by civil society for tax avoidance in Africa, through legally questionable practices. While there are a number of government efforts aimed at addressing this, one example being the Kenyan Government’s decision to phase out the tax incentives and exemptions offered to foreign companies, there is a need for companies to commit to reversing this trend, which deprives governments of sorely needed funds to meet the basic needs of citizens and fulfil human rights.

In Lonmin’s case, a report by the Alternative Information and Development Centre (AIDC), alleged that if it had not shifted profits from its South African operation to a tax haven, it could have met the pay increase demands of striking miners at Marikana before the massacre there in 2012. Lonmin denied the allegations. Elsewhere, an ActionAid report alleged that the Zambian subsidiary of Associated British Foods “paid virtually no corporate tax”, thereby depriving “Zambian public services of an estimated US$27 million”. Associated British Foods issued a statement, asserting that the company “… denies emphatically that it is engaged in anything illegal, immoral or in any way designed to reduce the tax rightly payable to the Zambian government…”.  A 2013 Global Witness report on the logging industry in Democratic Republic of Congo found that despite paying the lowest Surface Tax in Central Africa – only US$0.50 per hectare – logging firms paid only 10% of this rate.

The AU High Level Panel on Illicit Financial Flows notes that Africa loses between US$50-80 billion annually from capital spirited out of African countries, and estimates that 60% of this is attributable to the activities of large companies. This is significantly more than Africa receives in both aid and foreign direct investment, according to a study by Global Financial Integrity and a report of the International Bar Association Task Force on Illicit Financial Flows, Poverty and Human Rights. Edward Harris of Africa Progress Panel notes  the potential of natural resources to transform the continent, by providing governments with “precious revenues to spend on...health, education, energy and infrastructure...[to] unlock economic opportunity and help generate vital jobs”. The same is true of revenues generated by other businesses on the continent.

Many companies assert that they ought to be beyond reproach provided they negotiate tax advantages within the parameters of the law, for as the AIDC notes, “...transfer pricing schemes are often formally legal...” However, as the International Bar Association points out in its report “…[I]n a context of persistent poverty and rising inequality between and within nations, the fact that tax strategies…may be technically legal is no longer a sufficient justification for their continued use.”’ Kofi Annan, chair of the Africa Progress Panel, similarly observes that “…efforts to minimize tax liability are reprehensible, and particularly detrimental to Africa…”.

It hardly seems unreasonable then to expect companies that benefit from a productive labour force comprising educated, skilled, and healthy citizens to contribute to the resources used to realise those human rights. Not only does it make good business sense for companies to adopt an ethical approach to taxes, it also reduces the likelihood that a burgeoning youth population will be unable to attain education, employment, and other goals – a fertile environment for political and social instability.

In the light of the above, what steps should be taken to ensure that companies toe the ethical tax line?

A crucial point of departure is for companies to commit to paying their tax contribution.  More importantly, companies should report on their tax contributions in a transparent manner, preferably on a country-by-country basis. This is imperative as it provides a means by which companies can concretely show, as opposed to simply claiming, how much they contribute to the countries in which they operate.

We should encourage public acknowledgement and commendation of companies that voluntarily disclose their tax contributions: Rio Tinto was one of the first companies to be lauded – by Publish What You Pay in 2009 – for proactively disclosing the tax and royalties the company paid in 13 of the countries in which it operates. Such best practices should be championed through initiatives such as PricewaterhouseCooper’s Building Public Trust: Excellence in Reporting Awards, which seek to “...nurture a recovery in trust, by forging a common understanding founded on transparency, honesty, integrity, and an embedded culture of doing the right thing”.

Given the international dimension of tax abuses, priority should be given to improving tax regimes, as well as increasing transparency of capital and financial flows and company ownership - the G20 endorsement of the global Common Reporting Standard for the automatic exchange of tax information (AEOI) on a reciprocal basis is to be commended in this regard. Support should be provided to the work of collaborative, multi-stakeholder mechanisms such as the Extractives Industry Transparency Initiative (EITI), as well as NGO networks such as Tax Justice Network and Publish What you Pay.

States should work cooperatively to ensure effective accountability for tax abuses, and home countries should be prepared to exert pressure on companies that commit human rights violations abroad, particularly in host countries with weak regulatory or legal frameworks.

Finally, companies should recognise that the long-term gains of achieving more equitable and developed nations far outweigh the short-term benefits of an inflated profit margin attained through dubious means. With companies operating in an era of increased consumer interest, awareness and commitment to eradicating the negative human rights impacts of corporate activity, burying heads in the sand insofar as tax justice is concerned simply invites reputational damage now, and serious harm to both the company and society in the longer term. Judge Dennis Davis, chair of the Davis Tax Committee – tasked with assessing South Africa’s tax policy framework and its role in supporting national objectives – sums it up well in asserting that, ‘...[a]ll we are asking is, if corporates can only be here because they flout our tax law, then they must go elsewhere. But they won’t be able to go elsewhere because all those [OECD and G20] countries will be doing the same. The game is [becoming] global.”

Nokukhanya Mncwabe, Anglophone Southern & Western Africa Researcher and Representative: Business & Human Rights Resource Centre. This article is an excerpt of a presentation the writer gave at a Colloquium on Poverty and Human Rights hosted by the University of the Western Cape’s Community Law Centre on November 27-28