Malawi Lost Usd 4691 Million In Illicit Financial Flows Between 2001 And 2010

Malawi Lost Usd 4691 Million In Illicit Financial Flows Between 2001 And
2010

Malawi lost USD 4,691 million between 2001 and 2010 due to illicit  financial flows and if policy recommendations are not taken on board, the country could lose even more in the next decade. Currently, Malawi ranks 75th out of 143 countries for largest average illicit financial flow estimates for 2001 to 2010. 

IMAGE Heat Map of Total Illicit Financial Flows 2001-2010 (USD Millions)
(Global Financial Integrity, 2012) 

The term, illicit financial flows refers to the cross-border movement
of money that is illegally earned, transferred, or utilized , and on
average 80% of illicity flows are a result of trade mispricing. 

According to Global Financial Integrity s December 2012 report on
illicit flows, USD 5.86 trillion left developing countries in the
previous decade. In practice, this means that for every USD 1 developing
countries receive in official development assistance, usually from
nations that are home to the head quarters of companies engaged in
nefarious financial practices, they lose USD 10 through illicit
outflows. Sadly, Sub-Saharan African has witnessed a 23.8% increase in
outflows, driven primarily by trade mispricing. 

Companies and individuals are able to avoid paying taxes by shifting
large sums of money from one jurisdiction to another. Transfer pricing
is used by multinationals; goods are sold between two subsidiaries of
the same parent company. This is a legitimate practice as long as the
transfer price, or an arm s length price , used between the
subsidiaries is a fair market price, i.e. the same as if the two
companies involved in the transaction were two independents and not part
of the same corporate structure. 

However, some companies may wish to artificially distort the prices to
minimise overall taxes paid and record as much profit in an area with
low or no taxes. This phenomenon trade mispricing explains a
significant proportion of illicit financial flows. 

The Tax Justice Network provides a hypothetical example to illustrate
how trade mispricing occurs and who the losers are: 

For example, take a company called World Inc., which produces a type of
food in Africa, then processes it and sells the finished product in the
United States. World Inc. does this via three subsidiaries: Africa Inc.
(in Africa), Haven Inc. (in a tax haven, with zero taxes) and America
Inc. (in the United States). 

Now Africa Inc. sells the produce to Haven Inc. at an artificially low
price, resulting in Africa Inc. having artificially low profits and
consequently an artificially low tax bill in Africa. Then Haven Inc.
sells the product to America Inc. at a very high price almost as high
as the final retail price at which America Inc. sells the processed
product. As a result, America Inc. also has artificially low
profitability, and an artificially low tax bill in America. By contrast,
however, Haven Inc. has bought at a very low price, and sold at a very
high price, artificially creating very high profits. However, it is
located in a tax haven so it pays no taxes on those profits. 

What has happened here? This has not resulted in more efficient or
cost-effective production, transport, distribution or retail processes
in the real world. The end result is, instead, that World Inc. has
shifted its profits artificially out of both Africa and the United
States, and into a tax haven. As a result, tax dollars have been shifted
artificially away from both African and U.S. tax authorities, and have
been converted into higher profits for the multinational. 

This is a core issue of tax justice and unlike many issues which are
considered to be either developing country issues or developed
country issues in this case the citizens of both rich and poor
nations alike share a common set of concerns. Even so, developing
countries are the most vulnerable to transfer mispricing by
multinational corporations. 

Given that 60% of world trade now takes place within multinationals, the
potential for countries to lose important tax revenue is increasing and
it is becoming evermore difficult to track. In fact, a Christian Aid
study, False Profits: Robbing the Poor to Keep the Rich Tax-Free ,
(March 2009) suggests that USD1.1 trillion in bilateral trade mispricing
flowed into the European Union (EU) and the United States of America
alone from non-EU countries between 2005 and 2007. 

This week at the Alternative Mining Indaba, held to coincide with the
Investing in African Mining Indaba, both held in South Africa, Alvin
Mosioma of the Tax Justice Network Africa told the participants that the
top 10 global mining companies have an estimated 6 000 subsidiaries. As
a result, he explained that 

It is impossible for any government to know how much profit is generated
from its mineral wealth. 

How is it possible that you have 3 000 employees in Malawi and three in
the Cayman Islands and you can attribute 70 percent of your profit to
the operation in the Cayman Islands? 

[There is] very limited capacity within governments to negotiate good
mining contracts especially with multinational companies. In most cases,
the multinational companies have skilled personnel and negotiators while
governments do not. Mining companies may bring consultants, bankers,
economists and lawyers to the negotiating table and often outnumber
government [ ] teams. 

Access to this many resources, knowledge and expertise too often means
that contracts ultimately benefit the mining companies and the
government will always get the short end of the stick. 

Malawi faces a challenge in ensuring illicit financial flows do not grow
in the next few years with the increasing number of mining companies
operating within her borders.