Finance Minister Godongwana must recognise the need to stop illicit financial flows and fund public spending

10 Nov 2021

Government needs to tackle the vast outflows of wealth from South Africa in the form of illicit financial flows and cross-border corporate profit shifting. It’s a major driver behind Africa’s ‘resource curse’, where mineral wealth and foreign investment fails to translate to tangible benefits for the majority.

It is a sign of precarious times that the releases of the annual Budget review and Medium-Term Budget Policy Statement (MTBPS) have become such anticipated (and dreaded) events in the national calendar.

The past few Budgets were so important because they were a clear demonstration of the state’s true ideological, moral and economic commitments in the face of extraordinary pressures. The February 2020 Budget heralded the coming of austerity measures, which were further cemented by the following June 2020 Supplementary Budget, the 2020 MTBPS and 2021 Budget — despite the pandemic-induced economic crisis.

Through its half-hearted Covid-19 relief efforts, combined with cuts to the corporate tax rate, the state demonstrated that it was more firmly committed to conservative economic logic and the interests of capital than to the interests of the increasingly immiserated majority.

Today, in the shadow of COP26, and with the memory of the July unrest still fresh in our minds, all eyes are on the MTBPS. There is no doubt that this mini-budget will have a lighter tone than last year. The Treasury has received an unexpected tax windfall this year, giving it the opportunity to avoid further cuts while remaining on the path to fiscal consolidation; an opportunity it will surely be keen to take up, given the ANC’s dismal showing in the recent local government elections.

However, the reality of South Africa’s world-beating inequality and unemployment means that we need more than just status quo public spending. Economists, civil society, labour and community organisations have long been arguing that there is an urgent need for massive public investment in everything from infrastructure to social relief — such as a basic income grant — to the filling of essential vacancies in health and education.

South Africa’s economic structure is a pressure cooker for misery and unrest, and it will take more than the reintroduction of the R350 grant to change the conditions that led to the explosion in July.

With COP26 concluding soon, the issue of a Just Transition towards a decarbonised energy sector has also taken centre stage. There has been much fanfare about the recent $8.5-billion (roughly R131-billion) in just transition funding, grants, concessional loans and investments that South Africa has secured from the Global North at COP26, but this optimism might be premature. The details of the funding are still to be announced, and Saftu has already expressed concerns that the promised finance will be used for coal-to-methane conversions and restructuring at Eskom, at the expense of both workers’ livelihoods as well as true decarbonisation.

But even if these funds are well utilised, they will still be insufficient: Eskom’s transmission infrastructure alone will need around R118-billion in investment just to prepare for the coming roll-out of widespread renewable energy. This is not to mention the public funds that will be needed to make the transition “just” — to ensure that workers and communities reliant on fossil fuel industries (especially coal) are protected and involved throughout the process.

In our view, the severity of the intersecting economic and climate crisis means that the above kind of public spending is a minimum demand; the least that will be required in order to avoid social or ecological catastrophe.

The issue is that the state, and especially the Treasury, remains committed to its self-imposed economic limitations. South Africa is not a poor country, and there are plenty of alternative ways in which a progressive government could raise additional resources.

Ahead of last year’s MTBPS, we wrote an article in Daily Maverick identifying just one of these alternatives, calling on the government to tackle the vast outflows of wealth from South Africa in the form of illicit financial flows and cross-border corporate profit shifting.

A serious commitment to combating illicit financial flows and profit shifting is only an example of one way in which the government could signal a recognition of our intersecting crises and their commitment to funding a public pathway out of them.

Profit shifting is a common means of tax evasion for large corporations, involving the use of complex ownership chains and offshore tax havens such as those exposed in the Pandora Papers. This issue has been increasingly recognised as a major driver behind Africa’s “resource curse”, where mineral wealth and foreign investment fails to translate to tangible benefits for the majority.

According to some estimates, Africa loses up to $53-billion each year to just one form of profit shifting, outstripping the $40-billion in foreign direct investment received by the continent last year.

We argued that austerity, aside from being self-defeating, was also unnecessary if the state instead reclaimed the billions of rands in tax revenue lost to the all-too-common bad behaviour of tax-dodging corporates.

Almost exactly a year later, the Alternative Information and Development Centre, supported by Tax Justice Network Africa, held the “Closing Pandora’s Box” conference in Johannesburg. This conference brought together a range of participants, from trade unionists to government officials to legal experts, to build a shared understanding of the state of play for tax justice as well as to workshop strategies for taking up a broad campaign against illicit financial flows, corporate profit shifting and wage evasion.

There were several key lessons from this conference, but the most relevant is this: there would be no need for Enoch Godongwana to walk a fiscal tightrope in his maiden MTBPS if the government took the issue of profit shifting seriously.

In the opening address, Prof Patrick Bond referenced government sources that estimated annual losses of up to R354-billion in illicit financial flows, of which 60% (R212-billion) is estimated to be from corporate tax evasion alone. This wholesale loss of tax revenue deepens the state’s fiscal crisis, while benefiting some of the wealthiest and most environmentally harmful companies in South Africa, such as in the case of trade misinvoicing from the mining sector.

Bond also reiterated the fact that the outflows from the extractives sector also constitute a double loss insofar as they deprive the country of its non-renewable resources, in exchange for little benefit.

Other participants pointed out that these outflows are facilitated by a well-developed network of enablers, with some of the prime culprits being the same accounting firms implicated in State Capture and the hollowing out of vital institutions such as SARS.

The intimate links between public and private sector corruption mean that a comprehensive effort aimed at rooting out illicit financial flows would therefore have the added effect of alleviating public sector corruption, especially in procurement.

However, as several participants cautioned, serious attempts to take up the fight against illicit financial flows and corporate profit shifting have to be accompanied by the reintroduction of restrictions on the cross-border movement of capital. In the 1990s, many of these exchange and capital controls were abolished in order to attract investment from many of the same companies that are now using this relaxed environment in order to send the lion’s share of profits overseas.

By way of example, a participant familiar with the ongoing case lodged by AMCU against Samancor Chrome pointed out how company directors were allegedly able to redirect millions of dollars to their accounts in tax havens, despite one major bank and the Reserve Bank itself being aware of the transaction.

If this enabling policy environment is not reversed, then we not only continue enabling these outflows, but also risk experiencing capital flight as a reaction to any serious efforts at cutting them off.

Last year, we cautioned that the state cannot hand the problem of profit shifting over to international bodies either. This is even truer today. In the past few months, a package of reforms to the global tax system, developed by the wealthy nations in the OECD, has been rushed through the global consultation process by diplomatic brute force, in the end gaining the signed approval of the G20 at the end of October.

These reforms are meant to tackle corporate profit shifting through the institution of a global minimum tax rate, among other mechanisms, but they have been widely criticised for being biased towards the wealthy nations in which transnational corporations are headquartered.

As Learnmore Nyamudzanga, a tax expert and one of the conference participants pointed out, the reforms will deprive countries like South Africa of their own sovereignty to institute certain kinds of taxes, while handing over the bulk of the benefits to countries such as the United States. It is worth noting that former finance minister Tito Mboweni even penned a joint article of support for these reforms back in June, without expressing even a hint of criticism or resistance.

It was noted that the government had made some positive progress. Most notably, February’s budget allocated additional funding to SARS, and the recent proposed amendments to the Companies Act will lead to greater corporate transparency — possibly opening the door for unions to take up profit shifting as a wage bargaining issue.

However, when we look at the points referenced above, it is also clear that the state has generally only been willing to push this issue insofar as it remains convenient. It is easy to sign on to a global minimum tax rate when the G7 tells you to, and the rebuilding of SARS is in line with the broadly popular mandate of recovery from State Capture. But pushing against the OECD’s tax deal in the way that Kenya and Nigeria have, or tightening up capital controls against the wishes of multinational corporations, are actions with more serious consequences that may infringe on our leaders’ own narrow interests.

A serious commitment to combating illicit financial flows and profit shifting is only an example of one way in which the government could signal a recognition of our intersecting crises and their commitment to funding a public pathway out of them.

Whatever the means, in this regard we can only hope that Enoch Godongwana’s inaugural MTBPS will send out a different set of signals than those of his predecessor. DM

Jaco Oelofsen is a researcher based at the Alternative Information & Development Centre, AIDC, on whose behalf he writes.

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