To safeguard its financial resources, the continent needs a cohesive strategy for promoting international tax cooperation.
by Nara Monkam
Published on November 12, 2024
Global tax cooperation and the fight against illicit financial flows (IFFs) have become crucial in international economic governance, especially for African countries. As the global economy becomes more interconnected, base erosion and profit-shifting (BEPS) practices by multinational enterprises (MNEs) have intensified, leading to significant tax revenue losses. Africa’s annual losses due to IFFs total around $88.6 billion, representing 3.7 percent of its GDP, a severe leak in its economic bucket that exacerbates inequality and stifles growth. This leakage also threatens achievement of the objectives outlined in Africa’s Agenda 2063, the African Union (AU)’s blueprint for continent-wide economic prosperity, as well as the UN Sustainable Development Goals (SDGs). From 1980 to 2018, sub-Saharan Africa lost a staggering $1.3 trillion to these flows, highlighting the scale and persistence of the problem.
African countries are particularly vulnerable because of their heavy reliance on corporate income taxes and challenges in enforcing tax regulations. The digitalization of the global economy has further complicated taxation, making it difficult for African authorities to capture revenue from digital businesses. Despite the involvement of over 140 countries in the Organisation for Economic Co-operation and Development (OECD) and Group of Twenty (G20) Inclusive Framework on BEPS, African nations face significant challenges in fully benefiting from these global standards as a result of administrative and economic constraints.
Beyond OECD initiatives, the AU has addressed IFFs through the High-Level Panel on Illicit Financial Flows from Africa, chaired by former South African president Thabo Mbeki (the Mbeki Panel). The Mbeki Panel’s report urged African nations to strengthen institutional capacities to curb these outflows. Additionally, the UN has advocated for a more inclusive approach to global tax governance that addresses the unique challenges of developing countries.
Curbing IFFs and promoting sustainable development in Africa will require an Africa-centered approach to global tax cooperation that strengthens international rules on IFFs, preserves financial resources, and empowers African policymakers with strategic actions tailored to the continent’s unique challenges.
Navigating BEPS and IFF Challenges: An African Perspective on Global Tax Cooperation
BEPS occurs when multinational corporations reduce their tax liabilities by shifting profits to low- or no-tax jurisdictions with minimal economic activity. These practices exploit gaps in tax regulations, significantly eroding tax bases worldwide. BEPS results in an estimated annual loss of $100–240 billion, representing 4–10 percent of global corporate income tax revenue. This undermines the fairness and integrity of tax systems, particularly in developing nations, where reliance on corporate income tax from MNEs is high.
To combat BEPS, over 140 countries and jurisdictions have joined the OECD/G20 Inclusive Framework, implementing fifteen measures to ensure that profits are taxed where economic activities occur. These measures include enhancing the coherence of international tax rules and promoting transparency. The framework’s two-pillar approach—Pillar One reallocates MNE profits to market jurisdictions and Pillar Two endorses a global minimum tax rate of 15 percent—aims to address the challenges posed by the digitalization of the economy and aggressive tax planning strategies by MNEs.
While the OECD/G20 BEPS framework represents a significant step forward, developing nations face unique challenges in implementing these measures. Limited administrative capacity, budgetary constraints, and potential biases in arbitration rulings hinder these countries from fully participating in global tax governance. Moreover, the digital economy’s complexities make it difficult for African tax authorities to capture revenue from digital businesses, further eroding their tax bases.
African countries have expressed concerns about implementing Pillar One and Pillar Two of the BEPS framework. They regard Pillar Two as especially disadvantageous to African nations, since it prioritizes the Income Inclusion Rule (IIR), which allows the home country of a MNE to tax profits not sufficiently taxed abroad, over the Undertaxed Payment Rule, which allows source countries to impose additional taxes on payments to low-tax jurisdictions. This has the effect of perpetuating the imbalance in taxation rights between source and residency countries. Furthermore, African governments consider the 15 percent global minimum tax rate insufficient to prevent profit-shifting out of Africa, where the average statutory corporate income tax rate is between 25 percent and 35 percent. (The African Tax Administration Forum and the African Union propose a higher minimum global tax rate of at least 20 percent). The Subject to Tax Rule (STTR), a key component of Pillar Two, does offer some protection against profit-shifting by allowing source countries to impose withholding taxes on certain cross-border payments taxed at low rates in treaty partner countries. However, for the STTR to be effective, it must have broad coverage, including all service payments, to safeguard the tax bases of developing nations.
Overall, the OECD/G20 Inclusive Framework on BEPS represents a critical global effort to address tax challenges. However, for African countries to fully benefit, the focus must be on enhancing administrative capacities and tailoring the framework’s measures to meet the unique needs of developing nations. Collaborative efforts and specialized solutions are essential to protect the revenue bases of African economies and promote sustainable development.
The UN Framework Convention on International Tax Cooperation
The drive to negotiate a UN Tax Convention was inspired by the growing need for a more inclusive and effective international tax system, particularly to address the concerns of developing countries historically marginalized in global tax discussions. Traditionally, multilateral tax agreements have been crafted in forums—most notably the OECD—with limited participation from the countries most affected by these decisions, leading to international tax norms that often fail to meet the needs of developing nations.
Significant steps were taken in 2022 to respond to this imbalance. First, the European Network on Debt and Development—a network of European nongovernmental organizations that focuses on issues related to debt, development finance, and poverty reduction—proposed a draft UN Convention on Tax. Second, the Conference of African Ministers of Finance adopted Resolution 990 (LIV) of May 17, 2022, in which it called upon the UN to begin negotiations on an international convention on tax matters. Third and most importantly, the African Group at the United Nations sponsored UN General Assembly Resolution 77/244, which called for more inclusive and effective international tax cooperation. This resolution marked a critical shift toward ensuring that the voices of developing nations, particularly in Africa, are heard in global tax governance.
In 2023, the UN Secretary-General outlined three options for advancing international tax cooperation, focusing on inclusivity. The African Group, demonstrating leadership in this effort, tabled another General Assembly resolution, advocating the negotiation of a framework convention for international tax cooperation. This resolution, which passed with a vote of 125 in favor of the tax convention, forty-eight votes against, and nine abstentions, underscored a strong global preference for a binding framework, in contrast with an alternative, nonbinding approach favored by the United Kingdom, which the Global South largely rejected. The resulting move toward a binding framework represents a pivotal victory for developing nations in the search for a more equitable international tax system that addresses the needs and capacities of all countries, ensures a fair distribution of taxing rights, and promotes sustainable development. Tailoring strategies to African nations’ development objectives is crucial to ensuring that they benefit from this framework.
Challenges and Opportunities
The proposed UN tax convention presents significant challenges as well as opportunities for African countries. Key concerns include a potential loss of sovereignty, the risk of dominance by developed nations, and global disparities in information and resources. African nations must navigate these concerns while advocating for their interests, particularly with regard to building regulatory capacities and addressing the root causes of IFFs. To maximize the benefits of the UN tax convention, African countries must ensure that its negotiation and ultimate implementation is inclusive, addresses their specific needs, and is supported by adequate resources and capacity-building initiatives.
The convention also presents a unique opportunity for the continent to lead in global tax governance. The upcoming South Africa G20 presidency during 2025 and the African Union’s new status as a member of the G20 offer strategic platforms to advocate for a clear African position regarding the design and objectives of the UN framework convention. African governments can leverage this moment to champion the interests of their nations and other developing countries, advancing key objectives such as eliminating IFFs, protecting tax bases, and ensuring a fair allocation of taxing rights.
The Path Forward
The August 2024 session of the UN Ad Hoc Committee voted to approve terms of reference (ToR) for the development of a UN framework convention on international tax cooperation. The ToR included the need to align tax cooperation with international human rights obligations and the protection of national sovereignty. The final text emphasizes sovereignty but omits a “do no harm” clause, raising concerns about potential tax policies negatively impacting other states. The negotiations also highlighted the importance of integrating environmental concerns into tax policies, which was strongly supported by developing nations. The ToRs are now with the UN General Assembly for consideration during its seventy-ninth session. If endorsed, a member state–led committee will be tasked with drafting the convention and protocols over the next three years, aiming for a finalized treaty by 2027.
The proposed UN tax convention represents a pivotal opportunity for African nations to secure a more equitable share of global tax revenues and curb illicit financial flows. However, to fully realize the benefits, African countries must remain proactive in shaping the terms of this convention to ensure that it reflects the continent’s unique needs and challenges. By leveraging strategic platforms like the G20 and collaborating through Pan-African institutions, Africa can advance a collective agenda that strengthens its influence over global tax governance. With coordinated African efforts, the UN tax convention could be a transformative tool for sustainable development across the continent.
Strengthening African Tax Systems
The battle against BEPS and IFFs is a key element of Africa’s larger economic strategy. To effectively curb IFFs, African nations must close loopholes in international corporate tax laws that MNEs exploit through profit-shifting and transfer pricing. These practices result in significant revenue losses from IFFs, with some estimates suggesting up to $100 billion lost through mis-invoicing alone. Strengthening corporate tax legislation to address these loopholes is critical. Additionally, the increasing digitalization of economies presents significant challenges for tax collection in Africa. A tailored approach to digital tax reforms is essential, considering the varying levels of digital infrastructures and capacity across African countries. By implementing targeted digital policies and fostering multilateral collaboration, they can protect their economic interests while boosting tax revenues from digital services. Engaging in global discussions at forums such as the G20 is crucial to ensure that Africa’s unique needs are considered.
The proposed global minimum corporate tax rate under Pillar Two of the OECD/G20 BEPS framework poses challenges for African tax policies. While it aims to reduce harmful tax competition, it could undermine tax incentives vital to attracting foreign investment in Africa. A more nuanced approach, allowing for equitable tax competition under specific conditions, could help achieve the SDGs while safeguarding Africa’s tax base.
Effective tax administration is equally vital. Reforms should focus on enhancing taxpayer identification, registration, and assessment processes, supported by strong enforcement measures. These efforts will improve compliance and revenue collection, contributing to more predictable and equitable tax systems.
Addressing systemic political challenges is also critical. The current legal frameworks in many African nations often hinder investment and promote economic rents for officials, stalling economic growth. Reforms should aim to dismantle these systems, promoting better governance and economic development. Parliamentary reforms that enhance transparency, accountability, and public engagement in tax administration are essential for building public trust and ensuring the fair application of tax laws.
Capacity Building
Building African capacity to improve tax administration and enforcement is key to enhancing voluntary compliance, reducing tax evasion, and maintaining public trust in the tax system. Achieving this objective will require a multifaceted strategy that includes institutional reforms, international assistance, and the integration of digital technologies.
Digital technologies have already begun transforming tax administration in Africa. For example, Rwanda’s introduction of electronic billing machines has streamlined real-time transaction reporting, reducing compliance costs and improving corporate recordkeeping. Similarly, Togo’s digital services like Tmoney and Flooz have increased tax collection efficiency and transparency. However, challenges remain in fully utilizing digital data and aligning operations with new digital models.
Institutional reforms are also essential for improving the effectiveness of tax administration. Despite efforts, many African tax administrations still face inefficiencies, largely due to the informal sector and limited autonomy of revenue agencies. However, taxpayer segmentation (that is, distinguishing among taxpayers according to common characteristics, such as business sector or size) offers a promising solution, significantly enhancing efficiency and providing a strategic focus for ongoing reforms.
The Role of AI in Combating IFFs
Artificial intelligence (AI) holds significant potential for combating IFFs by enhancing the detection and prevention of financial crimes such as money laundering, tax evasion, and trade mis-invoicing. In South Africa, for instance, AI has been proposed as a solution to address deficiencies in anti–money laundering regimes in the banking and real estate sectors. Across Africa, IFFs continue to threaten economic stability despite efforts to establish institutional frameworks to counteract them. AI can enhance these frameworks by improving interagency cooperation and making reporting and monitoring mechanisms more effective.
Corruption, a major enabler of IFFs in Africa, can also be addressed through AI. Advanced analytics and monitoring tools can identify financial irregularities and corrupt activities, providing a powerful tool in the fight against corruption. AI’s ability to process vast amounts of data quickly and accurately makes it particularly useful for detecting patterns indicative of financial crimes, which are often complex and hidden within legal transactions.
However, the use of AI in this context is not without challenges. Issues related to transparency, fairness, and privacy must be addressed to ensure that AI systems are used effectively and ethically. Financial institutions must balance the need for effective fraud detection with the protection of taxpayer rights and compliance with regulatory obligations.
In sum, to harness the potential benefits of global tax cooperation and effectively combat IFFs, African policymakers must implement targeted policy and legislative reforms, strengthen tax administration and enforcement capabilities, and leverage AI technologies. These strategic actions will preserve and utilize Africa’s financial resources more effectively, supporting sustainable development across the continent. By pursuing an African-focused agenda in global tax cooperation, African nations can ensure that their unique needs and challenges are addressed, contributing to a fairer and more equitable international tax system.
Conclusion: Strategic Actions for Africa
Globalization and digitalization have intensified BEPS by MNEs, resulting in substantial tax revenue losses for Africa. Global tax cooperation and fighting against IFFs are essential tools African nations can use to combat these trends.
Recent global tax cooperation decisions, particularly the OECD/G20 Inclusive Framework on BEPS, have shaped international tax norms. Pillar One and Pillar Two of this framework represent a critical effort to curb profit-shifting by MNEs and ensure that profits are taxed where economic activities occur. However, African countries face unique hurdles in fully benefiting from these new global standards as a result of limited administrative capacity, economic constraints, and the complexities of the digital economy. While the global minimum tax rate of 15 percent under Pillar Two is an important step forward, it remains insufficient to prevent profit-shifting out of Africa, where corporate tax rates are generally higher than in advanced economies. Furthermore, African countries remain concerned that Pillar Two favors wealthier nations by allowing them to tax profits made by multinationals abroad, limiting Africa’s ability to collect fair taxes. Meanwhile, rules that would allow African nations to tax economic activities within their borders receive less emphasis, further disadvantaging them in collecting revenue.
To address these disparities and better align global tax cooperation with Africa’s needs, African policymakers must pursue an agenda that is both assertive and tailored to the continent’s unique challenges. This agenda could focus on the following five strategic actions:
Enhancing administrative capacities: African countries must invest in strengthening their tax administration systems to better implement and enforce global tax standards. This includes improving taxpayer identification, registration, and assessment processes, as well as adopting digital technologies to enhance compliance and revenue collection.
Leveraging regional collaboration: African nations should collaborate more closely through the African Union and regional tax organizations to present a unified stance in global tax negotiations. This collective approach could amplify Africa’s voice in international forums and ensure that the continent’s interests are adequately represented in the design and implementation of global tax rules.
Advancing global tax governance: Africa’s engagement was pivotal in shaping the terms of reference for the UN framework convention on international tax cooperation, aimed at creating a fair global tax regime that curbs illicit financial flows and secures equitable taxing rights. African leadership helped incorporate human rights into the tax principles and pushed for environmental considerations in tax policies. As negotiation over this framework moves forward, Africa must continue advocating for protocols that address digital economy taxation and IFFs to protect its financial interests and foster sustainable development.
Tailoring global tax measures to African realities: Policymakers should work toward adapting global tax measures, such as the BEPS framework, to better suit Africa’s economic context. This could involve advocating for a higher global minimum tax rate (such as the 20 percent or more proposed by the African Tax Administration Forum and the African Union), implementing measures to counterbalance the disadvantages of the IIR, and expanding the scope of the STTR to cover a broader range of cross-border payments.
Addressing digital economy taxation: As the digital economy continues to grow, African countries must develop and implement digital tax reforms that capture revenue from digital businesses operating within their jurisdictions. Engaging in international discussions on digital taxation and aligning these reforms with global standards will be crucial to safeguarding Africa’s tax bases in the digital era.
By pursuing these strategic actions, African countries can not only safeguard their financial resources but also contribute to a more equitable and effective global tax system. This African-focused agenda on global tax cooperation is essential for curbing IFFs, promoting sustainable development, and ensuring that Africa’s unique challenges and opportunities are fully addressed in the evolving landscape of international tax governance.
Global Governance
North Africa
Southern, Eastern, and Western Africa
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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Carnegie’s Global Order and Institutions Program identifies promising new multilateral initiatives and frameworks to realize a more peaceful, prosperous, just, and sustainable world. That mission has never been more important, or more challenging. Geopolitical competition, populist nationalism, economic inequality, technological innovation, and a planetary ecological emergency are testing the rules-based international order and complicating collective responses to shared threats. Our mission is to design global solutions to global problems.
Nara Monkam
Nara Monkam is an associate professor in the Department of Economics, head of the Public Policy Hub, and chair in Municipal Finance at the University of Pretoria, South Africa.
Courtesy : Carnegie Endowment for International Peace|Republished
