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Country Specific Tax Policy Considerations
Country specific tax policy measures required to stem IFFs from sub-Saharan Africa. In a study of five African countries,827 Readhead828 identifies several major challenges in implementing transfer pricing rules. The first challenge lies in the actual introduction of transfer price regulations into income tax legislation. Whereas inclusion of the concept of the arm’s length principle in the income tax law is the first step, regulations, administrative guidance or company-specific advance pricing agreements, to clarify documentation requirements and methods for determining an acceptable transfer price based on the arm’s length principle, are required. A second issue of concern is that legislation or agreements which impose taxes on the mining sector do not always refer to generally applicable transfer pricing rules, leaving an ambiguity that could be exploited, or which can lead to unnecessary disputes. Third, assessing transfer pricing in a way that is consistent with the arm’s length principle requires data (which may not exist, or may not be available to tax administrations) on comparable independent transactions. Fourth, administratively, revenue authorities are rarely adapted to the efficient implementation of transfer pricing rules. A dedicated transfer pricing unit, the common approach recommended by international organizations, may not be appropriate in developing countries with limited resources, a small number of MNEs and internal coordination challenges. Fifth, information and expertise may exist in silos, preventing revenue authorities and the agencies responsible for mining sector regulation from developing a comprehensive picture of transfer pricing risks created by the mining industry and deciding which risks warrant an audit. Related to this challenge is that of accessing taxpayer information from other jurisdictions, which results in the inability to develop a holistic view of a company’s global operations for the purpose of investigating transfer pricing risks. Lastly, the political economy of many resource-rich countries undermines the implementation of transfer pricing rules, where the relationship between the mining industry and the political leadership can prevent the systematic implementation of transfer pricing rules.
The Dynamics of Corruption
The World Bank describes corruption as a “complex phenomenon”843 because its roots may lie deep in government institutions. How corruption affects development is influenced by country conditions and the interventions governments make on policy and contractual levels. For example, in pursuit of financial gain, government officials may intervene in areas where no intervention is required, or they may fail to enact or implement policies.844 The term corruption845 covers a broad range of human actions. The World Bank defines it as the “abuse of public office for private gain”846 and primarily included in this definition are bribery and theft.847 Bribes can be intended for the bribe taker himself or for a third party – the relationship of the public official to the beneficiary and the reasons why the official might want to benefit the third party is of no relevance.848 The link between the bribe and the action or omission on the part of an official, is inherent to the definition of bribery, however, the requirement of a causal link between the bribe and the specific action or omission by the official could be extremely difficult to prove. Furthermore, an act or omission by an official does not have to be illegal per se or in breach of the official’s duties – if the bribe is aimed at inducing a breach in an official’s duty, it implies that there is a duty on public officials to exercise judgement or discretion impartially. For a corrupt act to constitute active bribery of a foreign public official, the goal of the bribe “must have been to obtain or retain business or other undue advantage in relation to the conduct of international business.”850 Undue advantage (meaning that the company or person has no legitimate right to it) in the context of business, includes relaxation of regulatory standards or granting undue tax breaks.851 Tanzi indicates that corruption may have different meaning and context in different countries:
“The concept of corruption, defined as the act of breaking an accepted social or legal norm, must inevitably recognise that different societies may respect different norms, and that some norms are not legally defined. Therefore, an act that may be considered corrupt in one society may be seen as normal, expected, and tolerated in another.”
It is interesting to note that acts of bribery of foreign public officials for non-business purposes are not covered by the definition of transnational bribery and are therefore not criminalized in international law. An example of non-business purposes includes bribery of an official so that an unqualified person is hired and appointed in a position where that person could advance the agenda of the briber. This can be in the form of allowing the briber to evade taxes in return for some personal or political favour, often with tacit approval of the tax administration or finance ministry.853 Under Article 4 of the AU Convention 854 the scope of application explicitly covers such instances where there is:
“the offering or granting, directly or indirectly, to a public official or any other person, of any goods of monetary value, or other benefit, such as a gift, favour, promise or advantage for himself or herself, or for another person or entity, in exchange for any act or omission in the performance of his or her public functions.”
Illicit enrichment855 is a criminal act that is only indirectly related to an illegal act by a public official, but it manifests through a variety of criminal acts such as accepting a bribe or embezzlement. In the case of illicit enrichment, it is not the act as such, but the use of the proceeds from the illegal acts. The reason for the existence of the criminal act of illicit enrichment lies in the difficulty of proving corruption in a court of law, and, by focusing on the unexplained wealth accrued through the illicit enrichment, the burden of proof can be discharged with lesser difficulty.
The government benefits purchased with bribes can vary from large contractual awards to petty corruption such as that found in issuing of licences or fast tracking services.857 Grand corruption is typically associated with international business transactions which involve government officials, and these are usually concluded outside the official’s home country.858 Whilst instances of grand corruption capture the world’s attention, the World Bank cautions that “the aggregate costs of petty corruption, in terms of both money and economic distortions, may be as great if not greater.”
CHAPTER 1: INTRODUCTION
1.1 Background
1.2 Research objectives
1.3 Research methodology
1.4 Assumptions and limitations
1.5 Structure of the thesis
CHAPTER 2: METHODOLOGY
2.1 Wicked problems
2.2 Dealing with wicked problems
2.3 Limitations
CHAPTER 3: DEFINING ILLICIT FINANCIAL FLOWS (IFFS)
3.1 Introduction
3.2 Defining IFFs
3.3 Conclusion
CHAPTER 4: ASPECTS OF GLOBAL FINANCIAL FLOWS
4.1 Introduction
4.2 Foreign Direct Investment
4.3 Financial flows associated with organised crime
4.4 Financial flows and the informal economy
4.5 Conclusion
CHAPTER 5: OVERVIEW OF THE DIAMOND INDUSTRY AND ITS REGULATION
5.1 Introduction
5.2 Understanding the diamond industry
5.3 Conflict and illicit diamonds
5.4 Domestic Regulation
5.5 International Regulation
5.6 Conclusion
CHAPTER 6: TAX POLICY CONSIDERATIONS
6.1 Introduction
6.2 Resource Tax Policy Contextualised
6.3 Taxation of Extractive Industries
6.4 Tax Policy considerations for the Diamond Sector
6.5 Conclusion
CHAPTER 7: CORPORATE STRUCTURING AND PRICING: CONSIDERATIONS FOR THE DIAMOND VALUE CHAIN
7.1 Introduction
7.2 Corporate Structuring
7.3 Transfer Pricing
7.4 Trade Mispricing
7.5 Base Erosion and Profit Shifting (BEPS)
7.6 Country Specific Tax Policy Considerations
7.7 Conclusion
CHAPTER 8: CORRUPTION, MONEY LAUNDERING AND TAX EVASION: THE INTER-RELATIONSHIPS BETWEEN COMMON FACTORS TO ILLICIT FINANCIAL FLOWS IN THE EXTRACTIVE SECTOR
8.1 Introduction
8.2 The Dynamics of Corruption
8.3 The Dynamics of Money Laundering
8.4 The Dynamics of Tax Evasion
8.5 Corruption, Money Laundering and Tax Evasion in the Extractive Sector
8.6. Overview: Regulatory measures to address corruption, tax evasion and money laundering
8.7 Conclusion
CHAPTER 9: A RISK MANAGEMENT FRAMEWORK TO COMBAT ILLICIT FINANCIAL FLOWS IN THE EXTRACTIVE SECTOR
9.1 Introduction
9.2 Risk Management Framework
9.3 Applying a Risk Management Framework to address IFFS in the Diamond Value Chain
9.4 Conclusion
CHAPTER 10: DOMESTIC COOPERATION TO ADRESS ILLICIT FINANCIAL FLOWS
10.1 Introduction
10.2 Models for Cooperation
10.3 Strategies for cooperation
10.4 Conclusion
CHAPTER 11: INTERNATIONAL COOPERATION TO ADDRESS ILLICIT FINANCIAL FLOWS
11.1 Introduction
11.2 Legal Framework
11.3 Conclusion
CHAPTER 12: ILLICIT FINANCIAL FLOWS: A CONVERGENCE OF RIGHTS
12.1 Introduction
12.2 Taxpayer rights to privacy
12.3 Income tax transparency legislation
12.4 Disclosure of taxpayer information in the public interest
12.5 The impact of developments in exchange of information on taxpayer rights
12.6 Taxpayer’s right to commercial confidentiality
12.7 Conclusion
CHAPTER 13: CONCLUSIONS AND RECOMMENDATIONS
13.1 Overall conclusions
13.2 Policy Recommendations
13.3 Summary of contributions of the study
13.4 Future research
ANNEXURE A DIAMOND MINING: COUNTRY OVERVIEW
1. Botswana
1.1 Taxation
2. Ghana
2.1 Taxation
3. Liberia
3.1 Taxation
4. Namibia
4.1 Taxation
5. Sierra Leone
6.1 Taxation
6. South Africa
5.1 Taxation
7. Zimbabwe
7.1 Taxation
BIBLIOGRAPHY
