In a recent speech, President Obama criticized corporate entities avoiding tax remittances through the exploitation of legal tax loopholes in a practice known as tax inversion. Recently, there have been a rising number of U.S. companies using international mergers to relocate their headquarters overseas in an effort to avoid paying U.S. corporate taxes.

Tax inversion is a process where companies in a particular country merge with foreign entities and use their foreign counterpart for their home addresses or tax base, thereby avoiding corporate taxes in their home country.

The effect of this move to the US, according to the US Treasury Secretary Jack Lew, is that it “hollows out the U.S. corporate income tax base.”

This leaves the government with a lot less resources at its disposal to fulfill its obligation to its public and its citizens. Such obligations include funding for health care, education and security among others.  

US administration officials estimate that the tax inversion deals, if allowed to continue, will cost its Treasury $17 billion in lost revenue over the next decade.

Obama opined that the move was very unpatriotic as firms, who have benefited from the country’s resources, its infrastructure, its market and economy, have “shirked” away from their responsibility of giving back to the system.

“There are a whole range of benefits that have helped to build companies, create value, create profits,” Obama said. “For you to continue to benefit from that entire architecture that helps you thrive, but move your technical address simply to avoid paying taxes is neither fair nor is it something that’s going to be good for the country over the long term”, he said.

The US government corporate tax income is set to hemorrhage further in the near future with nine inversions still pending for this year.

The US Congress has been pushing for a law to make inversion rules stricter, by increasing the proportion of a company’s stock owned by foreigners from 20 percent to 50 percent, among other muted changes.

Pfizer, one of the largest pharmaceutical companies in the world, and based in the US, publicly stated earlier this year that it has plans to merge with London-based AstraZeneca, in a move that would see it do away with billions in U.S. taxes. Through an inversion deal, Pfizer was seeking to reduce its U.S. corporate tax rate (35%) to a much lower one (21%) in England.

Another U.S. drug company, AbbVie is in talks to buy Shire Pharmaceuticals in a $55 billion transaction. Shire is based in Dublin, Ireland but incorporated in Jersey, a popular tax haven off the coast of France. AbbVie plans to take advantage of its counterpart’s incorporation in Jersey to significantly diminish its tax payments.

This is the latest example of U.S. companies seeking tax savings through a merger with a foreign partner.

The Nigerian Story

While “tax inversions” as it is experienced in the US have not been common in Nigeria, corporate sharp practices in the Nigerian corporate environment have taken on more sinister forms, mostly through tax dodging, illicit outflows (comprised of illegal capital flight and illegally earned, transferred or spent funds) and collusion with the authorities.

Nigeria’s tax revenue to gross domestic product (GDP) fell to 12 percent after the rebasing exercise, which is one of the lowest in Africa, as well as for a country of its economic size.

The Federal Government’s revenue as a percentage of GDP also fell to 4.6 percent from 8.7 percent previously.

The greatest obstacle to establishing a robust safety net programme for Nigeria is the low tax base.

South Africa spends 13 percent of GDP, on social programs including health while the developed-world’s average, calculated by the Organization for Economic Cooperation and Development is put at 22 percent.

Mexico spends about 7.4 percent, and South Korea, 9.3 percent.

Assuming Nigeria decided to go with the mid-range and spend an equivalent of 10 percent of GDP on a new safety-net programme, it would mean the country would need to appropriate $51 billion (N8.1 trillion) – out of its total consolidated budget (Federal and State) of about N9 trillion – to social spending alone.

The need for safety nets in the country is huge however.

Fifteen people died in stampedes in four Nigerian cities earlier this year as the National Immigration Service was conducting aptitude tests to recruit new officers.

Seven people died in a crowd of about 68,000 who registered for the test on March 15 at the National Stadium in Abuja, the capital.

Five were killed in the oil capital of Port Harcourt, two in Minna in the north and one in Benin City.

Nationwide more than 522,000 applicants paid N1, 000 ($6) each to take the test for about 4,500 open job positions.

“Young people are desperate to get work,” Shamsudeen Yusuf, Program Officer at the Centre for Democracy and Development research group, said.

Nigeria has averaged growth rates of 8 percent per annum over the past decade; however the economic expansion has been unable to provide enough jobs to keep up with population growth.

The Government currently has a Safety net programme using funds saved from the removal of fuel subsidy or Sure-P.

The Government says it has been able to reach over 10,000 women and children with conditional cash transfer programs across 8 States. 

That would however be a drop in the bucket compared to an estimated 70 million (40 percent) of Nigerians living below the poverty line.

Oxfam reports that Africa loses $63 billion a year to illicit flows and tax dodging. The resource drain from Africa over the last 30 years is almost equivalent to Africa’s current GDP. Illicit outflow of funds from the continent largely drives the problem of inequality.

The African continent has in the past decade, experienced high growth rates, with the continent having 6 of the 10 fastest growing economies in the world. Nigeria, in particular is poised to be among the top 20 economies in the world by 2030 according to a recently released Mckinsey Report. However, despite the progress made, the value of the wealth created has not had much of an impact on poverty reduction on a broader scale, as a result of illicit financial outflows, among other factors.

With sharp economic growth and wealth creation, whilst a high number of people still remain trapped in poverty, the African economic profile is disturbingly paradoxical. Persistent and ballooning inequality has increasingly undermined the effect of the economic growth achieved thus far.

Naturally, the continent, and Nigeria, as its largest economy has become a target for corporate exploitation.

Illicit outflows drives inequality

According to Winnie Byanyima, Oxfam International executive director, “inequality is being driven by factors including tax dodging, capital flight, reliance on private healthcare and education, mismanagement of extractive industries and failure to invest adequately in sectors that will increase employment such as agriculture.”

These large outflows from the continent mitigate the fiscal strength of African governments to pursue social welfare programs and policies which directly address poverty reduction.

Speaking more on foreign extractive industries which dot the economic landscape of the African continent, Byanyima says “extractive industries compound the trend because they create comparatively few jobs and are susceptible to tax avoidance. Without strong regulation and scrutiny, much of the financial benefit of these industries fails to translate into tax revenues or well-managed expenditures.”

She continues, “As long as most of Africa’s natural wealth continues to hemorrhage from the continent, inequality will continue to rise and all this spectacular growth will not do enough to help ordinary Africans.” 

Illicit outflows from Africa are abetted by tax loopholes, poor regulation of Africa’s extractive industries and weak political and financial institutions. “It is an important issue as regards the development of Africa. The continent is losing a lot of capital through illicit flows,” said Thabo Mbeki, Former President of South Africa, at an Oxfam event with the theme ‘Tackling illicit financial flows and inequality in Africa’, on the sidelines of the recently concluded World Economic Forum (WEF), Africa.

“The principal sources of illicit outflows (about 60 percent) are the commercial and large companies operating in Africa. The rest take the form of illegal activities and corrupt practices,” said Mbeki.

Reversing the trend

Africa is the second most inequitable region in the world after Latin America; however, this can be reversed. “African countries must crack down on corporate tax dodgers and invest far more in free healthcare and education and in industries that can create more and decent jobs,” says Byanyima.

“One of the simplest things that governments can do to help diffuse the inequality time-bomb is to invest more in public services. Public services redistribute by putting virtual income into everyone’s pockets” she says.

The case of Latin America gives us hope that the global trend of rising inequality can be reversed. According to Oxfam, Brazil has had significant success in reducing inequality, through spending on public health and education, wide-scale cash transfers, and a surge in the minimum wage.