Govt loses over 3trn/- annually on illicit financial flows

By Daniel Semberya , The Guardian
Published at 10:55 AM Apr 02 2024
 Associate Professor of Development Economics, University of Dar es Salaam, Professor Abel Kinyondo [2ndR] speaking during a Policy Forum
Photo: Daniel Semberya.
Associate Professor of Development Economics, University of Dar es Salaam, Professor Abel Kinyondo [2ndR] speaking during a Policy Forum

The government has been losing over 3trn/- every year over illicit financial flows [IFFs] through various forms, with extractive sector leading due to the importation of heavy machineries and technology.

Speaking yesterday in Dar es Salaam during a Policy Forum Breakfast Debate hosted by Policy in partnership with Stanbic Biashara Incubator, Hellen Masawe, the Programme Officer-Policy Analysis Department, Policy Forum said that IFFs have been negatively impacting the country’s development and economic growth.

She noted that IFFs are largely got through three major sources which are drug trafficking. Whereby the money is transferred illegally from one country to another.

Masawe further said that some investors in the extractive sector usually when preparing invoices they inflate prices or lower prices when importing heavy equipment for mining extraction and technology, from sister companies abroad.

As a result at the end of the day they declare that they have not got profit and thus minimize tax liability they were supposed to pay to the government. That is another way of IFFs being practiced by some of these investors.

She said that IFFs can also be done through using funds that have been gained legally, but are used illegally, for example by sponsoring terrorists and other illegal activities.

Masawe has suggested that if Tanzania and other developing countries want to eliminate IFFs in their countries, they should take concerted efforts so as to have global tax standards under the United Nations instead of being under the Organisation for Economic Co-operation and Development (OECD).

OECD is blamed for setting the market prices and contributes a lot to IFFs.”OECD has been establishing global standards that don’t match the needs of the developing countries, Tanzania inclusive.

IFFs happen as companies exploit gaps in national and international tax systems to reduce their tax liability 

IFFs are harmful since they undermine the integrity of the tax system, discourage tax morality and encourage a perception of unfairness in the tax system.

She has suggested that what is needed is for the government to increase more efforts of collaborating with other countries that would enable them get more information on IFFs.

For his part, Associate Professor of Development Economics at the University of Dar es Salaam Professor Abel Kinyondo and who is also an expert in International trade said that IFFs is like terrorism, is something that cannot be combated as a single country.

He said that since we are in a global village, even if you put a lot of regulations it will be almost impossible to combat it as an individual country. “The only practical solution is to have a global approach towards fighting IFFs.”

 Prof. Kinyondo said that for the purpose of tax, there are three jurisdictions. These are source jurisdiction, intermediary jurisdiction [tax havens], and resident jurisdiction. Some companies erode taxes through these jurisdictions.

He suggested that the only way of addressing commercial tax evasion, trade mis-invoices and abusive transfer pricing, is to add values to the local contents instead of importing from outside.

Meanwhile, he has said “Depositing money in banks is worth creating because the reserve becomes big and as a result that enables other customers to borrow that money.”

For his part, Business Manager with Stanbic Bank, Sylvester Malimu said that since 78 percent of Tanzanians don’t have bank accounts, instead they use cash based, so ending IFFs is a hard bone to chew.

He said that one of the requirements of the Central Bank of Tanzania to banks and other financial institutions as their regulator is to ensure they comply with the money laundering act.

Malimu said that with the presence of the IFFs in the market, banks don’t get enough deposits because some rich people have chosen to keep their money at home or have invested in real estates. They evade paying taxes.

He said one of the ways Stanbic is taking to combat IFFs in their bank is to know their customers and their financial status, including their inflows and outflows.

“Our bank is operating by adhering to the country’s laws and their organization in the right way, and serves the right customers.”

He has suggested that in order to combat IFFs everyone should embrace national interests over personal interests.

Other sources have indicated that there is a globe cartel or syndicate that deals with IFFs from developing countries to developed countries.

Some businesses in the country are also used to transfer IFFs because they are registered in foreign countries. So, the profits are sent back to where those trademarks were registered.

Others are double taxation agreement, technology and under-declaration. IFFs are common in Africa because of porous and slackness laws.

 “We need to enter contracts with those countries. There should be proper systems on how to exchange information between one country and another.”

Many companies engage in IFFs because they get their money illegitimately; through tax evasion and by sending money to countries where they entertain tax havens.

Impacts of IFFs to a nation’s economy include loss of revenues to a country; government failure to provide social services to its people; creating a huge gap between the haves and have not.

IFFs involve movement of money that is illegally earned, transferred, or utilized. This flow of money is in violation of laws in their origin, or during the movement or use and is therefore considered illicit.

Various forms of IFFs include tax avoidance, tax evasion, trade mispricing and money laundering.