Big accounting firms advice multinational companies on tax loopholes and lobby for tax exemptions. At the same time they advice governments in developing countries on tax reforms and engage in government task forces.  A new research project delve deeper into the dual role of multinational accounting firms.

Illicit financial flows threaten African economies. Estimates show that African countries may have lost out on as much as USD 1.8 billion dollars over the past 40 years because of large-scale capital outflows, of which tax evasion and abusive tax avoidance schemes constitute a large part. The mere numbers are mindboggling. Yet, very few researchers have dug into the actual effects of billions vanishing.

The project Taxation, institutions and participation (TIP) looks beyond numbers to uncover the direct and indirect consequences of tax avoidance, evasion and tax havens. The researchers study concrete cases from Angola, Tanzania and Zambia to establish who the crucial actors are, their modus operandi, and the actual impact on on domestic revenue mobilisation, accountability and citizens’ willingness to pay taxes.

Multinational accounting firms are among the main players.

-The biggest accounting firms are opinion makers and agents of influence. They are also active lobbyists. There is no doubt that these firms have a dual role. We will study their role, find out how they operate and what the consequences are, says Odd-Helge Fjeldstad, Senior Researcher at the Chr. Michelsen Institute (CMI), Research Director at the International Centre for Tax and Development (ICTD), and Extraordinary Professor at the African Tax Institute (ATI), University of Pretoria.

The rise and fall of the windfall tax
The circumstances surrounding the windfall tax on minerals in Zambia have become somewhat of a textbook example of what can happen when the processes concerning tax systems are governed by actors with personal interests and powerful connections across sectors. As copper prices boosted in the early 2000’s, central actors in Zambia argued that the mining companies should give their fair share of the profits to the Zambian state. With the support of international donors, the president managed to gain acceptance for the idea of a windfall tax, despite heavy opposition from the mining industry. The windfall tax was introduced in 2008, but president Levy Patrick Mwanawasa, who had been one of its most prominent advocates, died later that year and the tax was removed by his successor in 2009.

-The abolishment of the windfall tax sparked a host of rumours. The new president, Rupiah Banda, was not only renowned for his opposition to the windfall tax. A close relative held a high position in one of the biggest mining company, says Fjeldstad.

It also turned out that big accounting firms were doing the accounting as well as the auditing for mining companies, and that there were close connections between politicians, high-flyers in the mining industry and lobbyists from accounting firms.

Outdated tax regulations
To improve the living standards of their citizens, African countries need a tax base to fund public services. One of the main challenges is that bureaucrats and politicians frequently lack the required competence to develop a tax system that enables collection and redistribution of tax revenue. Limited competence and capacity is part of the explanation why multinational accounting firms get an important role in developing national tax systems, but other and less noble logics like dual roles and personal interests may also come into play.  Transparency is key to make sure that the development of new tax systems and regulations are not governed by personal interests.

Yet, transparency is not the most characteristic feature in the world of tax. The TIP-researchers fear that they will encounter closed doors as they delve deeper into the world of tax lobbying, dual roles and personal interests. The project has to make extensive use of media coverage and carefully map the committees and task forces that accounting firms are involved in. They will also rely heavily on qualitative interviews with actors from different sectors that take part in developing and improving tax systems and administration.  

The first fieldwork in Tanzania took place in November last year, where the team of Norwegian and Tanzanian researchers conducted interviews with key stakeholders in the business community, public sector and civil society organisations in Dar es Salaam. This initial work will lay the foundation for more in-depth work in the coming months.

-It will be interesting to trail the development of the new VAT-legislation in Tanzania. Our hunch is that the accounting firms who play an active role in this process will lobby for tax exemptions, says Fjeldstad.

Although the accounting firms’ activities may be questionable ethically speaking, they are generally able to keep to the straight and narrow path as they give advice to multinational companies and lobby for tax exemptions. According to Fjeldstad, a main challenge is that current tax regulations are outdated.

-Tax regulations relate to national borders, whereas multinational companies operate internationally. They bill where they have the most to gain from it and take out the profits where there are low or no taxes. Currently, the legislation is on their side, he says.

Odd-Helge Fjeldstad

Research Professor, Coordinator: Tax and Public Finance