“… The heart of the mechanism: diverting what are in effect public resources [taxes that should be paid, but are not] of the entire world, but especially of developing countries, to private shareholders. It is colonialism by other means” – Eva Joly, member of the European Parliament.

In nearly every country in Africa, there are economic free zones. These zones act as tax havens established with arbitrarily defined frontiers inside a country. Foreign companies can manufacture goods destined for exportation and not pay taxes during a specific period, usually 10 years, after which they pay a lower tax rate than the world average.

This leads to a rather unsurprising outcome. When the ten-year period ends, the company moves to another place in most cases. If it does not, it is because the ownership has changed and when the ownership changes the no-tax period starts over.
Supposedly the purpose of this “tax holiday” is to incentivize companies to establish themselves quickly in the country and later when established contribute with taxes. However, this is not what happens. Mining companies, for example, extract as many resources as they can during the ten years, then leave. This can accurately be described as exploitation.

Even if all this is “legal” under the country’s jurisdiction, this does not mean it is not exploitation. Considering that the reason it is legal is likely because an international group pressured the leaders of the government of the country to enforce these laws that allow for the creation of these economic free areas. Corrupt politicians were offered something, and in return, they passed the laws that enable big international corporations to pay no taxes while they take advantage of the country’s resources, cheap labour and infrastructure, through “legal” devices, without paying anything in return.

Not mean all international corporations engage in active corruption to get what they want, but some did. These corporations laid the groundworks for other global corporations taking advantage of these deliberate flaws in the jurisdiction of a country without breaking any laws. It is without a doubt legitimate for a company to make its best efforts to pay minimal taxes. However, if there are rules in some countries that enable the company to pay no taxes at all, there is something that needs to change in the system.
They are extracting value from a country and not giving value back. This is unjust and unfair. Moreover, the focus of the change should be on changing the rules and not on punishing the companies that take advantage of said rules while they are in place because they are just adapting to conjecture, or by other words: “don’t hate the player, hate the game”.

Governments often seek to maximize tax revenue. However, regarding Third World countries, in most instances politicians enforce laws that either reduce taxes for foreign investors or completely eliminate in order to gain rewards for themselves rather than an attempt to reach the maximum output of the Laffer curve (attempting to choose the tax rate that would maximize the tax revenue, considering that the more an activity is taxed, the less of it is generated). By increasing the gross value of the tax pool through a decrease in the tax rate, even if in some cases this might have been the reason.

When companies do not pay their fair share, the government will look for revenue in other places. Most often through VAT (Value Added Tax), which mostly affects the end users of products, the middle and the lower class earners. What this means is that international corporations can take advantage of already established infrastructure such as roads, ports, airports and electrical distribution networks that were developed through the use of taxes. While taking advantage of these publicly funded services they do not pay their fair share of the taxes. They can produce value in a country and pay taxes in another, they can even extract value from a country and pay no taxes at all. According to Eva Joly, if an investigation starts concerning particular company’s activities in offshore jurisdictions often among “legal” ventures, will be illegal ones and from the judicial point of view, more investigations should be carried out.

It also leads to market distortions, because profits become stationed in tax havens and the value of a share in the stock market accounts for the eventual distribution of this offshore stationed profits to the hands of the shareholders. If that were to happen these profits would have to go through the parent company in the country where the company is based and pay the expected corporate tax which would decrease the amount of the dividends and essentially have a lower-than-expected yield on the share.
Despite the true colonial period ending because of the many independent movements of ex-colonies around the world during the 20th century now, at the peak of globalisation and with no geographic barriers for international companies to do business anywhere around the world. It is still possible to achieve that which old European colonisation always wanted, to take resources from poorly institutionalized countries and exploit their cheap labour.

If there truly is a desire to help African countries to catch-up to the rest of the world, it is urgent that efforts be made to prevent corruption in those countries and to update the commercial laws to the standards of the developed countries. Otherwise, international corporations taking advantage of deliberate loopholes within developing countries’ jurisdictions will endure indefinitely.

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About the Author

Celestino Portela

Celestino is a Master's student in Philosophy, Politics, and Economics (PPE) at the CEVRO Institute in Prague, Czech Republic.

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