Africa’s double-edged sword: Public debt restructuring and tax disputes

Originally published by NewZWire

Africa’s public debt crisis is a socioeconomic albatross making the realisation of sustainable development goals highly improbable. A large number of African countries are spending more on debt servicing than on health, education, and social safety nets. According to the International Monetary Fund (IMF), 22 African countries are classified as either already in debt distress or at high risk of debt distress.

To a large extent, a public debt crisis is a replica public revenue crisis, particularly the mobilization of tax revenue. As a result, the public debt crises make African countries Zombies in terms of advancing the progressive realisation of human rights in line with their constitutional mandates.

Against this backdrop, a master class on debt and tax was held during the 13th edition of the Pan African Lawyers Union (PALU) annual conference, 5–7 July 2023, Livingstone, Zambia. The conference theme, “The Sovereign Debt Crisis in Africa- The Role of the legal profession” made domestic resource mobilisation a critical discussion topic.

This article is the first of a series that shines a light on the discussions on tax and debt. The first installment looks at the double-edged sword emanating from prolonged public debt restructuring on one hand and the even longer period taken to resolve tax disputes on the other, more generally the curbing of tax leakages through illicit financial flows (IFFs).

Cross-border movements of money or assets that are illegally earned and transferred utilized is the generic way used to define IFFs. The AU’s High-Level Panel (HLP) on IFFs from Africa’s definition goes beyond the illegal mark of tax evasion by raising the bar higher to cover unethical or immoral practices.

Tax avoidance, a result of aggressive tax planning by corporates and high-net-worth individuals is deemed to have the same effect as tax evasion by the HLP.

Pay an equitable share of taxes commensurate with economic gains derived from the concerned countries. Giving more specific details, the financial assets subject to IFFs according to the Organisation of Economic Cooperation and Development (OECD) included loans, equity, financial instruments, goods, services, and non-financial assets.

Lessons from Zambia

Taking a deep dive into the protracted challenges around debt restructuring, and resolution of tax disputes, experiences from Zambia are quite illuminating on these issues. Restructuring public debt, as can be seen from Zambia’s experience, can be a very protracted experience whilst it takes more time to solve court disputes involving tax evasion and tax avoidance in Africa.

Looking at Zambia’s case, it took roughly two years to restructure US$6.3 billion public debt from its bilateral relations with other governments. Zambia will enjoy a three-year grace period, paying only interest on the debt — meaning a freeze on the principal portion repayment of the debt. Further, the maturity of debt was stretched to over 20 years.

While it took Zambia two years to negotiate the debt restructuring, it took roughly five times more for Zambia to resolve a tax dispute with Mopani Copper Mines. Responding to an appeal by Mopani, the supreme court of Zambia ordered the company to pay 240 million Kwacha (US$13 million) to Zambia Revenue Authority (ZRA).

The tax liability emanated from 2006/07, 2007/08, and 2009/10 tax assessments undertaken by ZRA, whereby Mopani was caught offside for abusive transfer pricing. Zambia’s Tax Appeal Tribunal ruled in favour of ZRA in 2010, but Mopani sought relief from the Supreme Court of Zambia. The final judgment was delivered on 20 May 2020.

According to the African Tax Administrators Forum (ATAF)’s response to the ruling, “this form of transfer pricing between multinational corporations and their African subsidiaries is typical of the tax avoidance practices employed by corporate taxpayers primarily to reduce their tax liabilities.” In its judgment, the supreme court decried “the inadequacy of institutional capacity to deal with such corporations; exposes yearning gaps in the much-needed expertise to gather and interpret essential technical information for enhanced tax revenue collection from multinational corporations.”

The double toll

Considering that the tax dispute between ZRA and Mopani dragged on for 10 years, the costs are two-pronged; financial and human. From a financial perspective, the time value of money is a crucial factor. If Mopani was supposed to pay US$13 million in 2010 but later paid the same amount 10 years later, in 2020, they inherently enjoyed some financial benefits. It could be reinvesting the funds in question to earn more profits or interest. Therefore, the government of Zambia was supposed to fight hard in court to make sure that the interest portion of Mopani’s tax liability was to be factored in for 10 years.

Mopani could argue that the delay was not on their part, but still, it is important for the justice delivery system to consider the time value of money by being more efficient without compromising on the quality of the delivery. On the human side, money could have materially plugged some of the essential public service delivery gaps, assuming limited corruption and high regard for public welfare.

Many African countries are seeking to restructure their debt obligations, lawyers must ensure that the process is not too complicated and time-consuming as the cost overshoots the financial side. There is a human tool, and the most vulnerable groups in society are the worst affected. As Zambia’s supreme court judgment revealed, capacity gaps must be plugged to deal with the financial maze of commercial transactions that facilitates IFFs.

It is also important to look at the bigger picture. What are the factors that are enabling companies like Mopani to dodge paying an equitable share of taxes in the jurisdictions they operate in? Therein lies the importance of the overhaul of the global economic financial and tax system which will be tackled in the next instalment. The OECD, from which African countries are trying to wrestle control of the global tax reforms to give the mandate to the UN, strikingly, its member countries are the top recipients of IFFs from Africa.

One can argue that the US$13 million tax liability that Mopani tried to dodge is a drop in an ocean compared to the billions in public debt that Zambia owes. Mopani’s case must be understood as the tip of the iceberg. Boyce and Ndikumana (2018) estimate that Zambia lost US$59.4 billion via IFFs between 1970 and 2018.