The Global South Needs a Just Alternative to the OECD Deal: Lessons from South Africa

(Photo: Jonathan Torgovnik/Getty Images/Images of Empowerment)

By Jaco Oelofsen* 

Global South countries experience the impacts of profit shifting differently from the wealthy nations in the OECD, and this is doubly true for those with large extractive industries. In a recent webinar, organisations from Brazil, South Africa, and the Philippines presented their experiences and perspectives on the impacts of profit shifting in these “source” countries, and outlined how their needs will not be met by the looming OECD/G7 tax reform. The experience from South Africa is captured below:

Overview of Profit Shifting in South Africa

The South African context is marked by three features that make for fertile ground for profit shifting:

1. An export-based and mining-focused economy dominated by multinationals, perpetuating the highest levels of inequality in the world. A long history of colonial-era resource extraction by international mining capital ensured that this sector has always held a primary place in the economy and a close relationship with national elites. The post-Apartheid government has continued this relationship; the current President Ramaphosa was a board member of Lonmin, the British mining multinational implicated in the infamous 2012 Marikana massacre.
2. An open economic framework that is focused on creating an attractive investment environment and plugging into the global economy. As in many other Global South countries, the South African government undertook a process of economic liberalization in the 1990s, partly due to international pressure. This has led to the removal of many controls on the movement of capital and corporate activity, as well as the lowering of corporate tax rates.
3. A state that has been incapacitated by a combination of underfunding and corruption. While state corruption and underfunding has always been an issue, the past decade has seen the rise of corruption at the highest level of government, known as ‘state capture’, as well as the beginning of austerity in order to deal with the nation’s debt burden. This has led to the slow disintegration of vital public services, while crippling key institutions like the South African Revenue Service.

These factors have left South Africa exposed to the abuses of the skewed global economic framework by multinational corporations. According to various studies, the country is estimated to lose at least between 4-8% of its GDP (around $27bn) to illicit financial flows and profit shifting every year – and the extractives sector is deemed a key source of these outflows. The South African Revenue Service (SARS) estimated that more than $6bn has been lost to commercial tax evasion in the past year, while in 2015 they estimated a total of around $17bn lost to transfer mispricing over three years, including $5.3bn in spurious “management fees” sent abroad. These outflows bleed the nation of tax revenue, worsen the debt crisis, and hasten the collapse of vital public services on which the majority of citizens are reliant.

The Impacts of Profit Shifting at the Source

The impacts of profit shifting go beyond the broader issue of tax. Countries like South Africa are the first link in the chain of profit shifting – they are where the real economic activity takes place, and where the profits are generated. As part of our work supporting labour and community movements in investigating alleged profit shifting, the Alternative Information & Development Centre has seen how multinationals’ abuse of the global economic architecture sits at the intersection of a number of grassroots struggles.

Following the August 2012 killings of striking mineworkers at Lonmin’s Marikana mine, a Commission of Inquiry was set up to investigate the massacre. A researcher from the AIDC was asked to assist with answering a key question: was Lonmin able to afford the mineworkers’ demands for higher wages and an improvement to living and working conditions? This investigation concluded with the Bermuda Connection report, showing how Lonmin had been engaged in a variety of likely profit shifting practices, including the payment of overpriced marketing commissions to subsidiaries based in tax havens. In the end, the report found that Lonmin could likely have met the demands of striking workers, had the South African subsidiary not been made “artificially unprofitable” through these transactions. For this reason, profit shifting in source countries should be considered as wage evasion in addition to tax evasion.

More recently, the Association of Mineworkers and Construction Union (AMCU) has opened a case against directors and owners of Samancor, one of the largest chrome companies in the world, accusing them of shifting more than $500mn out of the country. Thanks to the testimony and evidence provided by an ex-director turned whistleblower, this case has provided an inside look at how profit shifting happens. As in the Lonmin case, it has demonstrated that profit shifting at the local level carries consequences beyond tax evasion; AMCU alleges that profit shifting has robbed workers and communities of benefits from the company’s employee share ownership schemes and community empowerment trusts. The Samancor case has also demonstrated how the odds are stacked in favour of transnational corporations in the current global system. According to the whistleblower testimony, the implicated directors were able to redirect company funds across borders and into haven-based accounts with the cooperation of major banks, without local stakeholders or the state becoming aware. 

Towards a Just Global Reform

The case studies outlined above have demonstrated some of the loopholes and weaknesses in the international economic architecture that need to be tackled. Corporate structures that stretch through tax havens and secrecy jurisdictions need to be challenged, and the network of financial services that enable profit shifting has to be dismantled. But there are also some broader, political principles that can be drawn from this experience; principles which ought to underlie any global reform that serves the interest of the Global South.

1. Global South “source” countries have the greatest need for, and the greatest claim to, lost profits. These nations are the first link in the profit shifting chain, where the real economic activity takes place. But they are also where the costs of that economic activity is located. In countries like South Africa, these costs include the damage to communities and the environment brought by mining and industry, the use of public infrastructure, and the permanent loss of non-renewable resources. Profit shifting removes the ability of states, workers, and communities to demand compensation for these costs. One of the key issues with the OECD tax deal is that it fails to recognize this – instead distributing revenues to the residence countries at the end of the chain.
2. International reform cannot take place without challenging the present and historical balance of power. Extractive industries in the Global South generally developed in the context of colonialism and imperialism, and are today still dominated by corporations headquartered in the former colonial powers. These sectors are at the heart of profit shifting, and often reroute these profits back to the former powers now making up the OECD, or the tax havens affiliated with them. The current global tax system was designed within a set of power relations not dissimilar to today, and therefore developed to the benefit of these nations. If today’s global tax reform takes place within the modern outgrowth of these power relations, then there is little reason to believe that it will be capable of challenging global inequality.
3. Finally, the push for more just global reform will require pressure from below. It has been rightfully said that Global South countries will need to unite in order to achieve a just tax deal, following the example set by countries such as Kenya and Nigeria in their rejection of the OECD Inclusive Framework “agreement”. However, in South Africa we have seen how our own government’s policy making has contributed to the issue of profit shifting, while readily putting their support behind an OECD proposal that will do little to benefit us. In order to achieve unity at an international level, there must first be political will at a national level. A key way to achieve this is to build pressure from below: profit shifting in the Global South affects everyone, its impacts go down to the bread and butter issues tackled by worker, community and civil society movements. It is imperative to realize this potential to build broad campaigns at the coalface of multinational tax abuses, which can in turn place pressure on states to take these issues up at an international level. 

* Jaco Oelofsen is a researcher in the Economic Justice unit at the Alternative Information & Development Centre in Cape Town, South Africa