Influence of tax dodging on tax justice in developing countries: some theory and evidence from Sub-Saharan Africa
| DOI | https://doi.org/10.1108/JFC-01-2022-0012 |
| Published date | 10 March 2022 |
| Date | 10 March 2022 |
| Pages | 332-360 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Olatunde Julius Otusanya,Jia Liu,Sarah George Lauwo |
Influence of tax dodging on tax
justice in developing countries:
some theory and evidence from
Sub-Saharan Africa
Olatunde Julius Otusanya
Department of Accounting, University of Lagos, Lagos, Nigeria
Jia Liu
Business School, University of Portsmouth, Portsmouth, UK, and
Sarah George Lauwo
Sheffield University Management School, The University of Sheffield,
Sheffield, UK
Abstract
Purpose –The mobilising domestic resources, in particular, taxation, is key to unlocking the resources
required for publicinvestment in infrastructure, growth and sustainable finance. Thisstudy aims to share the
perception that thetax arrangements of states and the transnational corporations(TNCs) of developed states
have a critical effecton the development prospects of the less powerful states in developing countries.
Design/methodology/approach –This paper locates the role of TNCstax practice within the broader
dynamics of globalisation and the pursuit of profits, to argue that the drive of TNCs for higherprofits can
enrich our understanding of why some TNCs engage in tax dodging. This paper used publicly available
evidenceto shed lighton the role played by TNCsin tax dodging practices in developing countries.
Findings –The evidence shows thattax havens and offshore financialcentres, shaped by globalisation, are
major structures facilitatingthe sophisticated tax schemes of highly mobile TNCs.This paper further shows
that the corrosive effect of low-tax jurisdictions (“tax havens”) continues to represent a majorobstacle to a
regulation of global economic relations, which is required for maintaining sustainable social and economic
developmentof poorer states.
Research limitations/implications –This paper used publiclyavailable evidence to illuminate the role
played by TNCsin tax dodging practices in Sub-Saharan Africa.
Practical implications –This paper, therefore, advocates a radical reform that could minimise the
attendant problems created by the activities of TNCs and the enabling structures that facilitate these
practices.
Social implications –Tax dodging has played a major role in causing serious damage to the
economic and social landscapein developing countries. This in turn, has undermined social welfare and also
investment in the public services, thereby eroding the quality oflife and producing a decline in average life
expectancy.
The authors would like to acknowledge the constructive comments of reviewers and participants at the
British Accounting and Finance Association, Annual Conference of the Northern Area Group (BAFA-
NAG) held in September 2017 at the Bangor Business School, Bangor University, Bangor, Gwynedd, UK
and 11th International Critical Management Studies Conference, held in 2019 at the Open University,
Walton Hall, Milton Keynes, UK. The authors wish to thank the anonymous reviewers, the Editor of JFC,
Barry A. K. Rider and Angela Futter for their invaluable and illuminating comments and suggestions.
JFC
30,2
332
Journalof Financial Crime
Vol.30 No. 2, 2023
pp. 332-360
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2022-0012
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
Originality/value –This paper is a general review of literature and evidence on contemporary
developmentalissues.
Keywords Tax justice, Tax dodging, Tax haven, Developing countries, Poverty,
Growth and sustainable development
Paper type Research paper
1. Introduction
Taxation is essential to sustainable development. Mobilising domestic resources, in particular,
taxation is key to unlocking the resources required for public investment in infrastructure,
growth and sustainable finance (Cobham, 2005;Otusanya, 2010). Tax is the most important,
sustainable and predictable source of public finance for almost countries. They bind us
together in a social contract with the governments we pay them to, and who we expect to spend
them. Taxes are a necessary precondition of a functioning state, which itself is essential for
economic growth and for the protection of human rights. If countries are to eradicate poverty
and hunger, then they will need to do so by increasing their own public finances –principally
through tax revenues (ActionAid, 2013,Otusanya, 2013). Tax plays a vital role in society. Tax
should redistribute wealth from corporations and rich individuals, fund public services and
tackle poverty. Yet, transnational companies dodge billions of dollars in tax every year, acting
as giant corporate parasites on the countries they operate in sucking profits out and leaving the
rest of society paying the price. Wenzel (2002) posits that:
The failure to comply with tax laws costs states billions of dollars each year, thus impacting
severely on their provision of government services and their socio-economic functioning (p.41).
In both developed and developing countries, the tax revenues needed to cover the ongoing
costs of decent public services are being underminedby the ability of some of the wealthiest
taxpayers –includingmany transnational companies –to effectively opt out of the corporate
tax system through a combination of ingenious (and lawful) tax haven transactions, and
huge tax concessions awardedby governments themselves (Cobham, 2005;Otusanya, 2011;
Otusanya et al., 2013;Moore, Prichardand Fjeldstad, 2018). Tax dodging is used to describe
all of the ways that companies and rich individuals reduce their tax bills, whether through
lobbying governments for tax breaks and lower corporate tax rates, exploiting obscure
loopholes in tax laws or shifting profits into taxhavens (Christian Aid, 2012). Some of these
are legal and some of them are not, but all increase poverty and inequality. Tax dodgingon
a massive scale by some transnational companies is deprivingpoor countries of the revenue
that could fund thesepublic services. As ActionAid (2012) puts it:
The OECD, appointed by rich nations as a global centre of the fight against tax dodging,
estimates that Africa loses several times more revenue to tax havens than it receives in aid (p. 6).
Tax dodging is a massive drain on resourcesin a world where one billion people go hungry
and 67 million children do not go to school [Dillon, 2017;United Nations Conference on
Trade and Development (UNCTAD), 2020)]. Every day the money lost through clever
accountancy tricksand secrecy costs ordinary people hundreds of millions of pounds(Sikka,
2016). To have a serious impact on poverty,developing countries need tax revenue to invest
in essential publicservices such as teachers, hospitals, roads and water.
In the world’s poorer countries, more and more governments are introducing savage
spending cuts while still facing debts of over £3tn. Tackling tax dodging could fund the
services being cut, tackle inequality and give poorer countries a part out of poverty.
Transnational companiesare only able to dodge tax because the tax rules of countries allow
Influence of
tax dodging on
tax justice
333
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