Canada harnessed natural resources for prosperity. Africa now has the same opportunity. But resource wealth can readily bypass ordinary citizens. Companies can use clever accounting to avoid taxation, while corrupt officials can be bribed into unfair deals and to divert public revenues. Honest African leaders lack the power to prevent these evils, but action by the G8 at its June summit could make a decisive difference.
First, the G8 can curb corporate tax avoidance, which has escalated because international lawyers and accountants have built a web of corporate opacity. Some minuscule jurisdictions have become the legal home to trillions of dollars of corporate assets through the unbeatable attractions of zero taxation plus secrecy.
Tax avoidance thrives on exploiting more than 700 independent tax jurisdictions, each of which can be the location for ownership of a company. Competition among them has created tax havens. When combined with the web of reciprocal tax treaties intended to avoid double taxation, we arrive at what Pascal Saint-Amans, head of taxation at the Organization for Economic Co-operation and Development, aptly calls "double non-taxation."
Companies shift profits to havens through transactions between subsidiaries. Profits are shifted out of Africa by transfer pricing: Output is sold at below its true value. Profits are shifted out of Canada and other G8 countries by relocating the ownership of intellectual property to havens where it hasn't been produced. G8 countries limit transfer pricing through scrutinizing the prices used for intracorporate transactions, but African tax authorities lack such capacity.
The OECD wants to help by creating a database of guideline prices that companies would be required to use or to justify deviations. The G8 could give this political impetus. G8 countries have a direct interest in curbing the relocation of intellectual property. There's no ideal technical fix, but companies could be required to report the apportionment of their global profits. Transparency would discourage tax avoidance through fear of reputational damage.
Second, the G8 can curb the laundering of corrupt money. Honest African leaders face overwhelming difficulties in enforcing legislation because corruption is difficult to prove and its proceeds are easy to conceal. African leaders point out that it takes two to tango: the bribing company as well as the bribed official. But corruption actually takes three: the briber, the bribed and the facilitator.
Corrupt money is laundered through fake companies and untraceable bank accounts. About $20-trillion of private wealth sits in haven accounts, nearly half of it from developing countries. The lawyers and bankers who facilitate these transactions aren't based in Lagos and Timbuktu; they're in London and Toronto. African governments are impotent to address money laundering, but the G8 could close it down.
Shell companies are the vehicles for bribes. Untraceable beneficial ownership of companies has been a concern of the Financial Action Task Force, a technical group of the major countries with the power to blacklist financial systems that lack transparency. But compliance with its anti-money-laundering procedures has degenerated into box-ticking. For the true ownership of companies to become a matter of public record, a new approach is needed, one that combines tighter responsibility for reporting, increased investigative effort, tougher penalties and the automatic exchange of information.
Corporate opacity is the cumulative achievement of some of the most brilliant minds on the planet. In the advanced economies, their actions are undermining the tax base. In Africa, they not only bleed societies of tax revenues but facilitate the looting of the public purse.
Finally, the G8 can complement curbs on money laundering with the mandatory public reporting of payments made by resource-extraction companies. In combination, looting would become much harder. The United States and Europe already require such reporting, but Canada is the main home for international resource-extraction companies operating in Africa.
Canada isn't only the G8's key resource economy; it also co-chairs the G20 Anti-Corruption Working Group. From this dominant position, Canada can drive the agenda of "helping Africa to become Canada" to the G20. Or it can torpedo it by inaction.
Paul Collier is a professor of economics and public policy at Oxford University.