International Financial Centers & Africa

There has been a lot of discussions in many African countries about setting up IFC’s. Let us just take a moment to briefly understand what IFC’s are and what they are not and let the reader draw their own conclusion.

The Genesis

In 1998 the Organization Of Economic Cooperation & Development (OECD) adopted a report (Harmful Tax Competition :An Emerging Global Issue) which established an international framework to counter the spread of harmful tax competition.Fast forward 2004, member countries were reported to have amended their tax regimes to ensure harmful practices are avoided.

There has been contrasting arguments regarding the relationship between Tax Havens & Offshore/International financial Centers.

For one Offshore Financial Centers (OFC’s) are not the same as Tax Havens. OFC’s are the commercial communities hosted by tax havens which exploit the structures that can be created using the tax haven’s legislation for the benefit of those residents elsewhere (Simply put OFC is made up of accountants,Lawyers,Bankers & their associated companies & intermediaries who sell services to those who wish to exploit the mechanism created by tax havens.

Tax havens simply put are countries & territories that offer favorable tax regimes such as low or zero corporate & withholding rates,bank secrecy and much more.

Pre-requisite for development of IFC are;Political stability,strong currency,light tax burden,skilled labor,powerful financial intermediaries, efficient communication,SUFFICIENT SAVINGS THAT CAN READILY BE INVESTED ABROAD etc

The purposes of IFCs are fundraising,asset management & global portfolio diversification,personal wealth management,global transfer pricing,global tax management & cross border tax liability optimization,global/regional corporate management operations, financing for PPPs,risk management etc

One would ask which of these reasons would push an African country to set up an IFC based on the current legal frameworks? the rule of thumb is that IFCs need tailored regulations in its development (we know how well African states legislate) secondly tax havens breed corruption and undermine democracy due to interference with state activities

Further to that is also the question of whether the positives envisaged will overcome the negatives in the situation of a developing country that seems only to be looking at the need to have investment increased in a country .