Taxes are the lifeblood of any modern economy. Without taxes, governments will find it difficult to maintain law and order, finance development agendas or provide support to the poor in society. One of the distinguishing features of most developed economies is their effectiveness in collecting taxes, underlining the importance of taxation to development. In Africa, however, there are still challenges with raising funds—domestic resource mobilization—through taxation.
While the tax-to-GDP ratio in OECD countries in 2016 stood at 34.3per cent, and was 22.7 per cent in Latin America and the Caribbean, the average tax-to-GDP ratio in 2016 for African countries covered in the 2018 African Tax Outlook was 16 per cent. The ratio for Africa varies widely between countries, ranging from about 5 per cent in Nigeria to about 28 per cent in Seychelles. The relatively poor performance of African countries in collecting taxes presents a huge challenge, considering that the continent has an annual financing gap of between $68-$108 billion for infrastructure alone, according to the African Development Bank. The World Bank estimates that between 50 and 80 per cent of what is required to finance the Sustainable Development Goals (SDGs) in developing countries must come from domestic resources. Since tax collection in developing countries will determine whether the Sustainable Development Goals can rival the success of the Millennium Development Goals (MDGs), it becomes imperative to improve taxation in Africa if significant progress must be made with the SDGs in the continent.
Challenges to Domestic Resource Mobilization in Africa
In their quest for domestic resource mobilization, the challenges facing African countries are huge and varied. Perhaps, the first place to start is the overall challenge of governance across the continent. African countries are some of the worst poorly governed countries in the world. This presents a huge challenge for tax collection that is often ignored. Because there is a social contract between the government and the governed, when governance outcomes are poor, it imposes a trust deficit among citizenry that is usually reflected in an acute unwillingness to fulfil their own part of the contract—paying the right taxes. This trust deficit serves as a permanent constraint to other efforts made by authorities to improve tax revenues.
There are also challenges related to tax policy and administration. This encompasses problems related to tax rates, the efficiency of tax administration, capacity problems in terms of the human and technical expertise needed to collect the appropriate taxes from sectors whose operations are complex and lack transparency like the natural resource sector. Tax authorities in Africa are also dealing with corruption problems themselves. Lack of data is also a challenge and hampers informed policymaking. A key challenge is the structure of most African economies, which are largely informal and difficult to tax. This keeps the tax base very narrow.
Another set of challenges relate to illicit financial flows and aggressive tax evasion by high net worth individuals and multinational corporations (MNCs). The United Nations Economic Commission on Africa (UNECA) High Level Panel on Illicit Financial Flows estimates that the continent loses more than $50 billion annually to illicit financial flows. These losses occur in different forms including the base erosion and profit shifting (BEPS) activities of MNCs. The 2015 Panama Papers and the 2017 Paradise Papers revealed cases of large-scale tax avoidance by high-net-worth individuals and multinational companies that exploit loopholes in tax legislation in African countries. Corruption, criminal activities and international commercial transactions with tax avoidance as main goal threaten DRM—the very requirement for achieving the SDGs. There is also an emerging challenge associated with the growth of the digital economy and how to tax it. Whether it is buying a song on iTunes or paying for an internet-based course, Africans are increasingly importing offshore services that are highly invisible to tax authorities and, thus, pose a high risk of tax avoidance.
Some of these tax challenges are a common feature across Africa while others are more pronounced in some particular countries. In Nigeria, for example, the informal sector is estimated to constitute about 60 per cent of the economy and is largely untaxed. Tax policy is also a problem as Value Added Tax (VAT) remains at 5 per cent, one of the lowest in the World. The country’s opaque oil sector is also fuelling illicit financial flows and imposing huge economic costs. The same ugly story of illicit financial flows also plagues the Zambian copper industry. In Burundi, a large informal sector, slow economic growth, capacity constraints and corruption pose challenges to tax collection. The country’s civil war history also means state institutions are only being built up. The African Development Bank observed that the structure and outlook for the Burundian economy were “severe binding constraints to domestic resource mobilisation.” In Botswana, a high unemployment rate, capacity constraints, low compliance levels and tax havens are impacting tax revenues negatively. In Angola, the challenge is also with corruption, widespread evasion and slow economic growth. It is easy to observe from the 2018 African Tax Outlook that in most African countries that are highly dependent on revenue from natural resources, the existence of ‘easy’ natural resource rents usually crowd out the effectiveness of tax authorities to collect other taxes.
Improving Domestic Revenue Mobilization in Africa
Many African countries are already undertaking reforms of their tax system and making efforts to resolve the challenges identified in order to improve how the government raises and disburses funds. The 2018 African Tax Outlook indicates that about 60 per cent of countries studied recorded positive real revenue growth in 2016. The recommendations made here focus on crucial areas for further intervention and are related to tax policy and administration, good governance and rebuilding trust, technology enablement, peer learning and international cooperation and how to deal with the digital economy.
Tax Policy and Administration
Tax policy and its administration are crucial for domestic resource mobilization. When designed and implemented effectively, tax policy can be the basis for a successful tax revenue-driven development.The challenge for policymakers, then, is how to strike the correct balance betweendesigning an attractive tax regime for investment and growth and securing the necessaryrevenues for public spending. Low tax rates in many African countries could be a low hanging fruit. In Nigeria, for example, there is room to raise substantial revenues by increasing the VAT rate which is currently at 5 per cent. Authorities should also pay attention to increasing the tax base as this holds the greatest opportunity for increasing revenue. There is also an immediate opportunity for increasing revenue by reviewing the threshold required to register for VAT.
Bringing the informal economy into the tax net is also important for broadening the tax base in Africa. Burundi offers important lessons on how to achieve this with its taxpayer identification number in the informal sector. Between November 2011 and August 2012, the Burundian Revenue Authority (OBR) ran an initiative to encourage informal traders to register for a taxpayer identification number (TIN), thereby bringing traders into the tax net. The campaign started in shopping centres in the capital Bujumbura and was extended to markets and shops. This helped to improve taxpayer registration and tax compliance. Such efforts should usually be preceded by tax education campaigns to improve public awareness on their tax obligations and to improve tax literacy generally. Burundi can further improve its tax base in this regard by making the taxpayer identification number compulsory for banking and for accessing public services.
The tax base can also be improved by pursuing inclusive growth and economic diversification. The recent slowdown in economic growth in many African countries is a constraint to improving the tax base and growing revenues. Even for countries like South Africa that are relatively effective with tax policy and administration, tax revenue drive is constrained by a narrow tax base. Out of about 19 million registered individuals in 2017, only about 6 million were active and were expected to submit returns for personal income tax according to the South African Revenue Service (SARS). The bulk of registered tax payers are earning too little that they are either exempted or only able to pay very little taxes. About 75 per cent of the assessed 714,422 companies in 2015 reported losses or no taxable income in 2015. Another 20 per cent of assessed tax payers had just between R1 and R1 million of taxable income. Only about 340 large companies contributed about 56.8 per cent of the Company Income tax (CIT) in the 2016/2017 fiscal year, highlighting the concentrated nature of the South African economy where it is mainly large companies that appear to be doing well enough to pay taxes. Small and Medium Scale Enterprises (SMEs) appear not to be doing well enough to be able to pay taxes.
An inclusive growth and economic diversification agenda in South Africa will ensure that growth is more broad-based, and that much-needed opportunities will be created to get unemployed people into meaningful jobs and make them eligible to pay taxes. The benefits of growth will be shared by a wider segment of society including SMEs who can then contribute meaningfully to tax revenues. Inclusive growth will help to unlock the economy, increase the base of the most important taxes and allow substantial growth in revenues.
Another important aspect of tax policy and administration is how to deal with capacity constraints—a huge challenge to most African tax authorities. Developing countries need more capacity to: administer and collect more complex taxes like income and wealth taxes; to deal with complex issues like illicit financial flows; and to engage and appropriately tax technical and opaque sectors like the natural resource sectors. There should be more commitment towards improving audit for compliance and staff productivity and rooting out corruption that are termed ‘deals’ within tax authorities themselves. This will help improve the effectiveness and efficiency of African tax authorities.
Another critical issue that can help improve the performance of tax authorities is to improve their capacity to collect, analyse and make sense out of data to drive decision-making. The 2016 African Tax Outlook recognizes data collection as a pre-requisite for revenue collection yet such data is still under-collected and under-utilized. Tax authorities must invest in their capacity to collect and utilize data to inform strategy, measure progress and facilitate peer review.
Authorities can also leverage on third party information from employees, banks, trade unions etc. to make tax evasion more difficult.
Improving Governance and Rebuilding Trust
Improving governance outcomes in Africa is the building block for improving tax revenues. The fact is that many citizens are disillusioned with the poor governance and development outcomes in most African countries and do not see reasons to pay taxes. This has created a trust deficit between the government and the governed and poses a challenge to tax authorities. Although this is beyond the direct control of tax authorities, improving governance outcomes will help restore trust in government and make citizens see paying the right taxes as an obligation and not a burden. What is clear is that in most well-governed countries, voluntary tax compliance is relatively high. Despite paying some of the highest taxes in the World, studies have shown that tax evasion in Denmark is low and voluntary compliance is very high. The Danes have continued to be ranked as some of the happiest people on earth.
Technology Enablement for DRM
The role of technology in taxation has been growing. Digital taxation can help unravel the complex global tax environment for authorities. By setting up a national VAT analytics platform, the Russian Tax Authority increased domestic VAT revenues by more than 12 per cent in 2015, the equivalent of around $4 billion. This platform required Russians to submit VAT transactional data along with their electronic VAT returns.
Tax authorities should also be looking at harnessing blockchain technology, a platform that many Africans are heavily involved with. Blockchain is a digital peer-to-peer asset transaction exchange, shared among a distributed network of computers that can help increase the speed of completion or settlement and improve security. It has the potential to streamline and accelerate business processes, increase protection against cybersecurity and reduce or eliminate the roles of intermediaries. The application of blockchain in tax has the potential to move the tax function from retroactive analysis and historical financial information gathering to a position where transactions can be recorded in real-time. This will help minimize errors, risk and fraud.
There is an opportunity to improve tax collection by modernizing and automating tax administration. By introducing e-compliance, e-filing and e-paying, tax payments might become less stressful and would improve compliance. This will help reduce the cost of tax administration and improve overall efficiency.
There is also an opportunity to leverage high digital penetration in Africa. ICTs, mobile phones especially, provide an opportunity for leapfrogging critical infrastructural shortcomings. First, these platforms can be used to drive a more effective tax education campaign. M-PESA, a mobile payment platform that is ubiquitous in Kenya is supporting businesses by facilitating payments and access to micro-credit. It has led to the growth of new enterprises (there were about 81000 M-PESA agent outlets in 2014), the creation of jobs and helped improve financial inclusion. In 2013, the value of transactions that flowed through M-PESA were equivalent to about 43 percent of Kenya’s GDP with over 237 million person-to-person transactions. Already, organizations use M-PESA to pay dividends and to pay workers in Kenya. There is an opportunity to out-scale this platform across Africa and use it to promote voluntary tax compliance. Tax Identification Numbers can be linked to M-PESA accounts where registered tax payers can easily file their tax returns.
Harnessing the Digital Economy
The drive for digital transformation is fuelling the growth of the digital economy. This economy refers to the billions of daily online transactions and connections among people, businesses, devices, data, and process. Tax authorities have not done so much to harness the potentials for tax collection in the digital economy because it throws up complex challenges for tax collection. Whereas for example, the cross-border supplies of goods are generally taxed at the point of entry, taxing services presents a challenge because they are intangible and do not cross physical borders. This makes these transactions almost invisible to tax authorities and thus make the risk of tax avoidance high.
There are also risks of double taxation and double non-taxation. However, African authorities can learn a lot from how South Africa overcame this challenge. The country took advantage of the action plan launched by the OECD in 2013 to address tax revenue losses due to Base Erosion and Profit Shifting (BEPS).Action Plan 1 of the OECD plan dealt with “Addressing the Tax Challenges of the Digital Economy.” Thus, in 2014, South Africa introduced legislation relating to VATon the inbound supply of services supplied by electronic means. What this did was to shift the onus of declaring the VAT from the domestic consumer to the non-Resident supplier. This meant that foreign suppliers of electronic services were required to register for VAT in South Africa whether they had a physical presence in South Africa or not. Between June 2014 and September 2017, this effort led to the collection of almost $161 million in VAT that could have possibly been lost previously from undeclared VAT on imported services.
Peer Review, International Cooperation and Partnerships
Peer review and peer learning is very important among African tax authorities. It is important that African tax authorities learn from the experiences of their peers and see how they can improve their individual tax systems. This is why the opportunity provided by the African Tax Administration Forum (ATAF) and the publication of the African Tax Outlook is very important. More African countries should be encouraged to join the forum so that they can benefit from the opportunities offered by the forum and improve the efficiency and effectiveness of their tax systems. It is also important to promote tax research to draw useful policy insights from the data that is becoming increasingly available.
International cooperation is also very important to navigate today’s complex global tax environment. The challenges with respect to double taxation, Illicit financial flows, tax evasion by high net-worth individuals and multinationals can only be resolved through international cooperation. Some African countries have already taken the right step by committing to the international standard of transparency and effective exchange of information by joining the Global Forum on Transparency and Exchange of Information for Tax Purposes. More countries should be encouraged to take this step.
The successful South African case study on VAT on e-services, which was facilitated by the work of the OECD and its Global Forum on VAT, shows how international cooperation can help developing countries to improve collections even in the face of a difficult global tax environment. The effort of the ATAFin putting forward proposals in the form of the ATAF Agreement on Mutual Assistance in Tax Matters to enable participating African Revenue Administrations to assist each other to counter tax evasion is, therefore, highly commendable.
Partnership should also be encouraged. A lot is already going on in this area but in in the medium to long term, efforts should be focused mainly on building the capacity of individual tax authorities to perform tax administration effectively and more independently so that these authorities would not have to wait for the prompting of the World Bank, the OECD and other external parties before taking steps that would improve tax revenue drive. The ongoing partnership at the individual authority’s level or at the ATAF level with organizations like the OECD, the World Bank and the AfDB etc is important and should be sustained until local capacity is built.
No Single Solution
Improving domestic revenue mobilization is crucial to achieving the sustainable development goals in Africa but the challenges facing domestic revenue mobilization on the continent are huge. These range from the poor governance and trust deficit in the continent to challenges related to tax policy and administration. Many African tax authorities have made laudable efforts to resolve some of these challenges and improve domestic revenue. Burundi’s efforts to bring the informal sector into the tax net and South Africa’s success with taxing imported electronic services through international cooperation could be useful lessons for other African countries.
However, there is no single solution to resolving the challenges facing domestic resource mobilization in Africa. As solutions to traditional challenges to DRM emerge, technology, hyper-globalisation, the growth of the digital economy and the changing nature of work are going to throw up new challenges for tax collection. African tax authorities must continue to evolve their strategies to function effectively in this changing tax environment. This has to be done with the utmost commitment as the continent’s development depends heavily on the ability of authorities to collect the right tax revenue⎈