African nations will have more resources at their disposal to meet the Sustainable Development Goals if their national revenue authorities can boost tax collection. The United Nations Economic Commission for Africa estimates that the continent loses more than $50 billion through illicit financial outflows per year, much of this linked to tax avoidance and evasion.

With an eye toward how to stem losses, African ministries of finance and tax authorities met in Kampala last week, as the African Tax Administration Forum released recommendations on how governments can improve tax intake. The African Tax Outlook 2017 includes the input of 21 national tax authorities and outlines steps for policymakers to rake in public funds that could be used to fuel development.

The report argues that if tax revenue grows faster than the economy, African nations will have greater funds at their disposal for public investments in areas such as education and health care. The key barriers today boil down to weak tax laws and incapable tax administration infrastructures. In documenting the experiences of other African nations, the report gives guidance including analyzing the strengths and weaknesses of implementing various taxes, and providing tips on making the collection process more efficient.

By restructuring outdated tax laws and then improving enforcement of these laws, African nations could close the gap between policy and implementation and collect billions in public revenue, which would better equip them to tackle development goals.

The payoffs from better taxation can be significant. ATAF has worked with Zimbabwe, Nigeria, and Rwanda for the past two years to improve their tax legislation, including international tax treaties and the taxation of multinational enterprises. These efforts have allowed the countries to collect more than $116 million in revenue that they were missing out on otherwise, said Logan Wort, the forum’s executive secretary.

Why tax systems are weak

Tax systems across the continent have traditionally been weak, due in large part to heavy dependence on natural resource extraction and undiversified economies, according to a 2014 report published by Christian Aid and the Tax Justice Network Africa. Country elites control wealth through opaque tax haven structures, and tax authorities have limited capacity to combat the problem.

African nations, which are heavily dependent on trade, also suffer from underdeclarations in values of imports, as well as faulty tax arrangements with multinational companies, said Wort. This could include shifting profits to low tax locations, claiming large allowable deductions, carrying losses forward indefinitely, and using transfer pricing.

The weak regulations can result in significant disputes. In June, the Tanzanian government accused Acacia Mining of operating illegally and evading taxes, saying that the company has not fully declared the minerals it shipped. The government issued a tax bill of $40 billion of alleged unpaid taxes and some $150 billion of penalties and interest owed. The company disputes the government’s assessment.

Another major challenge for tax authorities is how to manage the informal sector. The informal sector accounts for 50 to 80 percent of the gross domestic product of the 21 countries participating in the report. Businesses might be discouraged from registering formally because of high tax rates and transaction costs, and complex procedures for registering businesses.

Who to tax?

The report offers guidance on how to structure tax law, walking through some of the pros and cons of different types of taxes.

Excise taxes – taxes on goods such as fuel, tobacco and alcohol – can be a positive social force because they raise funds while discouraging bad habits. But a rise in excise taxes could correlate with a rise in smuggling, particularly if a country borders another with low tax rates.

In many African nations, consumption tax is the biggest source of revenue, with value-added tax accounting for over 90 percent of tax revenue in the countries examined in the report. VAT revenue share of GDP is highest in Lesotho, Senegal and South Africa. This type of tax is more difficult to avoid, which reduces tax leakages. But collection is also costlier, because it involves coordinating with more parties. If there are too many exemptions or no robust refund mechanisms, this type of tax can fall short of revenue expectations. Uganda and Tanzania, for example, saw disappointing returns before reforming the VAT system to cut back or abolish VAT and income tax exemptions, capital deductions and carry-forward losses afforded to some companies.

Personal income tax is the most equitable form of tax, but revenues are vulnerable to economic shocks and political crises. In Zimbabwe and Nigeria, despite increased registration of taxpayers, poor economic climates outweighed any positive effects.

Corporate income tax is even more volatile. In Nigeria, a decline in revenue was linked to a fall in corporate income tax revenue. 

Nontax revenue is popular in oil and resource rich countries such as Nigeria, Mozambique and Cameroon. This revenue is vulnerable to price changes in international markets, leaving nations to quickly adjust to a drop in revenue. Between 2011 and 2015, Cameroon’s oil revenue fell from 4.3 percent of GDP to 2.3 percent, and Nigeria’s from 10 percent to 3 percent.

In addition to basic taxes, African nations are not collecting enough social security contributions, the report says. This could include social security systems that cover public health, pensions, or both. The average ratio of social security contributions to GDP ratio was 1.4 percent, while the Organisation for Economic Co-operation and Development average is 9.1 percent.

The collectors

Once a country has tax laws in place, those laws must be enforced by a strong tax authority.

Some tax authorities are located within finance ministries, while others are semiautonomous. Working within the government ministry could make tax authorities more vulnerable to political interference when auditing large taxpayers, such as companies associated with the ruling political party, according to the report.

Countries including the Gambia, Mauritius, Nigeria, Seychelles and Zimbabwe have built information systems meant to detect under reporting. These networks interface or are integrated with other data, allowing tax authorities to compare, for example, domestic tax returns with export and import data. Revenue authorities can then spot unregistered taxpayers doing business with registered taxpayers, including any undeclared sales or income.

The report also recommends strengthening legal and regulatory systems to tax informal businesses, including measures to regulate the cash economy, control market entry and access and map all businesses locations. Regulatory obligations should be light enough to not discourage businesses from formally registering.

Some revenue authorities have put in place large taxpayer units to monitor high net worth individuals and multinational enterprises in efforts to curb inaccurate reporting. Others have attempted to reach deals with multinational companies to encourage them to make full disclosures on tax liabilities, including offshore activities.

According to the report, ignorance is equally to blame as avoidance for noncompliance. Some countries are making taxpayer services such as education and outreach at the heart of their compliance efforts. This includes tax clinics, seminars, and workshops. In some places, mobile education units travel to remote areas to register citizens for income tax and help them to file tax returns.

---

» Download: African Tax Outlook (ATO), 2nd edition 2017 (PDF, 10.7 MB)