Improving efficiency to boost tax revenue

How can African countries raise more tax revenue without putting off investors? Logan Wort executive secretary of the African Tax Administration Forum (ATAF) shares his insights.

What are some of the best and most feasible ways Africa’s revenue authorities can raise income?

This is not just a question of what African tax authorities can do to collect the appropriate taxes, it is also a question of ensuring that countries have the right tax policies in place. This means tax policies that ensure a broad tax base, the right mix of different tax types and appropriate tax rates that all contribute to reaching the tax potential of individual African countries.

Having a transparent, efficient and effective tax system is crucial to tax administrations’ efforts to collect the appropriate amount of tax and close the tax compliance gap between the tax due under the prevailing tax regime and the tax actually collected. If Africa is to stem illicit financial flows (IFFs) arising from tax avoidance and evasion it needs to redesign its tax policies and build the capacity of African tax administrations.

Africa must look closely at its policies for granting tax incentives. There is substantial tax lost in Africa through harmful tax competition and the granting of wasteful tax incentives due to a lack of accountability and robust cost benefit analysis to measure the effectiveness of these incentives. There is a need to create greater political awareness of the tax impact of these incentives.

There is a need for African countries to establish a framework in their country for the ministry of finance and tax administration to work together on revisiting the country’s domestic resource mobilisation strategy and agreeing their plans for implementing that strategy.

Why has tax collection historically been so low in some African countries?

It is important to note that in recent years the tax position of African countries has improved. The average tax-to-GDP ratio in African countries that participated in the ATAF African Tax Outlook survey has increased from 15.66% in 2010 to 18.33% in 2015. 

However, whilst that is an improvement upon earlier years it is still well below the OECD average of 25.1%. This is despite African countries generally having higher statutory tax rates than OECD countries. Africa also faces significant loss of revenues through IFFs. The African Economic Outlook report estimated Africa lost an annual average of $60.3bn, or around 4% of GDP in IFFs between 2003 and 2012.

Africa still suffers from weak domestic tax legislation, tax treaties that do not have the appropriate tax allocation rights between source and residence taxation and are susceptible to abuse, limited exchange of information networks, which starve African tax administrations of the vital information they need to stem IFFs, and limited capacity within tax administrations.

How can revenue collectors and tax institutions be strengthened?

ATAF is helping African countries strengthen their capacity to collect the appropriate taxes by building fair and efficient tax systems and administrations in Africa. Such tax systems will build trust with citizens and assist in improving voluntary compliance in African countries.

For example, ATAF, working in partnership with the TADAT (Tax Administration Diagnostic Assessment Tool) Secretariat, has started to assist African countries in carrying out TADAT assessments in a number of African countries. These assessments provide the country with very valuable information on the state of health of the tax administration and its processes. 

That data is being used by the country and ATAF to develop technical assistance programmes that take a holistic approach to the areas of assistance being provided.

How can African governments find the right balance between attracting international investment and raising taxes?

If African countries are to meet those challenges and achieve the appropriate balance it is vital they take a whole of government approach to the issue. Legislators, ministries of finance and tax administrations need to work together to design new tax policies for Africa and rapidly build tax administration capacity. African tax experts, academics and civil society also have a key role to play in pioneering African tax solutions.

This approach will however only be effective if policymakers have the relevant high-quality data and rigorous data analysis to assess the impact of tax policy changes and tax administration reforms.

How can African governments effectively tackle transfer pricing?

The ATAF technical assistance country programmes have already helped some African countries collect an additional $160m from transfer pricing and other international tax audit work in less than three years.

We are helping African countries strengthen their domestic legislation. As a consequence, a number of African countries in 2017 and 2018 have enacted new transfer pricing rules such as Malawi and Zambia,  and new interest deductibility legislation such as Senegal and Uganda.

We use the experience gained from those reviews to start developing African solutions such as African legislative tools. These tools are based on global standards but customised to meet the needs of African countries.

How important is global collaboration in bringing to heel multinationals? 

Global collaboration is key to ensuring that multi­nationals pay the appro­priate amount of tax. The pace of change in the economy and in particular its digitalisation is throwing into sharp focus the question of whether the current global tax rules are fit for purpose or require a fundamental overhaul.

These changes raise fundamental questions about the global tax rules both in terms of direct and indirect taxes. Those fundamental questions raise the opportunity for Africa to move itself from its current position where we have been starting to influence the global tax agenda but on a reactive basis, to having a more proactive role. At present we are following behind the global tax agenda processes. There is now a need to step up this work and for Africa to stop following and start initiating change in the global tax agenda.

Vital global tax issues such as the BEPS outcomes will be reviewed in 2020 and the OECD report on the tax challenges of digitalisation will be completed in the same year. It is crucial that the African Union, ministries of finance, tax administrations, civil society and business participate actively in this work and influence its outcomes to ensure they are fit for purpose in Africa and assist in improving DRM on the continent.

Tom Collins