TAX is an issue of fundamental importance for development. To many developed countries, lower taxes may just mean less revenue, but to many African countries, this has a direct impact on the lives of millions of people’s access to healthcare; basic education; proper nutrition; water and security.
However, African countries have for many years faced difficult challenges of tax collection and administration. Because most economic activities in Africa are informally organised, it is hard for governments to raise revenue from them to finance public services and development projects.
But most African economies are now growing steadily. Africa is also integrating into the global economy in new ways – notably through a large increase in private overseas investment. Although this new investment is mostly very welcome, it might raise problems for tax authorities.
Due to the high level of economic informality, few African governments raise much revenue from personal income taxes. A great deal of consumption is also untaxed. Compared to most parts of the world, Africa relies heavily for revenues on corporate income taxes. If it were unable to continue to raise revenue from this source, African governments would be in trouble.
In a world in which economic activity is globalised but taxing powers remain national, there is wide scope for transnational economic actors to avoid taxes by relocating their profits to low or no tax jurisdictions. This has become a major policy issue globally. It is now labelled the problem of base erosion and profit shifting (BEPS). If transnational companies come to play a larger role in African economies, there is a risk that they too would be able to avoid local taxes and thus put public finances at risk.
The OECD and the G20 are currently designing major reforms of the ways in which the profits of transnational companies are taxed. For instance, in 2013, the G20 declared its intention to effect a radical change: to establish a system where taxes are levied in the jurisdictions where real economic activity takes place and value is added. The OECD is also mid-way through the BEPS process of trying to draw up the rules and policies that would make this objective achievable.
Gains, but not sufficient
These international reforms are laudable and will definitely benefit Africa. The same is true of other ongoing international tax reforms led by the OECD, especially automatic exchange of information for tax purposes among revenue authorities. However, these reforms are unlikely to benefit Africa sufficiently.
This is because these OECD-based reform processes are designed by and for the purposes of the OECD and the BRIC/emerging economies. They are not designed with Africa in mind. And they do not take account of the fact that many tax administrations in Africa are relatively weak, in personnel and other resources.
One risk is that reforms designed by the OECD/BRIC countries will be organisationally too demanding for many African revenue authorities. Many of these reforms require revenue authorities that can very effectively question the accounts and other information presented to them by large transnational companies. For many African revenue authorities, this is currently close to impossible.
It would therefore make a great deal of sense for Africa to conduct its own tax reform programme, in cooperation with global tax reforms, but with Africa’s specific circumstances in mind. Although there are many differences between African countries, many of them face similar challenges and opportunities in their domestic resource mobilisation efforts.
For African countries to better mobilise domestic resources through taxation, better tax transnationals, and reduce harmful tax competition within the continent, African governments and tax authorities will need to cooperate seriously with one another.
Exemptions are inefficient
Institutionalised cooperation will enable them harmonise tax policies and practices regionally - especially to reduce the frequency of the granting of unnecessary tax exemptions for investors. Tax exemptions are spreading in Africa, and are already a major source of lost revenues. Despite the ritual threats and pleas of foreign investors, tax incentives are typically not required to attract investment. They are fiscally and economically inefficient.
Institutionalised cooperation among African governments will also help African tax authorities explore practical ways to collect taxes and position themselves to better tax corporate entities that work across their borders. Due to relatively low organisational and personnel capacities, individual African revenue authorities are often very weak in the face of the accountants and lawyers from transnational corporations. Cooperation among the tax authorities will help them to overcome these problems.
It will also enable them to explore the scope for using slightly unorthodox tax practices to deal with Africa’s specific problems. These could include: the wider use of excise taxes, especially to tax complex sectors like telecoms; alternative ways of taxing the extractive sector, including variable rate royalties in place of corporate profit taxes; and placing clear limits on interest deductions from profits, to reduce the scope for using this technique for transferring corporate profits overseas.
Finally, if Africa has a strong regional tax organisation, when undertaking future reforms to the global tax system, the OECD and the G20 will be much more likely to take account of Africa’s voice and needs.