EVERY year Africa loses $50 billion in illicit outflows. These are linked to commercial activities and include hiding wealth; dodging customs, domestic levies and aggressively avoiding taxes.
Nobody likes to pay taxes, yet this form of revenue is important in fighting poverty and promoting sustainable economic growth. After all, taxes are what help a country tick on - building up institutions, markets and democracy through making the state accountable to its taxpayers.
“Paying Taxes” is a joint report that has just been released by PwC and the World Bank Group that investigates and compares tax regimes across 189 economies, ranking them according to the relative ease of paying taxes.
It shows the yearly costs of all taxes that are borne by a medium-sized company (the Total Tax Rate) which is expressed as a share of the commercial profit, the time required to comply with tax obligations, and the number of tax payments made.
Highest “number of payments”
According to the recent PwC and World Bank Paying Taxes report, on average Africa has a total tax rate of 46.9%, a time to comply of 313 hours and there are 36.6 payments to be made - the highest “number of payments” indicator in the world.
When comparing Africa to the rest of the world, global averages show an average of 261 hours to comply with 25.6 payments with a total tax rate of 40.8%.
What this reveals is that while the region shows the greatest overall drop worldwide in the “costs” (or Total Tax Rate) since 2004, it is still relatively very difficult to pay taxes because the time needed to pay the them and the number of payments is high. This means that there is a higher risk of taxes not getting paid.
There are several factors that contribute to the difficulties in paying taxes. For one, an inability to keep up with the increasing number of payments due to the introduction of more labour taxes, social security contributions, corporate income taxes and property taxes.
Introducing new taxes, in some ways, can be seen as being a good thing. It helps to link clearly in the public mind a new public benefit or to show clearly how funds will be raised for a new government item.
One example is how Nigeria is currently debating the introduction of a security tax which would require registered companies operating in Nigeria to pay up to 5% of their profits towards the tax - a reaction to the cost of the insurgencies by jihadist rebel group Boko Haram that the country has grappled to deal with for nearly seven years now. If passed into law, the funds raised would be distributed between the Nigerian police force, civil defence corps, Department of State Services, prisons and fire service.
Not thinking about the future
However, introducing new taxes can make the process more complicated and lengthy. In an interview with CNBC, Taiwo Oyedele, the Head of Tax at PwC Nigeria, explained that many governments in Africa still don’t “have a clear policy around taxation” and that most still tend to do what fits at the time without thinking about sustainability and the future.
So that even though Africa’s “time to comply” is declining - in large part attributed to significant improvements in the use of electronic methods in filing and making payments for taxes - keeping up with new tax payments is a big headache.
But these difficulties associated with paying them - are not the only reason why people do not pay them - ie. are tax compliant.
Another factor affecting tax compliance, is that tax policies are uncertain and citizens want to see real benefits before they pay taxes - a bit of a Catch-22 for governments looking to collect them to create these services.
Lack of services
Taiwo described how in a recent stakeholder meeting in Nigeria the number one reason why people in attendance said they don’t pay taxes was because they don’t see social services being provided. Also, that even when they pay their taxes they still have to spend their money to fix roads, provide water and get electricity.
He explains that many governments in Africa need to recognise that taxpayers’ money is taxpayers’ money and when it is spent, it must be judiciously. People must see the results of the taxes, and they shouldn’t act like they’re doing them a favour when they provide social services.
However, these statements are generalised and Africa is a truly mixed bag - with some star performers in certain sub-indicators and worrying trends in others.
So which countries are nightmares in terms of the ease of paying taxes? Some pretty shocking findings…
1. In Comoros the total tax rate is 216.5% - due to its cascading sales tax
2. It takes 908 hours, over one month, to comply with tax regulations in Nigeria
3. In Cote d’Ivoire 63 payments are expected to be made