Sub-Saharan Africa needs to up its game to stem falling tax revenue
Improved governance and efficiency would boost the amount collected while digital systems would broaden the base
There has been extraordinary political progress in sub-Saharan Africa in the past 30 years, along with steady economic growth. Yet there still remains a need to improve tax collections.
Even though governments have allocated more resources to the process, revenue from taxation is shrinking instead of growing, both in real and absolute terms. There are 49 countries worldwide that collect less than 13% of their GDP, and 20 of them are to be found in sub-Saharan Africa.
The IMF suggests that’s the magic number countries need to collect to fund basic state functions as well as additional investment in physical infrastructure, education, health and other development initiatives.
The opportunity is huge: improved governance and efficiency could deliver as much as $110bn in new tax revenue over 2020-2025, according to a study by the UN Economic Commission for Africa (UNECA). That’s more than double the $51.8bn it received in official development assistance from 2018, according to the Organisation for Economic Co-operation and Development (OECD).
Collecting enough revenue opens up policy options and the capacity to execute them faster and better. Tax authorities have responded with various strategies to reverse the declining collection trend, including deepening their use of digitalisation, making it easier to pay tax and further penetrating their sizeable informal economies to find eligible taxpayers.
They also co-operate with one another in regional information exchanges and with peers worldwide — 22 have signed up to implement the OECD base erosion and profit shifting action plan initiative, the biggest global rewrite of taxation laws and regulations in history.
The policy direction is clear both globally and in Africa. Tax authorities are looking to tax where the value is created. Still, revenue has been declining for about 15 years in the region. In 2018, weighted tax revenues stood at 14.6% of GDP, down from a peak of 19.9% in 2005.
That peak came as governments began reforming their tax functions. Separate tax authorities became a trend in the early 2000s. These reforms included the shifting of tax and customs authorities from finance ministries to newly formed, quasi-independent and self-financing agencies. Most tax authorities now have good systems, and they know how to use them.
These systems also allow tax authorities to keep data private and secure, and that makes them one of the most trusted branches of government in many countries. Progress is being made in bringing additional taxpayers onto the tax base.
Digital systems for identification would speed up the pace, but are progressing slowly because of sensitivities. They could help broaden tax bases by identifying more potential taxpayers, since 86% of Africans work in jobs in the informal economy, according to the International Labour Organisation. This segment of the economy includes millions of traders and small businesses keen to avoid taxes. Though the tax authority views them as candidates to join the tax base, politicians also see them as voters.
An enhancement to digital security that helps tax authorities is mobile phone registration. In some countries, including SA, Nigeria and Kenya, consumers cannot buy a mobile phone SIM card without showing identification. With that know-your-customer check already performed, tax authorities can then send taxpayers compliance nudges to their phones. Meanwhile, taxpayers can download prepopulated returns and other forms to their phones, making it faster to pay and reduce the need for auditing.
Policy changes shouldn’t be abrupt or inconsistent. That principle applies to indirect taxes as well as direct ones. In Nigeria in 2015, the government aimed to use tax policy as a tool to boost domestic automotive production by hiking tariffs on imported used vehicles, but the result was a surge in used vehicles smuggled into the country.
Those policies are tied to goals other than boosting tax revenue, including import replacement and job creation. But if the goal is simply to collect more revenue, the focus should be on value-added taxes (VAT). Africa has the room to raise rates, and you can keep doing it without angering people. Nigeria boosted its rate from 5% to 7.5% in February 2020. The change happened without protest and still leaves Nigeria well below the 20% threshold at which fraud tends to rise.
VAT gaps are significant: a 2018 study by UNECA analysed VAT data from 24 African sovereigns and found a gap of 50% or more in 12 instances. Gaps were caused by compliance issues and a lack of enforcement ability, and from policy challenges such as large volumes of exemptions.
The e@syFile system of the SA Revenue Service (Sars) is a model for the continent. It features real-time submissions from a company’s enterprise resource planning software to the Sars system, with monthly reconciliations to process refunds within 48 hours of the month’s close. Participation is voluntary but popular, with about 90% of eligible businesses opting in. Speed is the incentive, especially for small businesses. As a result, SA’s VAT gap of 13.3% is the lowest in Africa, according to the UN study.
As tax authorities evolve, long-term investors have to as well. The old model is gone. We’re seeing investors who are interested in a fair policy narrative. They want to pay the right amount of tax.
• Eghan is EY’s SA tax leader.
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