Taxes & Tariffs | |
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Wednesday,
January 29, 2020 /06:06 PM / By FDC Ltd / Header
Image Credit: Sabastien Thibaut
What is
it like being a taxman in Africa? "A lot of sleepless nights," says Yankuba
Darboe, the Gambia's top revenue official, describing the pressure to meet
targets. Politicians across Africa are asking ever more of their tax
collectors, with good reason. The biggest hole in public coffers is not money
squandered or stolen, but that which is never collected in the first place.
Government revenues average about 17% of GDP in sub-Saharan Africa, according
to the IMF. Nigeria has more than 300 times as many people as Luxembourg, but
collects less tax. If Ethiopia shared out its tax revenues equally, each
citizen would get around $80 a year. The government of the Democratic Republic
of Congo is so penurious that its annual health spending per person cannot buy
a copy of this newspaper.
Governments
once turned to aid and natural resources to stay afloat. Historically "we
relied on oil," says Babatunde Fowler, until last month the head of Nigeria's
Federal Inland Revenue Service. "Nobody took taxation seriously." Lower oil
prices are now forcing a rethink, he explains. So too are shifts in foreign
aid. As a proportion of Africa's income, aid flows have halved since the 1990s.
Measured as dollars per person, they peaked in 2011 and then fell. Public debt
has risen sharply. Since the 1980s, governments have followed an IMF-inspired
recipe: slashing trade taxes, reducing top rates on personal and corporate
income, and embracing value-added tax. Data from the OECD for 26 African
countries show that over half of their tax revenues come from taxes on goods
and services. Only a quarter comes from personal income tax and social-security
contributions (about the same as in Latin America, but much less than in the
rich world). From 2008 to 2017 the ratio of tax receipts to GDP rose by 1.5
percentage points, but in many countries this was offset by falls in non-tax
revenues, such as fines, rents and royalties from resource extraction.
Large
firms grumble that they are footing the bill. Just 6% of tax-paying firms
generate 78% of receipts, according to the African Tax Administration Forum
(ATAF), a club of taxmen. But that statistics gives only a partial picture.
Analysis of corporate tax returns in Ethiopia by Giulia Mascagni of the
International Centre for Tax and Development and Andualem Mengistu of the
Ethiopian Development Research Institute reveals that small firms pay the
highest effective rate, perhaps because they lack accountants to find gaps in
the tax code.
In many
countries firms which are considered "informal" -because they are not
registered, or do not pay income tax-still cough up for license fees and market
dues. Ordinary Africans complain the system is rigged. Some 56% of those
surveyed by Afrobarometer, a pollster, considered it "very likely" that a rich
person could pay a bribe or use personal connections to dodge taxes. They are
probably right. When Ugandan tax collectors examined records for 71 government
officials in 2013/14, they found that just one had paid any personal income
tax. Only 5% of directors at leading companies were paying income tax
themselves. Authorities try to manage such tax-dodging through dedicated units
that focus on, say, wealthy individuals or large corporations. In Uganda,
officials built on their earlier research by drawing up a list of 117 rich
folk, then meeting them personally.
At the
time only 13% were filing tax returns; a year later 78% were. One pastor on the
list even started preaching about paying taxes. The taxmen also chased
government agencies. "It's a tax morale issue if you ask people to pay their
tax and then the government is not paying its taxes," says Doris Akol, the
country's top revenue official. Technocratic tax talk often centres on such
administrative reforms, which also include things like strengthening it systems
or adopting taxpayer identification numbers. Yet this package only goes so far. "It says build a good tax register, go to electronic filing, and so on," says
Logan Wort, the executive secretary of Ataf. "Those are all right. But you know
what the problem in Africa is? It has signed away its tax base." One example is
bilateral tax treaties. Originally intended to eliminate double taxation, and
later to attract investment, their practical effect is to limit taxation of
cross-border income, such as royalties or service fees.
The IMF
estimates that signing treaties with so-called "investment hubs", like
Mauritius, costs African countries an average of 15% of their corporate tax
revenue without increasing investment. Some governments, such as Rwanda's, have
wisely renegotiated terms. 17 Governments also erode the tax base by dishing
out generous exemptions. Estimates of "tax expenditures", or deviations from
usual tax rates, put the cost at up to 40% of revenues that African governments
collect. Those figures include some sensible allowances, like tax relief on
medicines, as well as questionable ones, such as tax holidays for investors.
Most businesses say that tax breaks do not affect their decision to invest; in
surveys, they tend to put greater weight on things like stability and roads,
which a little extra tax might fund. How much more could African governments
collect? The best estimates are that they lose revenues worth 2% of GDP through
corporate-tax avoidance, of all kinds, and perhaps another 1-2% through
individual wealth stashed offshore.
The
revenue forgone through tax expenditures is roughly 5% of GDP. It is neither
feasible nor desirable to close all those gaps, so the realistic gains are
smaller. Other measures, such as increasing compliance or expanding property
taxes, could also add a few percentage points.
The IMF
models the "tax capacity" of a country using variables such as average income,
trade openness, and governance. On that basis it thinks that African
governments could increase their revenues by 3- 5% of GDP, which is more than
they receive in aid. But in the past few years "there has been little
progress," says Papa N'Diaye of the IMF. The challenge is not starting tax
reform, he adds, but sustaining it. Africa's taxmen are in for a few more
sleepless nights.
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