Africa Tax Outlook
Official Launch of The 1st Edition, 27 June 2016
Data collection a prerequisite for revenue collection in African countries
Tax administration generates a substantial amount of data fragmented across different databases and often of varying focus and scope. The
African Tax Outlook (ATO) a publication by the African Tax Administration Forum (ATAF) was initiated by the need for accessible quality information on taxation in Africa. The
African Tax Outlook's objective is to be a reliable source of information on taxation that will serve as an African and global benchmark in formulating tax policies and tax administration reforms across Africa. It also seeks to be a barometer for the business community. To those ends, the
African Tax Outlook endeavours to: enable improved comparisons and benchmarking between African countries and between regions; supply meaningful, comparable data on tax policy, tax administration and tax legislation; analyse data to determine trends in taxation; and identify good practices within the African region to improve revenue administration.
This first edition of ATO, which brings together valuable, practical and relevant descriptive and analytical work on tax issues for the period of 2009-2014 from 15 countries, is the beginning of a journey. It is the first-ever attempt by African tax authorities to compare, in a consistent fashion, the ways in which African tax authorities raise revenue. It assesses and compares 15 countries against indicators in four broad categories: tax bases, tax structure, revenue performance, and tax administration. The indicators are crucial to African tax authorities as they implement reforms and policies to broaden the tax base, narrow tax gaps, simplify and improve fairness in tax systems, enhance overall voluntary compliance, and keep policy makers informed on tax matters. For the purposes of international comparison, the performances of the 15 countries are set against those of the OECD and the Inter-American Center of Tax Administrations (CIAT) where possible. The purpose of the publication is to build a solid framework of meaningful indicators that will help to compare, assess and ultimately improve African countries' tax administration and revenue performance.
Fifteen countries participated in this inaugural African Tax Outlook: Burundi, Cameroon, Gambia, Kenya, Lesotho, Mauritius, Rwanda, Senegal, Seychelles, Swaziland, Tanzania, Togo, Uganda and Zimbabwe. The ATO is a
project led by African tax administrations. The tax administrations' Heads of Research fully participated in determining the indicators and themes of the ATO, in developing the data collection tool and guidebook and were heavily involved in validating and analysing the data. The
Heads of Research/Statistics/Planning identified critical demand-driven indicators that they deemed necessary to assist in providing strategic direction essential to drive revenue in Africa. The
ATO project aimed at embedding the systematic collection of tax statistics in the day-to-day activity of their respective administration work. As a result, each country appointed a focal point whose job was to collect data over a period of five fiscal or calendar years. The tax administrations' data collectors were trained during a capacity workshop which increased capability of each focal point and led to peer learning exchange. Additionally,
this seminal project raised the importance of evidence-based policy recommendations and, therefore, the significance of data collection within a revenue authority. The process allowed for authentication of data provided by the tax administrations through signing of consent forms by Commissioners General, Directors General and Heads of Research. This makes ATO a source of reliable information that serves as an African and potential global reference since the process encourages full participation and ownership.
Some of the key points and findings include:
The ATO countries are very heterogeneous in population size as well as economic structure and levels of development. The results are wide disparities in GDP per capita and GDP growth. Similarly, numbers of registered taxpayers as a ratio of the labour force differ considerably from country to country – from less than 0.1% in Burundi to over 80% in South Africa when it comes to income taxpayers. Nominal economic growth was dynamic in the five years under study, 2010‑14. The ATO countries registered a near 11% average annual growth rate in nominal GDP (the main driver of increases in tax revenue). The highest nominal growth came in Burundi, Tanzania, Kenya and Uganda.
The ATO countries have similar tax structures. They all use VAT and excise duties as consumption taxes, they all tax personal and corporate income, and they all have provisions for the special treatment of SMEs. Standard VAT rates range between 14% and 19.25%, averaging out at 16.5%. All the 15 countries use both main consumption taxes – VAT and excise duty. Although they account for the bulk of tax revenue, they can be costly and inefficient when applied to small companies. Personal income tax (PIT) is progressive in all the 15 countries save Mauritius, which applies a 15% flat rate. The Gambia has the lowest bottom marginal rate at 5%, Zimbabwe the highest top marginal rate at 50%. Many people are income-tax-exempt or pay the lowest rates as their income is close to the bottom marginal rate. Most countries tax companies at uniform rates, regardless of sector. Standard corporate income tax rates range from 25% to 31%, with exceptions of Mauritius and Cameroon, where the rates are 15% and 38.5%, respectively.
The tax-revenue-to-GDP ratio, the composition of tax revenue, and tax productivity measure a country's ability to mobilize and use domestic resources to finance public services and investments. The 15 countries' ability to mobilize revenue – measured by the average tax-revenue-to-GDP ratio – 17.6% – is well below the OECD average (25.7%) versus CIAT (21.3%). Consumption taxes (including VAT and excise duties) finance 36.4% of total revenue in 15 countries. The customs tax share of revenue (16.8% on average) is above 10% in eight countries – Cameroon, the Gambia, Kenya, Senegal, Tanzania, Togo, Uganda and Zimbabwe – despite the fact that most other ATO countries have reduced or removed import duties, making customs taxes less important. On average, personal income tax and corporate income tax contribute 21.7% and 15.9% to the total tax revenue of ATO countries respectively. The average ATO PIT revenue-to-GDP ratio is 4.1% – less than half the OECD's 8.6%. The equivalent figures for VAT-to-GDP and CIT-to-GDP ratios are 6.2% and 2.8% (close to OECD's 2.9%) respectively.
The 15 tax authorities are adequately structured to their task, but administration
is costly. The average tax administration operating cost is 2.1% of net revenue collected – much higher than the OECD's 0.9%. The lowest ATO ratios are 0.3% in Cameroon, and the highest cost is Swaziland's 5.3%. Most countries have taken action to cut costs, increase compliance and improve collection. They have introduced ICT and web-based procedures, particularly electronic filing, payment and information sharing. There have also been measures both to educate taxpayers and to train staff, but tax authorities remain understaffed and under skilled.
Lack of data on critical indicators:
Some of the indicators identified by the 15 Heads of research could not be calculated. This is because few countries could not provide the necessary data on tax register, arrears, audits etc. – partly because macroeconomic accounting did not generate enough data and partly because of they lacked the resources and/or expertise for collecting and handling tax data.
Large taxpayers are large tax evaders and lead to challenges of BEPS:
ATO countries collect 45.2% of total tax revenue from large taxpayers, with a few large taxpayers contributing particularly high shares in Lesotho (60.9%), Mauritius (58.6%), Kenya (49.7%) and Cameroon (48.8%). Large taxpayers are generally large tax evaders and a serious threat to development lies in illicit financial flows (IFFs) out of the 15 countries. IFFs from Sub-Saharan Africa between 2003 and 2012 averaged 5.5% of GDP per annum, compared to 3.9% in all developing countries. Base erosion and profit shifting (BEPS) seriously jeopardises domestic resource mobilization in Africa, where countries rely heavily on tax revenue from MNEs. Multinational corporations – account for 65% of IFFs.
African governments at various stages of economic and social development are increasingly relying on the optimal collection of revenue from all types of taxes to meet their public expenditure obligations and budget commitments since aid to developing countries continues to fall. Aid is likely to continue decreasing as a result of economic crisis faced in donor countries. Approximately two thirds of external finance in African countries are Official Development Aid (ODA). In order to increase domestic revenue mobilisation and minimize ODA dependence, African countries should:
Foster compliance: Tax authorities should foster voluntary compliance by preparing laws that are clear to enable taxpayers to know what their obligations are and how to comply with them. Further still, Africa Governments should develop efficient legislative and administrative measures to create an environment that encourages taxpayer compliance. This includes responsible public spending on the expenditure side which may result in citizens' satisfaction with public services and consequently increase tax morale. Educating taxpayers in and raising their awareness of compliance is an effective approach that all Revenue Authorities in Africa should use. Penalties should be severe enough to act as a deterrent to noncompliance. Lastly, African countries should invest in automated, web-based technology and connectivity that make compliance less costly, more convenient and user-friendly. Improvements in the efficiency of tax administration and reductions in the cost of compliance are necessary conditions for further action to broaden the tax base through lower thresholds and fewer exemptions.
Ensure that data collection is made a prerequisite for revenue collection: Tax administration generates considerable bodies of data (Assessment and collection data), the findings show that data is under-collected and underutilised. If the 15 countries are to improve their tax administration, broaden their tax bases, and boost revenue collection they need up-to-date information on their tax system. Revenue authorities must, therefore, be as much data collectors as revenue collectors. They must have the resources and skills to gather data which support policy formulation, fiscal planning, compliance practices and enforcement. The importance of data collection, availability and quality cannot be overstated since without statistics, tax authorities cannot address or reduce non-compliance. Therefore there is a need for much more robust data collection and more, higher-quality taxation statistics in Africa. Finally, it is easier to implement tax reforms that are founded on statistical evidence-based policy recommendations.
Urgently address illegal outflows of fund: The African Tax Administration Forum (ATAF) has identified illicit financial flows (IFFs) in general and base erosion and profit shifting (BEPS) in particular as critical challenges to African countries' ability to mobilise and retain resources – particularly tax revenue. African countries need urgently to address illegal outflows of funds that rob them of revenue. It is urgent that African countries adapt the OECD's action plan against tax base erosion and profit shifting to their own particular needs. They should also work together and share information through the ATAF Agreement on Mutual Assistance in Tax Matters (AMATM). Under the terms of the AMATM, African countries are able to exchange information, share expertise, conduct joint audits and investigations, and give each other mutual administrative assistance.
Generate domestic revenue to offset the fall in customs duty revenue. As the ATO countries seek to maximize domestic revenue mobilization, they should not overlook the potential of small and very small businesses. Revenue authorities should encourage voluntary compliance by outreach and education. They should further design programs aimed at reducing cost of compliance by implementing simplified record keeping and reporting arrangement for SMEs operating in an ever more informal sector but with unique strengths for contributing to the revenue base of the 15 countries.
ATAF hopes that the African Tax Outlook will, with its distinctive methodology, make a significant contribution to the overall tax literature through the highlighted good practice and areas of improvement which is in line with the African Union 2063 vision. The policy action mentioned above which includes measures to increase tax rates, broaden the tax base and improve the efficiency of revenue administration is aimed at assisting tax administrations in increasing their tax to GDP ratio and tax productivity and hence domestic revenue mobilization. This will enable African government reduce their dependence on aid and implement long term economic and national development planning and sustainable spending.
ATAF is aware of the needs of its members and will continue to encourage tax authorities to build systems and processes able to provide the quality data needed to improve the functioning of tax administration in Africa. It will continue to assist African countries in building strong, effective and efficient tax systems by providing technical assistance, encouraging excellence through good practice and identifying areas for practicable research. ATAF plans to develop measures and targets that would be routinely monitored which is in line with the African Union 2063.
- Mr Frankie Mbuyamba, ATAF Research Coordinator (email@example.com; Tel: +27 12 451 8834 / +27 63 689 3896)