Speech by Mr. Logan Wort, Executive Secretary of the African Tax Administration Forum (ATAF) at the
D.I.E.
7th INTERNATIONAL WORKSHOP ON DOMESTIC REVENUE MOBILISATION
“Taxation, inequality and social cohesion”
(13 -14 November 2018 Bonn)
1. Introduction
Good morning. Firstly, I want to thank the DIE for the opportunity to participate in this workshop. When I saw the programme and the exciting topics, I immediately decided to register. Now I find myself presenting in this first session.
The discussion on Social Cohesion, Taxation and Inequality is an important discussion globally and for us in Africa especially. This workshop offers an opportunity to focus squarely on the socio-political and economic elements of taxation. It brings relief from the frenzy around Tax Technical issues such as the Inclusive Framework, AEIO, Treaties and EU arbitrary blacklisting of countries.
So, when I was invited to provide this speech, I decided to consider the issue of taxation, inequality and cohesion from the perspective first of my own country, South Africa and then from the perspective of my continent, Africa.
It is Stanley who defines social cohesion as “the ongoing process of developing well-being, sense of belonging, and voluntary social participation of the members of society, while developing communities that tolerate and promote a multiplicity of values and cultures, and granting at the same time equal rights and opportunities in society“
It is further stated that the consequences of growing global inequalities and uneven development are starting to be noticeable because of the effect on social cohesion.
South Africa is a good example of an unequal society. According to a report by the World Bank South Africa is the most unequal country in the world.
The report found the top 1% of South Africans own 70.9% of the country’s wealth while the bottom 60% only controls 7% of the country’s assets. More than half of South Africans (55.5%) or 30-million people live below the national poverty line of R992 per month. This number increased since 2011.
Other African countries fare little better. Our neighbours Namibia and Botswana were second and third. Zambia‚ Central African Republic‚ Lesotho and Swaziland‚ are also in the top 10 meaning Africa has 70% of the top 10 most unequal countries in the world.
South Africa faces triple socioeconomic challenge of poverty, unemployment and inequality. With unemployment at 27% and youth unemployment at over 50% inequalities runs deep. Of course, this is further exacerbated by inequalities along racial lines and xenophobia arising from pure economic inequality.
That inequality leads to a multitude of issues such as disempowered citizens, breeding cynicism and anxiety. Poverty and inequality lead to increased levels of crime, alcohol and substance abuse, high levels of disease particularly water and food-related diseases, simply because the poor often cannot afford "safe" foods.
Poverty is a major cause of social tensions and creates particularly significant division in South Africa which are exacerbated by our history and the legacy of Apartheid.
Part of the difficulty for SA is the failure to redistribute social and economic resources. Here access to land and capital are major factors.
It is therefore critical that they develop and adopt the correct policies and administration that will support integrity, transparency and confidence. These factors played a significant role in the successes of SARS up to 2015. During this period the compliance levels rose significantly, and the social contract strengthened (surveys of why people pay tax and links to service delivery by the state).
2. Tax and social cohesion
It is crucial that South Africa and other African countries address the issue of inequality and lack of social cohesion and as member of an African regional tax organisation I want to explore how building more effective tax regimes is key to addressing these issues through not only being one of the mechanisms for the redistribution of wealth and for providing governments with the funds needed for social development such as education and health, but also for building social cohesion in the country.
An effective and balanced tax regime where all are seen to be paying their fair share of taxes provides the State with greater legitimacy and helps to dispel the now widely held view that that there is a world within our world, inaccessible to the ordinary citizen, where super-rich elites play by different rules. The so-called Panama Papers, the largest leak of financial documents in history, show that idea to be the unpleasant and shameful truth.
In order to deliver on the development agenda, states need money. In Africa this comes through a combination of tax, ODA, Debt and royalties. Taxes, ODA and resource rents are the dominant income sources. So careful consideration must be given to how these three elements are managed.
3. Challenges to building effective tax regimes
There are significant challenges to South Africa and Africa more widely to achieving effective and balanced tax regimes. Firstly, African economies are characterised by;
- Large informal sectors
- Agriculture that is largely subsistence based
- A significant number of often high-profile high net worth individuals
- Economies dominated by multinational enterprises (MNEs) particularly in key sectors such as extractives, telecoms and financial sectors
Taxing these elements of the economy is difficult for any government in any part of the world. In African countries those difficulties are exacerbated by a lack of trust in government due to issues of corruption, weak governance and transparency and weak government institutions which leads to a general culture of non-compliance with the law. Citizens do not trust the government and how it will spend the revenues raised through taxes.
The State-Capture issue in South Africa is an example of such a breakdown of trust. In a background of state corruption tax compliance in the country reached its lowest levels since the 2008-2009 financial crisis. A commentator recently suggested that only 25% of 2018’s under-collection was caused by SA’s economic performance, while other factors, such as perceptions of SARS, contributed to the other 75%.".
The recent increase in VAT charges in South Africa which is the first increase in the VAT rate since April 1993 and is regarded by some as a tax that impacts hardest on the poor are widely reported to have only been necessary due to the R50bn shortfall in revenue collection by the tax agency — which is alleged to have been due to the mismanagement of SARS.
There is widespread belief that groups such as high net worth individuals and multinationals do not pay their fair share of taxes. This undermines the credibility of the tax system in the eyes of all taxpayers. If the largest and most high-profile taxpayers are seen to be avoiding their tax liabilities, confidence and effectiveness of the tax system is undermined.
Tax compliance is also impacted by poor infrastructure, lack of IT automation and overly bureaucratic processes which make it difficult and often time consuming to comply with the law.
4. How might South Africa and Africa address these challenges – successes to date
This requires both building of the capacity of African tax administrations, both human and infrastructure capacity, and implementing more effective tax policy and legislation.
From the technical assistance work ATAF has been undertaking in a large number of African countries we believe that this is possible but requires strong political support to bring about the necessary reforms.
We have already seen a number of success stories such as new legislation which addresses profit stripping by MNEs in Africa through abusive transfer pricing practices and excessive interest payments to foreign related companies who are located in low or no tax jurisdictions.
Recently with the assistance of ATAF Malawi, Nigeria and Zambia have introduced new and stronger transfer pricing legislation and Senegal, Uganda and Zambia have introduced new interest deductibility legislation.
ATAF, working in partnership with the TADAT Secretariat, has started to assist African countries in carrying out TADAT assessments in a number of African countries. These assessments provide the country with very valuable information on the state of health of the tax administration and its processes.
That data is being used by the country and ATAF to develop technical assistance programmes that take a holistic approach to the areas of assistance being provided. These technical assistance programmes that initially focused on building administration capacity on direct tax issues and in particular international tax and exchange of Information issues are now starting to provide assistance that builds the tax administration’s capacity on a wide range of direct and indirect tax issues.
The ATAF technical assistance country programmes have already helped some African countries collect nearly USD200 million additional tax from transfer pricing audit work in less than three years. Assessments have been issued for a further additional tax of over USD600 million in the past year.
There have also been successes in the taxation of the informal sector. ATAF and the Rwanda Revenue Authority conducted a pilot experiment in Rwanda to raise awareness of taxpayer’s obligation. The pilot experiment generated US$9 million in additional revenue for Rwanda.
5. We need to do more to build on these isolated successes
Most of these successes have been in the area of taxation of MNEs. Efforts need to be continued in this area as governments face new challenges such as those relating to the increased digitalisation of economies which is raising fundamental questions as to whether the global tax rules are still fit for purpose.
It should also be borne in mind that profit stripping by MNEs can have consequences that go beyond taxation. For example, if profits are stripped out of companies that are partly owned by a BEE entity then there will be underpayments of dividends to the BEE entity
More focus is needed on the taxation of the informal sector looking for ways to raise taxpayer awareness of their tax obligations and making it easier for taxpayers to comply. Broadening the tax base requires good communication strategies, outreach and taxpayer education and fairness in the implementation of the tax law. This requires consideration of both tax policies and tax administration.
- Are presumptive taxes a useful approach that should be used more widely
- How can political support be obtained to fund the much needed IT infrastructure to make complying easier
- What approaches have been found to be successful in African countries.
Little work has been done to tackle the challenges of taxing high net worth individuals. Some African tax administrations have formed specialist units to address these challenges, but further work needs to be done to skill up these units and most importantly ensure they are free form political interference.
There are a wide range of solutions different countries are adopting to meet these challenges and sharing of information and best practice between tax administrations will be vital to finding African wide solutions. ATAF is now providing the platform for promoting this sharing of information, homegrown tools and best practice in tax administrations.
In ATAF, we continue to promote the role of taxation and state building and understanding the social contract. Our main work here is to do compliance studies with our members. The first one was done in Rwanda and the results presented last year.
Conclusion
Until there is a global acknowledgement that economic inequality is perpetuated by among other things: non-Inclusive, inequitable and unaccountable tax systems, we will continue to talk about this global issue for years to come. We will continue to have to respond to a tax agenda that seeks to perpetuate unbalanced and unequal global tax rules and standards that in particular do not address the tax and development needs of the South.
I thank you for your kind attention.
