- Africa is behind the curve collecting tax. Some real challenges must be addressed.
- There is a lack of skills and infrastructure in Africa to meet complex issues and demands.
- Political will is needed to drive change.
- Sharing ideas and best practice is key for ensuring sufficient tax resources for the continent.
To improve domestic resource mobilisation (DRM) and help spur development in Africa it is essential to build tax administration capacity. At present the average tax to GDP ratio in Africa is 18 per cent, which is considerably lower than the OECD average of 25.1 per cent. Furthermore, the average cost of tax administration in African countries is 1.5 per cent of tax collected, compared to the OECD average of 0.9 per cent. It is clear therefore that African countries must build their capacity and do so quickly. Indeed Africa’s development agenda 2063, as well as the 2030 global SDGs, have their attainment premised on effective DRM.
However in building such capacity African countries face a number of significant challenges. These include:
- Deficiencies in domestic tax legislation;
- The granting of wasteful tax incentives often with no consultation with tax administrations and limited collaboration between those who determine tax policy, and the tax administration;
- Having Double Tax Agreements that do not reflect the interests of the African contracting State;
- Capacity constraints in the tax administration;
- Limited available technology to support processes for assessing and collecting taxes.
The pace of change in the global tax agenda also presents major challenges to many African Tax Administration Forum (ATAF) members. A particular issue is the capacity of members to address the implementation challenges these changes bring to Africa. The gap between standards and reality is making participation in global processes increasingly difficult, to the point where African countries will simply not participate, despite agreements being signed at a political level.
Africa also faces challenges in other tax areas such as the taxation of the informal sector. Many countries have very narrow tax bases and outsized informal economies, which makes taxation of this sector a daunting task.
Political support for change will be needed if African countries are to overcome these challenges. Support is needed to enact new and revised legislation, expand Exchange of Information networks in African countries and provide the funds and salary structures needed to build stronger and sustainable tax administrations.
Many ATAF members report that a major obstacle to building their tax capacity is a lack of skills to address complex areas such as transfer pricing. Dealing with such issues is both technically complex and also very resource intensive. At present, many tax administrations do not have the level of funding needed to invest more heavily in human capital, particularly in operational functions, to employ the number of highly-skilled workers required to address these issues.
Without that funding, tax administrations cannot build staff capacity in the areas that contribute significantly to domestic resource mobilisation. This includes areas such as international taxation, transfer pricing and auditing of large taxpayers. Staff in these areas are highly sought-after and it is often difficult for tax administrations to compete with the remuneration packages offered by the private sector. This leads to the loss of these skilled members of staff and makes it difficult for tax administrations to build long-term sustainable expertise.
Furthermore, African tax administrations often do not have the necessary infrastructure, such as IT systems, to effectively police the tax base and enable voluntary compliance by taxpayers. Technology and IT solutions are needed to assist tax administrations in providing quality taxpayer services which make it easier and less costly for taxpayers to comply with their tax obligations.
The release of the Panama Papers has shown the value of data analytics in examining millions of data sets. It is therefore imperative that revenue administrations move to empower themselves with the necessary IT infrastructure and capacity to conduct such in-depth data analysis.
Data and technology will also help tax administrations in understanding their tax base, how it is constituted and reflected on the tax register to ensure the right interventions are applied, in the right place and at the right time.
ATAF is assisting its members to build the capacity they need through long-term bilateral technical programmes. These programmes cover a wide range of topics, including transfer pricing, other international tax issues and exchange of information. The programmes are already having an impact with over $120 million in tax collected in under two years by a number of the countries receiving such programmes.
We now need to build on the success of this work. ATAF is expanding its capacity-building work into other areas of taxation such as VAT and the taxation of the informal sector.
We are also aware that such capacity-building must be underpinned by strong and clear legislation. We are working with a number of our members to help them introduce revised or new legislation relating to issues such as transfer pricing, interest deductibility, permanent establishments and some aspects of capital gains tax. The revised legislation is aligned to international best practice but also reflects the specific challenges faced in African countries. This, combined with the audit skills building work, is helping to increase domestic resource mobilisation and create a more certain and transparent investment climate.
Sharing of best practice and innovative ideas is also key to building capacity for taxing the informal sector, an aspect many African countries report as a major challenge. African countries are implementing many different solutions to meet these challenges and ATAF is providing a platform for the sharing of information and best practice between tax administrations so we can find solutions suitable for implementation across Africa.
In the recent past, ATAF has also commenced working in partnership with the Tax Administration Diagnostic Assessment Tool (TADAT) Secretariat to assist members in undertaking TADAT assessments. These are extremely effective in measuring the tax administration’s efficiency. This helps the tax administration identify its short-term, medium-term and long-term actions and the support it needs to carry out these actions.
Mary Baine is Head of International Tax and Technical Assistance, African Tax Administration Forum (ATAF)