African tax administration: A new era

©South African government

The launch of the ATAF marks a milestone in the continent’s quest for greater self-reliance, economic growth and social development.

Anyone who doubts the importance of tax for spurring growth and development should look no further than Africa. There, countries do not need to be convinced that tax administrations play a critical role, not just in raising funds for vital services, such as healthcare or policing, but for statebuilding and good governance, as well as for promoting economic development.

Effective, efficient and capable tax authorities able to mobilise domestic fiscal resources are essential if they are to provide governments with sustainable, domestically-generated revenue, thereby reducing the reliance on foreign investment and development aid. This will give African states the fiscal space to determine spending priorities in line with their own national objectives and socio-economic needs.

To demonstrate this conviction, 25 African tax administrations signed an agreement at a major conference in Kampala, Uganda in November 2009, formally constituting the African Tax Administration Forum as an independent legal body, with its own council, and headquarters in South Africa*.

For the ATAF, taxation is essentially about people, about the citizens of a country and the relationship they have with the state they are living in. Taxation affects all citizens, whether they are taxpayers or not. The way taxes are raised has an impact on the economically active–the employed, corporations, small business, traders and consumers. For them, raising taxes is about economic cost, the quality of service they receive as the providers of revenue and the social benefits they receive as citizens. The way taxes are spent also has an impact on the lives of citizens. Where the expenditure is seen to bring tangible benefits, providing means for the state to govern, pursue policies and provide for the social and economic needs of its people, it also plays a role in fostering legitimacy and responsiveness.

Clearly, tax administrations have the potential to be a force for development, state-building and social cohesion, making a difference to the lives of millions of Africans across the length and breadth of the continent. This is why the establishment of ATAF is a cause for hope for Africa as it wrestles with the social, economic and political challenges of the 21st century.

Strategic reasons for charting a new course

The need to mobilise domestic revenues for development has become even more acute in the wake of the global economic crisis, which has resulted in the near stagnation of development aid and greater difficulty among the smaller, poorer countries in attracting private capital flows.

For African countries, the crisis brought into sharp focus the importance of urgently addressing the structural factors that hamper economic and social development and looking for viable domestic solutions. Taking centre stage is an approach to development that aims to put control over the developmental agenda firmly in the hands of the African states themselves. Being able to rely on domestic sources of funding in the form of taxes will allow African states to reduce their dependency on official development assistance to fund development. It will give African states the room to determine their own development priorities and fund them accordingly without having to mollify donors, who attach conditions to development aid that often reflect the interests of the donor rather than the recipient.

Several studies have indicated that developing countries have the potential for greater domestic resource mobilisation. The 2005 United Nations Millennium Project estimated that these countries could increase their domestic revenue by about 4% of GDP over the next 10 years.

Challenges include the narrowness of the tax base, which limits the opportunity for collecting additional revenue. In many countries, the largest share of tax revenue is generated from natural-resource taxes, such as income from production-sharing royalties and corporate income tax on oil and mining companies.

The extent of the informal, or shadow, economy in developing countries also hampers efforts at broadening the tax base. Shadow-economy activities range from small-scale informal traders, such as hawkers and unregistered small businessses, to registered businesses that fail to declare profits and criminal syndicates that profit from activities such as drug trafficking and the smuggling of counterfeit goods.

A further challenge for tax administrations is the loss of revenue from assets that are held offshore, typically by wealthy individuals who make use of tax havens. Data on revenues lost to developing countries from evasion, avoidance and the use of tax havens is unreliable, and estimates vary greatly. Most estimates, however, exceed the level of aid received by developing countries–around $100 billion annually.

Significant revenue leakage also occurs as the result of illegitimate shifting of profits to jurisdictions where lower rates apply through transfer-pricing manipulation and by resorting to a host of sophisticated and advanced tax planning and avoidance measures.

A fact sheet compiled by the European Network on Debt and Development puts the illicit capital flight from developing countries at anything between $500 and $800 billion per year, with commercial tax structuring, criminal activity and corrupt money passing hands contributing 64%, 35% and 5% respectively. More simply put, it has been said that for each dollar that goes to the South in terms of aid, more than seven dollars come back to the North through illicit proceeds.

Forum for the future

So what can ATAF achieve? The first aim is to maintain its long-term objective to work for better tax administration in Africa, for only then will African countries be able to meet their sustainable development and poverty-reduction goals and enhance good governance on the continent. To underpin this, ATAF will work to set up an African Tax Centre as a base for multilateral tax work in Africa, gather intelligence, organise high-level conferences and regional seminars and develop best practices through experience-sharing activities.

A capacity-building programme for its members is already underway. ATAF also aims to stimulate continental and international dialogue on the issues affecting African tax administrations and to foster links with academic institutions in Africa with regard to tax education, skills development and research.

Above all, ATAF’s mission is to mobilise domestic resources more effectively and improve the accountability of African states to their citizens. Key subjects for future discussion are the removal of incentives granted to investors and issues related to exemptions of aid-funded goods and services that weaken the tax system, create considerable cost and complications, and open the way to corruption. Equal treatment of taxpayers is central to boosting the credibility of revenue administration, simplifying tax systems, broadening the tax base and encouraging voluntary compliance by local and multinational taxpayers.

A solid organisational infrastructure for ATAF will be needed, including a general assembly comprising all member states as the highest decision-making body of the Forum. The dates for the first general assembly will be decided at the first meeting of the ATAF Council in April 2010.

ATAF is an important investment and will be funded through membership fees and donor support for capacity development and projects. In the initial stages, donors are also committed to meeting the funding gap of about $2 million over two years. The official launch of ATAF in Kampala clearly demonstrates that African countries have the commitment and will to take the necessary steps towards capacity-building, enhanced tax administration and good governance.

Taxation is the lifeblood of development, and an African voice is a critically important addition to the global tax arena. ATAF is a concrete expression of what developing countries can do–and are doing–to mobilise their domestic resources and meet development goals.

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 * The tax administrations that signed the agreement are those of Botswana, Chad, Egypt, Eritrea, Gabon, Gambia, Ghana, Kenya, Lesotho, Liberia, Malawi, Mauritania, Mauritius, Morocco, Namibia, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, South Afria, Sudan, Uganda, Zambia and Zimbabwe.©OE

  ©OECD Observer No 276-277, December 2009-January 2010

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