Accountability and strong laws are key to effective tax collection in Africa

JOHANNESBURG — Citizens are more likely to pay taxes in countries where government funds can be accounted for, panelists said during a media training event hosted by the African Tax Administration Forum in Johannesburg, South Africa. When citizens can see that their tax payments haven’t been spent on building roads and schools, but instead have been pocketed by politicians and their associates, they are more likely to dodge taxes.

Calls for African countries to increase domestic funds to fuel their own development are growing as the future of international development aid remains uncertain. Africa is estimated to lose at least $50 billion through illicit financial outflows every year, according to the report of the High-Level Panel on Illicit Financial Flows from Africa established by the United Nations Economic Commission for Africa. This can include tax avoidance, tax evasion, and corruption, among other activities.

But many African nations have weak tax laws and collection systems which prevent them from roping in tax revenue. There is also often skepticism from citizens who wonder whether governments are putting the funds to good use.  

“It is that social contract where citizens pay in return for the rendering of social services, like infrastructure. The quality of that spending has a lot to do with whether citizens are tax compliant or not,” said Logan Wort, executive secretary of ATAF. “Tax works in countries where it is either fair, or at least perceived to be fair.”

For countries with high tax rates, like those in Europe, the state provides citizens with services such as free quality health care, free university tuition, and subsidized day care. Denmark has the highest tax-to-gross domestic product ratio, according to the Organization for Economic Co-operation and Development. But in many African countries, citizens pay taxes but still have to pay for university, drive on roads riddled with potholes, and pay for private schools because the public schools are substandard, leaving them to wonder about the rationale behind paying taxes.

“If the money gets spent on luxury 4x4s from Germany, instead of roads and electricity, it means something is wrong. What you want is people to see where the tax money goes,” said Bernd Schlenther, ATAF technical adviser. The Australian Taxation Office, for example, provides taxpayers, on their tax returns, information on how the money was spent in the previous year.

Laws and processes

Beyond improving transparency of spending, countries can also update their laws and tax collection processes. ATAF ran a program in two African nations that brought the countries between $140-150 million in revenue last year, just by fixing a couple of multinational company tax rules, said Wort. Multinational corporations contribute about 30 to 60 percent of revenue in countries that ATAF works with, he said.

“By fixing simple rules in your tax policy, you can collect that money that would have naturally flown out because you did not have the rules in place,” he said.

For instance, African nations are missing out on tax revenue because of number games played by companies that lead them to benefit financially from the ability to deduct interest charges from their taxes. Companies can make an intercompany loan to another arm of the company and charge above-normal interest. Profits are then reduced in one arm of the company, in a higher tax jurisdiction, and the other arm, in a lower tax jurisdiction, sees an increase in revenue. This allows the company to be taxed on its profits at a lower rate.

Because tax systems are based on self-assessment and self-reporting, one of the first steps to encourage compliance is to ensure that tax systems are simple and user-friendly. This also reduces compliance costs.

“If you have complex legislation, people don’t understand it and it’s going to be difficult for them to understand the taxpayer obligation. What you want is legislation that is as simple as possible,” said Schlenther.

Transparency is needed not just in how governments spend money, but it is also important for the tax authority to demonstrate that it is treating all taxpayers equally “whether you are a member of parliament or a bricklayer,” he said.

Maintaining continuity is also critical to ensure that investors are drawn to a country. For instance, if a government has agreed upon a tax framework for the mining industry, investors need to know that those laws will remain consistent throughout the lifetime of the project.

Editor’s note: The African Tax Administration Forum facilitated Devex's travel and logistics for this reporting. However, Devex maintains full editorial control of the content.