Modernizing tax systems crucial for development, says IMF Africa director

WASHINGTON — Helping governments with the technical work of modernizing their tax systems is a “crucial but often overlooked” part of what the International Monetary Fund does, and one which could have major benefits for the poor, according to Abebe Aemro Selassie, head of the IMF’s African Department. While the institution tends to be associated with austerity policies and is seen as a lender of last resort, this is no longer the case, he told Devex. Selassie — who is young for a director, at 51 — worked for the government of Ethiopia before joining the IMF more than 20 years ago. For him, some of the institution’s greatest impacts come from the technical assistance and training it offers governments. In 2017, this accounted for 28 percent of the IMF’s budget, worth $345 million. “Quite a lot of what we do is the really technical stuff around strengthening institutions like revenue authorities,” he said. While some might see it as “boring,” the work is “crucial” and often gets overlooked in favor of the IMF’s lending programs and the “difficult discussions we often have around the manner of policy adjustments,” he said. A big part of this technical assistance goes into supporting developing countries to modernize their tax systems — especially in sub-Saharan Africa, which receives about 40 percent of the IMF’s global technical assistance budget — so they can collect more revenue and spend it more effectively, he said. The IMF’s managing director, Christine Lagarde, has emphasized the importance of domestic resource mobilization. During June’s European Development Days summit in Brussels, Lagarde said raising domestic tax revenue would be crucial to achieving the Sustainable Development Goals, but that levels were stagnant in many developing countries, which typically collect only between 10 to 20 percent of GDP in taxes. The average for advanced economies is closer to 40 percent. Countries also need to crack down on tax evasion and avoidance by companies — recently brought into the media spotlight by the “Paradise Papers” leak, which has revealed details about politicians, wealthy individuals, and multinational companies using “tax havens” to move millions of dollars out of developing countries. Part of the assistance the IMF offers involves working with developing countries to more efficiently tax foreign companies. Speaking exclusively to Devex on the sidelines of the World Bank and IMF annual meetings last month, Selassie talked more about the IMF’s work on tax reform. Untapped tax potential Africa poses major opportunities and also challenges when it comes to tax reform, according to Selassie, who was previously country representative for Uganda, as well as mission chief for Portugal during the eurozone crisis, before taking on his current role. “In some countries we see a lot of tax potential not being collected,” he said, adding that this can be both in terms of the total revenue collected through taxes and also certain categories being underutilized. Overall, sub-Saharan Africa has increased its tax-to-GDP ratio over the past 15 years — from less than 15 percent in 2000 to a peak of 17.5 percent in 2012. Uganda has managed to raise its rate from 7-8 percent in the 1980s and 1990s to 14 percent now. However, according to Selassie, “this improvement masks a lot of variation across the region.” For example, he described the Nigerian government’s tax collection as “pitiful,” in part due to the country’s reliance on oil revenues. He also said that fragile countries and those emerging from conflict tend to have low levels of tax collection. For example, Sierra Leone, the Democratic Republic of Congo, and Madagascar have tax ratios below 15 percent. Reforming institutions The type of domestic resource mobilization recommended by the IMF depends on the specific context and is informed by lessons learned from working across “the whole gamut of the fund’s membership,” he said. For example, on the administrative side, the IMF has learned that dedicated taxpayer units can help drive revenue collection, Selassie said. “Setting up a specific large taxpayer unit can help mobilize more revenue,” he said, explaining that in many African countries between 500 and 600 companies will be contributing most of the corporate taxes, “and so creating a unit focused on those companies and monitoring them can be a very effective way of structuring your tax administration and enforcement.” Other options could include improved compliance and better management of natural resources, comprehensive tax administration reform, or administrative reforms and specific tax policy measures, the director said. Tax categories IMF staff also make recommendations to governments about more effectively structuring, administering, and collecting specific categories of taxation, from value added tax to corporate income tax and personal tax. However, corporate and personal taxation are complicated, Selassie explained, due to high levels of “informality” within the economies of much of sub-Saharan Africa. The lack of registered companies with details of employees means that “in many countries we see income tax falling on government employees,” the economist said. The IMF works with governments on ways to “capture people working in large-ish companies that have payroll,” he added. This involves a range of technical and policy reforms, including thinking through the kinds of incentives governments can offer companies to register for tax purposes. Issuing a tax on property is also a new “tax handle” the IMF is exploring, Selassie said during a session on growth in Africa at the London School of Economics on Monday. New technologies such as Google Earth could make it easier to apply the tax, which has traditionally been challenging due to uncertainties around property and land ownership, he explained. Taxing foreign companies In recent years the European Union and the Organisation for Economic Co-operation and Development have taken steps to crack down on tax evasion and avoidance by multinational companies, some of which escape paying billions of dollars by shifting profits to low-tax jurisdictions. This is particularly damaging for developing countries, which the IMF estimates lose approximately $200 billion every year through profit shifting — one-third more than the total amount received in aid by poor countries. Furthermore, $50 billion of that loss is felt in Africa alone -— mainly linked to the oil, gas, and mining sectors. According to Selassie, the IMF does a lot of work to help structure taxes — especially for the mining sector, which is a major culprit — in order to “minimize revenue losses for the country.” IMF staff also work with countries on tax incentives, which many governments offer to entice foreign investors. In reality, such incentives, including tax holidays and free zones, can lead to significant revenue loss, Selassie said. A report by ActionAid estimated that poor countries lose up to $138 billion every year through tax incentives. Furthermore, IMF research shows that the majority of multinationals would have invested in a country with or without the incentives. Cutting corruption through transparency Finally, tax reform must go hand in hand with transparency, the economist explained. “A lot of the work we do is to bring about transparency into public accounts … these public finance management reforms are very much about creating institutions and structures for accountability,” he said. This means having clear processes for tracking procurement and how money is spent. On the revenue side, the IMF requires client governments to adhere to the principles of the Extractive Industries Transparency Initiative. This global standard requires countries to publish timely and accurate information about tax and social contributions paid by companies and how this money is spent by the government, as well as information about extractive licenses awarded. The IMF is not afraid to take action when it believes transparency and accountability have been compromised, Selassie said. Last year, for example, it suspended its Mozambique program and demanded an audit be carried out to investigate $2 billion in unaccounted government loans. “Where we become aware that something has gone wrong, we ask for audits,” and can stop a program, Selassie said. Read more Devex coverage on tax reform and systems.