Tax transparency standards, as defined by the Africa Initiative, were launched in 2014. Since then, they have proved to be an effective tool in the fight against tax fraud and illicit financial flows in Africa. As a result, they have enabled the generation of additional government revenue. However, fraud persists, aided by the increased digitization caused by the pandemic, and tax administrations in need of modernization. Furthermore, the inadequacy of the tax base in many African countries adds to the tax gap. That is why an increasing number of countries are seeking to improve tax transparency, to boost domestic revenue mobilization (DRM).
Tax transparency in Africa: the current situation
Through the promotion of tax transparency and the related exchange of tax information between international revenue authorities, African countries have collected additional revenue to the value of €1.69 billion since 2009, according to the OECD’s Tax Transparency in Africa 2023 progress report. However, the OECD estimates that the continent loses US$60 billion each year due to illicit financial flows. Put to good use, this yearly amount could help propel African countries towards achieving sustainable development.
The increased digitization has compounded this issue. Indeed, it makes it challenging to determine not only the appropriate jurisdiction for tax collection, but also the value of digital goods and services, says the African Union. As a result, its impact on tax revenue collection on the continent has been a negative one. Therefore, if Africa is to achieve Agenda 2063, which aims to transform the continent into the “global powerhouse of the future”, it must urgently boost its tax revenue. To do so, the tax regime gaps need to be addressed, says Logan Wort, ATAF Executive Secretary, with an emphasis on domestic taxes.
Widening the tax base to improve DRM
Looking at recent news, Africa’s drive to optimize DRM is clear. Indeed, there are numerous reports of countries implementing new taxes on key economic sectors – or planning to do so – to widen their tax base, as Logan Wort recommended it. In Uganda, for instance, the revenue authority (URA) has announced its intention to leverage the tax potential of the mining and energy sectors, among other high-potential industries, to reach its 2023/24 revenue target. Kenya, for its part, has introduced VAT on digital supplies as part of a set of reforms aiming to broaden the tax base and promote compliance in the country. This initiative has received the World Bank’s approval, says the Business Daily.
Nigeria, on the other hand, decided to focus on strengthening its tax structures rather than implementing new taxes. Indeed, experts advised the Federal Government to implement solid tax structures and to reform trade in some key sectors, to improve tax collection and administration, and thus bridge the country’s significant tax gap. Interestingly, the government’s focus seems to be on generally alleviating the tax burden on some industries, as The Independent indicates.
African countries are also aware of the necessity to bring the informal sector on board to improve DRM. Furthermore, there are more and more examples of collaboration between tax administrations and government agencies to help identify new taxpayers. The rationale behind these DRM-boosting efforts in Africa is to secure funds for development and for the provision of quality public services like healthcare and education. Kenya, for instance, stresses the importance of effective DRM when it comes to achieving universal healthcare, The Standard reports.
However, once the tax base has been widened, and the digital ecosystem included, tax administrations need to be properly equipped to collect the revenue in a comprehensive way. This means adopting digital technologies that will provide the revenue authorities with one of the building blocks of effective DRM: data.
“Technology is the future of tax administration.”
Currently, access to accurate and reliable data is still lacking in Africa. But some forward-thinking countries, like Rwanda, Ghana and the Republic of Congo, have already chosen to embrace technology as a proven way to gather the data they need to drive tax compliance and revenue assurance. Au Ghana, GVG’s RegTech solutions currently support the revenue authority, the GRA, by connecting it directly with the telecoms sector, with positive results on tax collection.
GVG has been providing data-driven RegTech solutions to African governments and regulatory authorities since 2005. We therefore cannot but agree with the statement John Musinguzi, Commissioner General of URA, made at the 50th East Africa Revenue Authorities Commissioner General meeting: “Technology is the future of tax administration”. Indeed, technological tools have been proven to increase efficiency, accuracy, and compliance in the tax collection process. At this meeting, the countries of the East African Community agreed to leverage technology and data to promote effective DRM, as reported by New Vision.
Nigeria too is planning to leverage the potential of technology as a way to centralize tax collection in the country, says All Africa. President Bola Tinubu’s special adviser on revenue explained that the rationale behind the use of technology was to have one unique platform connecting all Nigerian revenue collection authorities, for improved visibility and collection.
Not only can technology help revenue authorities access the data they need to improve tax collection, but it can also help identify taxpayers by supporting the creation of digital identities. A significant portion of the African population does not have a form of identification. This makes it challenging to bring these individuals into the tax net. Technology helps bridge both the identity and the tax gap, by providing unidentified citizens with a digital identity. It also directly and securely connects revenue authorities to these new taxpayers.
African countries are clearly stepping up their tax effort, with a focus on DRM, to secure much-needed funds for development. It is also clear that technology is playing an increasingly important role in building the capacities of African tax administrations. Africa may still have a long way to go to realize its ambitious goal to become a “global powerhouse”. But we believe that technology, including our own solutions, will be there to accompany it every step of the way.
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