Taxes are essential to development. Governments use the collected tax revenue to finance infrastructure that supports socioeconomic growth. Africa is no exception. The continent has vast development needs and has implemented ambitious projects to meet them. As a result, it requires substantial funds. Unfortunately, inadequate tax collection has been hampering African countries’ efforts to increase their tax-to-GDP ratio and to raise the necessary funds for development. On the positive side, the digital transformation the continent is currently undergoing is reshaping the tax landscape. Indeed, new technology supports tax efficiency by building the revenue authorities’ capacities to enforce compliance.
How technology supports tax efficiency in Africa
The average tax-to-GDP ratio in Africa in 2021 was 15.6%. This figure is slightly higher than the minimum 15% recommended by the World Bank to support economic growth. However, it hides significant disparities. Indeed, middle-to-high income countries have much higher ratios. Tunisia takes the lead with an impressive 32.5%. Conversely, the ratio of lower-income countries does not exceed 10%.
Barriers to adequate tax collection in Africa include a large informal economy, weak tax administrations, tax evasion, and narrow tax bases. Limited access to technology is also an important factor. Technology helps build the tax administrations’ capacities by facilitating the identification of the taxpayers and supporting tax compliance, the World Bank states. Indeed, it can be used to collect information about the taxpayers and the type of tax to be paid. Furthermore, it enables the cross-checking of tax returns against the data gathered by the system. As a result, it allows for the identification of discrepancies and possible tax evasion. Finally, it makes tax compliance quicker, easier, and cheaper for taxpayers and tax administrations alike.
Over half of African countries have now taken steps to digitalize their tax systems. In some of these countries, results have been encouraging. The Social Science Research Network published a study pointing to the fact that technology-driven tax systems have indeed have a beneficial impact on tax collection. In Rwanda and Kenya, for example, the Electronic Single Window System and the iTax platform have improved efficiency, compliance, revenue collection, transparency and accountability, reduced corruption, and enhanced the taxpayers’ experience.
Harnessing the tax potential of the digital sector through technology
In addition to the benefits mentioned above, technology, and more specifically RegTech, may also assist tax administrations in enhancing their data-driven policymaking capacities. Indeed, these solutions enable the more effective gathering and analysis of the relevant data. It is crucial for revenue authorities to build their data capacities since data has the potential to optimize domestic revenue mobilization (DRM).
Data-driven decision-making is precisely what GVG offers them. Indeed, GVG’s regulatory technology supports tax efficiency in the digital sector by providing the authorities with the data they need. The digital sector, especially telecommunications and financial services, holds great promise from a tax perspective. Consequently, by improving tax compliance within the sector, our solutions contribute to stimulating DRM.
Many African governments therefore applied taxes to telecommunications and digital financial services like Mobile Money. However, the dynamism and complexity of this sector makes it challenging to oversee. This undermines the authorities’ ability to effectively collect the much-needed tax revenue it yields. Ensuring tax compliance in the digital sector implies the ability to trace the communications and financial transactions made within it, so that the related tax revenue can be collected efficiently.
By connecting regulators directly to the digital sector, GVG’s RegTech solutions give them full visibility over tax revenue-generating events, thus enabling comprehensive tax collection. For instance, the Ghana and Uganda Revenue Authorities, namely GRA and URA use GVG’s data-driven revenue assurance platforms to increase revenue collection from the telecom sector. In Ghana, the platform connects the GRA to the telecom operators’ core systems in a non-intrusive manner. This has led to a 36% increase in telecom tax revenue from 2021 to 2022 and to an 18% increase in taxes paid by the telecom industry in 2021, compared to 2020. (Click here to find out more about how GVG helps drive tax compliance in the Ghanaian telecom sector.)
Optimizing the effectiveness of digital tax systems in Africa
Despite some success stories, like those of Kenya, Rwanda, Ghana and Uganda above, digital tax systems often yield mixed results. According to a study published by the International Monetary Fund (IMF), e-filing did promote the timeliness of payments in Eswatini. However, this only happened once the tax administration made it mandatory. And even then, adoption by taxpayers only reached 41%. Ethiopia is a similar example. There, the mandatory use of electronic fiscal devices may have significantly improved tax compliance, but it also created non-negligible costs for some taxpayers. Moreover, the tax revenue gain very much depends on the tax administration’s capacity to sustain it through appropriate risk management.
These mixed results indicate that it is crucial for taxpayers and tax officials alike to buy into the new technology. The IMF’s study also highlights the need for tax administrations to implement a strategy to support operations and ensure sustainability. Another factor that negatively impacts technology’s effectiveness in the African tax context is inappropriate infrastructure. Even the most advanced technology requires a steady supply of electricity and reliable Internet connection to function optimally. We can also add to this list the need to create a regulatory framework enabling the exchange of data between tax administrations and supporting data security.
Empirical studies show that technology can improve tax efficiency in Africa. The outcome of GVG’s technological partnerships with the GRA and URA back up this conclusion. However, technology’s full potential remains to be tapped, due to insufficient adoption, infrastructure, operational strategy, and regulation on the part of some tax administrations. Governments and tax administrations therefore need to create the right conditions for technology to live up to expectations in terms of DRM.
Click here to read more about boosting domestic revenue mobilization in Africa.