Achieving development through the realization of the Sustainable Development Goals (SDGs) requires significant investment on the part of African countries. Taxation is an essential source of revenue for governments which, in addition, has been identified by the World Bank as being essential to long-term development. However, in many cases, it fails to live up to its revenue-generating potential. This article discusses measures governments and tax administrations may want to implement to more efficiently mobilize tax resources to ensure sustainable development on the continent.
Considering the positive relationship between taxation and development, it seems paradoxical that low-income countries, whose need is the greatest, tend to collect less tax as a percentage of GDP compared to higher-income countries. According to the World Bank, a tax-to-GDP ratio of 15% or more is a prerequisite for economic growth. But, although the average ratio in Africa exceeds this desirable minimum, with 16.6%, many African countries, especially in the Sub-Saharan region of the continent, have not yet reached the 15% mark. These countries therefore cannot benefit from the massive benefits of improved tax governance: up to 110 billion USD in new tax revenue over 2020-2025, as stated in a UNECA (United Nations Economic Commission for Africa) study mentioned in the OECD’s Revenue Statistics for Africa 2021 report.
World Bank economist Oyebola Okunogbe argues that tax revenue leakage in developing nations, including African countries, is due to the following three issues: lack of data, an administration in dire need of modernization and digitalization, and a regulatory gap. The governments of African countries wishing to increase their tax collection and consequently their tax-to-GDP ratio, therefore, need to put measures in place to stem tax revenue leakage and foster tax compliance. This would allow them to mobilize more revenue for development projects. Fortunately, they have two strong allies in this endeavor: regulation and technology.
Addressing the regulatory gap requires… an appropriate regulatory framework. Such a framework lays the foundation for tax compliance and effective revenue assurance. Moreover, to the positive relationship between tax compliance and GDP, we can add the fact that, from a general perspective, a robust regulatory framework has the capacity to boost GDP growth by more than 2% on a yearly basis. As for technology, and more specifically regtech (aka Regulation Technologies), it can help resolve all three issues highlighted by Oyebola Okunogbe. Indeed, regtech solutions provide tax authorities with the data they need to be able to efficiently fulfill their collection remits. Secondly, they strengthen the authorities’ administrative capacities by automating and streamlining processes, as well as limiting human error. And thirdly, they support the bridging of the regulatory gap by facilitating data-driven decision-making for governments.
Global Voice Group (GVG) develops and provides regtech solutions that enable tax administrations to widen their respective country’s tax base by harnessing the fiscal contributions of key economic sectors, like telecommunications, digital financial services, and online gambling. They do so by providing the government and regulatory agencies with reliable, real-time to near-real-time data on communications and transactions, and by enhancing and modernizing the tax administrations’ capacities.
Some African countries, like Rwanda and Ghana, have embraced digitalization and can be legitimately described as pioneers when it comes to the adoption of regulation technology. The telecom regulators of both countries, RURA and NCA, implemented some of GVG’s regtech solutions, which allowed them not only to enhance the governance of the telecom and digital financial services, thanks to the resulting improvement in their decision-making capacities but also to secure additional revenue from these sectors.
Appropriate technologies and regulations can effectively support the governments of African countries in widening their tax base, thus improving tax collection and increasing revenue for development. Moreover, their implementation brings about another benefit of great value: financial inclusion. Indeed, an increase in the number of people included in the formal economy is not only good news when it comes to revenue mobilization, but represents also in itself an important step toward sustainable economic growth.
Do you want to read the interview with James G. Claude that was published in this special edition of Regtech Africa Magazine? Click here.