Along with a colleague who is a specialist on Latin America, I recently attended a meeting in Africa on African tax issues.
After a couple of days of discussions, my colleague told me that he was surprised that so much attention had been paid to company taxation. By contrast, he said, in Latin America there was more focus on extending the tax net to more individuals and small enterprises. His observation was both acute and accurate. Tax policy discussions in Africa do focus heavily on taxing the private sector. In African tax administrations, there is not a great deal of interest in extending the tax net to small taxpayers.
Why this difference between Africa and Latin America?
There are several reasons. One is that the “tax take" – the ratio of taxes to GDP – is on average lower in Africa than in Latin America. African revenue authorities are that much more pressed to raise revenue. The larger organised private sector is then the place to go. Investing resources in trying to obtain small amounts of revenue from a large number of small taxpayers will pay off, if at all, mainly in the long term.
Another reason is that sub-national revenue systems tend to be better developed in Latin America than in Africa. These are the systems that most effectively tap in all the revenue potential of small taxpayers. Few senior African tax administrators have experience of revenue raising for sub-national governments. They talk about what they know, i.e. taxing at national level and therefore mainly taxing companies.
The third reason is the most significant for policy purposes. Much of sub-Saharan Africa is in the middle of a resource extraction boom. Quite a number of African countries have recently become – or will in the near future become first-time exporters of oil, gas or minerals of various kinds. The new investments that have been made in recent years are only beginning to pay off.
At the same time, large transnational corporations specialising in finance or in telecommunications are an increasingly prominent feature of the African business scene. African revenue authorities know that this is where the money lies. If they are to achieve their targets of raising the “tax take", they will need to tax large specialised transnational corporations more effectively. We know that in some cases, especially in the mining sector, levels of tax evasion are scandalously high.
What does this imply for aid donors and international organisations who are seeking to support domestic revenue mobilisation in Africa?
We know that there are quite a lot of new donors in the revenue field. Indeed, there are probably too many acting independently. They are likely to exacerbate familiar problems: too many competing small revenue projects, and pressures to reshape African tax systems in too many different directions. People who are very familiar with the field tell me that it is now too late to prevent this rather inefficient proliferation of aid activities. But the analysis presented above does suggest some ways in which aid donors could, even acting individually, take some strategic decisions that would at least alleviate the problem.
Looked at in long-term perspective, there seem to be two major, distinct weaknesses with most sub-Saharan African revenue systems. The first is the great challenges they face in effectively taxing large specialised transnational corporations. They need staff who are familiar with specific business sectors: mining, oil, gas, telecommunications, finance, insurance, etc.
Donors should no longer see their task as building up the general capacity of African revenue authorities. They need to focus much more on the capacity of those authorities to tax specific sectors, which currently contain so much of the potential additional tax revenue and so much of the capacity to avoid paying that revenue. This is a matter above all of building up and retaining specialist cadres of staff.
The second weakness of African tax systems – and opportunity for donors to contribute – lies at the subnational level.
For the reasons I give above, it seems unlikely that many national level African tax authorities will be able to put significant effort or resources into developing sub-national revenue systems. In the medium term, the potential for establishing effective sub-national revenue systems is substantial. In particular, satellite imaging and GIS (geographic information systems) can be used to establish effective property taxation systems in larger urban areas. But the political impetus to do this in most of sub-Saharan Africa is not strong. Donors could very helpfully give a push here – provided it is a consistent, long term push.
The resources, experience, and systems needed to improve the capacity of national tax authorities to tax large specialised transnational corporations are very different from those needed to establish effective subnational taxation systems.
Donors need to think through what they really can contribute when they talk about strengthening domestic resource mobilisation in sub-Saharan Africa.