Tax is a controversial topic in Africa, given the continent’s low tax collection rates coupled with growing needs as public officials seek resources to keep the wheels of government turning.
Measures offering relief from the pandemic have exacerbated revenue woes for governments.
Tax is one of the revenue streams that governments battle to get right. Most countries have a small tax base, a lack of infrastructure for efficient tax collection, and suffer from tax evasion by citizens who believe that they are not getting value for money. Addressing the problem often amounts to ad hoc measures that have unintended consequences for the broader economy and act as a deterrent to investment.
With the economic pain brought on by the COVID-19 pandemic, the issue of government revenue is under the spotlight as the fallout from lockdowns and other challenges continues into 2021. The palliative measures put in place to offer relief to companies and individuals affected by the pandemic have exacerbated revenue woes for governments. This has led to concerns that this will result in more aggressive tax collection measures as they try to recoup their losses.
How governments can raise more income
The likely direction to be taken by tax authorities on the continent in a post-pandemic era was raised in a recent webinar hosted by legal network LEX Africa and the South Africa-Nigeria Business Chamber. African tax expert, Kunle Olatunji, said there are already reports of increasingly aggressive tax collection methods and harassment of companies as officials are pushed to meet revenue targets.
Olatunji said that new taxes should be expected too. Ghana, he said, had introduced a COVID-19 relief levy and it is expected that digital services and carbon taxes can be expected, for example, as well as increases in other areas such as excise duties.
It is likely that more multinational companies could be named and shamed over tax issues, sometimes unjustifiably, as the authorities seek to find any loopholes business may have found to evade tax.
The South African company, MultiChoice, for example, is facing such a problem in Nigeria over what the tax obligations are of services rendered to a subsidiary by the company headquarters. The tax authority claims that it owes a massive $4.38 billion in alleged historical taxes. MultiChoice, which denies culpability, nevertheless had to pay 50% of the amount to a tax tribunal just to get its appeal heard. It says that the tax authority put the issue in the public domain even before approaching them? on the matter.
Trend to strongarm multinationals
Given a similar situation with another big investor in Nigeria, the mobile phone company, MTN, many believe that the tax authorities there are targeting foreign investors and trying to strongarm money out of them to enable the government to pay its bills.
Nigerian tax lawyer, Ivy Osiobe, from the law firm, Giwa Osagie & Co, said that the Federal Inland Revenue Service (FIRS) was not intentionally intimidating investors, but the country’s low tax base means that existing taxpayers are very visible, making them easy targets. More than 60% of the country’s tax comes from one sector – oil. Nigeria has the lowest tax-to-GDP ratio in Africa at just 6% despite being the biggest economy on the continent. Efforts are under way to build the tax base, but progress is slow.
The plan seemed to have suffered the fate of many grand Pan-African plans and ended up gathering dust. As a result, the continent still imports more than 90% of its medicines.
Broken trust between government and citizens
In Nigeria, as in other countries, the trust between government and taxpayers has been broken. Citizens believe that the state offers them little and squanders the tax that it does get.
This sentiment is growing in South Africa in the wake of a raft of reports of state corruption relating to COVID-19 funds and government officials generally. Talk of tax boycotts is getting louder. The country has one of the highest rates of company and personal tax rates in Africa at more than 40%.
In Kenya, the government offered many palliative measures in the wake of COVID-19, but this has amounted to “giving with one hand and taking away with the other”, according to the Kenyan lawyer, Nazima Malik, from Kaplan & Stratton, who spoke at the tax webinar. While the government had reduced the corporate tax rate from 30% to 25% and VAT from 16% to 14%, among other pandemic-related measures, it had simultaneously imposed new costs including a withholding tax on non-residents and on marketing services to companies outside Kenya and removed certain exemptions. In 2021, even though COVID-19 was still present, some of the earlier palliative measures were reversed, including the VAT and corporate tax rate reductions. “There was an outcry from the corporate sector, particularly because recovery was not yet in sight.”
The emergence of tax avoidance strategies
Transfer pricing and base erosion by multinational companies is the big issue on the table. These are, in essence, defined as tax avoidance strategies to exploit gaps and mismatches in tax rules in order to artificially shift profits to low or no-tax locations.
UNCTAD's Economic Development in Africa Report 2020 says that illicit financial flows rob Africa of $88.6 billion each year, almost equal to official development assistance and foreign direct investment flows combined. The African Tax Administration Forum says that a significant 60% of these flows are attributed to the business sector, involving mostly legal commercial entities. The rest is accounted for by government corruption (5%) and organised crime (35%).
In most countries, multinational corporations, which are believed to be at the heart of the problem, are the biggest taxpayers by far, given the small size of the private sector. This makes the impact of tax avoidance measures significant for those economies. The issue has worsened the already existing mistrust between business and government in Africa. Tax experts say that investigation of transfer pricing and appeal outcomes tend to be weighted in governments’ favour, often to the detriment of law-abiding companies.
The African Union is more focused on stemming the tide of illicit outflows than improving revenue generation in member states. Low tax-to-GDP levels in Africa – all countries in sub-Saharan Africa are below the OECD average of 34.9% (2019) – show the potential for tax revenue to grow. Olatunji said governments tend to think short term when looking at tax, focusing on extracting revenues rather than addressing the issue holistically, including creating a more business-friendly environment that would unlock more investment and job creation over the long term. “There is a big need for strong reform in Africa’s tax environment.”