Tax revenues account for over a third of GDP in OECD countries. But they account for far less in developing countries, particularly in sub-Saharan Africa, where they correspond to less than a fifth of GDP.
More tax revenue would not only help the governments of these countries function and pay for goods and services, but would open the way for other market and state reforms that would promote economic, social and environmental development.
Raising tax burdens might seem like an odd proposition to policymakers in crisisstricken OECD countries as they bid to raise revenues while keeping tax burdens as light as they can for the sake of growth. But when taxes account for 10 to 15% of GDP, a well-designed increase in tax is exactly what many developing countries need: just as an excessively heavy tax burden might crush activity, an excessively low one can starve an economy of the oxygen it needs to advance.
But how can more tax revenue be raised in poorer economies? One way is to generate more growth, but as many of the countries concerned lack the resources to administer tax, this approach may not be enough, that is, not unless efforts are made to improve the effectiveness of tax administration systems at the same time. That means strengthening the capacity and resources needed for better taxpayers’ services and enforcement, reviewing tax structures, and investing in skills and management systems needed to produce corruption-free tax systems.
This is easier said than done, of course, but improving the effectiveness and transparency of tax administration systems is nonetheless widely accepted as a key step to achieving the UN Millennium Development Goals. And because it means mobilising more domestic taxation, it can also help in smoothing efforts to open up world trade by further reducing the reliance on border taxes. In other words, channelling funds, including development aid, towards better tax administration is money well spent.
Indeed, as OECD data shows, tax/GDP ratios in sub-Saharan countries where tax administration reforms are being implemented now exceed 16.8% of GDP, which was the average for fragile and lower income countries. But to make a bigger difference, more information is needed about how tax administrations actually work and where the problems lie.
To fill this gap, the International Tax Dialogue, a global initiative based at the OECD and involving the EU, the IMF and the World Bank, among others, has undertaken a survey of 15 sub-Saharan African revenue bodies–Benin, Botswana, Burundi, Ethiopia, Ghana, Kenya, Malawi, Mauritius, Rwanda, Senegal, Sierra Leone, South Africa, Tanzania, Uganda and Zambia. The aim is to build a clear picture as to the various approaches and practices used across the continent, to identify problems and to provide policymakers with a better view of the kinds of measures that might be taken to address them. Similar work has already been carried out for the 50 middle and higher income countries of the OECD’s Forum on Tax Administration.
The good news is that all of the countries surveyed by the International Tax Dialogue are currently engaged in some pretty significant tax administration reforms, often with donor support. Nevertheless, our pilot survey has revealed some instructive trends and patterns.
Take cost, which is one of the main challenges facing tax administrators in developing countries. The cost of collection varies from 1% to 4% of the total collected in the region. Salary and related expenditures account for the largest portion–some 60- 80% of the budget. In most of the surveyed countries, investment in information technology accounts for less than 2% of total administrative expenditure. It should therefore come as no surprise to learn that most of the revenue bodies surveyed reported being dissatisfied with their existing IT systems. Efforts are being made to address this: all revenue bodies surveyed, with the exception of Burundi, indicated that they have a separate and substantive in-house IT function, and some are developing or plan to implement integrated tax administration systems for self-help services such as online registration, filing and payment.
Further investment in administrative systems would undoubtedly help improve treatment of taxpayers too. As the survey shows, all revenue bodies, except South Africa, assign identifi cation numbers ostensibly across all tax types, including customs. All personal and corporate income tax systems are based on self-assessment principles.
VAT is a feature across all countries surveyed, with a few countries using two thresholds, one for the sale of goods and another for services. In fact, indirect taxes contribute the highest proportion of revenue in seven of the countries surveyed, with direct taxes in six countries and international trade taxes in two countries. Non-tax revenues such as income from state-owned enterprises, fees and other payments for government services account for a very small proportion–about 1 to 2%–of total revenue collection. Compare this to developing countries in Latin America, where these can reach 10% or more of government revenues. Regarding enforcement, all countries believe they have adequate powers to enforce the payment of tax, with various interest and penalty regimes for similar offences applying across tax types, specifi cally for income taxes on the one hand and for VAT on the other. However, it is unclear how effective these measures are in practice: this is an area for further exploration.
Institutional arrangements are another issue which can have an impact on the effectiveness of tax administration. The revenue bodies in most of the countries surveyed follow a relatively unifi ed, semiautonomous model, meaning that they have considerable freedom to interpret tax laws, allocate resources, design internal structures and implement appropriate human resource management strategies. At the same time, they are responsible for tax, customs and non-tax revenue operations. Three of the countries surveyed are now integrating the collection of social security contributions with tax operations, a trend that is emerging in OECD countries too.
As for organisational arrangements, most are hybrid in nature. In line with current practice in tax administration, a number of revenue bodies have set up a headquarters function to provide operational policy guidance to fi eld delivery. Moreover, all revenue bodies (except Botswana) have set up a “large taxpayers’ offi ce” to administer all tax affairs of major enterprises and some individuals. Apart from Botswana and Mauritius, the revenue bodies have also created special taxation regimes for small and micro-enterprises, and six countries have set up dedicated units to manage them.
Meanwhile, all revenue bodies surveyed produce 3-5 year business/corporate plans using established planning frameworks, with clear mission statements, visions and objectives, as well as the actions to reach them, as do OECD countries.
Most of the revenue bodies are funded through parliamentary appropriations, meaning that they develop budget proposals and bid for funding just like any other government department or agency. Some countries provide their revenue body with a performance bonus, such as a percentage of the collections, which is a practice rarely found elsewhere.
As this pilot survey suggests, real efforts are evidently underway to build effective tax administrations in several African countries, which is good news for long-term economic development. However, the devil is in the detail, and a more comprehensive study is to be carried out in collaboration with the African Tax Administration Forum (ATAF) and other international institutions to paint a clearer picture of the character and particular needs of the various administrations across the region. This information will also feed into the G20-led push on tax and development. That means covering more countries, and collecting and further refi ning the data, while drawing comparisons with countries outside the region. It is a major undertaking, but if countries in sub-Saharan Africa can use the information to help them improve their tax policies and their development paths at the same time, then the task will be worth it.
Magashula, Oupa (2010), “African tax administration: A new era”, in OECD Observer No 276-277, December 2009-January 2010.
Owens, Jeffrey, and Richard Carey (2010), “Tax for development”, in OECD Observer No 276-277 December 2009-January 2010.
OECD (2011), Revenue Administration in Sub-Saharan Africa, International Tax Dialogue (ITD), Comparative Study Series.
See the International Tax Dialogue’s website at www.itdweb.org
©OECD Observer No 284, Q1 2011