Africa is becoming more and more connected through globalization. Ports and highways are being built and capitals are slowly industrializing their suburbs. Trade in Africa was booming until Covid-19, with North Africa reaching 78% of GDP volume, South Africa 55% and Sub-Saharan Africa 48%. At the same time, transactions are more complex, business more structured and information increasingly detailed.
To contend with the coming wave of investors, African tax and customs authorities have to improve their operational performance—this is a fact.
This article is the first part of a series on the digital transformation of taxation and trade in Africa, during this unique period of recovery from Covid-19, and emphasizes the importance of digitalizing tax administrations. Multinational companies have reimagined their operating models and digital tools have allowed an unprecedented wave of profits that governments could capture, but tax and customs authorities still need to achieve optimal taxpayer service and operational excellence.
We believe that Africa is a laboratory of reforms and initiatives that can inspire fiscal regulators and tax practitioners in reinventing the roadmap of digitalization of tax. Through looking at existing African projects, we will explore the objectives, the challenges and the opportunities of this Tax Administration 3.0.
Modernizing Fiscal Governance in Africa
Accelerating Adoption of International Public Sector Accounting Standards
The International Public Sector Accounting Standards (IPSAS) have been issued to strengthen public financial management through high-quality financial reporting. The Standards aim to become the cornerstone of fiscal governance by rebuilding trust in revenue authorities, as stated by the IPSAS Board Chair Ian Carruthers in 2019:
“IPSAS adoption and implementation therefore represent fundamental steps for governments to take, not only to increase transparency and accountability to their citizens and stakeholders, but also to inform effective decision making, so contributing to fiscal stability and sustainability.”
The benefits of IPSAS adoption are numerous. They help ensure:
- increased transparency of operations and management;
- better understanding of performance;
- greater accountability in resource utilization;
- improved financial information to support governance;
- efficient management of assets; and
- better decision-making.
Despite these benefits, there is wide variation in the rate of progress made with IPSAS adoption. The International Federation of Accountants (IFAC) reports slow progress in Africa for 2022, with three countries (Mauritius, Nigeria and Tanzania) having fully adopted, 17 countries partially adopted, and eight countries not having adopted the Standards.
The Association of Chartered Certified Accountants (ACCA) in 2017 reviewed the challenges and success factors for five African implementing countries—Ghana, Nigeria, South Africa, Tanzania, Zambia and Zimbabwe. If all these countries consider IPSAS adoption as an important part of their public financial management reform, they generally faced the same issues that progressively delayed or hindered the Standards’ implementation—inconsistent fiscal legislation, governance weaknesses, poor accountancy capacity, IT system deficiencies, lack of processes, tools and internal controls, and inadequate or missing documentation.
A more recent study has made similar conclusions for Africa, acknowledging that the continent was continuously plagued with an “in progress” mark despite many years of implementation, while countries who fully introduced the Standards still faced implementation deficiencies and financial misstatements.
Necessary Review of the Revenue Administration Model
As the World Bank DataBank tends to indicate, tax revenue as percentage of gross domestic product (GDP) is unequally distributed in Africa, with the Southern Africa region now exceeding 20%, while the rest of the countries stagnate below 15%. There is progress in the tax revenue collection in Sub-Saharan Africa from 2009 to 2020, but this is out of proportion with the 40% growth of the regional GDP in the same period. There is still a margin here to close the tax gap and expand the tax base: however, according to the Organization for Economic Co-operation and Development (OECD), the capacity of tax administrations, and tax morale (or willingness of people to pay taxes), are also strongly linked to the level of tax revenues.
The capacity of tax administrations has historically been personified by the revenue administration model (also called the “revenue authority” model), considered an efficient improvement to public financial management. However, the success of the model was challenged in 2006 in light of the lack of objective analysis proving that countries with revenue authorities performed better than those without.
The question was then addressed in 2010 with the introduction of performance management techniques at both strategic and operational level of revenue authorities, while increasing the focus on management systems: “Without such a system, the achievement of organizational goals and objectives will be jeopardized and the accountability and transparency of an effective tax administration will be lacking.”
Today, the lack of technology within tax authorities is pointed out as a key reason for poor fiscal performance in Africa. In particular, digital technologies appear to be deployed in a fragmented way and for “taxpayer facing” activities, rather than for internal control purposes.
Big data and automated systems are now seen as unexplored solutions for African tax authorities to foster tax revenue collection.
Africa and the Next Wave of Tax Administration Digitalization
The fourth industrial revolution, “Industry 4.0”, is centered around the manufacturing industry with connected machines, optimized supply chains, autonomous equipment and connected devices, known as the Internet of Things or IoT.
Whenever Industry 4.0 is applied to manufactured goods in cross-border trade exchanged through the connected supply chain, it transforms into Trade 4.0. Trade 4.0 brings an additional challenge to governmental institutions, namely the customs administration, in charge of securing and facilitating trade.
The role of the customs administration is to manage the movement of merchandise with the objective of securing the flow from terrorist attacks and guaranteeing the safety of the population, supporting socioeconomic development through revenue collection and eliminating the risks of tax and duty evasion. The core system used by customs to collaborate with other governmental institutions, including the tax administration authority, is the electronic single window.
As defined in the UNECE Trade facilitation implementation guide a single window is a collaborative platform used by the economic operator with a single data submission. The single window requires substantial digitalization of the different participating administrations in order to optimize the end-to-end process. Increasing digitalization is calling for a new model for all the participating agencies and specifically for the tax administration authority. The application of the new model to the tax administration authority leads to a more seamless process by reducing the tax burdens.
The objective of the new model is to move from the siloed and paper-based approach towards a more effective and efficient tax administration to eliminate “persistent tax gaps, large amounts of uncollected tax debt and continuing, and in some areas growing compliance burdens.” (OECD, 2020) .
The Future of Digitalization
Currently tax administrations’ modus operandi is described as working on third-party information exchange. An example of third-party information exchange is the collaboration of tax administrations with customs administrations as detailed in the SAFE Framework of Standards. Collaboration can go beyond the national borders through the customs-to-customs partnership with automated exchange of information.
Furthermore, digitalization of value-added tax (VAT) invoices, online cash registers and risk management is a tool that is increasingly being used by tax administrations, besides the standard e-filing, e-payment and online communication. However, there is more to come, and the digitalized tax administration should evolve towards a model that will be based, according to the OECD, on identifying in a unique manner the taxpayer through digital ID, allowing gains in efficiency, transparency and accountability.
The citizen-centered administration improves citizen satisfaction and trust in government through a common access point named the service center. The service center is one of the means used by the administration for the application of taxation rules and for improving compliance through guidance.
A digitalized administration necessitates a new set of expertise, including compliance management, customer service, and data analytics skills, thus there is the need for a specialized recruitment and training process for the tax administration.
Finally, digital capacity building requires a new governance framework constituting the essence of the tax administration new model based on public–private dialogue (PPD), the right for the taxpayer to appeal, and data privacy, in addition to a clear segregation between the setting up of the tax policy and the administering of the tax policy.
Success Stories in African Administration Digitalization
On March 21, 2018, the member states of the African Union meeting in Kigali signed the Agreement Establishing the African Continental Free Trade Area, commonly known as the AfCFTA.
Digital tools are being developed by the AfCFTA comprising a payments system, the Pan-African Payments and Settlement System (PAPSS), allowing for payments of intra-African trade in national currencies, thus boosting the traceability of the cross-border financial transactions. Many digital tools will follow, enhancing the trade of goods and taxation, like the Certificate of Origin (COO exchange) platform.
However, embracing the AfCFTA requires readiness by the African trade, tax and customs administrations to collaborate through a regional single window which has prerequisites such as the requirement of having existing national single windows centralizing trade and taxation information, thus becoming the vectors promoting seamless collaboration, traceability and transparency.
The next articles in this series will continue the theme of considering the digitalization of trade and taxation in Africa, with a look at improvements in tax administrations and the methods now being used to achieve them in several African countries.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Anthony Assassa is an Associate Member of the Chartered Institute for Securities & Investment (CISI) and works for BDO Global for the Africa & Middle East Region. He has over 12 years’ Africa and Asia background in IFRS, accounting, tax, compliance and advisory.
A leader of several governmental reforms in Asia and Africa, Elie Sawaya is a digital, private and public sector expert specializing in e-government, port community systems, supply chain, international trade facilitation, risk management, customs and cross border trade.