The authors of this series aim to provide an up-to-date look at the opportunities of electronic tax systems and, in general, information and communication technology (ICT) for Africa. They believe that beyond the availability of the technology and digital tools to support e-tax projects in Africa, a proper digital strategy, along with strong governance and leadership at the tax administration level, is necessary.
Ethiopia has historically been part of the experimental deployment of electronic tax systems in Africa to provide international funders and regional tax cooperation organizations with proof of reduction of tax evasion and increase in tax payments. The challenge was tremendous in a country used to poor internet, a low level of taxpayer computer literacy, lack of a skilled workforce, and poor coordination between revenue authorities.
With a 770-strong large taxpayer base in 2019, Ethiopia has been able to quickly mobilize tax revenues at a higher level than previously, allowing the country to set an ambitious new budget for the future.
Successful Implementation of ICT in Africa
Africa is part of the global move to adopt and integrate digital tools to improve processes and services with the aim of raising more revenue and reducing compliance costs. The Africa Tax Administration Forum in June 2021 published a survey report that highlighted seven capacity blocks that will support African tax administrations in ICT:
- governance and policy;
- cost and contract management;
- project management;
- stakeholder and change management;
- business process management;
- technology; and
These seven blocks are a comprehensive approach providing tools to African tax administrations to improve processes and reduce compliance costs. ICT provides the benefit of better supporting taxpayers and increasing compliance, allowing remote working and online taxpayer contact.
As an example, in North Africa, the Moroccan tax administration has been engaged in the digitalization journey since 2007, with an ICT master plan that started with a pilot program for value-added tax (VAT), corporate tax, and personal income tax in 2009. The tax authority is now capable of offering a wide range of functional services, from online tax returns and payments to tax claims, statements, electronic stamps, and refunds.
This fundamental change has allowed the Moroccan tax administration to improve the quality of service to taxpayers, reallocate its human resources to high-value tasks, improve audit and collection of tax revenues, and globally reach 24th ranking in the World Bank Doing Business classification.
How Ethiopia Resolved ICT Challenges
Ethiopia is historically a low-income country weakened by a significant corporate tax burden on small, middle-sized and large companies. The tax system presented high compliance costs with stringent accounting rules, recurring nil turnover reporting, and nil tax payments, and a need for improvement of tax audits to solve tax registry issues and potential non-compliance.
Until recently, Ethiopian digitalization was assessed as deficient. E-filing and e-payment systems were reported to have a limited number of users and to be always “down” or running very slowly. Few systems at the Ethiopian tax administration interfaced with other government agencies, making it difficult to obtain tax-related information from third parties. Taxpayer services were generally poor, with late or insufficient answers provided by officers to taxpayers. Weak support for taxpayers and poor compliance services resulted in massive VAT avoidance.
ICT is then an opportunity for Ethiopia to improve tax compliance. There is evidence in 2021 that technological innovation in Ethiopia has led to a positive response from taxpayers to these changes, with an increase in revenue of at least 12% for income taxes and 48% for VAT. However, the Ethiopian tax administration can still be observed as not making use of the available data to its full potential, thereby opening doors to possible process improvements and further tax revenue benefits as a result of a better digital strategy.
Electronic Tax Systems: a Strong Course to Compliance
African tax administrations have made important developments in digitalization. The use of ICT is becoming universal. The Ethiopian Revenue and Customs Authority (ERCA) is in a similar dynamic. At the end of the civil war in 1991 several reforms were launched: One of these reform areas has been taxation through rapid modernization and extensive use of ICT.
The adoption of electronic sales registration machines (ESRMs), had a positive impact on tax revenues which, as mentioned above, increased by 12% for income tax and 48% for VAT. It was demonstrated that the increase in tax collection was due to improved compliance rather than an increase in business activity.
In Ethiopia, the use of electronic tax systems has significantly reduced tax evasion and has increased the average amount of VAT paid by businesses. The use of electronic tax systems like ESRMs also facilitated the detection of non-compliance for both VAT and profits tax.
The improved compliance by the users of ESRMs is shown by the lower perceived probability of audit compared to non-adopters. Ethiopian firms found that the ESRM improved their capability to get updated and to easily access available sales data, besides reducing internal theft, in addition to the comfort of compliance with tax requirements.
E-filing systems have the potential to improve “the ease of data analysis for monitoring.” The system also reduces the interactions between taxpayers and the tax administration. It is important to note that according to the World Bank publication by Oyebola Okunogbea and Victor Pouliquen, “Technology, Taxation, and Corruption,” reduction of the frequency of in-person interactions between taxpayers and tax officials through e-filing may reduce collusion between the two parties to reduce tax payments. E-filing may also produce system-wide efficiency gains by removing the need for physical collection of forms and data entry.
Electronic Tax Systems: Building Fiscal Capacity
The fiscal capacity of a state is a major constraint that may hinder the economic development potential of the country. The use of an electronic tax system is an affordable alternative for monitoring revenue information and improving the fiscal capacity of a country.
The following are digital tools now deployed in Ethiopia:
- ERCA made a major IT investment in 2004 by developing the Standard integrated Government Tax Administration System (SIGTAS), an integrated database for managing taxpayers’ records.
- ERCA went further and, in 2008, launched ESRMs. These machines record sales and send the different business transactions to the tax authority through a general packet radio system (GPRS) which is a data transfer system through the cellular network.
- In 2010, the Ministry of Revenue introduced the first pilot for the tax filing system—named the e-filing system—that allows the capture of tax declarations online. The objective of the e-filing system is to allow taxpayers to file taxes online. The tax filing system has been complemented by the electronic payment system since 2019. The electronic payment system covers taxes related to private income tax, pension tax and federal taxes such as profit, withholding, cost sharing, dividend, excise, and VAT.
- The e-payment system is still undergoing continuous improvement by ERCA to include internet banking as a method of payment. The addition of payment methods through financial institutions will greatly improve service quality for taxpayers and could create a citizen-centric system, in a country where 59% of the population live more than five kilometers away from the nearest financial institution.
- In September 2020, ERCA introduced the electronic single window (ESW) service to eliminate the need for a taxpayer to be physically present at the customs office to process their declaration. With the ESW, the taxpayer can upload all required documents electronically and obtain customs clearance online. The ESW in Ethiopia generated a substantial reduction in processing time and cost, and boosted customer service satisfaction.
- In 2020, the Ethiopian government, through the Ministry of Peace, launched the National Digital ID Program. Digital ID allows the identification of the taxpayer with ease, and better communication, enforcement, and monitoring of compliance, in addition to a reduction in compliance costs. Digital ID systems can bring important savings for “citizens, government, and businesses” as well as “increase transparency and accountability and drive innovation.”
Growing Talent on the Road to Renaissance
Ethiopia is the third Sub-Saharan African economy, with $107 Billion GDP, and is the second most populous Sub-Saharan African country with a 115-million population. For the last 15 years, Ethiopia was one of the fastest growing economies on the globe.
However, the Human Development Index ranks Ethiopia below the Sub-Saharan Africa average, positioning Ethiopia as 178th of 193 countries on the United Nations e-government development index and this has an impact on the digitalization efforts conducted by the government. According to the UN Development Program, Ethiopia’s Human Development Index value for 2019 is 0.485, thus positioning it in a low human development category, ranking 173 out of 189 countries and territories.
The previous article in this series, “Digital Tools for Fiscal Governance in Africa,” described the tools and methods essential for the digitalization of the tax administration. Ethiopia is now using most of these tools, from digital ID, to e-filing, to ESRM and ESW.
However, some development challenges remain and one of them directly impacts the digitalization effort advocated by the government in its 10-year development plan.
As detailed in our previous article, a trained workforce remains essential for a performing digital administration. The great achievements that Ethiopia has made are still to be complemented by the continuous capacity building of its human resources. A “knowledgeable” workforce is essential for moving ahead on the road to renaissance.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Anthony Assassa is an Associate Member of the Chartered Institute for Securities & Investment (CISI) with over 12 years’ Africa and Asia background (Cameroon, Comoros, Congo DRC, Laos) in reforms towards mobilization and collection of tax and customs revenues. He attended the international specialization cycle in Tax & Customs Administration of the French National School of Administration (Ecole Nationale d’Administration, Paris).
Elie Sawaya led several governmental reforms in Asia and Africa and is a digital, private and public sector expert working for GIZ with more than 20 years of practice in public private dialogue, e-government, private sector development, port community systems, supply chain, international trade facilitation, electronic tax systems, risk management, customs and cross border trade.