Success Factors for Tax Revenue Mobilization and Collection in Africa

This article explores the current achievements of African tax revenue authorities in mobilizing tax revenue from companies running businesses in a national or multinational model, and the reasons behind these successes.

The article shows that African tax authorities have managed different ways of improving the effectiveness of tax collection, and it highlights the fact that the best practices are not consistently shared among them, with possible improvements that will be suggested in the closing comments.

Views from the Tax Authorities

I had the recent opportunity to lead this African conference with representatives of the revenue authorities of South Africa, Zambia, Uganda, Liberia and Nigeria on the topic of Transfer Pricing implementation—Revenue Authority Feedback. This panel was a unique one, as it tends to be difficult to get government officials on board facing an audience composed of private sector and civil society representatives.

My panelists were eager to share their experience and their views. They talked about trends, highlighting how much things have changed for them, with an inception dating much earlier than the outbreak of Covid-19. They showed how much professionalism grew in their units, how much relationships with taxpayers improved, and how much efficiency now matters for them.

I could not be more interested by their views, and more than just discussing transfer pricing, we were drafting the recipe of a successful transformation of revenue authorities in Africa.

From reliable public data, Africa has benefited until recently from historical economic growth and a stable tax-to-GDP ratio even lower than that of the Organization for Economic Cooperation and Development (OECD) countries. These external factors being favorable to African countries, they were likely to play a positive role in the tax authorities’ performance during the past 10 years.

Tax revenue in Sub-Saharan Africa is a historical concern of the international community. Governments were repeatedly encouraged to review their fiscal policies—and their management of taxes, in particular—in light of rampant corrupt practices, to become more efficient and more transparent, finally encouraging voluntary tax reporting and compliance at local levels.

But taxes are far more than the documents submitted by the taxpayer at a desk, and far more than a piece of law adopted by a parliament.

Taxes represent a unique architecture of laws, regulations, departments and units organized under a public authority, clear internal rules and methodologies, policies and procedures, career plans and promotions, IT infrastructures, and data collected and stored on servers.

African tax authorities had much to do in their public governance transformation. I am keen to share here the key factors that make these revenue authorities efficient today, hoping that these words will circulate beyond the tax advisory practice community, reaching African government officials who may find here a source of inspiration.

Factor 1: Regional Partnerships

Partnering on tax revenue in Africa has been an unexplored solution for a long while. It took time before the OECD, the African Tax Administration Forum (ATAF) or the West Africa Tax Administration Forum (WATAF) had enough involvement from African countries; when this started, it quickly sparked and led to programs and improvements of tax revenue mobilization and collection in Africa.

One of the key takeaways from partnering on tax revenue is the technical assistance that can benefit African tax authorities. These international or regional organizations play a key role in holding a list of available experts in tax administration and mobilizing them in countries that receive financial aid from international donors. These foreign experts have usually specialized in African countries and are a reliable way to share best practices between tax authorities and increase professionalism in tax divisions.

Another key takeaway is capacity building. Increasingly, international donors such as the World Bank, the African Development Bank, the EU or the International Monetary Fund focus on financing programs of building capacity in public financial management, tax revenue collection and public governance.

Along with their technical assistance in designing tax regulations or improving processes and systems for tax authorities, foreign experts tend increasingly toward the training approach and focusing on skills that could be applied to the daily work of African tax authorities. It can be fairly estimated that half of foreign technical assistance deals with training and capacity building.

Factor 2: Team Specialization

African tax authorities learned during the last decade the benefits that properly trained and specialized teams can bring to their capacity to raise tax revenues. It is now common to find within a tax administration the following units :

• legislation unit with officials skilled in reading, designing, commenting on the legislation, and building effective regulations;
• exchange of information/international unit with officials dedicated to the exchange of information through international channels and administrative tools effective under the double tax treaties their countries have signed;
• risk and intelligence unit with officials in charge of building the tools and systems that will analyze the information received from taxpayers and create the list of entities that the tax audit team will contact further;
• transfer pricing unit is a must-have team in the context of growing international transactions and increasing sophistication of base erosion and profit shifting (BEPS) mechanisms;
• large taxpayer unit is now a common subdivision of tax authorities, historically an innovation of the French-speaking African countries. The large entities unit addresses unique issues such International Financial Reporting Standards (IFRS) implementation and complex accounting systems to investigate, requiring from the team members a deep understanding of accounting and IT systems.

These units improve business practices and are more efficient in interacting with taxpayers, finding new ways to collect taxes, and countering tax erosion strategies.

Factor 3: Continuous Revision of Legislation

Tax legislation is temporal in essence as a country votes on taxes for a specific purpose and follows the rule that no tax can be collected without a proper law that authorizes the collection by the government. To follow the political agenda, to answer any new need for additional tax revenue, or to grant new incentives such as tax rebates or credits, tax legislation needs to be revised periodically.

African tax authorities have engaged in a continuous process of revision of tax legislation: In most countries, the Tax Act is revised every year along with the new government budget. This requires a rigorous organization and a skilled tax law team that can feed the government discussions with different proposals, prepare the draft of tax laws and regulations, review compatibility with existing laws, communicate on the adoption of the final version, and disseminate it to the public.

The more functional this revision process is, the faster African governments can provide fiscal answers to new economic or political trends.

Factor 4: Introduction of Risk Management

The introduction of a risk approach at African tax authority level has helped to focus on the taxpayers that have the most sensitivity for the government budget and on those that indicate the greatest risk in terms of losing tax revenues. The most relevant example of this is still the mining industry.

A risk approach deployed at tax authority level requires the right set of factors and the access to the right information to ensure that tax audit resources are allocated to the right taxpayers.

Risk profiling is a sensitive matter and a tax authority rarely communicates on the outputs of its internal analysis. However, if well established, it offers the virtue of addressing the fiscal priorities in terms of tax revenue collection.

Factor 5: Planning and Setting Objectives

Another success factor in tax revenue mobilization and collection is directly attributable to the governance of the African tax authorities. It is a standard criterion of public governance that the head of the tax authority sets up the strategy of its organization, deploys proper plans with its deputies to put the strategy in motion, and establishes the right criteria to measure the achievements and performance of its teams.

The improvements in governance of African tax revenue authorities have significantly contributed to transforming their tax divisions into more operational and more effective teams.

Objectives with clear internal rules, training, career plans and methodologies have provided African governments with more tax revenues in a sustainable manner.

Challenges

While African tax authorities have taken positive steps, they are not exempt from recurring challenges.

• There is still much more to do in terms of tailoring African tax laws and regulations to local business environments. Africa still faces a persistently high number of informal economy operators avoiding direct and indirect taxes, and this challenge remains in place.
• Taxpayer documentation is still perceived as an insufficient source of information. African tax authorities lack the power to access customs data and foreign sources of information that could help to confirm the reliability of the documentation submitted before and during a tax audit.
• The use of discretionary comparables by African tax authorities during their verification of international transactions is common but unfair to taxpayers. This is a tax audit practice that derives from the lack of systems that could compile and filter economic and financial comparable data. The African tax authorities tend to use information covered by professional secrecy, which could be seen as unethical.
• Covid-19 has pushed several African tax authorities to consider new systems and tools available from a booming technology market. The offer keeps growing in quantity and quality, but it inevitably comes with a rising cost that requires an adequate budget planning effort. However, these new tools are acknowledged as effective facilitators for the collection of tax revenues.

In my next article, I will specifically explore the opportunity and challenge of adopting a new system for an African tax authority; a case that will shed more light on the steps required to leverage technology for tax revenue management.

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 is also an experienced advisor dealing with complex situations for investors and shareholders involving reporting, compliance, and change issues. Anthony has over 12 years Africa and Asia background in IFRS, accounting, tax, compliance and advisory.

The author may be contacted at: anthony.assassa@gmail.com