AFRICA- WIDE REPORT ATAF REGIONAL STUDIES ON REFORM PRIORITIES OF AFRICAN TAX ADMINISTRATIONS. Leading Africa In Tax Administration

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1 MOROCCO ALGERIA MAURITANIA EGYPT SUDAN TUNISIA GAMBIA SIERRA LEONE LIBERIA GHANA NIGERIA SENEGAL IVORY COAST BENIN NIGER ATAF REGIONAL STUDIES ON REFORM PRIORITIES OF AFRICAN TAX ADMINISTRATIONS AFRICA- WIDE REPORT CHAD MALAWI African Tax Administration Forum (ATAF) Private Bag X923, Pretoria, South Africa Tel : info@ataftax.net GABON CAMEROON ERITREA UGANDA KENYA RWANDA BURUNDI TANZANIA ZAMBIA BOTSWANA ZIMBABWE NAMIBIA SOUTH AFRICA SEYCHELLES MADAGASCAR MAURITIUS MOZAMBIQUE SWAZILAND LESOTHO This research project received financial and technical support from the following development partners: Leading Africa In Tax Administration

2 ATAF REGIONAL STUDIES ON REFORM PRIORITIES OF AFRICAN TAX ADMINISTRATIONS AFRICA- WIDE REPORT AUTHOR: Nara Monkam 1 CONTRIBUTORS: AN ATAF PUBLICATION ATAF Research Team Christiane Schuppert (GIZ Technical Advisor to ATAF) Frankie Mbuyamba (ATAF Research Project Manager) Logan Wort (ATAF Executive Secretary) Michael Ade (ATAF Director of Research and Capacity Development) NOVEMBER Nara Monkam, Ph.D. in economics, is the deputy director of the African Tax Institute (ATI) and a senior lecturer in the Department of Economics at the University of Pretoria, South Africa. E: nara.monkam@up.ac.za; T: +27 (0)

3 FOREWORD AND ACKNOWLEDGEMENTS The African Tax Administration Forum (ATAF) is pleased to present the Africa-wide study on reform priorities of African Tax Administrators on the continent. The undertaking of this study has been informed by the need to improve on the capacity, skill base and address specific regional challenges faced by tax administrators. Against the backdrop of the global economic, financial and fiscal crisis, most African countries are still facing major challenges. The challenges are political and socio-economic with varying levels of intensity in the African continent, impacting seriously on economic development. The need exists for a close collaboration between the state, business and civil society to promote tax responsible citizenry through empowerment and education; which could help deter the culture of tax avoidance, tax evasion and tax resistance. The role of the African revenue authorities in ensuring that more revenue is mobilized to enable the government meet its fiscal obligations is very important. Revenue authorities need to continually improve in their functions to expand tax base, reduce tax leakages and have improved tax collection methods in order to improve on revenue as African governments come under increased pressure to deliver. This research provides a basis for improved performance in tax policy, organizational setup, critically assesses the core functions of tax administrations, management aspects and resources needed by tax administrators to enhance performance. With the increased need for tax administrators to become better and more efficient in performing the tasks the need arise to address the challenges, current needs and major impediments that tax administrators encounter in Africa. The areas of reform priorities and development have been identified in the study, in order to better channel resources and energy towards improvement. This study is important as it complements other studies that highlight the challenges faced by Tax administrators in Africa and the reform priorities needed. The research makes a very significant contribution to the overall tax literature with a unique methodology that allows for direct input from tax experts of revenue authorities in the African continent. The study, which is the condensed review of six regional studies that have been identified, will eventually provide an overview of common characteristics, current needs, reform priorities and areas of support for ATAF members in the region. With the findings of this study having been enhanced by direct comments from high-level representatives from the respective tax administrations around the continent, we are confident that the value added will be great to tax administrators in Africa, relevant stakeholders and other users of the information. All errors and comments are those of the researchers and editors and do not represent the views of the institutions to which they are affiliated. Our appreciation goes to Dr. Nara Monkam (PhD) for conducting the research, reviewing and providing valuable insights. We are also grateful to the heads of revenue authorities for nominating members to participate in different diagnostic workshops. We are grateful for the support from Germany provided through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) for making this project a success and to Dr. Christiane Schuppert from the GIZ for providing insights, comments and overall support to the project. A special word of thanks for the financial support provided by ATAF Donors namely, the IRISH AID (Ireland Ministry of Foreign Affairs Republic of Ireland), the MINBUZA (Ministry of Foreign Affairs Netherlands), the NORAD (Norwegian Agency for Development Cooperation Kingdom of Norway), the SECO (State Secretariat of Economic Affairs - Switzerland) and the DFID (Department for International Development United Kingdom). Finally, we recognize the contribution from the entire staff of the ATAF secretariat and appreciate the overall co-ordination towards the success of this project. It is our sincere hope that this study shall alongside the other regional studies contribute to the development of capacity in African Tax Administrations. WESTERN AFRICA WEST AND CENTRAL AFRICA NORTHERN AFRICA SOUTHERN AFRICA 1 SOUTHERN AFRICA 2 EASTERN AFRICA Logan Wort Executive Secretary African Tax Administration Forum (ATAF)

4 PRELIMINARY NOTE Background This final Africa-wide report reflects a consolidation of six regional reports of a research project aimed at analyzing the major needs and priorities of tax administration reform on the African continent. This research project is an initiative of the African Tax Administration Forum (ATAF) which was launched successfully in November 2009 with the objective to encourage and support partnership and intensified interaction among all African tax administrations. Ultimately, ATAF aims to improve the capacity of African tax administrations and contribute to state-building and good governance. The specific objective of this research project is to identify the major issues, challenges, current needs, and main priorities of tax administration reform on the African continent. One specific characteristic of this Regional Studies on Reform Priorities of African Tax Administrations is that it ultimately provides an in-depth African perspective on the areas of current demand for support to ATAF members. The outcomes of this research project will guide ATAF in designing specific intervention strategies enabling the Forum to achieve its objectives of improving the capacity of African tax administrations, contributing to state-building and good governance in Africa and providing tailored support to ATAF member countries. The research findings will also help in: (1) defining core issues for technical events and other forms of direct support to members, (2) defining topics for ATAF technical conferences or creating new working groups, (3) identifying common characteristics and regional peculiarities, as well as areas for further research, and (4) providing overall impetus for discussions on tax policy and administration issues in African and international debates. 2 Research Methodology The methodology of this research project consists of a phased regional approach, addressing the issues and priorities of reform in the six African regions separately to gain in-depth insights into each region s current priorities of tax administration reform. Specifically, the research in each studied region is conducted in two phases, namely: the drafting of the preliminary regional report and a diagnostic workshop to complement the preliminary regional report and culminate in the final regional report. In the third and final phase, an overall continent-wide report builds on the findings of the six final regional reports and provides an overview of the common characteristics and current needs and priorities of tax administration reform on the African continent. Phase 1: Drafting of the Preliminary Regional Report (PRR) The preliminary regional report (PRR) summarizes the current needs and priorities of reform as assessed only by existing studies. In order words, the findings presented in the PRR are the results of a desk research; in this case, a comprehensive literature review of the challenges and needs facing tax administrations in the region. The goal of the PRR is to provide input for discussions with ATAF member countries during the regional workshops. Targeted Regions for the Research Project For the purpose of this research project, the 34 ATAF member countries 3 were grouped into the following six country groupings (hereafter regions) on the basis of common language and geographical proximity: East Africa (six Anglophone countries): Burundi, 4 Eritrea, Kenya, Rwanda, Tanzania, Uganda; Northern Africa (four Francophone/Arab speaking countries): Egypt, Mauritania, Morocco, Sudan; 5 Southern Africa I (six Anglophone countries): Botswana, Malawi, Namibia, South Africa, Zambia, Zimbabwe; Southern Africa II (six Anglophone/Francophone/Lusophone countries): Lesotho, Madagascar, Mauritius, Mozambique, Seychelles, Swaziland; West Africa and Central Africa (seven Francophone countries): Benin, Cameroon, 6 Chad, Côte d Ivoire, Gabon, Niger, Senegal; and West Africa II (five Anglophone countries): Gambia, Ghana, Liberia, Nigeria, Sierra Leone. Phase 2: Diagnostic Workshop to Complement the Preliminary Regional Report (PRR) Given that the overall goal of the research project is to ultimately obtain an in-depth African perspective on the reform needs of the tax administrations in the region, a participatory regional approach is chosen. In every of the six regions, a diagnostic workshop with high-level representatives from the respective tax administrations of every country in the region is organized. In general, the workshop takes place in a country in the region willing to host it. During the workshop, representatives from the respective tax administrations of the studied region have the opportunity to reflect, discuss, confirm and/or infirm, and complement the results of the PRR. Most importantly, the diagnostic workshop allows representatives from different tax administrations in the region to get to know the specific tax systems of other countries, to learn from other countries experiences with tax reforms, and to share best practices. This participatory process ensures that the research is hands-on and informs ATAF on the actual needs of its members. The input provided by the ATAF members during the diagnostic workshop subsequently complements the results of the first phase and feeds into a Final Regional Report (FRR) for the respective regions. Phase 3: The Final Africa-Wide Report The six Final Regional Reports are subsequently condensed in a Final Africa-Wide Report providing an overview of the common characteristics and current needs and priorities of tax administration reform on the African continent. 2. As a network of tax administrations, ATAFs work focuses on issues of tax policy and administration. While challenges in the area of customs will be highlighted as far as they directly relate to or affect the area of taxation, customs is not one of the main components of this research project. 3. At the beginning of 2012, the ATAF membership comprised the following countries: Benin, Botswana, Burundi, Cameroon, Chad, Egypt, Eritrea, Gabon, Gambia, Ghana, Ivory Coast, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. 4. Burundi has French and Kirundi as official languages. In Rwanda, Kinyarwanda, English and French are all official languages. 5. Algeria and Tunisia were later on added to the list of the 34 ATAF member countries and specifically to the Northern Africa in order to make the regional report more representative and thus meaningful 6. Cameroun is a bilingual country, with English and French as official languages.

5 CONTENTS I. INTRODUCTION 1 II. OVERVIEW OF REGIONAL CHARACTERISTICS Review of Existing Studies Expert Assessment 4 III. OVERALL CHALLENGES AND OBSTACLES FACED BY AFRICAN TAX ADMINISTRATIONS ON THE CONTINENT Tax Policy Organizational Setup of Tax Administrations Core Functions of Tax Administrations Management Aspects and Resources of Tax Administrations 12 IV. GENERAL REFORM PROPOSALS FOR AFRICAN TAX ADMINISTRATIONS ON THE CONTINENT Tax Policy Organizational Setup of Tax Administrations Core Functions of Tax Administrations Management Aspects and Resources of Tax Administrations 21 V. PRIORITIES OF REFORM AND AREAS FOR ATAF SUPPORT 23 VI. CONCLUSION 25 VII.REFERENCES 27

6 1 INTRODUCTION In recent years, domestic resource mobilization (DRM) has strongly taken its place in the economic development discourse on the African continent. Domestic resource mobilization (DRM) is defined as the generation of savings from domestic resources and their allocation to socially productive investments. DRM involves the generation of private domestic savings channeled through the financial sector and the generation of public savings through borrowing and taxation (AEO, 2010). Enhancing domestic resources mobilization in Africa is vital to reduce dependence on foreign aid and the vulnerability resulting from over-reliance on commodity exports. In that regard, African tax administrations are called to play an important role in mobilizing domestic resources through taxation, thus contributing to economic growth, alleviation of poverty, and sustained development on the continent. In this context, improving the performance and the capacity of tax administrations in Africa is paramount. Specifically, this Africa-wide report presents an assessment of major issues, challenges, needs, and priorities of tax administration reforms on the African continent by focusing on the insights and views provided by the tax experts that African tax administrations in each of the six studied African regions. In this regard, the report only reflects the views of the tax experts from countries participating in the diagnostic workshops. 7 It does not provide a comparison of this expert assessment with previous studies, which can however be found in the corresponding regional research studies. Furthermore, the benefits of taxation are not constrained to revenue generation. Taxation has also implications for good governance and state building. In effect, as governments increasingly rely on domestic revenues through broad-based taxation, citizens as taxpayers would negotiate tax demands and oversee the collection and use of tax revenues through public expenditures, thus making governments more accountable. Taxpaying citizens would increasingly demand higher and better quality service delivery in return for their taxes, urging states to better respond to their citizens needs and thereby improving the citizen/state relationship. This process will ultimately be conducive to a participatory political process based on negotiations, bargaining and balancing conflicting interests. As quasi-voluntary tax compliance increases, governments would develop strong and capable tax administrations with the ability to collect and administer taxes effectively, thus building and improving state capacity. Governments would also have the incentive to foster their citizens prosperity, thus generating more revenues and reinforcing the fiscal contract (Moore, 2008; OECD, 2008; Bräutigam, 2008b; Bräutigam, 2008a). It is in this context that the challenges and needs of tax administrations in the African continent are carefully identified, with the goal to inform tax policy and administration reforms in Africa so as to improve their capacity and to advance the role of taxation in the continent s governance and state building. The present Africa-wide report summarizes the regional reports addressing the issues and topics of tax administration reform in six African regions described in the preliminary note, in order to gain in-depth insights into each region s current priorities. It stems from diagnostic workshops organized with the representatives from the respective tax administrations in each of the six studied regions (hereafter called experts, delegates, or representatives), who identified, by consensus, overall challenges, needs, and priorities of reform of the tax administrations of the respective region, as well as areas for ATAF support. The report presents an in-depth African perspective on the reform needs of tax administrations in Africa. 7. The six diagnostic workshops were organized as follows: in Arusha (Tanzania) for the East Africa region; in Nouakchott (Mauritania) for the Northern Africa region; in Pretoria (South Africa) for the Southern Africa I and Southern Africa II regions; in Cotonou (Benin) for the West Africa and Central Africa region; and finally in Banjul (The Gambia) for the West Africa II region. 1 INTRODUCTION INTRODUCTION 2

7 2 OVERVIEW OF REGIONAL CHARACTERISTICS This section of the study will provide an overview of the regional characteristics in all six regions of the research project, first as highlighted by the existing literature and, second, as provided by the country representatives. The objective of this section is to review the overall socio-economic context of the studied regions. Specifically, the aim is to bring forth in each region the existing characteristics related to economic growth, social development, agriculture, natural resource endowment, manufacturing and infrastructure sectors, problems faced by landlocked countries, and regional integration, etc. The aim is to highlight salient characteristics that might help ATAF to specifically tailor its support to a specific region. In other words, the challenges pertaining to regional characteristics faced by the countries in these regions and warranting the need for specific intervention in capacity building in the economies in general and in tax administrations in particular will be expounded. 2.1 Review of Existing Studies According to the existing literature, the socio-economic characteristics vary widely by regions. However, some characteristics are recurrent in the majority of regions, especially in the East Africa region, the Southern Africa I region, the West Africa and Central Africa region, and the West Africa II region. This concerns most notably the fact that these regions rely to a great extent on subsistence agriculture economies with relatively low productivity. This is a fact of special relevance for tax administrations since the North-South Institute s report (2010) shows that as agriculture rises as a percentage of gross domestic product (GDP), tax mobilization tends to decline. Additionally, another structural factor at play in these regions is the low income as measured by per-capita GDP. This is a fact of special relevance to tax administrations since tax mobilization tends to rise with income (IMF, 2010). Furthermore, a report by the World Bank (2005) states that per capita income reflects not only the taxable capacity of the population; it also serves as an indicator for general development of an economy. This assertation is supported by UNCTAD (2007) who stated that low levels of domestic resource mobilization (DRM) are caused by low levels of income among other factors like demographic factors and the structure of financial markets, which are generally difficult to influence in the short to medium term. With regard to tax administrations, tax bases in the above-mentioned regions tend to be extremely narrow. In general, the tax burden tends to fall disproportionally on the few large and visible economic players in the formal sector. Furthermore, the tax bases in all regions in the continent are in general eroded by high levels of capital flight, evasion and avoidance (North- South Institute, 2010). Overall, in the continent, the rate of economic growth has increased over the past decade due to factors such as improved democracy and better governance, gains from rise in natural resource prices, and economic reforms including strengthened tax policies and improved revenue administration (Kloeden, 2011; IMF, 2010). Moreover, although countries in Africa are quite diverse in terms of unemployment levels, they are in general characterized by high unemployment rates (ADB, 2012a). Another common structural factor with detrimental impact on DRM is the predominance of the informal sector that characterizes most economies in all regions. The International Poverty Centre (2008) remarked that most African countries are beset with very large informal sectors and underground economies where cash transactions do not leave any audit trails for tax purposes. The lack of political will and leadership have also been identified in the majority of regions as hindering the implementation of comprehensive tax policy and administration reforms consistent with an overall growth and development strategy (North- South Institute, 2010). Landlocked countries in the majority of regions have also been hampered by high overheads, poor transportation and communication infrastructures, and difficult access to markets (Kloeden, 2011; EC, 2007). Overall, the relatively underdeveloped manufacturing and information-based sectors pose challenges to tax policy and tax administration (Kloeden, 2011). Marked differences exist in revenue collections as a percentage of GDP across the regions; however, tax to GDP ratios remain in general low (World Bank, 2010). With respect to regional integration, the North Africa region, the East Africa region, and the West Africa and Central Africa region have yet to take full advantage of cooperation among their countries and remain poorly integrated despite having regional economic communities. In effect, regional integration has the potential to enhance economic development, increase competitiveness, and allow for a more effective use of resources as new governments and social relationships are being formed and barriers to integration removed (ADB, 2012b). Finally, based on the literature, resource-rich countries where a substantial share of revenues are derived from exporting scarce and valuable commodities such as oil, gas, diamonds and various minerals, tend to be, to some extent, characterized by weak tax bureaucracies. In effect, while in some countries like Botswana and South Africa, the rich mineral resources have contributed to the economic development, in other countries, resource riches have hampered the establishment of an effective non-resource tax administration (Kloeden, 2011). This is part of the so-called resource curse, i.e. the damaging effects on governance of abundant natural resource rents, particularly those from oil and minerals (Monkam, 2011; Bräutigam, 2008a; Moore, 2008; Bräutigam, 2008b; OECD, 2008). 2.2 Expert Assessment This section provides an overview of the regional characteristics in each of the six regions of the research project as highlighted by the representatives of the tax administrations who were present during the diagnostic workshops. In general, the tax experts mostly corroborated the results of the literature review and complemented these results by providing the subsequent information. East Africa Region In the East Africa region, specifically Burundi, Eritrea, Kenya, Rwanda, Tanzania, and Uganda, 8 the team of experts cited the ineffective regional integration as a major macroeconomic concern. In particular, they argued that there is limited knowledge of the integration process and the benefits thereof amongst the East African citizenry, yet the East African Community (EAC) integration agenda is meant to be private sector driven and people centered. This ineffective regional integration affects the business environment, handicaps cross-border investments and therefore limits the opportunities for regional alignment and harmonization, and thus adversely affecting tax base growth in the region. Northern Africa Region In the Northern Africa region, specifically, Algeria, Egypt, Mauritania, Morocco, Sudan, and Tunisia, 9 the tax representatives stated that the region as a whole is characterized by inequalities of economic development among countries and substantial inequality in the areas of infrastructure, transportation, and communication. In that regard, the experts argued that tax incentives must be designed and implemented to attract investment and employment into disadvantaged jurisdictions, thus boosting economic growth in the neediest regions. They also recommended creating a business tax to finance infrastructure, transport and communication projects in the region. Another regional characteristic emphasized by the experts is related to the centralization of power in the region, which they pointed out, can be mitigated by a strengthened political and fiscal decentralization process as well as by a strong political will. In effect, the lack of political will and leadership have also been identified in the region as hindering the implementation of comprehensive tax policy and administration reforms consistent with an overall growth and development strategy. 8. It is important to mention that the East Africa region as a whole was studied; however, the tax representatives of Eritrea were not present at the diagnostic workshop and their views are therefore not reflected in the expert assessment. 9. It is important to mention that the North Africa region as a whole was studied; however, the tax representatives of Egypt, Morocco, and Sudan were not present at the diagnostic workshop and their views are therefore not reflected in the expert assessment. Algeria and Tunisia, two non-member states of ATAF, were included in this regional study to ensure an in-depth and comprehensive assessment of the challenges and reform priorities of the region. The contribution of these two countries was very meaningful and enhanced the quality of the study. 3 OVERVIEW OF REGIONAL CHARACTERISTICS OVERVIEW OF REGIONAL CHARACTERISTICS 4

8 Finally, the resource-rich countries in the region are in general characterized by tax systems that are inadequately diversified; consequently, they must make significant efforts in widening their set of taxes to generate revenues, thus implementing a better tax mix to increase revenues at lower statutory rates. Southern Africa I Region In the Southern Africa I region, specifically, Botswana, Malawi, Namibia, South Africa, Zambia, and Zimbabwe, the delegates indicated that the region as a whole is characterized by an inadequate use of the incentive regime to attract foreign direct investment (i.e. lack of transparency, multiple government bodies granted discretion in incentive contracts without coordination with tax administrations, ad-hoc awards of tax incentives often politically motivated, etc.). The tax representatives highlighted the fact that the countries within the region are characterized by a weak manufacturing sector. They specifically emphasized, on the one hand, the existence of a weak link between the extractive industries (mining, oil and gas) and the manufacturing sector, and on the other hand, the weak link between the agricultural sector and the manufacturing sector. The experts in the region argued that a solution would be to strengthen the manufacturing sector in order to boost economic growth in the region. Another trend characterizing the countries throughout the region is a poor regional integration, especially in the areas of transport, information and communications technologies, and financial systems. West Africa Region II In the West Africa II region, i.e. Gambia, Ghana, Liberia, Nigeria and Sierra Leone, 10 the experts noted that the contribution of the manufacturing sector to revenue mobilization through taxation has reduced significantly, as the sector is dwindling very fast. They also pointed out the growth in the services sector in the region, especially the telecommunications industry. This sector, they observed, has seen phenomenal growth owing to the growth of information technology which has impacted heavily in the increased use of mobile phones and computers, thus the recorded growth. The experts also mentioned inadequate public service delivery, low intra-regional trade, and poor regional infrastructure, as major challenges in the region. In that regard, improved infrastructure, especially information and communication technology (ICT) in the region, was articulated as a need, as it is crucial to enhance exchange of tax information within the region and improve regional integration. With regard to the challenge of inadequate service delivery in the region, the experts emphasized the need for greater accountability and transparency of revenues collected. The dominance of agriculture in most countries in the region was also highlighted by the experts. They indicated that the agriculture being practiced was of the subsistence type which thus does not lend itself to taxation. They thus called for the need for encouraging commercial agriculture, reducing if not entirely eliminating the tax holidays currently being offered to the sector. In other countries in the region, the ever-growing dominance of the extractive industry, i.e. the natural resources sector, and especially the efficient management of this sector was also identified as a major challenge. Southern Africa II Region In the Southern Africa II region focusing on Lesotho, Madagascar, Mauritius, Mozambique, Seychelles, and Swaziland, despite the huge potential in revenue collections owing to natural resources and tertiary services, the tax experts alluded to the fact that the region is plagued by a growing informal sector which is in general non-compliant and difficult to manage, thus narrowing the tax base. Furthermore, with regard to natural resources, the delegates confirmed that Mozambique and Madagascar are the most natural resources endowed countries followed by Lesotho and Swaziland. In Mauritius and Seychelles where natural resource endowments are not as extensive, the tourism sector dominates the economy. Similarly to the other countries in the Southern Africa I region the countries within this region are characterized by a weak manufacturing sector, that if strengthened, especially in the extractive industries (mining, oil and gas), would boost economic development and growth in the region. Finally, according to the experts, corruption in the region is endemic and needs to be curbed as a matter of urgency. The corruption is in general between taxpayers and tax administrators. The tax experts advocated for the punishment of all those found to be corrupt whether they may be taxpayers and tax administrators. West Africa and Central Africa Region According to the country representatives or the tax experts in the West Africa and Central Africa region comprising of Benin, Cameroon, Chad, Côte d Ivoire, Gabon, Niger, and Senegal, the optimal collection of tax revenue by tax administrations are for the most part hindered by the predominance of the activities in the informal sector mainly attributed to the following: the relatively high tax rates and transaction costs that are prevalent in the formal sector; the complex procedures and costs for setting up and registering businesses; the low risks associated with illegal activities perpetuated by the lack of enforcement of existing laws; and the insufficiency of administrative means in terms of computerization and taxpayer identification. Additionally, the countries in the region are characterized by very low tax ratios in general ascribed to the poor performance of tax administrations and a narrow tax base; the latter due in part to the low level of development and the large size of the informal economy. These countries are also largely subsistence agriculture economies, with agriculture accounting for between 15 to 45 percent of GDP. As highlighted by the country representatives, resource-rich countries in the region like Cameroon, Chad, and Gabon tend to be characterized by weak tax bureaucracies due to limited support for revenue-raising efforts. Finally, the lack of political will and leadership have also been identified as hindering the implementation of comprehensive tax policy and administration reforms consistent with an overall growth and development strategy in the region. 10. It is important to mention that the West Africa Region II as a whole was studied; however, the tax representatives of Liberia were not present at the diagnostic workshop and their views are therefore not reflected in the expert assessment. 5 OVERVIEW OF REGIONAL CHARACTERISTICS OVERVIEW OF REGIONAL CHARACTERISTICS 6

9 3 OVERALL CHALLENGES AND OBSTACLES FACED BY AFRICAN TAX ADMINISTRATIONS ON THE CONTINENT 3.1 Tax Policy Tax Incentives and Exemptions One major challenge raised by experts across the continent is the issue of incentives and exemptions. In general, the experts established that there is a proliferation of tax incentives and exemptions across the regions and they are often not evaluated in terms of cost-benefit analysis. In particular, the experts emphasized the challenge of the proliferation of tax exemptions within the VAT regime throughout the continent. At the same time, there are the issues of the abuse of the incentives system and the lack of coordination between the various government agencies that grant the incentives and the revenue authorities that are required to administer the incentives. In particular, the tax experts specified that tax authorities are not always aware of tax incentives granted in the context of double tax agreements (DTAs) and memorandum of understanding (MOUs); which raises the question of which government agency should hand out special tax regimes in the various studied regions. According to most tax experts across the continent, the abuse of the incentives system is particularly prevalent in the extractive industry (mining, oil and gas) and causes a major challenge for tax administrations in resource-rich countries. They indicated that this challenge acutely affects revenue collection in those countries as revenue is lost where there is no adequate monitoring of the tax incentives and exemptions. During the diagnostic workshops, it was underscored that tax incentives and exemptions have been over-emphasized as investment promotion tools by the various governments in the continent, although they have not necessarily delivered in terms of attracting huge investments in the countries of the regions. The tax experts maintained that tax incentives in the form of tax holidays, rebates, allowances, credits and tax rate deductions constitute a major challenge to tax administrations in Africa in so far as they create an administrative burden and they do not deliver the much-needed direct increment in revenue generation. Various tax incentives have been provided to investors setting up businesses yet significant revenues collected from these incentives schemes are still to be realized. Finally, the experts emphasized the challenge of rationalizing, managing, and monitoring the system of tax incentives. In the same vein, the experts raised the issue of the streamlining of tax expenditures. Overall, they observed that there is great lacuna in the quantification and analysis of tax expenditures made through the tax systems. In that regard, the quantification and analysis of tax expenditures is required to ascertain, for example, the extent to which tax expenditures erode tax collections in different African countries. VAT Regime With respect to the value-added tax (VAT) regime, the experts in some regions like the North Africa region and the West Africa and Central Africa region specifically indicated that there is a lack of systematic monitoring of VAT within tax administrations (whether through invoice, checks, etc.). Moreover, they observed that the imposition of the VAT is not generalized in some important sectors of the economy such as agriculture and land and air transport. The Informal Sector The predominance of the informal sector and the underground economy is a common major challenge for tax administrations across all regions in the continent. In general, the predominant size of the informal sector is attributed to factors such as: complex tax structures and procedures; lack of capacity to comply (due to illiteracy and innumeracy, limited skills and competence in accounting or bookkeeping, etc.); poor taxpayers identification and taxpayers registration; inadequate taxation of the informal sector; and in some instances limited access to tax administration offices. Other factors, such as the low risks associated with illegal activities and perpetuated by the lack of enforcement of existing laws and the presence of tax evaders who deliberately choose to stay in the informal sector to avoid taxes and regulations, have also been found to contribute to the size of the informal sector. In general, the experts argued that there is a lack of coordination between tax authorities, other government agencies (e.g. Ministry of Interior and Commerce, and regulatory, audit or service agencies), and third parties (e.g. financiers and bankers, buyers of outputs and suppliers of inputs, external accountants and auditors, etc.) to exchange information on business activities; which tends to exacerbate the importance of the informal sector across the continent. Resource Taxation Overall, the tax experts agreed that the taxation of natural resource (mining, oil and gas) remain a fundamental challenge across the continent. An important related challenge arises from the fact that companies exploiting natural resources do not share their management reports deliberately with governments thereby leading the latter to make decisions about incentives and the general taxation of natural resources that are not well informed. Another big challenge stems from the multitude of government agencies administering natural resources revenues. For instance, one can frequently to observe that the government body managing the income tax revenues from the oil and gas industry is different from the government body managing the royalties from the same industry which is also different from the one managing the cost of oil expenses (oil exploration). The tax representatives also stated that tax administrations in most regions are challenged, to a large extent, by an inability to gather and analyze data, to deduce trends, and in general, to produce quality and actionable intelligence to inform decisionmaking. This is particularly so in the extractive industry sector which remains significantly opaque in these regions. Furthermore, the delegates raised the issue that the extractive industries in some countries are characterized by the granting of substantial incentives that are affecting tax administrations revenue mobilization efforts, especially in a context where the administration of these incentive schemes lacks transparency, coordination and monitoring. Generally, the experts concluded that the taxation of extractive industries across the continent is unfair, ineffective and lack of transparency. Transfer-Pricing and Exchange of Information In the aggregated opinion of the representatives of the tax administrations across the continent, transfer-pricing abuse, i.e. manipulating financial transactions in multinational enterprises with the view to reduce corporate income tax liabilities, is a major obstacle not only to effective revenue mobilization but also to development and poverty alleviation. The experts acknowledged that the taxation of cross-border transactions is a common challenge that administrations across the continent face as most countries in the six regions lack skilled and experienced staff to identify and analyze complex transfer pricing cases. Furthermore, most countries in Africa do not have effective tools used to combat transfer mispricing and protect the tax base, such as comprehensive transfer pricing rules and regulations, reference guidelines, advanced pricing agreements (APAs), 11 formal tax treaty agreements, strong regional and international cooperation, sound information sharing, etc. Specifically, the experts alluded to the fact that the legislative framework and guidelines for transfer pricing are either non-existent or very complex which makes it difficult to implement them. As aforementioned, given the global integration and the increasing role of transnational corporations (TNCs) as well as multinational corporations (MNCs), most countries in Africa would require strong regional and international cooperation and sound exchange of information to help stem transfer-pricing manipulations. In that regard, the experts highlighted another common challenge facing tax administration, i.e. the lack of a platform promoting dialogue, exchanging experiences, and especially exchanging information, with other national authorities (e.g. treasury, customs, banks, etc.), other tax administrations in the continent, and treaty partners. 11. An advance pricing agreement (APA) is a contract or agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology specifying the pricing method that the taxpayer will apply to its related-company transactions for some set of transactions over a fixed period of time. OVERALL CHALLENGES AND OBSTACLES FACED BY AFRICAN TAX ADMINISTRATIONS ON THE CONTINENT OVERALL CHALLENGES AND OBSTACLES FACED BY AFRICAN TAX ADMINISTRATIONS ON THE CONTINENT 7 8

10 The experts also pointed out that the tax administrations across the regions are not fully utilizing instruments providing for information sharing even when they do exist; for example, the Memorandum of Understanding (MoU) on Exchange of Information and the Double Taxation Avoidance Agreements (DTAAs) amongst the East African revenue authorities. Furthermore, the experts surmised that throughout the continent, there is a power imbalance when negotiating international agreements such as Double Taxation Agreements (DTAs) and Memoranda of Understanding (MoU). Additionally, they indicated that frameworks of double taxation agreements are in general characterized by a complexity of international tax laws often written in favor of developed countries and often outdated. Other Tax Policy Related Issues The experts agreed that, although corruption is not pervasive within tax administrations throughout the continent, nevertheless corruption and fraud among tax officials clearly exist. During the diagnostic workshops, it was pointed out that there is an overall lack of fiscal citizenship characterized by the absence of citizens knowledge of the importance of their tax contributions and tax obligations. 12 The experts also raised the issue of not only complex and often ambiguous tax laws across the regions but also frequent and often unanticipated tax policy changes which tend to create uncertainty for investors, reduce the predictability of business costs, and make it difficult to anticipate windfall business profits. Moreover, problems of inadequate and outdated tax laws as well as the lack of tax laws harmonization was pointed out by tax experts during the diagnostic workshops in the majority of regions. The challenge of the multiplicity of tax rates characterizing most tax systems in the continent was also emphasized by the delegates; in effect, they argued that the multiplicity of tax rates causes a heavy tax burden and renders tax administration cumbersome, thus affecting overall tax compliance. In general, multiple and high tax rates create a mismatch between tax liabilities and taxpayers ability to pay throughout the continent. Conducting a tax gap estimation, a commonly used measure of tax administration s effectiveness, was also outlined as an important challenge. Indeed, it is often very difficult for tax administrations across the regions to undertake research and produce periodic estimates of the aggregate tax gap for the major taxes. Tax experts across the regions specifically emphasized the weaknesses in quantifying and understanding tax gaps. Another challenge for the majority of tax administrations in the continent is related to the pressure of meeting unrealistic revenue targets set by the government, which may undermine the credibility of tax administrations in the eyes of state elites and the public. Finally, the tax representatives indicated that most regions experience the lack of strong political will to support tax reforms which often lead to unsuccessful reforms. 3.2 Organizational Setup of Tax Administrations Segmentation According to Taxpayer s Size Although there is an increased trend toward taxpayer segmentation across tax administrations throughout the continent, the experts argued that this issue still remains a significant challenge for tax administrations. In particular, within most tax administrations in Africa, there still exists the need for a segmentation based on specific business sectors such as medium and small enterprises, the banking sector, the extractive industries (mining, oil and gas), the electronic services or the internet and telecommunications sector. The aim of this segmentation (by sector and size) of the population of taxpayers is not only to improve the understanding and knowledge of taxpayers, but also to improve the overall tax administration by tailoring intervention and services to different groups of taxpayers. In general, the experts acknowledged that the definition of clear criteria for segmentation in order to tailor intervention and services to the distinct challenges posed by different taxpayer groups remains a challenge in most regions. Some experts mentioned that, in some regions, these criteria are often not based on any scientific analysis. Consequently, the taxpayer segmentation is often inappropriate and does not always reflect the economic conditions in the countries. Organization According to Tax Types or Functions 13 For the majority of tax administrations across the regions, the experts stated that the organizational design structure around products (tax types) and functions (e.g. identification, registration, filing tax returns, payment, audit and investigation) often remains unclear. 12. The concept of fiscal citizenship focuses on the moral link of paying dues for the collective betterment of a country as a whole and the responsibility of each taxpayer in contributing to the upliftment of citizens in the country (SARS, 2008). 13. Many revenue authorities have moved from structural arrangements based largely on types of tax (i.e. separate, largely self-sufficient multifunctional departments each responsible for a specific type of tax and independent of each other departments) towards one based principally on functions (e.g. registration, accounting, information processing, audit, collection, appeals, etc.) and/or taxpayer segmentation criteria. In practice, however, the majority of revenue authorities have an organizational structure based on a mix of criteria. Additionally, the experts noted that there is often a competition between the operational division (i.e. the core line of tax administration s business such as assessment and collection of taxes) and support division (e.g. human resource management, legal services, internal audits, finances, IT support functions, procurement, public relations, office cleaning and security services, etc.) within tax administrations in the region. In effect, most tax administrations in the continent tend to emphasize their core business functions over the support services with regard to human and financial resources. Semi-Autonomous Revenue Authorities In the West and Central Africa region and in the Northern Africa region that are largely organized following the Francophone administrative tradition, the revenue administration functions are typically the responsibility of a tax directorate that is located within the Ministry of Finance. In general, the tax representatives acknowledged that this directorate does not possess powers to negotiate and set conditions of service for staff and do not have legal protection from political interference. Overall, a semi-autonomous revenue authority (RA), through its capability to set and offer competitive salary scales and its autonomy to recruit, promote, and dismiss staff, should be able to attract a higher qualified staff. Additionally, a semi-autonomous revenue body should also be able to secure an independent source of funding through the general government budget appropriations approved by the Parliament or by appropriation of a fixed share of the revenues it collects. Semi-autonomous revenue authorities have been established in almost all Anglophone countries in Africa. For most revenue authorities in Anglophone regions, their tax representatives identified the lack of autonomy as a major challenge, owing to increased political interference in their operations, appointments, recruitment, and promotions, among others. They thus decried the increasing politicization of the revenue authorities throughout most regions. Specifically, according to the delegates, the politicization of the RAs across these regions tends to affect the conduct of tax audit of taxpayers, especially large taxpayers, who are in general closely associated with the ruling political party. Often, these tax audits are interfered with and in most cases stopped by government functionaries or politicians. It is thus difficult to bring recalcitrant taxpayers to book as the interference sets in to truncate any punitive measures to be applied against taxpayers. Consequently, these political interferences hamper punitive measures which are meant to ensure that delinquent taxpayers change their behavior and become compliant. Environment of Operations and Stakeholders Relations Concerning the tax administrations environment of operations and their relations with various stakeholders, the tax representatives identified a few challenges. First, given that in most Francophone African countries, the tax administration is the responsibility of a tax directorate that is located within the Ministry of Finance (MoF), the relations between the Ministry and the tax authorities are a frequent source of tension. In particular, concerns have been raised in the following areas: limited possibilities to establish differential and competitive salary scales in order to attract and retain skilled staff, political interference (especially in appointment issues), and tensions and lack of clear responsibility in the formulation of tax policy; overall, there is a lack of financial and managerial autonomy of the tax administrations in these countries. Additionally, the delegates indicated that there is often no systematic consultation between the Ministry of Finance (MoF) and the tax authorities in the formulation of tax policy and the setting of objectives and revenue targets to achieve. As a result, tax administrations are often put under pressure to achieve certain revenue targets, often judged unrealistic by tax officials. It was also generally agreed that the Minister and the Ministry of Finance in these countries hold significant power and this often has some detrimental effects on the operations of tax administrations. Overall, the delegates in the majority of Anglophone and Francophone countries further expressed concern over the political interference in the granting of tax incentives and exemptions. The experts indicated a lack of evaluation of reform initiatives within most tax administrations across the regions. Specifically, there is no systematic monitoring and evaluation mechanism to track performance of the reform initiatives to gauge the effectiveness of the reform programs. Therefore, although policy and tax administration reforms are in general regularly implemented in these countries, unfortunately, a strong and coherent monitoring and evaluation framework often does not exist. In other words, there is a lack of regular assessments of the impact of reforms with the aim of improving the efficiency and effectiveness with which these reforms are able to actually meet the objectives defined by the tax authorities. The inadequate provision of agency services throughout the countries across the six regions was another challenge emphasized by the experts, with limited physical points of presence or physical regional branches (i.e. inadequate geographical spread of tax offices). This situation tends to make compliance cumbersome and costly for taxpayers as they are often required to travel to the capital city to comply with their tax obligations or to have access to tax advisory services. In general, the experts argued that the issue of inadequate decentralization of tax administration offices to smaller cities and towns creates substantial revenue losses in those areas where there are no tax administration offices. According to the tax OVERALL CHALLENGES AND OBSTACLES FACED BY AFRICAN TAX ADMINISTRATIONS ON THE CONTINENT OVERALL CHALLENGES AND OBSTACLES FACED BY AFRICAN TAX ADMINISTRATIONS ON THE CONTINENT 9 10