Towards Measuring Fairness of Tax Systems in Developing Countries

Transcription

1 Towards Measuring Fairness of Tax Systems in Developing Countries Cephas Makunike TAX JUSTICE NETWORK-AFRICA i

2 Produced by Tax Justice Network Africa and Oxfam Novib APRIL 2015, NAIROBI, Kenya ii

3 Acknowledgements Tax Justice Network Africa (TJN-A) and Oxfam Novib would like to thank Cephas Makunike for conducting the research and authoring the Fair Tax Index (FTI) indicators preliminary research paper. We would also like to thank members of the FTI Working Group peer review team. The paper also benefitted from comments from TJN-A staff (Reagan Ojok and Sandra Kidwingira) and Oxfam Novib colleagues (Francis Weyzig, llse Balstra and Marketa Drozdkova). Lastly, we would like to express our appreciation to members of the FTI Working Group for providing some comments which contributed to the production of this paper. iii

4 Table of Contents Acknowledgements... iii Table of Contents... iv List of Tables... vi List of Figures... vii Acronyms... viii Glossary... ix Executive Summary... xi 1. Introduction Fair Tax Index Indicators Progressivity Share of direct tax revenue in total tax revenue Share of Personal Income Tax revenue in total tax revenue Share of Corporate Tax revenue in total tax revenue Share of Sales Tax revenue in total tax revenue Share of Goods and Services Tax revenue in total tax revenue Share of Indirect tax revenue to total tax revenue Share of Property tax revenue to total tax revenue Share of Excise tax revenue in total tax revenue Share of Trade Taxes in total tax revenue Effectiveness Share of Tax revenue to GDP Share of Non Tax revenue to GDP Tax evasion and avoidance Ratio of Illicit Financial Flows to GDP Coverage of tax system Effectiveness of tax administration Government spending Share of education spending to total government spending Share of health spending to total government spending Share of Social Protection Spending to total government spending iv

5 How pro-poor government is spending Public perception of fairness of tax system Gender Transparency Data sources Conclusion References Annexure 1: Comparison of data sources per indicator/database... a Annexure 2: The data retrieval process... f v

6 List of Tables Table 2.1a: Direct Tax Revenue Share of Total Tax Revenue (Decimal)... 3 Table 2.1b: PIT Revenue Share of Total Tax Revenue (Decimal)... 5 Table 2.1c: Corporate Income Tax Share of Total Tax Revenue (Decimal)... 7 Table 2.1d: Sales Tax Revenue Share of Total Tax Revenue (Decimal)... 9 Table 2.1e: Goods and Services Tax Revenue Share of Total Tax Revenue (Decimal) Table 2.1f: Indirect Tax Revenue Share of Total Tax Revenue (Decimal) Table 2.1g: Property Tax Revenue Share of Total Tax Revenue (Decimal) Table 2.1h: Excise Tax Revenue Share of Total Tax Revenue (Decimal) Table 2.1i: Trade Taxes Revenue Share of Total Tax Revenue (Decimal) Table 2.2a: Ratio of Total Tax Revenue to GDP Table 2.2b: Ratio of Non-Tax Revenue to GDP Table 2.2c: Ratio of Illicit Financial Flows to GDP Table 2.6a: Education Spending Share of Total Government Spending Table 2.6b: Health Spending Share of Total Government Spending vi

7 List of Figures Figure 2.1a: Direct Tax Revenue Share of Total Tax Revenue... 4 Figure 2.1b: PIT Revenue Share of Total Tax Revenue... 6 Figure 2.1c: Corporate Income Tax Revenue Share of Total Tax Revenue... 8 Figure 2.1d: Sales Tax Revenue Share of Total Tax Revenue Figure 2.1e: Goods and Services Tax Revenue Share of Total Tax Revenue Figure 2.1f: Indirect Tax Revenue Share of Total Tax Revenue Figure 2.1g: Property Tax Revenue Share of Total Tax Revenue Figure 2.1h: Excise Tax Revenue Share of Total Tax Revenue Figure 2.1i: Trade Taxes Share of Total Tax Revenue Figure 2.2a: Ratio of Total Tax Revenue to GDP Figure 2.2b: Ratio of Non-Tax Revenue to GDP Figure 2.2c: Ratio of Illicit Financial Flows to GDP Figure 2.6a: Education Spending Share of Total Government Expenditure Figure 2.6b: Health Spending Share of Total Government Spending vii

8 Acronyms AEO AfDB CIT CRAFT CSO DRM FTI GDP GFI GFS GRD GS ICTD IFF IFS IMF IMF CR K&M LCU OECD ON PIT TJN-A UNESCO WB WDI WEO WTD Africa Economic Outlook dataset African Development Bank Corporate Income Tax Capacity for Research and Advocacy for Fair Taxation Civic Society Organisation Domestic Revenue Mobilisation Fair Tax Index Gross Domestic Product Global Financial Integrity IMF Government Finance Statistics Government Revenue Dataset Goods and Services Tax International Centre for Tax and Development Illicit Financial Flows International Financial Statistics International Monetary Fund International Monetary Fund Country Reports Keen and Mansour (2009) dataset Local Currency Units Organisation for Economic Cooperation and Development Oxfam Novib Personal Income Tax Tax Justice Network - Africa United Nations Education Scientific and Cultural Organisation World Bank World Bank Development Indicators World Economic Outlook World Tax Database viii

9 Glossary Administrative Efficiency. Measures the amount spent by the tax administration per dollar collected. Direct Taxes. Taxes on income such as Personal Income Tax, Corporate Income Tax and Capital Gains Tax. Equity/Fairness. Making people with greater ability and the rich people to pay more taxes (vertical equity) and taxpayers in similar circumstances to pay similar amounts of tax. Fair Tax Index. A tool which measures tax fairness and compares the levels and trends of tax injustice that exists across country tax systems and over time Free Trade. A global system with zero duties/taxes on international trade (imports and exports). Illicit Financial Flows. The cross-border movement of funds that are illegally acquired, transferred or used. The sources of these cross-border transfers may be bribery, theft by government officials, the trafficking of drugs, arms and humans, smuggling, commercial tax evasion, trade mispricing or abusive transfer pricing. Indirect Taxes. Taxes on consumption such as VAT/Sales Taxes/Goods and Services Tax, Customs duties, and Excise duties. Progressivity. A progressive tax is one that places the biggest burden on those most able to pay. Most often applied in the form of income tax, a progressive tax is one where the tax rates rise as incomes increase, so that those who earn high incomes have a greater proportion of their incomes taken as tax. Public Spending. Expenditure by the government on public infrastructure/goods and social amenities such as education and health. Quality of Government Spending. Measures the level of public expenditure directed to the poor (pro-poor spending). Regressivity. A regressive tax, in contrast to a progressive tax, is one where everyone pays the same amount of tax, regardless of their income or their ability to pay. This results in the ix

10 poor paying relatively more of their income on the tax than those with greater ability to pay. Tax Avoidance. The practice of seeking to minimise the tax one pays. Tax avoidance seeks to reduce the payment of tax by arranging affairs in a way that fits within the letter of the law, (though not necessarily within the spirit of the law). As a result, tax avoidance might be legal, but it is not risk-free for the taxpayer. Therefore, tax avoidance implies accepting a level of risk when seeking to reduce tax payments. The term aggressive tax avoidance. Tax Evasion. It is an illegal or fraudulent non-payment or under-payment of tax. Washington Consensus. Policy prescriptions made by the institutions such as the World Bank and IMF. x

11 Executive Summary This paper provides a preliminary data collection and data analysis for the development of the Fair Tax Index. The preliminary data collection and analysis in this paper covers various Fair Tax Index indicators which were grouped in tax system measurement categories such as progressivity (as measured by the ratio of direct taxes and indirect taxes to the respective country s total tax revenue); effectiveness (as measured by the ratio of total tax revenues and total non-tax revenues to the Gross Domestic Product as well as the cost of tax collection by a country s tax administration); tax evasion and avoidance (as measured by the ratio of revenue forgone due to illicit financial flows to the gross domestic product) and government spending (as measured by the ratio of education and health spending to total government spending. This is the initial part and foundation of a broader project which intends to develop a tool to assess tax systems and to evaluate to what extent they are pro-poor, transparent and how they help to fight inequality. Such a tool (fair tax index) will enable comparing of tax systems over time and between countries, identifying main issues in tax systems and drawing policy recommendations. Various indicators have been incorporated in this study and this is expected to provide an all-round overview of countries tax systems. This preliminary indicators research will create a building block for the overall Fair Tax Index development process. The paper intended to collect data for a larger scope of indicators but realized that some data were not available on the key international databases. The unavailable data include that for tax system measurement indicator categories such as effectiveness (as measured by the ratio of non-tax revenues per sector, cost of tax collection [how much the tax administration spends per dollar collected as well as compliance costs]); tax evasion and avoidance (as measured by the ratio of revenue forgone due to the informal sector and revenue forgone due to tax exemptions to the Gross Domestic Product); coverage of the tax system (as measured by the ratio of the number of registered Personal Income Tax payers to the total active population in the respective country); effectiveness of tax administration (as measured by the ratio of the number of tax officers to the registered tax payers); government spending (as measured by the ratio of assistance and social protection xi

12 spending and pro-poor government spending to the total government spending); public perception of the fairness of the tax system (as measured by an overview of the available surveys per country and the information they include); tax and gender and transparency (as measured by transparency of exemptions). Such unavailable data will have to be collected with the assistance of in country actors (CSOs) who can access country statistical offices and the government offices which work with/release the respective data. Moreover the paper was initially supposed to cover the period 2007 to 2012 but had to shift to cover the period 2000 to 2010 (for revenue data) to cater for unavailable government revenue data for the period 2011 and 2012 and also found it more statistically important to have data for a longer period since it shows a better picture of the government revenue and expenditure trends and other trends in general. Data was collected for eleven project countries which are part of the Capacity for Research and Advocacy for Fair Taxation (CRAFT) project, namely Bangladesh, Egypt, Ghana, Mali, Nigeria, Senegal, and Uganda as well as other non-craft project countries namely Morocco, Niger, Pakistan and Tunisia. Analysis was only done for five focus (DGIS funded CRAFT) project countries namely Bangladesh, Senegal, Mali, Nigeria and Uganda. The study faced challenges linked to the availability, reliability and comparability of data on the Fair Tax indicators especially government expenditure data, revenue forgone, coverage of tax system, effectiveness of tax administration, public perception of fairness of tax system, gender and transparency on exemptions data. Government revenue data was available in merged form, thanks to the International Centre for Tax and Development s innovation on the construction of a comprehensive and reliable government revenue dataset ranging from far back as 1970 to This paper sets out the issues with existing data sources and explains issues such as the process of data gathering and the discussion of remaining limitations. The paper also presents data on tax, revenue, illicit financial flows and government spending trends over the past decade. The concluding section considers strategies for and barriers to more effective data collection in the future, while a recommendations section proposes certain data (unavailable on international databases) to be collected from national sources and proffers cautionary measures to be considered when collecting data from national level sources. xii

13 1. Introduction There are significant levels of tax injustice across developing countries which are mainly perpetuated by tax systems which are regressive, not pro-poor, socially unjust, promote tax policies and practices that favour the wealthy and aggravate and perpetuate inequality and do not promote domestic revenue mobilisation (DRM). Whilst there are so many ways in which different stakeholders have used to show that indeed there is tax injustice across most developing countries, there has been a lack of, if any, barometer or tool which has been developed to really measure and compare the levels and trends of tax injustice that exists in most developing countries tax systems. It is against this background that Tax Justice Network - Africa (TJN-A), Oxfam Novib (ON) and other country based partners, under the ambit of the Capacity for Research and Advocacy for Fair Taxation (CRAFT) project decided to develop a tool to assess tax systems and to evaluate the extent to which they are pro-poor, transparent and how they help to fight inequality. The CRAFT project was developed through collaboration between Oxfam Novib and Tax Justice Network-Africa (TJN-A) and other country based partners in Uganda, Mali, Senegal, Nigeria, Ghana, Egypt and Bangladesh with a view to achieve accountable, fair and pro-poor tax systems. The project reaches out to mobilize civil societies in several countries in Africa, the Middle East and Asia (Uganda, Mali, Senegal, Nigeria, Ghana and Egypt, Bangladesh) on fair taxation. One of the CRAFT focus area is research which is meant to build vital research capacity to gain good insights in the tax justice dynamics. Moreover, this focus area researches the existing taxation policy and practice, detects the underlying trends and formulate a vision on what pro-poor and fairer taxation should look like in each country specifically using a tool known as the Fair Tax Index (FTI). The FTI uses data which will enable Civic Society Organisations (CSOs) to engage in targeted policy advocacy to change tax systems (policies and practices). In line with the FTI development process, this paper is a data collection and data analysis instrument based on some selected FTI indicators grouped into specific tax system assessment and scoring categories. The data collected and compared is for eleven selected African and Asian countries namely Bangladesh, Egypt, Ghana, Mali, Morocco, Niger, 1

14 Nigeria, Pakistan, Senegal, Tunisia and Uganda. Seven of the countries namely Bangladesh, Egypt, Ghana, Morocco, Nigeria, Senegal and Uganda are CRAFT project countries whilst the others are not. This paper s work on five focus countries (Bangladesh, Mali, Nigeria, Senegal and Uganda) extended beyond data gathering and comparability to also include placing the indicators in context 1 as well as analysing them. On the basis of the data gathered and the comparisons made as well as the placing of indicators in context and analysis done, the paper assessed the main strengths and weaknesses of each indicator. The paper managed to do the following: o determine the most suitable data source on the basis of data quality, coverage and comparability (even in cases where various data sources were available); o explain for five focus countries (Bangladesh, Mali, Nigeria, Senegal and Uganda), how they score on each specific indicator compared to the other CRAFT project countries ( Egypt, Ghana, Morocco, Niger, Pakistan and Tunisia), what this means and what policy measure it implies; o collect data on nine African and two Asian countries and further, for the five focus countries, place the indicators in context as well as analyse them; o assess the main strengths and weaknesses of each indicator based on the above; o investigate why certain indicators obtain different values in different databases; o compare definitions of each indicator among databases and o provide recommendations on what data sources should be used when constructing the FTI based on data availability, coverage of the countries and the databases review (most recently updated databases). The goal of the preliminary research was to review the availability of data as well as comparing the available data sources. This goal is envisaged to be key to the reliability of the FTI as it guarantees that quality data will be inputted in the index. The indicators used fall under categories namely progressivity, effectiveness, tax evasion and avoidance, and government spending. Data on categories namely coverage of the tax system, effectiveness of tax administration, public perception of fairness of the tax system, gender and transparency of tax exemptions was not readily available on international tax databases. 1 This involves linking the FTI indicators with tax policy and tax administration. 2

15 2. Fair Tax Index Indicators Blanks and zero figures shown in the ensuing tables refer to missing data and nil collection respectively. The study also chose to present VAT, Sales Tax and GS data separately following the same method chosen by the ICTD GRD because of different interpretations of such data across countries to avoid confusion that may arise by merging or summing up the data or figures. For example, in some countries GS tax is a separate tax from Sales tax/vat whist in other countries GS means the same with VAT or Sales Tax. Therefore summing up of the three or not will depend with the differing purposes of use of the data and the study generally found it more reliable and simpler to present the data separately to make it flexible to use Progressivity Direct tax revenue is widely viewed as the main/key tax revenue source for the future as the effects of globalization (free trade) where trade taxes (form of indirect tax) continue to decline significantly the world over. Direct taxes are also generally viewed as progressive focused as contrasted to indirect taxes (consumption taxes) which are regressive. Direct taxes, therefore, are a very strong tool to test the progressivity and fairness of a tax system. Indicators under the progressivity category are as indicated below: Share of direct tax revenue in total tax revenue Table 2.1a below shows the contribution of direct tax revenue to total tax revenue across eleven countries from the year 2000 to the year Table 2.1a: Direct Tax Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria

16 Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1a below is a graphical representation of the ratio of direct tax revenue to total tax revenue trends for the five focus countries for the period 2000 to Figure 2.1a: Direct Tax Revenue Share of Total Tax Revenue Source: ICTD GRD, 2014 Figure 2.1a above shows that Nigeria has a consistently higher level of direct tax revenue share of total tax revenue than all the other four countries during the period 2000 to Senegal has a broken line from 2003 to 2005 and this is as a result of missing data during that period. Bangladesh had generally the lowest direct tax revenue to total tax revenue ratio over the period under study which generally shows more reliance on indirect/consumption taxes revenue. A higher ratio of direct tax revenue to total tax revenue than the ratio of indirect tax revenue to total tax revenue in a country is, in general, a sign of a more progressive tax system and the vice versa. 4

17 The graph above also shows that there is no country, amongst the five focus countries, which has a direct tax revenue to total tax revenue ratio above 50%. This implies that these countries rely more on indirect tax revenue than direct tax revenue as their source of tax revenue. This generally points to a negative impact to progressivity Share of Personal Income Tax revenue in total tax revenue This ratio measures the contribution of PIT revenue to the total tax revenue. In general, it is expected that tax equity in this case should imply that those with greater ability and the rich should pay more taxes (vertical equity) and those with the same circumstances should pay similar taxes (horizontal equity). Vertical equity is normally defined in line with the ability to pay criterion. To get a better picture of equity from PIT it is necessary to also look at the PIT tax tables in specific countries to see whether the rates are progressive or regressive. Progressive rates point to a more fair system. Table 2.1b below shows the contribution of Personal Income Tax (PIT) revenue to total tax revenue across eleven countries from the year 2000 to the year Table 2.1b: PIT Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1b below is a graphical representation of the ratio of PIT revenue to total tax revenue trends for the five focus countries for the period 2000 to

18 Figure 2.1b: PIT Revenue Share of Total Tax Revenue Source: ICTD GRD, 2014 The average share of PIT revenue to total tax revenue is about 10 percent which is generally low. This points to the tax systems which are skewed more to indirect taxes revenue. There is a significant prevalence of missing data for PIT. This is worrying as PIT is an important component of direct tax which plays a significant role in contributing to the progressivity and fairness of a tax system. Senegal has missing PIT data for the period 2004 to 2010 as shown by the broken line. Nigeria has the highest levels of PIT share in total tax revenue almost across the entire 10 year period. Uganda has got missing data also for the period 2005 to 2010 and Mali for the period 2007 to However comparing PIT revenue to total tax revenue ratios across countries poses some challenges because PIT revenue levels depend on various factors such as economy size and income levels. High PIT revenue to total tax revenue ratios, therefore, might not necessarily imply a more progressive or fair tax system Share of Corporate Tax revenue in total tax revenue CIT is a form of a direct tax charged on companies. Low ratios of CIT revenue to total tax revenue imply less tax revenue contribution by companies. This is the case in most 6

19 developing countries due to the often excessive use of tax incentives and exemptions mainly given to big corporates and Multinational Companies (MNCs) in a bid to attract Foreign Direct Investment (FDI). This leaves much of the tax burden being shifted to individuals, small to medium enterprises (SMEs) and the informal sector. Table 2.1c below shows the contribution of Corporate Income Tax (CIT) revenue to total tax revenue across the eleven countries from the year 2000 to the year Table 2.1c: Corporate Income Tax Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1c below is a graphical representation of CIT revenue to total tax revenue trends for the five focus countries for the period 2000 to

20 Figure 2.1c: Corporate Income Tax Revenue Share of Total Tax Revenue Source: ICTD GRD, 2014 The share of CIT revenue in total tax revenue is an important issue. This is so because of the debate on IFFs, and transfer pricing abuse/profit shifting by corporations which has eroded the tax base and made most developing countries governments to rely more on indirect taxes and PIT and this has had a significant negative weight on the fairness of the tax system. In general, Figure 2.1c above shows low levels of CIT revenue to total tax revenue ratios of less than 10% except for Nigeria which has an average ratio above 15% and Mali with 30% from 2006 to Low CIT revenue to total tax revenue ratios could imply loopholes in the tax system as a result of issues such as IFFs, transfer pricing abuse and profit shifting including the excessive use of tax incentives and exemptions. These have a negative impact on the equity of a tax system Share of Sales Tax revenue in total tax revenue Sales Taxes are a form of indirect tax/tax on consumption. Indirect taxes are generally regressive and usually benefit the rich more than the poor. Sales taxes have generally been modernized to VATs in most countries across the globe. Proponents of the VAT (mainly the Washington Consensus) contend that it is a smart tax and collects high revenues and they 8

21 prefer governments to address inequalities from the expenditure side and not the revenue side of fiscal policy. However, most developing countries are not good at redistribution of income through public expenditure due to vices such as corruption and poor governance systems. They instead prefer to use multiple VAT/Sales tax rates, exemptions and zero rating to try and address the regressivity of the VAT/Sales tax system. Table 2.1d below shows the contribution of sales tax revenue to total tax revenue across eleven countries from the year 2000 to the year Table 2.1d: Sales Tax Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1d below is a graphical representation of the ratio of sales tax revenue to total tax revenue trends for the five focus countries for the period 2000 to

22 Figure 2.1d: Sales Tax Revenue Share of Total Tax Revenue Source: ICTD GRD, 2014 This indictor is an important component of the FTI. Some databases regard sales tax as the VAT Figure 2.1d above reflect that the five focus countries have an average of about 30% in the ratio of sales tax revenue to total tax revenue during the period 2000 to This figure is reasonably high and this is the general trend the world over where revenues from the VAT/Sales tax make up a significant share of total tax revenue. Most developing countries use various rates under the VAT, such as zero rating, use of various standard rates, exemptions to try and induce some progressivity in the sales tax or the VAT. However studies have shown that consumption of zero rated or exempted products is not exclusive to the poor and hence this dispels the progressivity of the VAT argument. 10

23 Share of Goods and Services Tax revenue in total tax revenue GS tax is known is under VAT or Sales tax in other databases. It is a form of an indirect tax which is generally regressive. Table 2.1e below shows the contribution of Goods and Services (GS) tax revenue to total tax revenue across eleven countries from the year 2000 to the year Table 2.1e: Goods and Services Tax Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1e below is a graphical representation of the ratio of GS tax revenue to total tax revenue trends for the five focus countries for the period 2000 to

24 Percent of Total Tax Revenue Figure 2.1e: Goods and Services Tax Revenue Share of Total Tax Revenue Goods and Services Tax Revenue Share of Total Tax Revenue ( ) 90,00% 80,00% 70,00% 60,00% 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% Bangladesh 53,16% 34,56% 35,77% 44,91% 37,22% 36,09% 36,95% 37,07% 35,71% 52,36% 54,24% Mali 23,53% 23,26% 0,13% 19,34% 22,13% 53,56% 55,12% 45,67% 43,87% 43,33% 42,14% Nigeria 27,65% 25,83% 21,35% 21,49% 22,16% 22,77% 25,28% 25,97% 28,64% 26,93% Senegal 60,43% 58,65% 58,60% 59,49% Uganda 80,71% 74,34% 75,26% 72,35% 71,42% 60,50% 59,90% 58,72% 61,31% 59,13% 57,88% Source: ICTD GRD, 2014 Figure 2.1e above shows that there is a significant share of GS revenue in total tax revenue in the five focus countries during the period under study with an average GS revenue to total tax revenue share of about 40%. Bangladesh shows the highest figures with its highest figure of 80.71% in the year Senegal has some missing data for several years as shown by its broken line. Nigeria has a consistent average below 30% over the entire study period. This supports the aforementioned comment that tax revenue is generally being generated more from indirect taxes than direct taxes. This brings in the importance of developing countries to strengthen their expenditure side redistributive capacity to address inequality. 12

25 Share of Indirect tax revenue to total tax revenue Like the aforementioned discussions, indirect taxes are regressive. High indirect tax revenue to total tax revenue ratios is an important pointer to a regressive tax system. This indicator is key to the FTI. Table 2.1f below shows the contribution of indirect tax revenue to total tax revenue across eleven countries from the year 2000 to the year Table 2.1f: Indirect Tax Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1f below is a graphical representation of indirect tax revenue share of total tax revenue trends for the five focus countries for the period 2000 to

26 Figure 2.1f: Indirect Tax Revenue Share of Total Tax Revenue Source: ICTD GRD, 2014 Figure 2.1f above shows an average indirect tax revenue to total revenue share of about 65% for the five focus countries. This reflects a heavy reliance on indirect tax revenue as the main source of tax revenue which has a negative impact on the fairness of a tax system Share of Property tax revenue to total tax revenue Property tax is a very important source of tax revenue although statistics and trends internationally show that most developing countries either do not have property taxes or have a very poor property tax administration system shrouded with a lot of loopholes and valuation challenges which usually result in zero or very low property tax collections. However research has shown that property tax has the potential to tax the rich more than the poor since the rich are the predominant if not the exclusive owners of property in most countries. Taxing the rich more than the poor is a good attribute of a fair tax system. 14

27 Therefore, a tax system which does not have a property tax or which has a low property tax revenue to total tax ratio weighs negatively to a fair tax system. Table 2.1g below shows the contribution of property tax revenue to total tax revenue across eleven countries from the year 2000 to the year Table 2.1g: Property Tax Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1g below is a graphical representation of the share of property tax revenue to total tax revenue trends for the five focus countries for the period 2000 to

28 Figure 2.1g: Property Tax Revenue Share of Total Tax Revenue Source: ICTD GRD, 2014 Figure 2.1g above shows that only Mali and Senegal have some form of property tax though with very low property tax revenue to total tax revenue ratios, whilst the other countries have nothing. Property tax revenue to total tax revenue ratio is an important indicator for the FTI Share of Excise tax revenue in total tax revenue Excise tax is a consumption or indirect tax. Whilst indirect taxes are predominantly regarded as being regressive, an excise tax could actually have an opposite effect because it is usually meant to discourage consumption of goods with a negative externality such as alcohol, cigarettes and petroleum products. Most countries excise tax regimes also charge excise duty on luxury goods which impact more on rich than poor people. Depending on the specific country excise tax regime, higher levels of excise tax share in total tax revenue may imply some progressivity in the tax system. Table 2.1h below shows the contribution of excise tax revenue to total tax revenue across eleven countries from the year 2000 to the year

29 Table 2.1h: Excise Tax Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1h below is a graphical representation of the share of excise tax revenue to total tax revenue trends for the five focus countries for the period 2000 to Figure 2.1h: Excise Tax Revenue Share of Total Tax Revenue Source: ICTD GRD,

30 Figure 2.1h above shows low levels of excise duty revenue contribution to total tax revenue except for Uganda. Uganda has a significant share of excise tax revenue in its total tax revenue averaging about 26% between the year 2000 and From 2004 onwards Mali also showed considerable excise tax revenue in total tax revenue. The other three countries have an average of about 2% which is a very low ratio. This indicator is important because international standards require that excise duty revenue need to cater for the control of the externalities which they are imposed on. An example is spending on health directed to cancer and diabetes treatment (negative externalities) and also spending on cleaning the environment of carbon emissions. The poor people usually find it difficult to pay for cancer and diabetes treatment for example Share of Trade Taxes in total tax revenue Trade taxes are a form of indirect tax. Indirect taxes generally affect the poor more than the rich. However developing countries still have some substantial dependence on trade taxes. It is also important to note that not all indirect taxes are regressive. High rates of taxes on luxury goods, for example, is a progressive instrument whilst low tax rates or tariffs on imports of certain basic commodities can also be viewed as a progressive tax instrument. This therefore calls for a deeper analysis of indirect taxes in order to establish whether they are regressive or not. Table 2.1i below shows the contribution of trade taxes revenue to total tax revenue across eleven countries from the year 2000 to the year Table 2.1i: Trade Taxes Revenue Share of Total Tax Revenue (Decimal) YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal

31 Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.1i below is a graphical representation of the ratio of tax revenue to total tax revenue trends for the five focus countries for the period 2000 to 2010 Figure 2.1i: Trade Taxes Share of Total Tax Revenue Source: ICTD GRD, 2014 Figure 2.1i shows a significant declining trend in the ratio of trade taxes to total tax revenue from as high as 53% (Mali) in 2000 to less than 10% in 2010 (Uganda and Senegal). This trend is in conformity with the globalization trend which has ushered in free trade regimes hence the slump in trade taxes. The general response to the decline in trade taxes has been the use of the VAT, either by increasing the VAT rate or removing exemptions and zero rating. From a developing country perspective this does not address the equity of the tax system. 19

32 2.2. Effectiveness Share of Tax revenue to GDP International standards dictate that a tax to GDP ratio of at least 30% is good. Tax to GDP ratios below 30% are a sign of ineffectiveness in tax collection. This is the trend across most developing countries with sub-saharan Africa having an average tax to GDP ratio of 15%. This is usually as a result of lack of administrative capacity and poor and or weak tax policy systems which result in tax loopholes and leakages. Table 2.2a below shows the ratio of tax revenue to GDP across eleven countries from the year 2000 to the year Table 2.2a: Ratio of Total Tax Revenue to GDP YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD, 2014 Figure 2.2a below is a graphical representation of the ratio of tax revenue to GDP trends for the five focus countries for the period 2000 to

33 Figure 2.2a: Ratio of Total Tax Revenue to GDP Source: ICTD GRD, 2014 Figure 2.2a shows that Nigeria has the least ratio of total tax revenue to GDP. This is mainly explained by the fact that, conventionally, countries that are home to significant oil production by private firms appear among the world s top tax collectors, while similarly resource-rich countries that rely on national petroleum companies appear among the worst tax collectors, as almost all revenue is classified as non-tax revenue(prichard, et al., 2014). Figure 2.2a shows a consistent pattern of an upward trend in tax revenue collection over the decade under study. Senegal had a tax to GDP ratio above 15% whilst the other four countries ratio was below 15% and hence below the 15% average ratio for developing countries. A ratio of 30% is the international ideal minimum. The low tax to GDP ratios show ineffective tax revenue collection which could also be a result of noncompliance and tax dodging which results in a few taxpayers contributing to the fiscus and hence creating challenges in making the tax system fair. The more effective tax collection is in a country the more revenue is available for public spending and this revenue can be very crucial in addressing pro-poor spending. Quality of spending is however key to achieve a good pro-poor spending. 21

34 Share of Non Tax revenue to GDP A high ratio of non-tax revenue to GDP reflects a significant dependence on non-tax revenue. More dependence on tax revenue is healthier, since it is generally envisaged that taxation fosters government accountability and representative democracy which are key to addressing inequality. Table 2.2b below shows the ratio of total non-tax revenue to GDP across eleven countries from the year 2000 to the year Table 2.2b: Ratio of Non-Tax Revenue to GDP YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: ICTD GRD & IMF WEO, 2014 Figure 2.2b below is a graphical representation of the ratio of total non-tax revenue to GDP trends for the five focus countries for the period 2000 to

35 Figure 2.2b: Ratio of Non-Tax Revenue to GDP Source: ICTD GRD & IMF WEO, 2014 Figure 2.2b shows that Nigeria has the highest non-tax revenue to GDP ratios as contrasted to very low ratios for the other four countries. In this case, it shows that Nigeria depends more on oil revenues than tax revenue and has a much more ineffective tax collection system. This negatively impacts on government accountability and the sustainability of revenue collection. This is an important FTI indicator Tax evasion and avoidance Data for this category was not readily available on international tax databases. This data can be collected from country level sources. However data on illicit financial flows was available from the Global Financial integrity database although data on actual country by country revenue losses attributable to illicit financial flows is very scarce Ratio of Illicit Financial Flows to GDP Illicit financial flows erode the tax base and negatively affect revenue collection and public spending ability. The United Nations Economic Commission for Africa (2015) estimates that Africa loses $50 billion dollars annually due to illicit financial flows. IFFs contribute to 23

36 a regressive tax system and impose an unfair tax burden on poorer sections of society. Moreover, IFFs contribute to worsening inequality in other ways as well. The provision of social services and social protection schemes are means of reducing inequality. African governments, for example, find it difficult to provide these forms of support in increasingly constrained economic circumstances. Table 2.3a below shows the ratio of IFFs to GDP across eleven countries from the year 2003 to the year The IFF data used in the table below is composed of trade mispricing (over or under invoicing and transfer mispricing) data only from the Global Financial Integrity database. Table 2.2c: Ratio of Illicit Financial Flows to GDP YEAR Country Bangladesh Egypt Ghana Mali Morocco Niger Nigeria Pakistan Senegal Tunisia Uganda Source: GFI, 2014 Figure 2.3a below is a graphical representation of the ratio of IFFs to GDP trends for the five focus countries for the period 2003 to

37 Figure 2.2c: Ratio of Illicit Financial Flows to GDP Source: GFI, 2014 Figure 2.2c shows that Mali, Uganda and Nigeria have a significant IFFs ratio to GDP whilst Senegal has a very negligible IFFs ratio to GDP. The real strong indictor which will give a good picture would be the tax revenue loss due to IFF to GDP ratio. However the data for tax revenue losses due to IFFs is very scarce. This study proposes the use of country level CIT rates to derive the actual revenue loss from IFFs. This entails multiplying the IFFs figure for a specific year with the CIT rate for the same year. The Global Financial Integrity used a similar method (Global Financial Integrity, 2014). The CIT yearly rates could be collected at country level from the Ministry of Finance, Tax Administration or country Statistical Offices Coverage of tax system Data for this category was not readily available on international tax databases. This data can be collected from country level sources Effectiveness of tax administration Data for this category was not readily available on international tax databases. This data can be collected from country level statistical sources. 25