A COLLABORATION BETWEEN THE AFRICAN TAX ADMINISTRATION FORUM AND THE AFRICAN UNION COMMISSION

African Tax Administration Forum • May 17, 2021

POST-COVID TAXATION: POLICY AND ADMINISTRATIVE STRATEGIES FOR MOBILISING ENHANCED DOMESTIC TAXES IN AFRICA

The 5th ATAF High-Level Tax Policy Dialogue attracted over 380 officials from Ministries of Finance and African Tax Administrations of 49 African Union (AU) member states, Members of Parliament, Regional Economic Communities (RECs), Civil Society, African Development Bank (AfDB), African Central Banks, African Stock Exchanges, African Capacity Building Foundation (ACBF), Organization for Economic Cooperation and Development (OECD), Global Forum for Transparency and Exchange of Information, United Nations Economic Commission for Africa (UNECA), International Monetary Fund (IMF), Development Partners including FCDO and NORAD, other key partners, the Media, individual tax policy experts and private sector players. The High-Level Tax Policy Dialogue took place virtually on the 5th and 6th May 2021 under the theme “Post-COVID Taxation: Policy and Administrative Strategies for Mobilising Enhanced Domestic Taxes in Africa”. The event was jointly organised by the African Tax Administration Forum (ATAF) and the African Union Commission (AUC), with the support of the African Development Bank (AfDB).
The three speakers in the Opening Session: Mr Logan Wort (Executive Secretary, ATAF), Mr Phillipe Tchodie (Chairman, ATAF Executive Council) and H.E. Amb. Albert Muchanga (Commissioner, Economic Development, Trade, Industry and Mining at the African Union Commission) highlighted the following critical issues:
As the COVID-19 pandemic has had a major economic impact on African countries, it is clear that African countries can no longer continue to rely on aid to supplement domestic revenue. Therefore, governments need to look inwardly to innovate and apply scientific methods and approaches to doing business. Most importantly, countries should push to consolidate tax bases by shoring up Domestic Taxes, such as Corporate Income Tax, Value Added Tax and Personal Income Tax; hence the focus on these tax heads during this dialogue.
While countries continue to focus on building efficient and effective systems to stem Illicit Financial Flows largely by Multinational enterprises, African countries also need to deploy mechanisms that will assist small to medium-sized enterprises, many of which remain on the brink of economic collapse from the pandemic. In achieving this, governments should improve efforts to work with private sector players, with a particular focus on women, whilst creatively expanding the tax net. In this regard, governments should aim to improve tax fairness, tax certainty, transparency, and equity. Tax morality was consistently tabled as critical to increased tax compliance as governments consciously account for how they use tax revenue through improved spending on public services.
A recurring theme of the discussion was the need for digitisation of systems as critical for any meaningful progress by tax administrations if they are to keep up with constant advancements. Tax administrations will need to re-evaluate their approaches to encouraging voluntary compliance by being innovative and implementing modernised tools in tax administration, including expanding electronic payment, online filing, and the use of mobile applications to improve tax administration which will reduce the cost of compliance for taxpayers. Also, revenue authorities were urged to use ICT solutions even further through practices like pre-filling taxpayers’ tax returns from third-party information and advancing data analytics to improve tax compliance. Additionally, countries should strive to ensure quality tax spending through targeted investment in technology to improve voluntary compliance.
The Meeting welcomed that The African Union Commission (AUC) has commenced the process of the appointment of a Champion and Leader on the Mobilisation of Domestic Resources and the Elimination of Illicit Financial Flows from Africa. The Champion and Leader will be at the level of a Head of State and will lead the drive and advocacy for increased DRM on the continent with a specific focus on key sectors such as extractives. The Champion will provide regular reports to the peers in the African Union Assembly of Heads of State and Government; and, in the process, enhance political dialogue on these pertinent issues.
In enhancing collaboration regarding Domestic Resource Mobilisation and stemming Illicit Financial Flows on the continent, the meeting welcomed the progress made by the African Union Commission and the African Tax Administration Forum (ATAF) in establishing a Continental Platform on African Tax Issues as tasked by the First Extraordinary Session of the Specialised Technical Committee (STC) on Finance, Monetary Affairs, Economic Planning and Integration held from 1st to 4th December 2020. The platform’s main aim is to enable discussions on tax issues that affect African countries and facilitate the development of tax policies that strengthen Domestic Resource Mobilisation to contribute to the attainment of Agenda 2063. To advance this initiative and the AUC’s tax policy structure, the meeting was informed by the AUC that ATAF had placed a designated tax expert at the AUC, to provide required technical support, a move greatly appreciated by the Commission.
The meeting welcomed efforts that governments have put in place to sustain cash flow for businesses during the pandemic. It was generally agreed that in moving forward in implementing tax policies that are fit for purpose in the post-COVID era, governments should be more open in firstly supporting businesses that have been hard hit by the economic effect of the pandemic and also engage private sector players to ensure that business growth is highly considered. To support these efforts, strengthening the relationship between tax administration and taxpayers would ultimately be hinged on supportive tax policy and sound administrative processes that encourage compliance through increased and targeted communication.
The meeting observed that the private sector is a critical engine for the economy. Therefore, the role of the private sector in driving economic growth was recognised. As a result, a great opportunity for collaborative opportunities and partnerships exists, particularly in the area of digital innovation. In this regard, the State’s role should largely be the creation of a conducive economic environment for enabling growth, as well as transparency in public spending as a means to honouring the social contract between the state and its citizens.
The meeting also agreed that as some countries have adopted, Public-Private Dialogue should be a priority in designing fiscal and tax policy measures as businesses provide valuable inputs regarding the impact of these policy measures on private sector development.
The meeting agreed that there should be a directed and analytical approach to the granting of tax incentives as they could have a negative effect on outcomes that a country may be seeking. Therefore, incentives should be sector-specific and driven by tangible and achievable economic outcomes. However, the meeting agreed that as research has shown that tax incentives are not key determinants of investment decisions by investors, governments should first seek to curtail their use and address other critical issues such as the rule of law, infrastructure and human capital development.
The meeting agreed on the need to expand the tax base to include both the informal and agricultural sectors. Taxation of these sectors should be transparent and ensure that the tax burden is allocated equitably. However, the meeting cautioned countries not to seek to increase taxes on the informal sector as a post-COVID-19 policy measure, as this sector remains significant in African countries in the absence of proper social protection systems. In contrast, African countries like the rest of the world should look into effective taxation of the wealthy, commonly referred to as High Net Worth Individuals (HNWIs) and those businesses that have benefitted from the pandemic, such as those providing digital services and goods, telecommunications etc.
African trade blocks should focus on greater tax alignment to ensure the success of the AfCFTA. In addition to this alignment, African countries should strive for a greater level of predictability in tax policy frameworks, build business confidence, and provide investors with certainty.
The meeting noted measures that enhanced cash flow and minimised the compliance burden on taxpayers were the most helpful in facilitating the survival of businesses, while measures to support healthcare facilitated the access to PPEs required in containing the pandemic. As such, it was underscored that African countries should transform these into permanent measures while not compromising the improved efficiency and effectiveness of VAT administration and the tax system. Such measures should include but not be limited to the implementation of policy and administrative frameworks for the use of technology in tax administration, especially the adoption of digital channels for service provision to taxpayers and improved efficiency in VAT refund.
The meeting noted that to fight the COVID-19 pandemic, the value of collaboration and consultation between both state and non-state actors and with other partners; as well as the inclusion of business interests in planning for the implementation of recovery measures, was critical, as was the simplicity of measures and their presentation to gain support and as a basis for good compliance.
While the meeting recognised that relief measures were necessary for post-pandemic consumption to recover, there is a need for attention to be given to ensuring that the recovery also addresses the needs of low-income households and the most vulnerable. However, caution was also expressed on the fact that administrations need to maintain vigilance against abuse of the repayment/refund mechanisms in the case of VAT while also aiming for faster repayments where possible as this aids business certainty.
The meeting agreed that to support post-pandemic recovery, African countries need to balance mobilising revenue and supporting businesses by implementing measures that strengthen the VAT base while improving compliance enforcement and voluntary compliance. The VAT refund process, it was observed, could be used as an incentive for improved compliance, as good taxpayers are prioritised for refunds over those who have defaulted.
It was recognised that the pandemic had stimulated the digitisation of supplies. It was noted that implementing a compliance regime for cross border supply of electronic services is one of the ways to strengthen the VAT base, especially if the regime is in harmony with the global best practices of simplicity and consistency. Consistent global practices are the key to implementing an effective regime because it mitigates the compliance challenge for businesses that operate across multiple jurisdictions where they have no physical presence. Consistency is to facilitate voluntary compliance thus should not be seen as usurping the sovereignty of a jurisdiction.
The meeting unanimously agreed that while deferred payments and downright exemptions for the affected sectors during the pandemic have been welcomed, it is paramount for tax administrations to expedite VAT refunds without compromising quality audits and other recovery methods. The meeting also noted that the management of these refunds on a case by case basis could be an extra boost to determine improved tax compliance, as good taxpayers will continue to enjoy steady and timely refunds due to established integrity.
The meeting further agreed that VAT compliance monitoring and enforcement could be improved by implementing an effective framework for harnessing internal and external data and using technology in processing such data. This is vital to having an efficient compliance improvement programme inclusive of good risk-based compliance activities. Deepening compliance should be prioritised over measures such as VAT rate alterations which may cause a burden on businesses and consumers or counteract the objective of facilitating recovery in economic activities.
The meeting was informed on progress made by ATAF and IGF on their work on the future of resource taxation in preparing resource-rich countries to shore up their extractives revenues post-COVID-19. Through this collaboration, a paper was produced which showed that there was a fall in demand for some minerals and a fall in the price of several commodities. Two critical issues for recommendations on mining policy during this period of COVID-19 are: (i) on how to improve the current fiscal regimes, and (ii) what is the alternative to the mining sector in resource-rich countries?
The meeting agreed that due to the technology development and the opportunity of discovering new minerals, African countries should not rely on the status of their minerals and get prepared to face the future when these shocks come across. The need for Countries to invest in building capacity in understanding minerals value chains continues to be a threat to their effective pricing and taxation, and the necessary stakeholders must prioritise this.
As resource-rich countries face challenges such as Illicit Financial Flows, inadequate tax regimes and limited human and financial resources, leading to more than US$ 1 billion yearly loss from this sector, the meeting agreed that countries should implement reform measures. These reforms include disallowing mineral royalties as a deductible expense for Corporate Income Tax purposes, adjusting the Thin Capitalisation Rules to the Fixed Rating Rule, increasing the mineral tax rate based on the turnover, introducing the import duties on some mineral-based products to protect the local industry, and investing equipment to check the quality of minerals.
The meeting noted that mining taxation is not just a national problem but continental. Therefore, the African countries should work on setting their mining standards for taxation. It was agreed that the localities where these mineral resources are exploited and the mining revenue should be used to assist these communities. ATAF was tasked with prioritising support to African countries in effective taxation of this sector, as the additional income would support recovery plans from the COVID-19 pandemic.
The meeting agreed that to rebuild post-COVID-19, there is a need for a second renaissance for resource- rich countries as they look for ways to attract investments in the extractives sector. Therefore, the type of investment needed should create value addition at the local level, avoid the mistakes of the past that gave away resources, generate good-paying jobs for citizens and infrastructural development, all supported by strong, progressive, robust and fair fiscal regimes that establish a legacy for the continent.
In regard to tax compliance and improvement frameworks, the meeting agreed that there is a need to understand the issues around obtaining new data sources. It was noted that critical issues to consider included legal constraints and ethical principles of reasonableness and proportionality. This is informed by a wider understanding of the social compact between the revenue administration and its citizens, enabling the wider conversation about access to third-party data. In other words, the balance between openness versus confidentiality in a given country, and if that needs to shift to give administrations access to the right data and information.
The meeting recognised the need to adapt the skills set of resources and the organisational structure needed to make the best use of data once obtained. To improve outcomes from data analytics, it was agreed that countries should consider the type of systems and mechanisms needed to put data to best use, the right number of people with the right skills in place, and the opportunities in sharing and collaborating.
The meeting acknowledged the crucial role played by availability of data, access to data in the assessment and collection of taxes and to this end, the meeting called upon African countries to put in place the relevant infrastructure to access the data required, including improving the regulatory framework relating to data access. The meeting requested tax administrations to work closely with other government agencies to put in place a mechanism that would allow the free flow of information between different government departments.
A general concern was the challenges of accessing data, such as legal hurdles and privacy rights enshrined in the constitution for citizens of a particular country that may pose problems for tax administrations to access the information needed. The meeting asked the relevant tax administrations to work with relevant institutions such as Finance Ministries to make legal modifications and reforms that would allow tax administrations to have unhindered access to the tax information. Indeed, the balance between privacy and access should be recognised and addressed in national frameworks.
Given the sensitivity of tax information and the need to collect taxes, the meeting urged tax administrations to put in place confidentiality process and procedures to gain the confidence of taxpayers without stifling the need for a useful exchange of information for tax purposes. In this regard, it was highlighted that countries that do not have Exchange of Information (EOI) units in their tax administrations need to establish these at the very earliest, to support meaningful audits.
Globalisation has allowed taxpayers to move freely across the world, and this poses a challenge for tax administrations if there is a need to enforce tax laws for taxpayers who are beyond the reach of tax administrations. Realising this challenge, the meeting recommended African tax administrations embrace and implement Exchange of Information on request and Automatic Exchange of Information, which will help increase tax collection and recovery. Coordinated collaboration across Africa was also recognised and encouraged as a way to improve engagement, overcome legal and technological constraints, and enable mutuality of benefits to occur. In this regard, the meeting applauded the work done so far by ATAF and the Global Forum on Transparency and Exchange of Information for Tax Purposes in aiding countries to form these EOI units and stressed the need for the two institutions to support the remaining countries without this function.
The meeting agreed that to enhance tax compliance, a holistic and innovative approach has to be deployed. Countries were encouraged to strongly consider the Science Model that the Uganda Revenue Authority uses, which gives revenue authorities an unprecedented level of access in regard to taxpayer transactional data and fraud scheme information such as sales suppression. Also, by implementing new tax administrative strategies, revenue authorities will be able to combat under-declaration and provide science-based research and advisory for a more equitable and effective tax policy. Specifically, the impact of the model was recognised with enhanced audit outcomes of US$29.5 million since 2017. Moreover, the meeting recognised that digital forensics gives insight on IFFs, a pertinent issue outlined to be dealt with by the AU High-Level Panel Report-an effort led by Former President Thabo Mbeki.
It was recommended by the meeting that countries adopt using IT tools for greater analysis into taxpayer behaviour and the unearthing of complex schemes that would otherwise not be captured using traditional audit methods. Computer forensics have enabled tax administrations to dig deeper into taxpayer’ systems in cases where some taxpayers can have various databases and accounts to suppress incomes, to lower their taxable income.
The meeting agreed that tax administrations need to use tools that measure the performance of tax systems and further provide a basis for benchmarking the performance of systems as well. This is critical to ensuring that systems currently in use remain relevant and responsive to the rapid changes in information technology, taxation landscape both regionally and globally.
In assessing the efficiency of tax administration, the meeting agreed that it is an important aspect to guide future reforms in certain directions based on the results achieved through focused diagnostic studies. For African countries to sustain progress in improving their tax systems, there is a need to conduct diagnostic tax administration assessments using the existing tools periodically, such as the Tax Administration Diagnostic Assessment Tool (TADAT) developed by the IMF.
It was recommended that countries invest time, human and financial resources to implement outcomes from these assessments for meaningful reforms. The discussants noted tools like TADAT give an objective view of the tax administration system’s health, provide a baseline for tax administration to focus, set reform objectives, and establish priorities and sequence implementation. Countries were further encouraged to use available resources, including the African Tax Outlook (ATO) annual publications, in addition to others, which provide the necessary tools for tax administrations in embarking on a path toward continuous tax system improvement.
The meeting echoed the importance of adequate and accurate tax-related data and statistics to assess tax administration efficiency adequately. The discussants noted weaknesses across African tax administration systems that included – an unreliable taxpayer registration base, under-utilisation of digital technologies to enhance compliance and revenue collection processes, ineffective risk management (compliance, institutional and human capital risks), unresponsiveness to taxpayer needs, unstructured processes and procedures, and lack of accountability and transparency in the tax administrations’ operations. ATAF was called to continue delivering capacity development activities more especially through peer-to-peer learning in identified weaknesses.
The meeting agreed that tax administration efficiency is vital in ensuring a high tax to GDP ratio for much- needed revenue to provide socio-economic infrastructures. It was noted that although the average efficiency score for the thirty (30) African member countries was 84.9 per cent and that 50 per cent of tax administrations were less efficient, the tax administration average efficiency has increased by 4.1 per cent over the 4-year period (2016 -2019). This was, therefore, a clear incentive for countries to assess their health in terms of their tax system.
Further still, a significant percentage (56 per cent) of the assessed African Tax Administrations scored poorly in a number of the dimensions under TADAT. This indicates inadequate performance that calls for vigorous reforms to ensure effective and efficient domestic resource mobilisation. Countries were called upon to leverage existing efficiency at the regional level or other organisational through peer learning activities organised by ATAF.
The meeting emphasised the critical role that the African Union plays in providing political support for African tax policies and working with member states to ensure that our taxing rights are secured. The role of ATAF for over a decade in providing Domestic Resource Mobilisation support to African countries was lauded. The meeting also recognised the financial support provided by the African Development Bank in delivering this yearly High-Level Tax Policy Dialogue.
In conclusion, the meeting appreciated the High-Level Tax Dialogue and urged both the AUC and ATAF to continue the efforts in bringing together relevant stakeholders to debate salient tax issues while building a nexus between tax policy and tax administrators.