Revenue generation is an ongoing headache for African governments, but attempts to plug holes in the fiscus often amount to ad hoc measures that have unintended consequences.
Tax is a crucial revenue stream that governments must battle to get right.
Many African countries have a small tax base because of the informal nature of their economies.
But rather than putting in place sustainable, broad-based systems that deliver predictable revenues, governments often resort to ad hoc taxes on specific goods and services or disproportionately burden multinational companies.
A 2018 report from the International Monetary Fund (IMF) argued that African countries could increase their tax revenues by an average of 5% annually if comprehensive tax reforms were carried out.
In many countries, such action seems unlikely. In cash-strapped Zimbabwe, a deeply unpopular 2% tax on electronic transactions was introduced in 2018 in a bid to address tax shortfalls created by a shrinking formal economy.
After years of economic hardship, severe cash shortages have led to a spike in electronic transactions, putting most people in the catchment of the new levy.
It has hit everyone hard, but particularly small traders operating on tight margins.
In July 2018 the government of Uganda imposed a tax on social media and a 1% levy on all mobile money transactions, which affected some 5m people.
The move may bring more money into government coffers, but it has had other consequences.
The Uganda Communications Commission says that internet subscriptions declined substantially and the value of mobile money transactions fell by $1.2m in the three months following the imposition of the tax.
Multinational companies are easy targets because of their obligation to stay on the right side of the law.
The African Union and others have accused foreign companies of avoiding tax through transfer pricing and other complicated measures, but they remain the biggest taxpayers in most countries.
In 2015, Rwanda reported that 70% of its tax base came from multinational entities.
In Nigeria, it was 88%. In Burundi, one foreign company contributed nearly 20% of the country’s total tax collection.
This disproportionate reliance on multinationals means that tax avoidance has an equally disproportionate impact on national revenues.
Base erosion and profit shifting by multinational companies – defined as tax avoidance strategies to exploit gaps and mismatches in tax rules in order to artificially shift profits to low or no-tax locations – are often the outcome.
Failure to invest
The Organisation for Economic Cooperation and Development (OECD) is working with 100 countries to develop a country-by-country reporting initiative that aims to address this problem.
It will require multinationals with consolidated revenues to provide information relating to their activities in each country in which they operate rather than accounting as a single entity.
This will include information about revenue, profits, employee numbers, tax paid and tax payable in each jurisdiction.
But many of the problems with taxation in Africa are about something much simpler – the failure of governments to invest in institutions, skills and capacity to increase the size of the formal sector.
Nigeria, which has the biggest economy in Africa, also has the lowest tax-to-GDP ratio – just 5.9%, according to the International Monetary Fund.
The informal structure of the economy allows people to do business under the radar, often with the collusion of officials who turn a blind eye.
President Muhammadu Buhari has moved to change the situation with a targeted campaign against defaulters, which included a tax amnesty. By mid-2018 this had brought in $84m.
But in Nigeria, as in many other countries, officials have been overzealous in their attempts to remedy years of poor tax compliance.
Companies have complained about regular harassment, saying government is targeting those who are already compliant.
At issue is not just the principle of paying tax but related issues such as weak institutions and skills shortages, the ambiguity of tax legislation and the ad hoc and sometimes retrospective application of tax laws.
In Nigeria, as in most African countries, the public also resists paying tax because of a view that public money is either squandered on projects that offer little value to citizens, or misused by public officials.
Another issue is the cost of maintaining bloated public service wage bills and dysfunctional or bankrupt state-owned enterprises.
In Zimbabwe, the public sector swallows up a massive 90% of the national budget, leaving almost nothing for healthcare, education, infrastructure and other sectors.
In Kenya, public servants account for less than 10% of the population but their wage bill takes more than 50% of tax revenues.
But the solution is not only in tax reform but in improving the business climate to enable companies to grow.
It also requires building stronger institutions to ensure more accountability and transparency in government spending.
Greater trust may remove the need to use heavy handed measures to enforce tax compliance.
Dianna Games is CEO of Africa @ Work, an advisory company focusing on African business