Ingé Lamprecht
3 minute read
20 Mar 2014
9:00 am

Plugging Africa’s tax leaks

Ingé Lamprecht

The erosion of national tax bases in Africa is not the result only of multinationals' aggressive tax planning practices, but is often self-inflicted due to governments' ill-conceived tax incentives.

Image courtesy stock.xchnge (KillR-B)

Logan Wort, African Tax Administration Forum (Ataf) executive secretary, says the continent “signs away” its own revenue, thereby further eroding its tax base.

Speaking at the ATAF Consultative Conference on New Rules of the Global Tax Agenda, he said: “We sign away our own revenue, often through ill-conceived tax incentives. We sign it away through non-transparent concessions we give to multinational corporations; often through non-transparent deals in the extractive industry. We sign it away by not sufficiently taxing the wealthy.

“So it is not only the behaviour of corporations that affects our tax base but it is also our own behaviour and the disconnect between tax policy and tax administration that leaves huge gaps and huge tax losses.”

Wort’s comments comes amidst global efforts to address base erosion and profit shifting (Beps), a practice that can loosely be described as multinationals exploiting loopholes in international tax regulation to minimise taxes.

While Beps is not illegal, it can distort competition and investment decisions and could also undermine voluntary compliance by taxpayers since it is deemed to be unfair.

Multinationals such as Starbucks, Google and Amazon have all been under fire in the recent past for “not paying their fair share of taxes”.

The erosion of the tax base is also a problem since the tax burden could fall to the balance of the citizens that may not have much opportunity for tax planning.

The Organisation for Economic Co-operation and Development (OECD) has been actively involved in international efforts to address challenges related to Beps and published an ambitious action plan in this regard in July last year.

Wort says at a policy level many African economies do not have a sufficient tax mix and there is either an overreliance on indirect taxes or an overreliance on a single source (for example oil, copper or gold). This affects countries’ ability to develop a sustainable revenue base.

Base erosion is a problem for most developing countries – for many of these countries activities by multinational corporations constitute a large and significant portion of national income.

However, due to various practices, which could include the payment of royalties and management fees and over-gearing of subsidiaries, this income is often eroded.

Lee Corrick, OECD transfer pricing specialist, said corporate tax often represents a higher proportion of an African country’s tax base than it does in more developed countries.

Close to 20% of tax revenues in low-income countries arise in corporate income tax compared to 8% to 10% for developed countries, he said.

Eduard Westreicher, representative of ATAF’s development partners, said it was estimated that the average annual losses in 2006 could be as high as around $100 billion in developing countries and $3.8 billion in Africa.

Westreicher said many African tax administrations suffer from a lack of skills and find it difficult to address tax problems with adequate instruments.

Ivan Pillay, acting commissioner of the South African Revenue Service (SARS) and chairman of ATAF, said delegates had to ask themselves if they had all legal instruments needed to adequately deal with base erosion.

It should also consider to what extent its domestic tax policies encourage the erosion of the potential tax base.

Pillay said the mobilisation of resources through taxation is a top priority on Africa’s development agenda.

A survey across Sub-Saharan Africa suggests that average tax revenue was around 24% of GDP from 2000 to 2010.

When compared with tax adverts in OECD countries it is clear there is room for African countries to expand tax revenue generation, he said.