Taxing Africa: Coercion, Reform and Development
Launch of the latest book in the African Arguments series, in partnership with the International Africa Institute and Zed Books.
Wednesday 19 September 2018, SOAS.
Mick Moore, Professorial Fellow, Institute of Development Studies
Henry Saka, Commissioner of Domestic Taxes, Uganda Revenue Authority
Jalia Kangave, Research Fellow, Institute of Development Studies
Chair: Professor Chris Cramer, Department of Development Studies at SOAS and Vice Chair of the Royal African Society
Mick Moore- Professorial Fellow, Institute of Development Studies
Key messages from the book- Taxing Africa: Coercion, Reform and Development
- When using conventional criteria for measuring the performance of tax systems, Africa performs as well or better than many other regions e.g. Asia.
- African governments are better at collecting taxes than strengthening the social compact regarding how the tax is spent.
- An account of collecting tax and who pays that tax in Africa varies drastically depending on who you are and who you are talking to: e.g. IMF, World Bank & OECD all reference figures collected by central government organisations and it is often assumed that these are the only taxes collected in Africa. However, Africans themselves refer to many taxes collected by local governments and organisations which have differing levels of legitimacy, don’t appear on government accounts but impact directly on citizens. These have more impact than national revenue authorities.
- Gender dimensions of tax are important but complex: e.g. female stall traders at six Ugandan markets, mainly said they are not discriminated against,, but in practice their costs of doing business were much higher than for men because of the high costs of using the toilets in the market area.
- The main tax gap was the tax not paid by mining companies (more so than oil companies). There is a whole chapter in the book on this, the main vehicles for tax avoidance being the shifting of profits to offshore havens, unjustified tax ‘holidays’ and wholly untaxed exports of product through informal channels. The argument that the largest tax gap is from the informal sector is false- the informal sector pays more taxes than the many of wealthiest people and parts of the formal sector.
Henry Saka- Commissioner of Domestic Taxes, Uganda Revenue Authority
Case study of tax collection in Uganda
The environment in which African tax collectors operate is not black and white. For example, the female market traders who do feel they are unfairly treated will be reluctant to pay their official taxes- as such, these factors have direct impact on tax compliance and policy making.
Uganda’s population is 39-42 million people with a large influx of refugees. However, the tax base is just 1.4 million people. 50% are salaried employees of the government and the private sector and the remainder comes from approx. 100,000 businesses that pay tax (out of approx.700,000 businesses in total)
Uganda’s current tax to GDP ratio is 14.2%. Four years ago it was 11% and in a good year it should increase by approx. 0.5%. Uganda’s revenue administration which deals with both customs and tax is 27 years old.
Employee income tax, VAT and local excise and import duties are the biggest revenue for the Authority. For local government, is mainly from property rates and semi-formal taxes.
There is a mismatch between how we think citizens should be taxed and how they want to be taxed- Africa’s taxation systems are largely copied from the west but are not always appropriate for an African context.
Key complaint of taxpayers are the confusion over what to pay, to whom and when; and the feeling that there is no connection between the taxes paid and services received. For example, Ugandan taxi drivers have started a campaign calling for fees to be consolidated at the Government level due to confusion and complications regarding different fees and charges they have to pay to various districts in which they operate. They are willing to be taxed, but want transparency of where it goes and what they get in return. On the other hand local revenue collection often sees higher compliance as tax payers are closer to the benefits paid for by the tax. Social media has also allowed the free flow of information and created a growing social interest in taxation.
The fact that many of the wealthiest people are closely involved in politics can make it difficult to tax the rich. In Uganda, both rich politicians and business resist the transparency that enables effective tax policies (e.g. collecting transaction details from banks). The revenue authority had therefore created a separate team to work with VIPs made up of people that were particularly persuasive and persistent!
There is a common misconception that the informal sector is small scale. However, many large businesses worth millions of dollars are run informally with no paperwork and all in cash with no distinction between the owner and the business. In addition, there are informal practices within the formal sector. For example, the steel industry pays scrap metal merchants in metal sheets.
As part of the debate around creating enabling environments for business, the big business lobby often argues for tax exemptions to encourage investment, especially FDI. They tend to speak directly to politicians rather than economists or the tax authorities, as the politicians seem more open to persuasion. Whilst “easing regulation” may make it easier to do business, it means that the information gathered through “red tape” regarding who to tax and how is lost, and therefore taxing business becomes more difficult.
Profit shifting within multi-national companies is an issue especially in the mineral sector, oil & gas and coffee. Ugandans in the coffee sector make only 10% of the profit drawn from consumers, as most of the profit is taken by middle men and retailers outside of the country. African-based companies are often run at a nominal loss, so that profits accrue outside the continent in low-tax jurisdictions. Statistics show that countries that have the biggest income from coffee are non-coffee producing countries e.g. USA and Switzerland.
This behaviour by MNCs is a huge issue for tax collection, but due to powerful lobby and elite interests, revenue authorities often find they are asked to focus on the informal sector. However, focusing on the informal sector is regressive as often taxing poorer people and is expensive to administer. A better approach would be to focus on wealthier tax avoiders and shifted profits. To be effective, fines for MNCs for not paying tax need to be in the range of millions of pounds, not £20,000 to £50,000 as they currently are.
More cooperation on tax is also needed between African countries. For example, through double taxation agreements with each other- not just external countries such as the UK. The OECD work on base erosion and profit shifting is useful, but the African Tax & Administration Forum needs to develop this further for themselves, for example through introducing a blueprint to improve bilateral negotiations.
The Ugandan Revenue Authority created the “Public Sector Office” specifically to focus on tax in the public sector. Programmes within government departments are often short of the money they need, so instead of paying tax, a common practice became to use the funds for tax to support programme spending instead. However, this was still misappropriating funds and the funds could still sometimes end up in private pockets. Further, the public sector is the biggest buyer and there have been issues where the public sector did not pay their debts to private business as couldn’t afford to. This is why VAT is important as the Government in turn needs to pay private suppliers.
Jalia Kangave- Research Fellow, Institute of Development Studies
The importance of public consultation of tax
Small taxes are how most Africans often pay tax - for example paying for public services, education and healthcare at the point of use, which in western countries is often free.
Further, in the register released by the Ugandan Revenue Authority is was clear that the poorer people were paying their taxes and the wealthy and politically connected people were not.
However, it is not automatic that paying taxes means that the government becomes more responsive to the needs of the people. Work is needed to build trust with citizens in a social contract.
E.g. In July 2018, the Ugandan government introduced a mobile money tax on transactions at 1% per transaction. Social media went wild in outrage at the tax. The President then responded that is was actually 0.5% and that the Government would welcome public views. Earlier and more engagement in such proposals is needed as people will respond, thanks in part to the boom in social media.
At the same time as the mobile money transaction tax, there was a social media tax or “over the top services” tax as it is known, whereby every social media user was asked to pay 200 Ugandan Shillings (equivalent to 4 pence) a day to use social media. This also caused outrage as it is seen as regressive and encroaching on the freedom of expression of the poorest people.
Whilst the need for African Governments to raise their own revenue is great - it needs to be equitable and accountable as otherwise there will be political repercussions, especially if tax is being seen as a tool to silence views (as was the case when Tanzania introduced a similar social media tax). Civil society needs a more clearly defined space to oversee tax measures and counter any negative use of tax.
NW/HB RAS September 2018