Out-Law News 3 min. read

Industry could face more tax demands if new report’s advice followed

Companies in the natural resources, telecoms, banking and construction industries could face increased tax demands from African countries if governments follow advice on taxation contained in a report by Christian Aid and Tax Justice Network-Africa (TJN-A).

The report said that countries should focus on the enforcement of personal income tax (PIT) and corporate income tax, “with a particular focus on high net worth individuals and on the extractives sector, as well as growing sectors such as telecommunications, banking, construction, finance and tourism" if they want to reduce inequality.

It also recommended abolishing discretionary tax incentives, meaning those given to individual companies or organizations, as well as the discretionary powers vested in individual government officials that enable the granting of such incentives.

The report called on governments across Africa to overhaul tax systems to combat rising inequality. It claimed the absence of effective taxation systems in sub-Saharan Africa are “directly responsible for the unacceptably high levels of poverty suffered by so many on the continent”.

National taxation systems, international taxation issues and the relationship between them are discussed in the report, which also considered how “the enabling environment for tax dodging impacts on national tax systems in sub-Saharan Africa”.

The report looked in detail at trends in revenue generation, tax equity and tax reforms with a special focus on the experiences of Kenya and South Africa, which it says “have two of the stronger tax systems in sub-Saharan Africa, but which also have extensive shortcomings in the area of tax equity”.

The report added: “To make progress, sub-Saharan Africa must be able to tax its vast income and assets held offshore. This means tackling illicit financial flows and tax dodging in all its forms. However... there are severe limits to national-level action. Systemic, global reforms are a vital part of the answer.”

Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-Law.com, said the report raised important questions about the development of tax policy and processes in Africa. 

She added: “There is broad support for the basic objective of enabling poor countries to become less reliant on aid, by improving the proportion of income collected in taxation. The report recognises the difficulty of obtaining reliable data in many key areas, and on the whole is transparent in acknowledging the limitations of the figures used. 

“However, it is disappointing to see the figure of $160 billion quoted yet again as being an estimate of 'trade mispricing'. Mike Truman, the editor of Taxation, comprehensively challenged this number in 2010. By repeating a figure which many feel is seriously overstated, Christian Aid risk damaging the credibility of other statistics quoted in their report.” 

Countries studied in detail are Ghana, Kenya, Malawi, Nigeria, Sierra Leone, South Africa, Zambia and Zimbabwe. The report says they were chosen because they are countries in which TJN-A and Christian Aid’s partners and members are actively collaborating to advocate for progressive taxation reforms.

The report said: “While some of these countries can provide us with some examples of good practice, generally there is great concern over the need to ensure a progressive taxation system is in place and the lack of progress being made to reduce inequality.”

According to the report, there are “many shortcomings” in direct taxation in the countries studied. “Personal income tax systems lack equity as the bulk of the burden is on employees.”

In South Africa, the government has been actively reforming the PIT system so that the tax burden on higher earners has been reduced year on year, according to the report. “The same yearly income in real terms was being taxed at 33.8% in 1994/95 but only 18.2% in 2010/11.”

The report said: “If countries in Africa cannot tax income and wealth correctly, they will shift the tax burden onto the poor.” There has been a “comprehensive failure” to tackle decisively the lack of transparency and the unfairness of international tax rules that allow resources to be “drained” from Africa, the report says.

The report urged governments in sub-Saharan African to coordinate tax policies and improve their access to information across countries as well as pushing for global reforms. It said measures should include signing and incorporating the Organisation for Economic Co-operation and Development’s (OECD) Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

"The report rightly highlights the problem of tax evasion by wealthy individuals as being a key part of the problem," said Self. "Major governments such as the US, with the Foreign Account Tax Compliance Act, and the UK, with the Lichtenstein and Swiss disclosure initiatives, have had a significant focus on similar issues in recent years, and there may be more that Africa could learn from their experience." 

“In the corporate area, there is general support for the principle of transparency, and particularly for the provision of sufficient information to tax authorities for them to be able to perform a proper risk assessment of a multinational group's tax position," she said. "However, the proposal for automatic exchange of information is unlikely to be supported where a local tax authority does not have strong processes in place to preserve the confidentiality of commercial data, and to ensure that the data is only used for its intended purpose.” 

 “It is now time to move this project forward and to look for realistic ways to help African countries to improve their tax revenues," said Self. "Some of the initiatives already in place, such as the ‘Tax Inspectors without Borders’ project, are already providing support to local fiscs in building capacity. But more could be done, and there is an opportunity for constructive engagement with major companies and advisers, as well as the NGO and civil society movements.”

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