Collection troubles and resource dependency hamper government efforts to raise revenue.
Taxes often are considered a drag on economic activity, but most African countries lack so many public resources that a hike in tax revenues would largely benefit their economies.
Unfortunately, despite countries’ efforts and international appeals, the ability of the continent to collect taxes remains limited. According to the latest report from the African Capacity Building Foundation (ACR), tax revenues have surged in recent years, more than doubling to $508.3 billion in 2013 from $213.1 billion in 2002. But this increase remains dependent on volatile markets such as commodities.
“These numbers may not reflect the situation across the continent, since the resource-rich countries skew the regional average and most African countries have tax-to-GDP ratios below the regional average,” says the report, which is produced annually by the ACR, a cooperative venture backed by many African governments as well as global agencies such as the IMF.
African countries are setting relatively low corporate income tax rates and offering a variety of incentives to business in an effort to boost the tax base and eventually increase revenue. A 2016 survey by auditor KPMG showed that the average corporate income tax rate of 28 African countries is 23% or lower, with Mauritius being the lowest at 15%. Most of the countries considered in the report—called The Africa Incentive Survey 2016—are offering some sort of incentives.
“We have noticed a trend in more African countries’ attempting to diversify their economies from an over-reliance on extractive industries and to branch into mainstream industries,” the report says. “African countries appear to be introducing new or revised incentives, seemingly to compete more favorably for both local and foreign direct investments.”
Many African countries, including Kenya, Rwanda and Ghana, are offering tax incentives to attract investment. Bryan Leith, chief operating officer of KPMG’s Africa practice, praises Nigeria, whose recently appointed government has made an effort to attract private investments from abroad.
“Nigeria is moving in the right direction to attract foreign direct investments in sectors of the economy different from the oil sector,” he says.
Often tax revenue is missing owing to inefficiency in tax collection. Countries in sub-Saharan Africa have the world’s most expensive system of tax collection, the ACR report shows. One measure of cost is the ratio between the budget of the tax authority and the revenue collected. This is equal to 3% in sub-Saharan countries. By comparison, Latin American and Caribbean countries have an average ratio of 1.3%, less than half, despite the fact that the two regions have similar average numbers of people employed in tax collection, as measured by the number of tax authority staff per 1,000 inhabitants.
“The governments realize that they need to have sophisticated systems in place to make tax avoidance more difficult,” says Leith. “A good example is Mauritius, showing that you do not have to increase the tax rate to collect more. You need to have a good system in place and a high level of employment. South Africa in particular has a very sophisticated tax regime, and it attracts the most foreign direct investment to Africa.”
When making strategic investments, large international groups, although attracted by low rates and incentives, are more concerned about stability and predictability. “One of the first questions that our clients who want to move to Africa ask is, ‘What is the tax regime?’” Leith says. “They are not necessarily looking for the lowest tax rate regime; they are actually looking for certainty.”