Ongoing economic pain wrought by the Covid-19 pandemic has put government revenue under a harsh spotlight. The likely direction to be taken by tax authorities in Africa in a post-pandemic era was discussed in a recent webinar co-hosted by LEX Africa and the South Africa-Nigeria Business Chamber. One disconcerting possibility raised was that revenue shortfalls would prompt more aggressive tax collection methods.
Palliative measures put in place to provide financial relief to companies and individuals affected by the Covid-19 pandemic have exacerbated revenue woes for African governments.
The four panellists at the LEX Africa-SA-Nigeria Business Chamber webinar discussed what might happen as governments go in search of new sources of revenue – while still trying to stimulate economic growth. Questions included whether African countries would see more aggressive tax collection, higher and greater numbers of taxes and the erosion of current economic stimulus benefits.
There are four main ways governments can raise more income from citizens: introduce new taxes, increase existing tax rates, reduce tax benefits or deductions, and implement aggressive tax audits to close the net on possible defaulters.
Africa tax expert Kunle Olatunji said there were already reports of increasingly vigorous tax collection methods and harassment of companies as officials were pushed to meet revenue targets.
He said new taxes should be expected, too. Ghana had already introduced a Covid-19 relief levy and digital services and carbon taxes were reportedly on the way – as well as increases in other areas such as excise duties, Olatunji noted.
He said Africa’s needs were significant, with governments borrowing 66% of GDP in 2020, the highest in 15 years.
One solution to the revenue problem might not be increasing taxes for those already inside the net but improving countries’ tax-to-GDP ratios. Currently, the average in Africa is a low 16.5%, compared to the OECD average of 34.3%, with Nigeria, Equatorial Guinea and Chad the lowest and South Africa, Seychelles and Tunisia at the top of the African list.
“This shows the potential of what can be done,” said Olatunji.
But governments were more focused on short-term revenue collection than adding long-term value by improving the business environment, which would have a knock-on effect on the tax base, he added.
Lawyer Nazima Malik of Kaplan & Stratton in Kenya spoke about what the Kenyan government had offered – and taken away – over the Covid-19 period in terms of tax and other measures. She said palliative measures were put in place with the onset of the pandemic, to alleviate hardship, but many of these were removed early in 2021, even as the pandemic continued unabated.
These measures included an initial reduction of value-added tax (VAT) from 16% to 14% and a reduction in the corporate tax rate from 30% to 25%. Removal of these concessions brought an outcry from the corporate sector, “particularly because recovery was not yet in sight”.
Malik said government actions had been a case of “giving with one hand and taking away with the other” as it had summarily imposed new costs such as a withholding tax on non-resident activity and on marketing services to companies outside Kenya. It had also removed certain exemptions.
In the June budget, the Kenyan Treasury had met its revenue collection budget for the first time in a while – after it put the tax tribunal under pressure to clear a backlog of almost 800 cases in two months. This had generated a lot of income for the government.
Transfer pricing and price erosion is a big issue in Africa, but concerns were voiced about whether the authorities might exploit existing mistrust between the private sector and government to assume guilt by companies where there was a dispute and they did not have the capacity to rule on such matters.
Nigerian tax lawyer Ivy Osiobe of law firm Giwa Osagie & Co confirmed that Nigeria’s tax compliance was very low, with a tax-to0-GDP ratio of just 6%. Out of a potential 77 million taxpayers, only 10 million actually paid tax. Problems included lack of decent tax infrastructure and multiple tiers of taxation due to Nigeria’s federal system and what Osiobe called a broken social contract between government and citizens.
“We have a perverse social contract in Nigeria. Taxpayers say, ‘We don’t want to pay tax because we are not getting anything from the government’, but the government says, ‘If they are not paying tax we don’t have to give them our resources’.”
Most Nigerian tax comes from just one sector – the oil industry – which contributes just 9% to GDP but 61% of tax revenue. The crash in the price of crude oil as a result of severe retraction during the early period of Covid-19 hit the fiscus hard and resulted in serious forex shortages.
“We know that no country can tax itself into wealth, so we need to find long-term sustainable measures to increase revenues,” observed Osiobe. This could be done by increasing the size of the formal sector and, in turn, the number of taxpayers.
Nigeria’s tax agency, the Federal Inland Revenue Service (FIRS), has been under attack for what many see as its aggressive revenue collection methods, often naming and shaming companies before allegations about tax avoidance have been resolved.
South African mobile phone company MTN has suffered this treatment in recent times, eventually paying a fee well below what FIRS had alleged it owed.
Another South African company, broadcaster Multichoice, is now facing allegations by FIRS of tax evasion relating to tax obligations of a company’s heaquarters over services rendered to a subsidiary. The tax authority claims Multichoice owes a massive $4.38 billion in historical taxes.
Multichoice, which denies culpability, nevertheless has had to pay 50% of the amount to a tax tribunal just to get its appeal heard. It says the tax authority put the issue in the public domain even before approaching it on the matter.
Osiobe said the FIRS was not specifically intimidating investors but the country’s low tax base meant large taxpayers were very visible, which made them easy targets.
The Nigerian government was trying to increase the tax base by improving the ease of doing business, introducing incentives for paying tax and other measures. But a new challenge has been the taxing of digital services, for example, companies providing services in Nigeria where they have a significant economic presence.
Dev Erriah of Erriah Chambers in Mauritius said the country had been an international tax centre since 1993, with the aim of attracting foreign investors with very low tax rates so they could use it as a gateway to investment in Africa and other regions.
Mauritius has a network of tax treaties with many countries, including 40 in Africa, which has led to allegations that the country is being used for tax evasion. Erriah denied this, saying the aim was to prevent companies paying double tax. The strategy is based on an OECD model.
Erriah said concerns emanated from the fact that one country may lose out on tax paid, while another benefits. However, the details were negotiated on a bilateral basis and would eventually benefit both countries as the situation encouraged foreign direct investment to flow into African countries, which might not otherwise be the case.
He said Mauritius would not allow foreign multinationals to use it purely for tax purposes. Transactions routed through the country had to have “substance”.
Tax burdens of 33% to 40% were not attractive to investors into Africa and if they could not get a better deal, they were likely to look elsewhere, he said.
Mauritian regulations do not enable tax evasion, he said, but the country was on the “grey list” of the Financial Action Task Force because of concerns that its regulatory structure relating to anti-money laundering, counterterrorism and financial counterterrorism did not fully comply with the regulations of the task force. It is fighting to get off the list and a task team will visit Mauritius later this year to review the situation.
Webinar panelists suggested that the African Union devise a tax agreement model for Africa to ensure the continent remained attractive to investors and was not compromised by individual countries’ regulations and laws.
Malik commented that such an initiative seemed to be a long way off given that, even in East Africa, the regional bloc with the deepest integration efforts on the continent, there was no harmonisation of tax or double-tax treaties among member states – though a common agreement on customs issues was in place.
Olatunji said continental tax harmonisation was an achievable goal, but the question was how soon it could be put in place. Currently there was harmonisation of legislation in pockets and the recently implemented African Continental Free Trade Area was accelerating the process.
“Once we have trade harmonisation, it will be easier to move to tax harmonization,” he added.