Taxes on corporates and individuals have steadily declined in Africa just as national budgets are being stretched. How can Africa boost tax revenues?

In late August, South African telecoms giant MTN, Africa’s biggest mobile operator, was stunned by an $8.1bn demand from Nigeria’s Central Bank, which had accused the firm of illegally sending money abroad. With executives and investors in a state of disbelief and shares plunging to a nine year low, the firm barely had time to respond before the country’s attorney general – an unusual outlet for such orders – demanded a further $2bn in taxes and charges from the company in an unrelated case just days later.

For MTN, the charges represent just the latest challenge it has faced while operating in the volatile Nigerian market following a multi-billion dollar fine levied on the firm in 2015 in a dispute over unregistered simcards. “It’s completely unfounded,” MTN group president and chief executive Rob Shutter told African Business after the moves wiped some $6bn off the company’s share price. He argues that Nigeria’s allegations are incorrect and takes issue with the attorney general’s role in the affair.

Implications for Nigeria

“I think a lot of our investors are more concerned about the implications for Nigeria as an investment destination than the specifics of our two incidents,” says Shutter. “The sooner we can persuade the authorities that we have not made any infraction in either engagement the better for everybody because once that is resolved not only will it clear some of the headwind we are facing but it would also show that the rule of law in Nigeria is still in good shape.”

As the thorny case of MTN in Nigeria shows, taxes and the way in which they are levied have become a highly emotive subject that can make or break a country’s business environment. For every outraged executive smarting at an alleged corporate shakedown, there are politicians and campaigners arguing that companies are taking host countries for a ride by failing to pay their fair share. They argue that this has a direct impact on African citizens, who suffer from a lack of basic services and vital infrastructure as a result of shrunken government revenues while corporates carry off the profits.

No simple answers

And yet there are no simple answers. For some, high taxes are the backbone of a successful economy, while for others tax breaks and tax holidays are the way forward. Compare Sweden and Singapore. Both have dynamic economies yet vastly different tax regimes and tax revenues as a share of GDP. In Africa, the continent’s budgets are stretched and perforated. Debt levels, in some cases, are ballooning. Organisations like the IMF have recommended domestic resource mobilisation by doubling down on taxes.

Fortunately, the data suggests that tax collection is already improving in Africa. According to the OECD’s Revenue Statistics in Africa 2017 report, the average tax revenue to GDP ratio from data in 16 countries was 19.1% in 2015 – an increase of 0.4% from 2014. Since the turn of the century, every country in the survey increased its ratio, with average growth of 5%.

The bulk of these increases are the result of strengthened indirect taxes. Most sub-Saharan countries introduced VAT to replace a general sales tax. In 2015, taxes on goods and services were the largest contributor to total tax revenues at an average of 57.2%. Direct taxes on corporates and individuals, in contrast, have been steadily declining in sub-Saharan Africa – mirroring a global trend. The average personal income tax collection has decreased from around 44% to 32% since 2000, while corporate income tax collection has dropped by an average of 5%.

Expanding the base

While these are positive steps, problems remain. Individual countries register strong performances – according to Heritage Foundation data, Lesotho’s tax revenue to GDP ratio stands at an impressive 42.9% – but others clearly lag. Nigeria stands as low as 6.1% and many fall below the 15% mark. These deficits are caused less by onerous tax rates – income, corporate and VAT levels largely mirror the rest of the world – but more as a result of narrow tax bases in the context of huge informal markets and limited revenue authority capacity. Expanding this base will be key to plugging budgets and offsetting debt.

The IMF predicts that African countries can mobilise a further 5% of GDP from taxes over the next few years. It identified six countries that have pursued effective resource mobilisation strategies at various stages: Liberia, Mozambique, Rwanda, Senegal, Tanzania and Uganda.

“All countries paid special attention to measures to build the tax base, simplify the tax system, and tackle exemptions and incentives,” they argue. “The countries in the study appear to have made limited use of tax policy adjustments. The focus was instead on measures to improve the effectiveness of tax policies and expand the tax base.”

Grappling with giants

Building a healthy tax base fundamentally relies on the ability of a country to successfully tax corporate activity. As the MTN case shows, striking the right balance between encouraging multi­nationals to invest and ensuring they give back to domestic governments has been a tricky undertaking in Africa. Too often the scales are disproportionately tilted towards multinationals.

Many campaigners argue that tax regimes have been extremely lenient to international companies and investors. As part of the continent’s development path, attracting capital through tax exemptions and tax breaks has been a major strategy. Yet as the continent attracts greater numbers of successful companies and gains a reputation for lucrative markets, many have begun questioning the need for such incentives. The IMF argues that unnecessary exemptions are significantly narrowing the tax base.

Recent events in Africa’s mining sector, particularly in the Democratic Republic of Congo (DRC), have brought this issue to light. In the wake of the Second Congo War, president Joseph Kabila enacted favourable mining legislation in order to incentivise private sector participation. Royalties on precious metal were as low as 2% and miners like Glencore, China Molybdenum and Randgold enjoyed a generous regime. Recently, Kabila reworked the legislation to raise general royalties to 3.5%, while royalties on strategic metals including cobalt have been hiked to 10%. Cobalt prices have more than doubled since 2017 owing to the metal’s use in long-life lithium ion batteries. Despite great initial protest, the mining firms now look to have accepted the legislation. In reality they have little choice: DRC is home to over two-thirds of the world’s cobalt.

“In my experience foreign investors tend to believe that they can get away with much more in developing markets as compared to developed markets,” says Kunle Elebute, chairman of KPMG West Africa. “They feel they have a stronger leverage over the country.”

Illicit flows

Indeed, some shadowy corporates on the continent bypass the tax authorities with impunity. The United Nations Economic Commission for Africa (UNECA) recently estimated that around $50bn is lost annually in Africa due to illicit financial flows. Within this estimate there are many different forms of activity, ranging from flagrantly corrupt criminal behaviour to questionable corporate capital streams. Africa’s tax base has been significantly eroded by both types of activity over the years.

Elebute describes how the biggest outflows are due to corrupt local officials doling out contracts to international firms in exchange for sizeable back-handers. “Local contractors don’t have the capacity to build a big dam – you need foreign contractors,” he says. “And that’s where all the corruption happens: between foreign companies and international firms.” Elebute queries why more isn’t done by the international community to stop such practices.

African regulators particularly face an uphill battle in the fight against corporate profit shifting through transfer pricing. A common strategy is paying taxes on goods and services in a tax haven as opposed to the country where the transactions take place. With large legal teams and a wealth of resources available to multinational companies, African regulators repeatedly find themselves on the back foot. Indeed, the issue is testing even the most advanced economies, and institutions on the continent look ill-equipped to take on large corporates. “For us in developing countries we have no way to prevent those guys from using intermediary companies in tax havens,” comments Elebute. “There’s no amount of legislation we can pass to stop that happening.”

Improving administrative capacity is vital in expanding Africa’s fight against illicit flows and many governments are looking towards technology for solutions. E-tax platforms are making a foothold on the continent as governments seek to use technology to simplify tax payments. Rwanda has introduced mobile tax payments, while electronic tax registers have been used in Kenya since 2005 to instantly record VAT payments and relay the information to the authorities. Centralising payment records and providing tax payers with easy platforms to pay will be key to bringing more corporates and individuals into the system.

The dangers of onerous tax systems

Yet there are counterarguments against a general crackdown on cross border flows, with some firms arguing that it puts legitimate business models at risk. Antoine Maillet-Mezeray, chief financial officer of Nigerian e-commerce firm Jumia, argues that regulators in Africa may jump to the wrong conclusion by targeting corporate capital flows, especially in emerging sectors like e-commerce and technology. Certain Jumia operations, he explains, are centralised in Europe and therefore the company requires some cash flow to and from Europe and its African markets.

“Some governments will always think that we are trying to escape taxes,” he says. “But I think as they are getting more and more familiar with e-commerce this will change.” In many cases, Jumia must spend time and energy explaining to the regulators what they actually do. The company has two business models: one where Jumia buys and resells products online and the other where the company acts as the market intermediary between buyer and seller. Most African governments are unaccustomed to this business model and therefore struggle to regulate the sector.

“Not all the countries have the relevant expertise,” says Maillet-Mezeray. “They are getting up to speed but it takes time and meanwhile it creates some friction.” During this interim period African regulators must take care not to spook nascent sectors or startup companies, but to engage in clear conversation in order to find regulation that works for both parties. Jumia’s troubles and MTN’s battle in Nigeria highlight the importance that African regulators should place on responding fairly to new and lucrative sectors like e-commerce, fintech and telecoms, as well as the use of new tools like blockchain.

If regulators and central bank governors slap heavy taxes and restrictive legislation on firms due to unfamiliarity, or to make a fast buck, any opportunity for Africa to leapfrog in new technologies is cut short. Nigeria, for example, has blocked mobile money due to protest from established banks. Elsewhere unfamiliarity with cryptocurrencies has seen the potentially transformative technology barred from markets. Critics say that this cornering of the market will only serve to stifle wealth creation, arguing that services are best and profits more equally distributed when competition is rigorous.

Innovative tax

Yet there are multiple ways to creatively tax both new and existing firms without resorting to a corporate shakedown. Abebe Aemro Selassie, director of the IMF’s Africa department, points to new methods of raising taxation that African countries ought to consider.

“Urbanisation and real estate development has been a very important feature of many countries in the region. So things like property taxes which have in many cases not been an important source of revenue in the past are now being seriously looked at,” he says. “As the structure of your economy changes, you have to make sure you look at ways of capturing that.”

In Lesotho, property taxation already accounts for half of local government revenue. In Cape Verde the figure is 70%. Yet elsewhere penetration is low and the IMF says that more can be raised through such means.

Meanwhile, VAT and excise duties can be further levied. In 2015, sub-Saharan Africa countries collected on average 1.4% of GDP from all forms of excise taxes, less than half the level in Europe. Wide disparities also exist on a country-to-country basis. Benin, Côte d’Ivoire, Madagascar, Nigeria and Sierra Leone all collect excise revenues of less than 1% of GDP.

The positive case for tax

But perhaps one of the most effective ways of encouraging companies to part with more of their cash is simply showing the benefits that a strong and wealthy state can offer to entrepreneurs. Tax revenues spent in a sustainable, targeted way on improving institutional capacity and building vital infrastructure projects ultimately improve the business environment for firms operating in the country, and thus increase the potential for greater future profits.

Until now, low levels of confidence in governments and institutions across sub-Saharan Africa have led many companies to conclude that money given to the government will be frittered away on vanity projects or siphoned off through corruption. “What are governments doing with taxed money?” asks Elebute.

“In the developed world you see exactly what the taxes are used for: health, roads and education. But what are the taxes used for in Africa?” Taxes, after all, are a social contract between government and citizens and are underscored by the belief that the state will offer some form of return on the capital invested. If more is on offer it may be easier to persuade citizens or companies to part with their money.

Selassie believes that this shaky contract between government and citizens is steadily improving across the continent. “In most low-income countries, not just in Africa, there are always low tax-to-GDP ratios within the early stages of development,” he says. “As the legitimacy of governments strengthen and they are able to show what they are doing with the resources, so too will the willingness of people to pay taxes.”

A fair and stable tax regime, which sees every economic actor contribute equally to the treasury relative to their means, is the ideal that governments and companies should work towards. Private enterprise must be incentivised to grow but wider contributions to the national economy will ultimately have a positive knock on effect on the business environment. While the challenges Africa faces in getting taxes right are many, the continent is making steady progress.

Tax, if used correctly, has the potential to balance Africa’s books and drive economic transformation. If used incorrectly, regulators may do more harm than good. While problems certainly exist, Africa looks to be diligently expanding its tax base and gradually boosting the reach and capacity of its institutions.

Tom Collins