Taxing Africa

Front matter

AFRICAN ARGUMENTS

Taxing Africa Coercion, Reform and Development

Mick Moore, Wilson Prichard & Odd-Helge Fjeldstad

Contents

4. What can Africa do in the face of international tax challenges? is:sis te teccsenricncot sis epyessein nedee wietiestectindivescsneseepen/id 67

7. Small taxes and large burdens: informal and subnational

ACKNOWLEDGEMENTS

Introduction

If asked to identify the most important issues facing Africa in the twenty-first century, few people would mention tax. For most of us, taxation lies somewhere on a spectrum between irritating and boring. At best, it is an unappealing necessity — rather like sewerage or vaccinations. “Tax’ is the domain of charisma-free accountants, lawyers and number crunchers. It seems an unlikely place to encounter big societal questions about democracy, development, equity or good government. Yet it is exactly these kinds of issues that pervade the conversations about taxation that we, the authors, have with policymakers, business people, tax collectors, civil society activists, journalists and aid donors in Africa. Many of them think tax is central to African development. Let us begin by introducing you to one of these tax aficionados.

A ground-level view of taxation in Africa

Dr Samuel Jibao is now one of our close research colleagues. Samuel’s original contact with the authors was in 2010, when he and Wilson Prichard worked together on an analysis of the (many) challenges facing the Sierra Leone tax system. At their first meeting, Samuel introduced himself as a native of Kailahun District, in the east of the country, and an economist by training. He worked initially as a lecturer at the national university before joining the newly created

National Revenue Authority (NRA) in 2003. There, he rose to become Acting Director of Research in 2010. In 2011, he left the NRA to create an independent research institute, the Centre for Economic Research and Capacity Building, which specialises in taxation.

Samuel’s rise within the NRA reflected a keen intelligence and a deeply held commitment to honesty and public service. But what also distinguished him was that he regularly travelled around the country and got to know tax officials and taxpayers at every level. He sought to understand the tax system from the ground up, focusing not only on formal laws and institutions, but also on the lived experiences of taxpayers and tax collectors. It was this need to understand how the system actually functioned that he emphasised during his first meeting with Wilson — over several bottles of Heineken and a plate of palaver stew, in a small Freetown restaurant up the street from the headquarters of the NRA. Interrupted regularly by colleagues, jokes, personal stories and much else, Samuel explained why it was important to speak with taxpayers themselves.

The first thing you discover, he said, is that when you talk about ‘taxes’ in Sierra Leone, the word will mean very different things depending on who you are talking to. In the big cities, and among the national elite, ‘taxation’ generally means personal income taxes, corporate taxes, value-added taxes and customs duties. These taxes bring in most national revenue, and — probably for that reason — dominate international discussion of taxation. However, to people outside the big cities and small elite circles, ‘taxation’ means something very different: smaller taxes, levies and fees paid to local governments; ‘informal’ payments to tax collectors and state officials; and a wide range of payments to groups other than the government, including traditional chiefs. These kinds of payments — what in Chapter 7 we label small taxes — are easily overlooked by outsiders but are an integral part of the story of taxation in Africa.

In 2010, we, the authors, established the International Centre for Tax and Development (ICTD). Four years later, Samuel’s Centre for Economic Research and Capacity Building worked with ICTD to conduct a large survey to find out exactly what citizens of Sierra Leone outside large cities pay in taxes and tax-like levies. Samuel had been exactly right. Few people outside the cities pay income tax or corporate taxes. About half of the tax and tax-like payments they make are to local governments. The remainder are ‘informal taxes’ collected by people and organisations who are not in any sense ‘official’ or part of the state: chiefs, community development organisations, religious organisations, informal defence groups and so on. More surprisingly, people on average had significantly more confidence that these non-state ‘informal taxes’ would be transformed into public services than that the formal taxes they paid to the local and national government would be (Jibao et al. 2017). Back in the restaurant in Freetown, Samuel had gone on to explain that, if you are willing to take the time to sit down with them and let the tax conversation develop, most Sierra Leoneans will want to talk about the (lack of) taxation with regard to local mining operations. At that time, large new mining investments were flowing into the country, but the government had signed ad hoc agreements with mining companies and had granted them large-scale tax exemptions. As a result, the government was collecting very little revenue from the mining companies, either through corporate income tax or through royalty charges on the depletion of national assets. In 2010, the Sierra Leone government was seeking to renegotiate some of those contracts. Taxpayers were asking why the government was gathering taxes from poor citizens, but collecting little or nothing from the large mining firms that seemed to have a much greater capacity to pay. It was not only in Sierra Leone that this question was being asked. Then, and today, many African governments raise strikingly little direct revenue from mining operations (Chapter 5). Samuel said that most taxpayers had neither the interest nor the expertise to discuss details of mining tax design, but they had a strong sense of fairness and they believed that the current system was not delivering it. The powerful were not paying their fair share, while those lacking political connections and international links were picking up the bill.

If you sat for longer with local taxpayers, Samuel explained, the conversation would likely get around to a more general question: ‘Why should I pay taxes when I don’t seem to get anything in return?’ Many people in Sierra Leone, and across the continent, lack access to electricity, running water, consistently passable roads or decent health and education facilities. And surveys suggest that in many countries tax and customs authorities themselves are viewed as corrupt (Chapter 6),' while taxpayers have little confidence that the revenue that reaches the government will be used productively (Aiko and Logan 2014; Jibao et al. 2017; van den Boogaard et al. 2018; Paler et al. 2017; Fjeldstad and Semboja 2001). As Samuel explained, it is small wonder that there is little active public support for, or interest in, increasing taxation.

There is mounting evidence that while effective enforcement is important to ensuring tax compliance, so too is perceived fairness, reciprocity and accountability in the collection of taxes - and in the spending of tax revenues (e.g. Ali et al. 2014). Talking with taxpayers, Samuel explained, makes clear the need for stronger links between what people pay and what they receive in return. Many tax collectors have similar views. They lament that, although they bring in the money, they are not in a position to make their own job easier by influencing how that money is used. Reliable surveys suggest that most Africans believe that governments have the right to collect taxes and that, in principle, citizens have a duty to pay them (Aiko and Logan 2014). But there is widespread mistrust of the claims that taxes will be translated into viable services, or that public opinion affects how the money is spent.

Concerns about fairness, equity and reciprocity are thus pervasive among taxpayers. Yet popular initiatives to improve tax systems have been rare, both in Sierra Leone and elsewhere. This seems to reflect a broad sense among taxpayers that the failures of national and local tax systems are firmly rooted in the realities of power and politics. It is commonly believed that powerful individuals do not pay the taxes that they owe — be they income taxes, corporate taxes, trade taxes, property taxes or others — because of the political influence that they enjoy. Official data almost everywhere seems to confirm this story. While taxation is often presented as a highly specialist, technical and rule-bound enterprise, taxpayers themselves often have a visceral sense that politics explains much of what occurs in practice.

Finally, Samuel stressed that to fully understand taxation in Africa it is also necessary to consider history, and especially colonial history. A central point of reference for the tax history of Sierra Leone is the Hut Tax War of 1898. The British had recently established the protectorate and had introduced a new tax on dwellings. Led by a coalition of chiefs, local forces launched armed resistance that lasted nine months. It ended after the British resorted to ‘scorched earth’ policies (Abraham 1974). In the minds of Sierra Leoneans, the Hut Tax War is not ancient history. Rather, it is a significant influence on how they understand the world today. At the time when Samuel and Wilson were having this conversation, the government had been proposing to introduce a property tax to provide a revenue source for local councils in smaller towns. This new tax was introduced successfully, but during the process critics often referred to the Hut Tax War. Again, it was said, the government in Freetown was trying to extract revenue from rural areas without making any effort to consult, create consensus, or offer reciprocal benefits. This awareness of the extractive character of colonial taxation is widespread across the continent (Chapter 2).

Underlying Samuel’s history of tax was a broader understanding that taxation is not only about the (tedious, technical) practicalities of raising revenue, but also about questions of power, accountability and effective, legitimate government. On the one hand, the Hut Tax War illustrates the coercive face of taxation, and the ways in which, even before the colonial period, rulers have flailed around to raise revenue. On the other hand, it also demonstrates both the depth of popular convictions that taxation ought to be legitimate and accountable and the consequent potential for tax policy failures to become springboards for popular political action. Samuel explained that, in the aftermath of a decade of civil war between 1991 and 2002, the Sierra Leone tax system was neither fair nor accountable. But many Sierra Leoneans understood that improving it was very much about changing politics, and closely connected to the task of strengthening governance more broadly.

Taxing Africa: what are the big questions?

Samuel is one of many people contributing to a mounting level of debate in Africa about how tax systems might be transformed for the better, so that they are more fair, equitable, reciprocal and accountable, and contribute to development more broadly. This book aims to capture this emerging set of ideas and debates and to open them up to new audiences. What are the overarching ideas that we seek to capture?

The diversity of tax experiences

The first idea relates to the diversity of tax experiences, and the importance of making public the relatively untold story of how tax impacts on most Africans.

Academic and policy accounts of taxation in Africa focus on central government taxes — personal income tax, corporate income tax, value-added tax, customs duties and taxes on natural resources. These taxes provide the bulk of government revenue. As we explain at various points in this book, African governments are not novices at the business of collecting these taxes. They do so more effectively than governments in some other low-income parts of the world, and they are making consistent, gradual progress in improving their revenue systems and in capturing a higher proportion of national income for public purposes. But the majority of people who pay taxes in Africa have no direct contact with the organisations that raise revenue for central governments — (autonomous) revenue authorities and customs and internal revenue departments of ministries of finance. Instead, most Africans who pay taxes hand their money over to local governments or to one of a range of organisations that levy what we term informal taxes on behalf of non-state actors. Information on the amounts of money raised by local governments and informal tax collectors is scarce and unreliable. Overall, the amounts are very much smaller than central government revenue collections. Conversely, they often account for quite a high proportion of the incomes of poor people. They face a diverse array of small taxes, of varying and often ambiguous degrees of formality. They almost always meet the tax collector face to face. Sometimes collection is accompanied by an element of threat or coercion. Collusion with tax collectors to reduce the agreed tax bill is common. A significant share of the revenue handed over to formal tax collectors never appears in government accounts.

There are many different tax worlds in Africa. At one end of the spectrum, a small number of large transnational companies, which provide much of the revenue collected by some African governments, interact with revenue authorities through formal procedures that would be familiar to Her Majesty’s Revenue and Customs in the UK. The other end — the world of small taxes described in Chapter 7 —is much less formal and more diverse. Less money flows through it, but it impacts directly on more taxpayers. It is easily overlooked by people not directly involved, but it is critical to local livelihoods and the links between taxation, decentralisation and state-building.

Fairness, equity and inequality

With economic inequality increasing in much of the world — including, it seems, in Africa — more attention is being paid to the potential redistributive role of tax systems. This is actually a reversion to an earlier situation. In the 1960s and 1970s, in Africa and elsewhere, tax regimes and tax reforms were widely conceived and rationalised as means of redistributing income from rich to poor (Kaldor 1963). In practice, they failed. Africa did not have revenue administrations with the resources, commitment or political backing needed to effect change. The perception of failure helped justify the shift in the 1980s towards a less ambitious agenda for tax collectors, one that focused more on simplifying and improving tax administration at the nuts and bolts level — and on introducing the new VAT, which is a tax on consumption, not on income. The pendulum is now swinging back, towards a middle ground. For example, taxes on property, having been almost entirely ignored or relegated to the terrain of local government financing, are now being taken more seriously — by national governments in Africa, and internationally by the International Monetary Fund (IMF) and others.

The discussion over redistribution has sometimes been reduced to a simplistic debate over the relative merits of (putatively progressive) direct taxes and (potentially regressive) indirect taxes. The underlying intuition is clear and, in very general terms, mostly correct. Direct taxes on income and wealth are more likely to harvest revenue from the relatively wealthy than are taxes on sales, imports or value added. But in any specific country at any moment in time, the real policy choices will be more diverse and complex. Some taxes on sales, imports or value added might be good ways of ‘soaking the rich’. Even regressive taxes can have redistributive effects if they fuel progressive patterns of public spending.

More important perhaps in much of Africa are the implications for fairness and equity, not just of the law and formal tax schedules but also of the ways in which they are implemented by revenue administrations. Personal income taxes are only redistributive if wealthy people actually pay them; in practice, many — probably most — wealthy people in Africa do not (Chapter 6). Similarly, the property taxes that in principle could raise significant revenues from wealthy people, especially in the light of a series of booms in property prices in many African cities, generate very little money

(Chapter 7). Either the legislation is not in place or it is not implemented — or even implementable. Larger corporations often benefit from excessive and unjustified tax exemptions granted by governments, and from their ability to exploit international tax rules to their own advantage (Chapters 3, 4 and 6). Meanwhile, the informal taxes mentioned above appear to fall disproportionately on those with lower incomes.

Tax systems that are visibly unfair and regressive do not only exacerbate inequality. They also threaten to undermine tax compliance and the legitimacy of governments more generally.

Linking the international, national and local

In recent years, we have learned a great deal about the many ways in which the international tax system facilitates tax avoidance and evasion by transnational companies and wealthy individuals. We know that African governments lose revenue. But how big is this problem in relation to other tax challenges facing the continent? And what can be done about it?

The basic narrative advanced by tax justice campaigners is correct. The evolution of the system for taxing trans-border economic activities over the past century was shaped by richer, capital-exporting countries in their own interests. In recent decades, various kinds of ‘tax havens’ have developed to become major players. They comprise both the small islands that feature strongly in popular images of tax havens and, in varying degrees and in different ways, rich Organisation for Economic Co-operation and Development (OECD) countries such as Ireland, the Netherlands, Luxembourg, Singapore, Switzerland, the UK and the US. Capital and potential tax revenue are systematically extracted from low-income countries. There is no shortage of examples of transnational enterprises, particularly in the extractive industries (Chapter 5), paying little of the tax that they would otherwise owe by siphoning profits to tax havens overseas. Similarly, we know a great deal about how Africans who possess great wealth — and especially those who came by it illicitly — hide it offshore beyond the reach of their national tax and judicial authorities.

We know that the current international system drains potential tax revenues from Africa. We do not know precisely the size of the revenue loss. More importantly, we do not understand with certainty how African governments should best respond. Should they, collectively, put a great deal of effort into trying to change the rules of the international tax game? If, individually or collectively, they were to focus their energies on more closely monitoring and auditing the local subsidiaries of transnational corporations, how much addition revenue could they generate in the long term? Or would they scare off potential investors? Should they instead try to close the many loopholes found in their domestic tax systems? And might new approaches to combatting international tax challenges be more successful than those adopted in the past? This book does not answer these questions, but attempts to provide analysis and information that will help African authorities and campaigners to think through what is most effective in their specific circumstances.

Here are some of the issues that they might need to bear in mind:

e No individual African government can do much about the rules of the international tax system. Collective action is required to change the rules.

e There are, however, considerable opportunities for governments to reduce their trans-border tax losses by implementing the current international rules more rigorously.

e The same is true of internal taxation. From a technical perspective, there is a great deal of scope to collect more revenue.

e It is not obvious that efforts to strengthen the collection of domestic taxes will reduce either the motivation or the capacity to tax trans-border activities more effectively. There may be more synergies than conflicts.

e Lobbyists for transnational companies, especially those engaged in sectors such as tobacco or alcohol, are persistently telling

African ministries of finance that trying more effectively to tax transnational activities is a mistake. Beware of lobbyists.

Politics, and the challenge of reform

Underpinning all the issues listed above is the reality of power and politics. Many of the shortcomings of African tax systems could be remedied, in whole or in part, if there were determined and effective political leadership. This may sound obvious. Taxation involves extracting resources from taxpayers with no guarantee of any kind of corresponding benefit. It is, of course, deeply political. That in turn vindicates analysing tax challenges through an explicitly political economy lens. Economists, lawyers and accountants all have much of value to say about tax. But political economy should help us address the question of how to mobilise the political support necessary for reform.

For example, the low yields from personal income tax collection in so many African countries cannot be boosted simply by recommending measures such as improved audits or wider use of data from ‘third party’ sources — banks, property registers or passport offices, for instance. Without political support, tax auditors may feel unable to question the tax returns submitted by influential citizens. Similarly, standard tax administration procedures for recording, collating and cross-checking data about individuals may fall into abeyance because no one in authority shows interest in them. Effective reformers need both to identify appropriate technical, organisational or procedural changes and to identify or construct political support. That may mean building political support among national elites, among tax administrators themselves, in the private sector, or among a broader public. Each case is likely to have unique political dynamics and require tailored strategies for overcoming resistance.

This message recurs in various ways throughout this book. While property taxes are poorly collected almost everywhere, we present evidence that the technical capacity for improved performance is relatively easily constructed. The problem lies in finding strategies to overcome political resistance. Similarly, the pervasiveness at local levels of small taxes that fall heavily on low-income people reflects politics, including the unwillingness of local elites to agree to more efficient local taxes and dysfunctional relationships between central and local levels of government. If tax reformers do not take these political considerations into account, progress is likely to be very slow.

Taxation, accountability and state-building

Currently, in Africa and among its aid donors, there is much emphasis on increasing total tax collection, with frequent suggestions that governments should aim to collect no less than 15% of gross domestic product (GDP) in taxes — and, in some cases, suggestions of targets as high as 20%. This is argued to be the minimum needed to finance public goods and service — sometimes equated with achieving the UN’s Sustainable Development Goals. However, the use of such targets has prompted an important objection: expanded revenue collection is worthwhile only if that revenue is translated efficiently into valuable public goods and services. Yet we know that this often does not happen, and the use of revenue targets could, at worst, motivate and validate more coercive forms of tax collection.

Arguments in favour of the expansion of taxation are often linked to a belief in the potential of such an expansion to contribute to state-building and increased government accountability. A particular narrative about these links has become relatively widespread in recent years. This narrative holds that states that rely heavily on taxation to fund their activities — as opposed to relying on natural resource wealth or foreign aid — are more likely to build strong state structures and become accountable to their taxpayer citizens. A government seeking to collect its own tax revenue will be forced to build more effective public sector organisations to collect that revenue; this will include, for example, a wider use of meritocratic hiring and promotion practices, improved business and land registries, stronger law enforcement and judiciaries. Meanwhile, the expansion of taxation may prompt processes of ‘tax bargaining’ and the construction of new ‘fiscal social contracts’ as taxpayers resist taxation, make demands for reciprocity and enter into constructive interaction with governments. This narrative is grounded in the history of taxation and state-building in early modern Europe, but appears to be supported by the results of recent research in Africa and elsewhere in the developing world.

However, while the causal links set out in the narrative are potentially powerful, they are also seductive and can easily be oversimplified and robbed of necessary nuance, complexity and local content. There is clear evidence that taxation can be, and has been, a driver of expanded political responsiveness and accountability, and a spur to constructing new state capacity. However, it is equally clear that these positive connections are not guaranteed. Taxation is, everywhere, in large part an exercise in the use of coercive power, as states extract resources from citizens. Whether that process leads to state-building and accountability depends on the broader characteristics of the state doing the taxing, the nature of the political resources possessed by taxpayers, and the characteristics of tax systems themselves. The big questions are thus not about whether taxation can in principle be a spur to improved state-citizen relations and accountability, but about when and how such connections are likely, and how these positive processes might be supported. It is on these latter questions that we focus much attention — especially, but not only, in Chapter 8.

The shadow of history — and a distinctive African future?

Finally, underpinning the discussion in this book is an effort to place contemporary African tax debates, structures and policies in historical perspective. In many respects, the history of taxation in Africa is a story of external imposition of tax policies and practices, and of the influence of the global tax system and of the ideas of global epistemic communities of tax specialists. The origins of some contemporary tax practices lie in the colonial period, when the tax system was not only imposed externally but was fundamentally oriented to extraction and control. After independence, governments retained some of the features of colonial tax systems while introducing new and more ‘modern’ taxes from abroad. Two decades later, the period of structural adjustment brought major tax reforms dictated largely by the IMF and World Bank — including the introduction of VAT — with very little public debate. These external models were not always perfectly suited to local needs. In recent years, it has become increasingly clear that African countries are substantially — and negatively — affected by international tax rules over which they have no effective say.

More recently, there have been encouraging signs that African governments, civil society organisations and researchers are becoming more active and assertive in seeking to shape the future tax agenda on the continent. This is reflected in the creation of a new pan-African network of tax administrators, the African Tax Administration Forum (ATAF); in the development of closer tax cooperation in Southern and Eastern Africa; in the rise of civil society organisations and business associations that are increasingly engaged in shaping national tax debates; in African governments and civil society organisations finding a voice in international tax debates for the first time; and in the emergence of a distinctively African discussion of tax policy and administration dealing with issues as diverse as the taxation of small informal firms, approaches to more effectively taxing elites, and the use of mobile technology to improve taxation. The strength of local dialogue around tax reform appears to us to be an essential part of any account of taxation in Africa — and to be pivotal in the potential for longerterm improvements.

This book

This book is broad in scope and light on the technical details of tax policy and administration. Those details certainly matter. We highlight them where they are particularly important. We are, however, more focused on the realities of how tax systems function in practice, and on their broader societal and political implications and consequences. We present what we think we know about these larger issues, indicate where big and important questions remain unanswered, and highlight the implications for thinking about development challenges in Africa. The book does not aim to be prescriptive — that is, to tell people such as Samuel what should be done — but to contribute to engaging new audiences with these debates, and thus creating space for locally led strategies and solutions to take root.

Bearing that in mind, in Chapter 2 we present a broad overview of the history of taxation on the continent. The emphasis is on the changes since the colonial period in the ways in which African governments have financed themselves. Over the last two to three decades, they have become more dependent on taxes for revenue, and more effective as tax collectors. Their tax systems have increasingly come to resemble those of most other countries in the world. In Chapter 3 we explain how the international tax system impacts on Africa, especially on the ability of African governments to raise revenues domestically. Chapter 4 follows on directly: what can African governments do to either change the international tax system or operate more effectively given the constraints that it imposes? The extractive sector — oil, gas and mining — features prominently in many African economies and accounts for a high proportion of the value of exports from the continent. The sector in general — and the mining subsector in particular — poses major tax challenges for governments. Those challenges are explored in Chapter 5. Chapter 6 addresses the question of how well national revenue collection systems in Africa are performing. Our summary includes a mix of achievements and some significant deficiencies.

These national revenue collection systems barely touch directly the great majority of people and taxpayers in Africa, who are much more affected by small taxes — a diverse, and often perverse, mixture of local, informal and small-scale taxes that we survey in Chapter 7. Chapter 8 provides a more in-depth exploration of the connections between taxation, state-building and accountability. Drawing on the material in the preceding chapters, we seek to ground abstract ideas about taxation and governance within the diverse realities of Africa today. The central question we address is not whether taxation can be a spur to improved governance, but when and how this is likely to happen in practice — and what we can confidently say about how such positive dynamics can be encouraged. Chapter 9 speaks for itself: the way forward.