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BackgroundTax is a human rights issue! Governments use

tax revenue to provide, inter alia, public servicesand social amenities such as roads, electricity,clean water, free education, quality healthcareand security. Taxes are used as a tool of wealthredistribution in order to reduce the gap betweenthe rich and the poor and to generally enhancewelfare.

To meet sustainable development goals,domestic resource mobilisation is seen as themost viable source of revenue to governments asopposed to loans and grants. External assistancenot only limits the policy space of a country as itcomes usually with conditions but also tends todampen national pride.

Countries are losing certain important sourcesof domestic revenue. Trade tariff revenues havebeen declining due to various trade liberalisationagreements both at multilateral and regionallevels. Another dwindling source of tax revenueis the tax due from foreign investors. Presumablyin an effort to attract more foreign directinvestment (FDI), countries appear to engage inharmful tax competition.

The fact that developing countries, particularlyAfrican countries, continue to lose some sourcesof taxation provokes one to raise questions onwhy these countries choose to engage in taxcompetition and why some of the existingloopholes are tolerated. This paper is intended tobrief the reader on various issues aroundinternational taxes in Africa and offer plausiblerecommendations.

ContextArguably, taxation levels could be one

indicator for a country�s level of economicdevelopment and social security. In manydeveloped countries, almost all incomes, goodsand services are taxed; and that tax revenue hashigher share in total production, as measured bythe Gross Domestic Product (GDP). Furthermore,efforts are made to make the structures fair andthe collection procedures transparent; whilecitizens are more or less able to hold theirgovernments accountable for anything on thecontrary.

The share of tax revenue in developingcountries and more so in sub-Saharan Africa (SSA)is low- generally less than one-fifth of GDP.Similarly, the amount of tax money available forthe government to spend for each person (tax percapita) is very low whereby in certain Africancountries, for instance Ethiopia, DemocraticRepublic of Congo and Guinea Bissau, theestimated annual per capita taxes is as low asUS$11 per person. The implication of such lowlevel of tax is that governments must heavily relyon other sources, including external assistance tofinance development.

A myriad of reasons explain the low level ofdomestic resource mobilisation in SSA �all ofwhich are somehow related to loopholes thatresult in collection inefficiency, corruption andtax evasion by rogue companies.

PAY UP!International Tax Issues in Africa

Briefing PaperNo. 5/2015

Governments use domestic resources to meet set development goals. As countries continueto lose tariff revenues due to global and regional trade liberalisation agreements; andoffer tax concessions to foreign investors, it is imperative that citizens hold their authoritiesaccountable for wastage and unfairness in tax administration as well as question certaintax concession deals. This Briefing Paper presents tax issues in Africa including tax evasion,illicit financial outflows and tax competition and what can be done to stop tax moneyfrom disappearing into thin air.

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Illicit Financial OutflowsOn average, SSA losses around 5.7 percent of

GDP annually from illicit capital outflow, which ismore than the world average of 3.9 per cent.African and Middle East owned assets heldoffshore are estimated to be more than five timescompared to European assets held abroad. Manyof the offshore financial institutions, such asSwiss banks, are accused of aiding tax evaders byasking few questions, if at all any, on the sourceand amount of money being transacted.

In an attempt to evade paying taxes, somemultinationals are accused of underreportingprofits, some even reporting losses for years; aswell as underreporting volumes of production.What is even more shocking is the involvement ofreputable global consulting and auditingcompanies in this scam by advising their clientson how to dodge taxes. To benefit from unfairtransfer pricing, some corporations are accused ofoperating subsidiary companies in countriesconsidered as tax havens so that they sell at verylow prices to subsidiaries and remain with low taxbills.

Corruption, which is the main cause of so manyother social and economic problems ailing thecontinent, can also be blamed partly for the largescale illicit financial outflow witnessed in Africa.It facilitates illicit financial outflows, especiallytax evasion, since companies and individualsknow they can get away with fleecing poornations without being held accountable.

Tax CompetitionSome African governments, including

resource-rich countries, compete to offer taxincentives and exemptions to corporations in anattempt to attract FDI. However, such unhealthycompetition has resulted in losses whereby, forinstance, the EAC continues to lose aboutUS$2.8bn every year while Uganda alone losesdouble of the amount it budgets for its healthcaresector.

Foreign investors are attracted to Africancountries for a number of reasons including thevery presence of natural resources and notnecessarily the favourable policy environment. Ifthe latter was to be true then countries that arehighly ranked in the �Doing Business� reportwould have the highest FDI inflow. However, it isevident that many investors flock to countriesthat are resource abundant, which could even bepolitically unstable, such as the DemocraticRepublic of Congo and South Sudan. In short, itcan be argued that tax exemptions may notnecessarily be the best trigger of FDI and shouldbe minimised.

On the other hand, contracts entered onextractives are usually guarded with high secrecyand the public is not aware if the nation is gettinga raw deal or whether it is getting appropriate taxdues from its natural resources.

Informal Cross-Border TradeTax non-compliance from informal sector

operators is a common problem across African

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countries. Informal businesses are estimated tobe 35 to 50 percent of GDP in many developingcountries and in some countries hire as high as 90percent of total population. It is believed thatmany informal sector operates do not complywith tax payments due to lack of capacity. Atborders, informal cross-border traders, themajority of whom are women, use panya routesto transport tradable goods.

Apart from insecurity, sexual, verbal andphysical abuse, such activities lead to loss of hugesums of tariff revenue. Furthermore, taxadministration systems at border posts are weakbecause of lack of electronic systems, as they maynot even have power supply; and staff poorlytrained officers. One of the biggest problems is,however, the absence of tax structures that aretailored for the informal sector in general andinformal cross border traders, in particular.

Conclusion and RecommendationsThe opportunity cost of uncollected official tax

has serious implication on the economic growthand sustainable development of countries. Thewhole objective of improving domestic resourcemobilisation is to finance development andenhance welfare through fair and efficient taxstructures and systems.

The development and policy space of nationsare compromised by illicit financial outflows,mainly through transfer pricing and tax evasion bymultinational companies, the same companiesinvited to spur growth. Thus, countries needexamine if their tax incentives are attractingunscrupulous investors.

The following are plausible recommendationsmeant to stop tax money from disappearing intothin air.i. Taxes on natural resources must result in

economic benefits. Contracts should not besubject to confidentiality and the publicshould be aware if contracts are of mutualbenefit to both the nation and the foreigninvestor; and need to be awardedcompetitively. Therefore, civil societies andthe media should continue to agitate for fulldisclosure of information on natural resourcecontracts.

ii. World Bank�s Doing Business Report ranks 189economies and selected cities according tomeasures of business regulations on localfirms. However, beyond ticking boxes onregulations, more indices need to be addedon the report or a different global reportneeds to be produced to indicate

responsible business practices and indicesthat can answer the question business forwho?

iii. There is need for meaningful global co-operation among financial intelligence unitsto end financial secrecy. If it is possible totrack and link money laundering to fundingof terrorist groups, it certainly must bepossible to identify companies that stashmoney in offshore accounts, abuse transferpricing to evade taxes; and ultimatelycompromise the growth of poor nations.Offshore accounts are the favourite of manyunscrupulous companies and individualsoperating from Africa as they offer secrecyand anonymity. Disclosure of foreignaccounts by law is one very importantmeasure to stop stashing money in suchaccounts. For example, Finnish financialinstitutions have been obligated to institutedue diligence procedures to establish whena new account is opened by a US citizen andnotify the US government. Africanstakeholders need to borrow a page thus forbilateral agreements.

iv. Strengthening law enforcement against taxfraudsters begins with reducing the generallevel of corruption. As indicated above,corruption is the root cause of many vices inAfrica, which requires a holistic approachfrom development practitioners, civilsocieties, the media and church, amongothers.Ever widening income gap; social andeconomic classes; cultural (positive) attitudetowards materialistic gains and greedpromote amassing wealth through anyconceivable means. Thus, a whole culturalrevolution is required for zero tolerance of

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This Briefing Paper has been prepared by Martha G Bekele, Programme Officer, CUTS Nairobi

CUTS Briefing Papers are meant to inform and educate readers and provoke debate on specific issues. Readers are encouraged to quote orreproduce materials from this paper for their own use, but as a copyright holder, CUTS request due acknowledgement and a copy of thepublication.

© CUTS Nairobi 2015. CUTS Nairobi, Yaya Court, Second Floor, Room No. 5, Ring Road, Kilimani, Nairobi, Kenya. Ph: +254-20-3862149.Fax: +254-20-3862149, E-mail: nairobi@cuts.org, Web: www.cuts-international.org/ARC/Nairobi

corruption. Development practitioners andpolicy advisors, on the other hand, need towork on narrowing income gaps, for instancethrough tax structures that favour the poorand make the rich contribute more.

v. In relation to the above point, tax authoritiesneed to revise salary scales for their officersand offer better incentives to reduce rent-seeking behaviour and collusion withfraudsters.

vi. Research and advocacy need to be promotedwith regard to taxes, economic losses andeconomic crimes. Not many people out thereare aware of how much is lost from illicitfinancial outflows or tax exemptions; and if

indeed some are aware, perhaps the findingsmay not be relatable. As an ordinary citizen,one would be interested to know theopportunity costs of forgone taxes in termsof say how many people living with HIVcould not have access to antiretroviral drugs;how many kilometres of roads could not bebuilt in a remote area; how many infants dieper day; or how many people could not haveaccess to electricity because somecompanies or some people decided not topay up dues. Such a powerful knowledge isenough to put pressure on governments totighten tax loopholes.

vii. In relation to the above, civil societies andthe media need to play a crucial role innaming and shaming of individuals andcompanies as well as in agitating citizens tohold their governments accountable.

viii. SSA countries have to invest more ininformation technology (IT). Electronicinformation, registration, filing and paymentneed to be put in place for efficient taxcollection and ease of administration.

ix. With regard to informal traders acrossborders, not only do countries lose taxes butso many of the informal traders, whichhappen to be women, suffer from physical,sexual and verbal abuse from law enforcers.It is high time that SSA governments andregional blocs try to integrate these tradersby facilitating the total free movement ofpersons and tailoring the tax structure to suitsmall cross-border traders.

ReferencesChristian Aid (February 6, 2015). Era of Bank Secrecy Still Far from Over for Developing Countries. Christian Aid.Available on http://www.christianaid.org.uk

Institute of Economic Affairs (September 2012). Informal sector and Taxation in Kenya.A Publication of the IEA BudgetInformation Programme. Issue No. 29

Kar, Dev and Spanjers, Joseph (December 16, 2014). Illicit Financial Flows from Developing Countries: 2003-2012. Readon http://www.gfintegrity.org

Mubiru, Alex (2010). Domestic Resource Mobilization across Africa: Trends, Challenges and Policy Options. TheCommittee of Ten Policy Briefs Nº 2 / 2010; Africa Development Bank available on http://www.afdb.org

Tax Justice Network-Africa and ActionAid International (2012). Tax competition in East Africa: A race to the bottom?Tax incentives and revenue losses in Uganda. Read on http://www.actionaid.org