Tracking tax revenues across 30 African countries
Covid-19 has thrown Africa into its first recession in decades.
Thursday saw the release of Revenue Statistics in Africa 2020 – a report produced by the OECD Centre for Tax Policy and Administration, the African Union Commission and the African Tax Administration Forum – during an international webinar.
The report compiles comparable tax revenue and non-tax revenue statistics for the years 1990 to 2018 for 30 countries in Africa, a much-needed resource to inform tax policy analysis and decisions on tax policy.
Between 2010 and 2018, the average tax revenues of the 30 African countries participating in this report increased from 15.1% to 16.5% of GDP– but remain lower than the averages for Latin American/Caribbean and OECD countries (23.1% and 34.3% respectively in 2018).
Impact of Covid-19 on African economies
Covid-19 has thrown Africa into its first recession in decades, and millions of people could be facing extreme poverty. Lower commodity prices, loss of tourism, border closures and lower international trade flows have had a devastating impact on income levels.
Much of the socio‑economic progress made over the past 10 years in Africa has been reversed.
The International Monetary Fund (IMF) has estimated that sub-Saharan revenues will decrease on average by 2.6% of GDP compared with 2019. Expenditure is expected to increase by 0.9% of GDP as a result of the various fiscal packages to mitigate the impact of the crisis on the economy. The generally high external debt levels and fiscal deficits have exacerbated the economic crisis.
Unemployment and poverty are expected to rise, and the worse affected will be the informal sector, which is responsible for more than 60% of employment in many African countries.The United Nations Economic Commission for Africa has estimated that between five million and 29 million people will fall below the poverty line.
And that over 19 million jobs will be lost.
The disruption to food imports, transport and agricultural production will have a knock-on effect on food insecurity and malnutrition.
Remittances to Africa may drop 25%
Remittances to Africa from residents in the US and Europe contribute approximately a third of total external financial flows, but this is now impacted by the rising unemployment in those countries.
The World Bank has estimated a decline of nearly a 25% in remittances to Africa in 2020.
The limited regional trade and lack of access to markets within the continent will result in a decline in foreign financial flows. Foreign direct investment (FDI), mostly in resources, will drop with the fall in commodity prices. The UN Conference on Trade and Development has estimated that Africa is set to lose FDI flows amounting to 25% to 40% in 2020, resulting from the combined impact of Covid‑19 and falling commodity prices.
Tax relief measures
Like the rest of the world, African countries were compelled to introduce Covid-19 tax relief measures. These included deferral of tax payments, tax rebates, exemptions and reliefs, suspension of penalties and interest for late payments and extension of filing periods.Interestingly, among the 23 African Tax Administration Forum member countries, one of which is South Africa, the highest number of tax relief measures were granted by Rwanda, Lesotho and Uganda.
Most tax relief measures were for personal income tax, corporate income tax and value-added tax.
As a result of inexperience, several African countries neglected to couple tax relief measures with sunset clauses, which will cause problems in trying to retract these measures.
Suggested measures to support economic recovery
The report suggests various measures that countries can implement to support economic recovery:
- Revise revenue targets to account for the negative impact caused by the pandemic, to ease the pressure on revenue collection agencies;
- Explore other revenue streams such as wealth taxes and property taxes;
- Modernise tax administration systems;
- Place caps and sunset clauses on tax relief measures;
- Put in place teams to monitor the impact on the tax relief measures, including quantifying revenue forgone due to these measures versus economic benefits derived;
- Automate and track expenditures related to these measures, especially those on support to businesses;
- Consider increasing support to the informal sector – a key engine of most economies in Africa, but the one with the most vulnerable workers;
- Ensure business continuity and minimise tax fraud;
- Safeguard customs revenue by, for example, intensifying post clearance audits and putting in place systems to curb smuggling activities; and
- Attract direct foreign investment.
Free trade area
It is hoped that the long-awaited implementation of the African Continental Free Trade Area (AfCFTA) will play an important role in the future of domestic resource mobilisation in Africa, and in accelerating the economic recovery.
Agreement has been reached on the protocols on trade in goods and services, but not on tariff offers, service offers and rules of origin. A total of 54 African countries have signed the agreement, and 28 have deposited their instruments of ratification. A new implementation date is planned for January 1, 2021.
AfCFTA’s implementation will result in the removal of non‑tariff barriers to trade, and broader trade facilitation measures. It is expected that this will lead to a 3% increase in tariff revenues by 2035.
Looking beyond Covid-19 – with mounting unemployment and rising poverty levels, African countries are faced with the difficult task of boosting resources, reducing inequalities, promoting development, and restoring public finances.