This article was first written and published in November 2016.
Tuesday last week, our Communications Manager wrote: "I want to draw your attention to the news item below on IMF's suggestion to African countries to boost tax collections. https://www.reuters.com/article/us-africa-economy-imf-idUSKCN12P0IM?il=0 ... I will suggest a rejoinder that can be attributed to you ..." And so my instruction came!
The referenced article is from Reuters Business News of same day and captioned "IMF urges African states to cut deficits as growth grinds lower". Knowing Olatubosun, I will bet the Naira that his instruction was informed by the following 29 words opener of Mr. Duncan Miriri's article: "African exporters of oil and commodities should remove subsidies and boost taxes to weather their slowest growth in more than two decades, the International Monetary Fund [IMF] said on Tuesday". But Mr. Miriri was only paraphrasing the admonition of Mr. Abebe Aemro Selassie, the IMF's newly appointed Director of its African Development.
It is reported that Mr. Selassie has been with the IMF since 1994. In Mr. Mirir's interview-styled article, Mr. Selassie projected that economic growth in Sub-Saharan Africa (SSA) may only reach the average 3 percent mark if fiscal reforms are implemented. IMF's 2016 growth forecast for SSA is 1.4 percent. Failure to implement the fiscal reforms actually means doom as the current forecast cannot be guaranteed. The SSA gloom is attributable to 23 resource-dependent countries like Nigeria, South-Africa and Angola.
The shinning stars include Rwanda and Senegal that are growing in excess of 5 percent. Speaking of fiscal reforms, the Nigerian government is reminded of the need for a "coherent and consistent [economic] policy package"; Zambia is advised to eliminate fuel subsidies; Kenya should adhere to its medium-term consolidation path; and generally, African nations should opt for cheaper institutional debts and slow down on the craze for Eurobonds. Now seriously, Olatubosun, what rejoinder do you want from a tax practitioner?
However you read the Reuters article and several other publications, particularly those attributed to economists and politicians (the line gets blurrier these days), a call to boost tax revenue should be read, a call to improve the effectiveness and efficiency of tax administration (now you see Olatubosun's genius). In the absence of any empirical study or report (now we call for a rejoinder to this piece), it is strongly arguable that African countries need to introduce more taxes. Practically speaking, what is the basis for the introduction of new taxes when existing taxes have not been optimally administered? In reality, such enterprise only kills tax-compliant businesses, individuals and other taxable units. How? Because they are already in the net and may only continue to be fleeced into extinction. Taxation is not optimal in the face of so many being outside the tax net. The arguments of the formal and informal sector, attributing to the latter, the inability to collate their data and hence minimal tax coverage, is ridiculous in any 21st century economy. A cardinal principle of good taxation is fairness; some spell it "equity". Without falling into the philosophic debate of fairness and equality, the bottom-line is that any tax system worth the name must be structured in a manner that being outside the tax net should be a rare exception and probably should exist only in the few days after one becomes an economic unit in a society.
The development of societies is never isolated from active citizen participation. Citizen participation simply means the guarantee of citizen rights and the enforcement of citizen obligation. Taxation covers the latter and often times spread its wings to embrace non-citizens alike. A good tax system is an incident of a thinking society.
Taxation is the administration of taxes. At Taxtech, we believe that an effective and efficient tax system must have optimal functionalities in the following 7 areas of tax administration:
- Registrations (the registration of the tax payer should be as easy as opening an email account);
- Computations of taxes (tax is a science not an art; tax computation (with tax optimality options) should be software driven).
- Remittances (payment of taxes online should be easier said than done).
- Returns (filing of tax returns (and the consequential update of tax payer information) should today be a cloud-based function).
- Receipting (payment of taxes is incomplete without an authenticated receipting process – collection of tax receipts and tax clearance certificates can be absolutely electronic).
- Audits (a paper-based tax audit process should be prehistoric, alas it is not in most African countries).
- Accounting (accounting for tax revenue should be a real-time function provided by the revenue collecting agency to the federating units that will utilise the tax revenue.
Speaking of Nigeria, taxes and other related revenues contributed a marginal 5% of GDP in 2015, arguably not because of the tax rate, but because of tax administration. Of the country's workforce of 77million people as at 2015, only about 17million are registered individual tax payers. Value Added Tax (VAT) administration figures reveals only 12% of registered VAT liable persons as filing returns as at when due. The Federal Inland Revenue Service (FIRS) reports that it has only been able to drag 1.2million of the about 1.5million Nigerian companies into its tax net, but then what is the rate of compliance? If these abysmally low figures account for the country's projected N5trillion 2016 tax revenue, one can only imagine what the figure would be if we hit optimal compliance. Compliance with Nigeria's 5 payroll taxes (should you agree that all compulsory payments are taxes, regardless of any personal benefit), that is: the Pension contributions, the income tax, National Housing Fund contribution, Employee Compensation Scheme contribution and the Industrial Training Fund contribution; currently account for 100 man hours monthly-spend. To harmonise these taxes is currently not a subject of a debate. We can go on and on, on this deluge of administrative inefficiencies in the tax system.
Taxation in Africa has to rise; and not for taxes to be raised. Incidentally, we are at a positively interesting period in history, the age of information communication technology (ICT). It comes as an age where information may only be commercialised to the extent it is clothed with components of good service delivery. Information simpliciter should be relatively free. ICT deployed in the provision of services, particularly taxation, is the way to look for Africa. Automating the 7 core functions itemised above is the path to thread. But then the development and deployment of functional ICT solutions costs money. As with almost all technology, their costs depreciate as new, better and more expensive technologies become available. ICT is hardly one product, it is often a process designed as a product that goes through continuous development and progress. Investments in ICT should really not be viewed as projects but as a functional process with projectized features – a process that requires pockets of projects almost at all times. With this understanding, it becomes important for government and other stakeholders in the tax space to design funding options that addresses the particular ICT needs of the taxation function. Granted, Nigeria's National Tax Policy places the responsibility of funding ICT for tax administration on the doorstep of government when it stated: "It shall be the responsibility of Government to provide the required funding and platform for the automation of tax administration processes, as this would aid effective and efficient administration of taxes in Nigeria"; however the sheer amount of challenges still being faced in the tax system, should engender the participation of other stakeholders in charting the much needed course, particularly in relation to the investments needed, for providing the ICT platforms for effective and efficient tax administration. In this challenge lies a good opportunity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.