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Africa Rising? Inequalities and the Essential Role of Fair Taxation

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Africa Rising? Inequalities and the Essential Role of Fair Taxation Africa rising? Inequalities and the essential role of fair taxation MNCS POST-2015 RESOURCES TAX JUSTICE TAX AVOIDANCE SOUTH AFRICA REDISTRIBUTION TAX JUSTICE INEQUALITY SECRECY SIERRA LEONE TAX SYSTEMS VAT ILLICIT FINANCIAL FLOWS TAX JUSTICE GHANA REDISTRIBUTION TAX INCENTIVES TAX HAVENS TAX INCENTIVES SECRECY TAX JUSTICE INEQUALITYREDISTRIBUTION SIERRA LEONE NIGERIA TAXATION SIERRA LEONE GHANA TAX HAVENS DODGING KENYA POST-2015 BEPS SECRECY TAX JUSTICE INEQUALITY ILLICIT FINANCIAL FLOWS TAX INCENTIVES MNCS INEQUALITY SIERRA LEONE VAT POST-2015 DODGING TAX HAVENS GHANA BEPS ZAMBIA DODGING SOUTH AFRICA GHANA SECRECY ZIMBABWE TAX JUSTICE DODGING TAX AVOIDANCE VAT POST-2015 TAX HAVENS DODGING MALAWI DODGING MNCS RESOURCES ILLICIT FINANCIAL FLOWS TAXATION MNCS TAX HAVENS VAT February 2014 2 Africa Rising? Inequalities and the essential role of fair taxation Contents List of Acronyms 4 Acknowledgements 5 Executive Summary 6 Introduction 9 Chapter 1: Inequality in sub-Saharan Africa 12 1.1: Why inequality matters 12 1.2: Income inequality trends in sub-Saharan Africa 13 1.3: Horizontal inequalities in sub-Saharan Africa 21 1.4: Conclusion 23 Chapter 2: Addressing Inequality through Taxation 24 2.1: Why tax matters 24 2.2: Aggregate tax revenue trends in sub-Saharan Africa 26 2.3: Illicit financial flows and inequality in sub-Saharan Africa 28 2.4: Tax equity and the impact of the tax consensus in sub-Saharan Africa 36 2.5: Trends in direct and indirect taxation in selected countries 39 2.6: Personal income taxation 40 2.7: Corporate income taxation and tax incentives 41 2.8: Value added tax 45 2.9: Property taxation 47 2.10: Informal sector and local-level taxation 49 2.11: Extractives taxation 50 2.12: Conclusion 54 Chapter 3: Case studies: Taxation in South Africa and Kenya 56 3.1: South Africa 56 3.2: Kenya 60 3.3: Conclusion 66 Chapter 4: Conclusion and Recommendations: 67 4.1: Conclusions 67 4.2: Recommendations 68 Annex A: Analysis of direct and indirect taxation in selected sub-Saharan African countries, % of GDP 70 Endnotes 73 Africa Rising? Inequalities and the essential role of fair taxation 3 List of Acronyms Acronym Full Description ADB African Development Bank AEO African Economic Outlook AFRODAD African Forum and Network on Debt and Development AIDC Alternative Information and Development Centre APP Africa Progress Panel ATAF African Tax Administration Forum BEPS Base Erosion and Profit Shifting BIG Basic income grant CABRI Collaborative Africa Budget Reform Initiative CfSC Centre for Social Concern CIT Corporate income tax COSATU Congress of South African Trade Unions CSO Civil society organisation CTPD Centre for Trade and Policy Development EAC East African Community EITI Extractives Industry Transparency Initiative EPAs Economic Partnership Agreements EPZ Export processing zone GDP Gross domestic product GFI Global Financial Integrity GST Goods and services tax HNWI High net worth individual ICTD International Centre for Tax and Development IMF International Monetary Fund ISODEC Integrated Social Development Centre KRA Kenya Revenue Authority MDG Millennium Development Goal MNC Multinational corporation OECD Organisation for Economic Cooperation and Development PAYE Pay As You Earn PIN Personal identification number PIT Personal income tax SADC Southern African Development Community SARS South Africa Revenue Service SEATINI Southern and Eastern African Trade Information and Negotiations Institute SPII Studies in Poverty and Inequality Institute TJN Tax Justice Network TJN-A Tax Justice Network Africa UNDP United Nations Development Project UNECA United Nations Economic Commission for Africa UNU-WIDER United Nations University World Institute for Development Economics Research VAT Value added tax ZRA Zambian Revenue Authority 4 Africa Rising? Inequalities and the essential role of fair taxation Acknowledgements Author: Claire Kumar Concept and project management: Alvin Mosioma and Sophie Powell Acknowledgements: This report was commissioned by Tax Justice Network Africa and Christian Aid in collaboration with our members and partners, including Economic Justice Network (EJN), Studies in Poverty and Inequality Institute (SPII), Alternative Information and Development Centre (AIDC), African Forum and Network on Debt and Development (AFRODAD), Centre for Trade Policy and Development (CTPD), Centre for Social Concern (CfSC), Budget Advocacy Network (BAN), National Advocacy Coalition on Extractives (NACE), Ghana Integrity Initiative (GII), and the Tax Justice and Governance Platform Nigeria. With many thanks to the following people who provided invaluable comments and inputs: Charles Abugre, Dereje Alemayehu, Joseph Ayamga, Vitus Azeem, Karol Balfe, Abu Bakarr Kamara, Vitumbiko Chinoko, Alex Cobham, Helen Dennis, Odd-Helge Fjeldstad, Dick Forslund, Isobel Frye, Taku Fundira, Kyauta Giwa, Christian Hallam, Andrew Hogg, Mathias Kafunda, Alison Kelly, Melton Luhanga, Priya Lukka, Collins Magalasi, Zipporah Maruvu, Savior Mwambwa, Jane Nalunga, Ernest Okyere, Olatunde Julius Otusanya, Alex Prats, Michelle Pressend, Wilson Prichard and Joseph Stead. Tax JusticeAfrica Network Rising? Africa Inequalities Inequality and and the Taxation essential in role Sub-Saharan of fair taxation Africa 5 Executive Summary ‘It cannot be said often enough, that overall progress remains too slow and too uneven; that too many Africans remain caught in downward spirals of poverty, insecurity and marginalisation; that too few people benefit from the continent’s growth trend and rising geo-strategic importance; that too much of Africa’s enormous resource wealth remains in the hands of narrow elites and, increasingly, foreign investors without being turned into tangible benefits for its people’ Kofi Annan, Chair, Africa Progress Panel1 After a decade of high growth, a new narrative The evidence gathered in this report shows that of optimism has taken hold about Africa and its increasing income inequality should be of huge economic prospects. Alongside buoyant growth concern to governments in at least six out of the rates, there has been some poverty reduction and eight countries – Ghana, Nigeria, South Africa, some positive progress in sectors such as health and Zambia, Kenya and Malawi. In Ghana and Nigeria, education. However, despite this, there is a broad income inequality is rising strongly. In Nigeria, consensus that progress in human development between 1986 and 2010, there has been a 75% has been limited given the volume of wealth created. increase in the concentration of income in the There is growing concern that the high levels of country. In Ghana there has been a 50% increase in income inequality in sub-Saharan Africa are holding the concentration of income over an 18-year period. back progress. In Zambia income inequality is now at its highest levels since data was collected. South Africa has one This report investigates the issue of income inequality of the highest levels of inequality in the world and in eight sub-Saharan African countries (Ghana, one which keeps increasing. The sharp rise in the Kenya, Malawi, Nigeria, Sierra Leone, South Africa, incomes of the richest 5% is driving the increase at Zambia and Zimbabwe). While there is growing the top end. Yet there is no evidence of progress public recognition that inequality is the issue for our in tackling this inequality, or even much time - both globally and in sub-Saharan Africa – there preoccupation with it, in South Africa’s new is little definitive analysis of income inequality trends National Development Plan. on the continent. This report seeks to contribute in this area, looking at whether income inequality is, It is also clear that this trend is not just a result of the in fact, rising and in what context this is occurring. In rich getting richer. There is clear evidence that this particular, this report seeks to locate an analysis of is at the expense of the poor who are also getting tax systems in sub-Saharan Africa in the poorer, and are therefore actively impoverished in context of these economic inequalities, given the this process. To make matters worse, we know that primary importance of national tax systems in we are vastly underestimating the problem. As Tax redistributing wealth. Justice Network research has shown, both wealth and inequality are being dramatically underestimated The report looks at national taxation systems and to a very significant degree, in every study and in international taxation issues – and, critically, the every country.2 relationship between them. In this way it reveals how the enabling environment for tax dodging impacts on In this context of rising inequality, the role of taxation national tax systems in sub-Saharan Africa. It also in redistributing income is particularly critical, with dissects the trends in revenue generation, tax equity progressive tax systems being one of the most and tax reforms across the eight countries. It has a important tool available to governments. However, special focus on the experiences of two countries the report shows the extent to which illicit financial – Kenya and South Africa – which have two of the flows undermine this prospect. stronger tax systems in sub-Saharan Africa but A central contention of this report is that rising which also have extensive shortcomings in the area income inequality is going hand in hand with – and of tax equity. is ultimately caused by – the current growth model and the illicit financial flows which have increased significantly throughout Africa’s high growth
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