AFRICA TAX SPOTLIGHT Quarterly newsletter of the Taxation and Development Second Issue 2010 Volume 1 _________________________________________________________________ ____________________________ Editorial Attiya Waris Welcome to the second issue of Africa Tax Spotlight. In beginning to develop tax justice and the dis‐ cussions around it not only in the domestic but also the international context and how it is applied in the African context for the entire con‐ tinent but for each individual coun‐ try, the Tax Justice network re‐ Participants at the Pan‐African Conference on Taxation and Development cently hosted the Pan‐African Con‐ ference on Taxation and Develop‐ ment in Nairobi, Kenya be‐ tween on the 25th and 26th of Table of Contents March 2010. Editorial 1 Public Resource Mobilization This conference the first and hope‐ Mobilizing Tax Revenue for & Aid in Africa 12 fully not the last of its kind, held in Transfer Pricing and the Nairobi Kenya, made critical input Development in Africa 2 into the issue of domestic taxation, Harnessing Domestic Tax Taxing Rights of resource‐based taxation as well as Developing Countries 14 international taxation and as a re‐ Policies for Development 3 sult made recommendations for the Aid and Property Taxation Africa’s Bane 15 many issues of critical concern for The Kenya Report 16 the improvement of taxation and in Francophone Africa 6 its re‐distribution within individual Taxing Extractives in TJN Across the Globe 17 states in Africa. Mauritania 7 News & Events 19 Profile 20 Foreign Aid, Investment With the current financial crisis and Trade in Resource Rich hitting most of the world there is Guest Editor: Attiya Waris currently a re‐assessment being Countries 8 Contributing Editor: Sandra Kidwingira undertaken by many developed Changing the Investment Compiled by: Catherine Njue countries and international donor email: [email protected] bodies on how much money can be Structure in Natural Published by the Tax Justice Network‐ sent to developing countries to as‐ Resources 9 Africa, Nairobi Secretariat sist in alleviating poverty and im‐ © TJN‐A www.taxjustice4africa.net proving development. It is at this Africa and Secrecy For free circulation point in time that this conference 2010 volume 1 TJN‐A newsletter made a seminal change by en‐ This issue gives the reader a sam‐ and international systems of collec‐ gaging development practitio‐ ple of some of the papers pre‐ tion and distribution of resources ners, economists, lawyers and sented at the conference as well that are accountable, transparent, government officials from all the news around Africa in the past responsible, economic, efficient, over Africa and internationally quarter not only regionally but in‐ just and fair. in order to begin to engage ternationally as well. with the repercussions that will See Conference Communiqué here: If one critical issue can be leaned face Africa in the ensuing year http://taxjustice.blogspot.com/2010/04/tjn- from the conference and from the and in the long term. Partici‐ for-africa-issues-nairobi.html developments in taxation in Africa pants and presenters were and internationally in the past few ________________________ from both francophone and months it is an urgent need for so‐ Anglophone Africa and it is Attiya Waris, Vice Chair, cieties and developing countries to hoped that this will develop begin to engage with each other TJN International further to include Lusophone more in order to build domestic, Africa and North Africa. regional Mobilizing Tax Revenue for Development in Africa: The Way Forward Despite decades of reform and and poverty reduction to take 2. Redistribution: to redistribute foreign aid, the quality of gov‐ place in African countries, it is income and to reduce inequal‐ ernance in most African coun‐ essential that a coherent, dy‐ ity through progressive taxes‐ tries remains poor. Colonial namic and domestically driven higher tax rates apply to powers did not leave behind capital accumulation, interme‐ higher income; strong, indigenous institutions diation and mobilization process 3. Re‐pricing: to re‐price economic that could tackle the develop‐ take root. alternative, that is, the use of ment challenges of modern The link between taxation and taxes and subsides to ensure state. Economic crises, wars and governance is not immediately that market prices better re‐ political instability have also apparent, but one is in fact vital taken their toll. Yet, taxation flect social costs and benefits; to the other. Taxation is a core which is one entry point for im‐ 4. Representation: to strengthen governance function. It has the proving governance on the con‐ potential to shape relationship political representation. tinent has received little atten‐ between state and society in sig‐ tion. Tax revenues are relatively nificant and distinctive low in most When governments are more de‐ ways. In Europe, tax not countries ___________________ pependent on tax revenue and less only helped create the in Africa. on income from natural resources, state, they ‘helped to Raising ad‐ For sustainable aid, or debt financing, this gener‐ form it’ (Brautigam, ditional tax growth and poverty 2007). The origins of rep‐ revenue is resentative government further reduction to take are intimately bound constrained place in African with the evolution of by weak countries, it is es‐ taxation. There is a State le‐ strong consistent connec‐ gitimacy, sential that a coher‐ tion between the ways in as taxes ent, dynamic and which governments are have often ally stimulates accountability to domestically driven financed and the ways in not trans‐ citizens regarding the use of gov‐ which they govern. lated into capital accumula‐ ernment funds. The effect is felt improve‐ tion, intermediation In brief, tax system can more on direct taxes placed on ments in serve four main goals; personal and corporate income. Aid public ser‐ and mobilization apply to higher income; dependence on the other hand, vice deliv‐ stimulates accountability to exter‐ process take root. 1. Revenue generation: ery. For to raise government nal donors. sustainable ___________________ revenues; growth and What Are The Problems? 2 2010 volume 1 TJN‐A newsletter The ability to obtain direct tax reve‐ ‐tion and small for non payment holidays not only shrink the tax base but also complicates tax ad‐ nue, which are often progressive in Capital flight nature and can be used for effective ministration and are a major redistribution, is especially low; 2‐6% Capital flight involves the deliber‐ source of revenue loss and leak‐ ate and illegal disguised expatria‐ age from the taxed economy. of GDP in poor countries compared to tion of money by companies or in‐ They should be abolished, Fur‐ 12‐18% for developed countries dividuals taxable within the coun‐ thermore, laws against manipulat‐ (Cobham, 2005). This is due to the try of origin. Developing countries ive transfer pricing should be in‐ following features that characterize lose more money through private troduced and the necessary tech‐ developing countries: capital flight than they receive in nical capacities must be created; public aid. The Large Informal Economy ! It is very important to educate the young (who are the next Most developing countries have a Tax Competition generation of taxpayers) on the large informal economy, which is Tax competition means that coun‐ significance and role of taxes. under–taxed or completely untaxed. tries compete against each other Outreach activities including, Trade liberalization by using tax related or financial TV and radio coverage, advertis‐ incentives to attract Foreign Direct ing and tax themed programs Many African countries rely on tariffs also helps children and adults to for an important share of govern‐ Investment (FDI) understand the civic responsi‐ ment revenue. While opening up Willingness to Pay trade is expected to bolster long‐ bilities of paying taxes; term economic growth, countries Citizens’ wiliness to pay tax may ! The working conditions of tax participating in trade negotiations, be low for historical, political and officials also need to be im‐ such as the Doha Round and the Eco‐ cultural reasons, and may also re‐ proved in order to motivate nomic Partnership Agreements flect the perception that govern‐ them to carry out their duties in (EPAs), are required to cut their tar‐ ments consistently misuse public a more efficient and profes‐ iffs and are thus likely to collect less funds. sional manner; revenue. The Way Forward ! The monarchs (Traditional Personal Income Tax ! Fine‐tuning the policy and the heads) are very close to the While personal income taxes yield administration governing the people they rule over. The tax about 7.2% of GDP in developed taxation of these taxpayers’ in‐ authorities should therefore countries, the corresponding figure comes would help in raising addi‐ maintain close relationship with for developing countries is only 1.9% tional revenue. Policies should them and explore such relation‐ ship to bring more people into of GDP (Bird and Zolt 2005). focus on strengthening the tech‐ nical capacity and organization the tax net and also increase Limited Capacity of Revenue Au‐ of revenue authorities through the level of taxpayer’s compli‐ thorities computerization and improved ance. operating procedures. Stricter Tax leakage in developing countries _____________________ enforcement mechanisms as well is often worsened by poor function‐ as improved tax audits and in‐ Samuel Fakile, ing tax authorities due to variety of spections also contribute to in‐ reasons; under–resourced or under– Covenant University, Ota, trained administrators, poor tax col‐ creased taxpayer compliance; Nigeria lection systems, failure of legal en‐ ! Using free zones that offer tax forcement mechanism for tax collec‐ Harnessing Domestic Tax Policies for Development. Domestic Tax Policies and Practices: Is there a Better Way? The role of domestic tax policy in and obvious need for more reve‐ revenue are essential for a gov‐ nue to enable the state to provide ernment to be effectively sus‐ development and maintain even the most basic tained.