Taxes :
Painfully necessary

Africa is the continent with the smallest tax base. Given the rising debt, balanced taxation would offset the fluctuating revenues generated by natural resources. Kenya's recent  Finance Bill riots brought to light just how difficult this process can be. And the need for fairness in favour of the lowest earners.

Nearly forty dead. This is the appalling toll of the protests that swept Kenya in late June, mainly but not solely motivated by the introduction of new taxes [read our feature on the Youth Revolution]. President William Ruto was forced to abandon his finance bill, which was intended to ‘ensure the country's sustainable socio-economic transformation’. With the aim of reducing the budget deficit from 5.7% to 3.3% of GDP, Ruto wanted to introduce a series of taxes on food (16% on bread), vehicles, tyres, batteries, smartphones and even sanitary protection (already too expensive for two-thirds of Kenyan women). Elected two years ago, Kenya's Head of State prides himself on having worked as a street vendor in his youth, and promised during his campaign to champion the informal economy's ‘hustlers’. Now he has the infamous nickname of ‘Zakayo’, a Swahili translation of ‘Zacchaeus’, the biblical tax collector who gets fat at the expense of the poor! His ostentatious taste for luxury watches has certainly not helped social acceptance of these tax hikes. He is thus confronted with the contradictions of his programme (Bottom-Up Economic Transformation Agenda 2022- 2027), which promised to ‘reduce the cost of living’ but, at the same time, to ‘broaden the tax base’.

Taxes, the promise of stable incomes

Yet Africa needs taxes. The tax/GDP ratio is only 18% on average, compared with 21% in Asia and 33.4% in Western countries, according to the African Tax Administration Forum (ATAF), which brings together the tax departments of 43 countries on the continent. The ratio is fairly high in Morocco, Tunisia (32.5%) and South Africa, but insignificant in oil-producing countries (just 5.5% in Nigeria in 2020!). However, revenues from raw materials, foreign direct investment (FDI) and international cooperation are not enough to meet these needs. However unpopular they may be, ‘taxes are the main source of public revenue’, and are ‘essential to economic development and job creation’, points out the preamble to the ATAF annual report by its chairman Philippe Tchodié, who is also commissioner-general of the Togolese Revenue Office.

‘The need to promote an effective and solid resource mobilisation strategy is an essential component for every state on the continent’, he insists. All the more so as African states are faced with a debt crisis, growing needs generated by climate change and the demographic challenge, as well as unpredictable fluctuations in commodity prices, which make budget forecasts more fragile (in Chad, between 2013 and 2015, the fall in oil prices divided the tax/GDP ratio by three). Against this backdrop, the authorities are increasingly aware of the need to improve tax revenues.

All the more so, says Arthur Minsat, head of the Africa Unit at the OECD Development Centre, because “in a macroeconomic context of widespread uncertainty, at a time when risk premiums in Africa are at record levels, good tax administration can reduce the perception of risk for investors”.

Collecting from the informal sector

​​​​​​​The principle of taxation is based on a social contract that must be respected by both the taxpayer and the State. However, collecting taxes forces the State to account for its use of public expenditure. In countries where oil (or any other commodity that generates foreign currency) is abundant, the government may have preferred to use this windfall in a discretionary manner, without feeling the need to be accountable to its citizens... ATAF also points out that tax evasion and avoidance cost the continent 88 billion dollars every year. Ghana, which declared itself in default in December 2022, has asked the main multinationals operating in the country to settle its tax arrears (estimated, for example, at 773 million dollars in the case of the South African mobile operator MTN, which has fought to reduce the bill). The digitalisation of the economy is making the tax equation even more complex: ‘Digital transformation means that multinational companies no longer need to have a physical presence in the countries where they operate’, points out the French Development Agency (AFD) in its latest report, which constitutes ‘a major challenge in terms of taxation and loss of revenue for African economies’.

However, African governments are faced with a major challenge: how can they make people pay income tax when 90% of the workforce work in the informal economy, and are therefore deprived of social cover (17% of Africans have social protection, compared with a world average of 47%)? The idea would be to encourage these workers to declare themselves and pay a progressive income tax in exchange for social protection, as is already the case in North Africa: ‘If all African countries taxed as Tunisia does, this would represent 500 billion dollars of additional revenue per year’, writes economist Sébastien Markley in L'Économie Africaine 2023 (published by La Découverte). African governments have a number of tools at their disposal to find tax solutions. In 2015, at the Third International Conference on Financing for Sustainable Development, held in Ethiopia, the Addis Tax Initiative (ATI) was launched. This partnership brings together the continent's governments to 'promote tax services that serve the people' and help achieve the 2030 Sustainable Development Goals (SDGs).

Changing attitudes and mindsets

The United Nations Commission for Africa (UNECA) is currently working to optimise taxation in the digital and technology sectors. ‘In 2023, the ATAF recorded a significant increase in requests for technical assistance programmes, and greater participation in capacity-building events (conferences, webinars, etc.), indicating urgent needs,’ writes its chairman, Philippe Tchodié, noting that the tax/GDP ratio is on the rise in nine member countries. Technical assistance has facilitated the issue of new tax returns, totalling 1.41 billion dollars in 2023, and tax audits promoted by the ATAF have generated 620 million in revenue. While these results are certainly modest in comparison with what is needed, they do herald a change in attitudes.