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Four steps to develop a post-Covid African tax system

By Grégoire Rota-Graziosi, Rabah Arezki
Posted on Monday, 1 March 2021 09:40

Course bursary. © Andriy Onufriyenko / Moment RF / Getty

Introducing property tax, agricultural VAT and a tax revenue agency are just some of the strong ideas advocated by economists Rabah Arezki (AfDB) and Grégoire Rota-Graziosi (International Development Research Centre) to establish a modern African fiscal policy.

At the end of World War I, Joseph Schumpeter described countries’ tax systems as the “thunder of history” to underline how much they are shaped by wars, revolutions and disasters.

The fight against Covid-19, which resulted in significant public expenditure and reaffirmed the need for efficient administration, offers a unique opportunity to renew the “social contract” between countries and their citizens around taxation.

While the debate is largely focused on introducing a wealth tax in developed economies, it is quite different on the African continent. There it is centred on ensuring greater efficiency and transparency, including in the natural resource sector.

A modern African fiscal policy should contribute to the continent’s recovery while encouraging investment. To do so, four measures are essential.

1- Introduce property taxation

A pragmatic decision would be to introduce effective property taxation, which is too often lacking in Africa. As a reminder, revenues generated by property taxes represent 3 to 4% of GDP in France and the US, whereas they are very modest or even non-existent on the continent (less than 1% of GDP).

Taxation should target primarily the continent’s major capitals, where the price per square metre is nothing in comparison to that of other major metropolises in the world. Kigali and Accra have instituted such a reform, which notably uses property georeferencing techniques for addressing. But we can go even further by using blockchains for real estate transactions, as is the case in Sweden, which makes it possible to secure property rights and speed up transactions.

2 – Implement taxes that are simple to administer

Property taxation must be introduced before tax rates can be applied. This failure to introduce effective property taxation has led to significant losses of tax revenue. It is, therefore, necessary to put an end to the fragmentation of fiscal power between ministries but also to the lack of cooperation with customs, which often remain the main collector.

Following the example of the English-speaking world, several African countries – Burundi and Togo in particular – have established a revenue agency. The initiative is a step in the right direction as it brings together tax and customs administrations into a single organisation. However, it is not enough as the Ministry of Finance has not yet introduced an adequate fiscal policy.

To complement and improve transparency, the evaluation and publication of tax expenditure information must become standard practice, as was imposed in 2015 by the Union économique et monétaire ouest-africaine [West African Economic and Monetary Union] (UEMOA) on its members.

3 – Drastically reduce exemptions

There is a risk that the post-Covid era will lead to a proliferation of derogatory tax regimes to promote economic recovery. This temptation must be resisted or else the already unclear regimes will become even more complex and fall into a spiral of granting exemptions to certain companies, then to their subcontractors and then to subcontractors of subcontractors.

To avoid this pitfall, governments will need to clearly define which subcontracting companies are eligible for exemptions.

Exemptions must be banned even when it comes to corporate tax. Not only does the measure favour the most profitable companies without guaranteeing the survival of those in difficulty, but it also leads companies to not declare anything, leaving administrations in the dark. For this reason, tax credits should be systematically preferred to tax exemptions.

4 – Using taxation for industrial purposes

In recent years, China’s tax policy has been an instrument of its industrial policy, with value-added tax refunds encouraging companies producing raw materials to stop exporting and process them locally. African countries, which need to expand beyond exporting raw materials, must seize this tool.

Similarly, taxation can play a significant role in the formalisation of the economy, in particular through value-added tax (VAT). For example, the Mauritian tax authorities refunded VAT credits accumulated by an exporting mining company between 2012-2013. As part of this process, they examined thousands of invoices paid by this company and uncovered hundreds of previously unknown national suppliers of its services.

More generally, introducing VAT encourages businesses to declare their earnings in order to benefit from tax deductions.

The agricultural sector, which is largely exempt on the mainland, would have everything to gain from such taxation, particularly if VAT credits (possibly increased as in China) were granted to agricultural cooperatives for investments made. This practice would encourage both formalisation and modernisation.

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