In April, the Council of the African Tax Administration Forum, which you chair, met for the first time. What will the forum focus on in this first phase of its existence?
We have set ourselves high goals and standards, and invested much time, energy and resources in laying the foundation of ATAF. At the ATAF Inaugural Conference last November in Kampala, member countries gave us, the Council, a mandate to develop this organisation into a mechanism that is able to concretely benefit them in developing effective and efficient tax administrations. In this respect, we basically need to focus on two main areas.
Firstly, focussing on the needs of its membership, ATAF will develop programmes that will concretely assist its members to:
a) mobilise their domestic tax bases as key mechanisms to escape aid or single resource dependency;
b) reinforce government legitimacy through promoting accountability to tax-paying citizens, effective state administration and good public financial management;
c) promote economic growth, reduce extreme inequalities, and significantly improve the lives of citizens; and
d) achieve a fairer sharing of the costs and benefits of globalisation.
Translating this to a practical level, it involves developing sufficient skilled capacity in African tax administrations to collect the taxes due to their respective governments, to retain and tax the profits attributable to them from multinationals operating in their countries, to increase transparency in tax administration and to implement internationally-agreed standards on exchange of information to counter tax evasion and other abuses.
Secondly, in order for ATAF to serve the needs of its membership and deliver on its objectives, we need to lay a strong foundation for the organisation so that it is able to function in a structurally and financially sustainable manner. For that reason, the first Council meeting in April was so important. We not only deliberated on the issues of establishing ATAF as an international organisation, determining its organisational infrastructure, the ATAF Workplan, its budget and activities, the structure and staffing of the Secretariat, and relations with our development partners, but there were also very important matters for us to consider pertaining to the governance of the organisation and the roles and responsibilities of Council members. These matters are crucial for providing direction for the future of the organisation and the manner in which we conduct our business.
ATAF’s goal is “to become the central platform for African tax administrators to articulate African tax priorities and develop and share best practices”. How do you want to achieve this goal?
As global developments in the area of taxation gathered pace, it had become clear that an African voice was needed to enable Africa to make up ground in the complex of taxation, so crucial for economic development. We therefore began the process of developing this collective voice, through a mechanism that would channel its energies into sharing experience and developing an Africa-wide approach to key issues on taxation on the continent. In the same way that other tax associations play a vital role in their respective regions, ATAF will be the collective voice of African Tax Commissioners and create opportunities to develop joint strategies and programs.
Of great importance is that ATAF shows value to its members through the holding of technical events and coordination of capacity sharing. ATAF has already held several technical events for African tax officials on key issues of tax administration, namely on Transfer Pricing, Taxation of Mineral Resources, Domestic Resource Mobilization and on Financial Markets. These events, in particular, have made the most significant impact to date, and remain a cornerstone of the ATAF approach to developing effective and efficient tax administrations on the continent. About 9 more demand-driven technical events are planned for 2010.
Furthermore, ATAF is currently participating in a collaborative research project with two other African organisations working towards an African Declaration on Good Financial Governance, as well as embarking on an analysis of the current state of African Tax Policies & Systems. Other projects lined up are the development of an accessible skills- and knowledge-base on tax matters in Africa, and investigating the feasibility of a continental mechanism for the Exchange of Information.
Are there more similarities or more differences between the member states’ tax performance? Can you give an example?
Tax administrations had developed in different ways across the African continent and, to varying degrees, have been influenced by the administrative structures of the former colonial powers. Speaking generally, in the last years, we have seen many African countries forming revenue administrations, encompassing both tax and customs functions. How a country structures its tax administration, however, does not detract from the fact that it needs to be able to collect as much revenue due to it in order to finance its development agenda.
With the aim of increasing their tax performance, the tax reforms that many African countries have undertaken in the past two decades have tended to treat taxation as a technical and administrative exercise, ignoring its political and social nature. These reforms have mainly sought to change the composition of taxation to favour taxes that are easier to collect and perceived to be less distorting to the economy. Typically, this translated into a focus on indirect taxes such as value added tax, a reduction of direct tax rates combined with measures to increase their reach, and a reduction of the importance of taxes on international trade.
These reforms have had limited success in increasing the tax revenue of African countries. It is, of course, essential to improve the technical and administrative aspects of taxation, especially improving the capacity of tax administrations and tackling corruption. But by focusing exclusively on those aspects, the reforms have ignored the fact that taxation represents a political relation between the state and society.
Because the tax performance of a country is determined by so many factors (such as the level of economic development, capacity of the tax administration, compliance culture of the taxpaying population, to name but a few), African countries have had varying degrees of success. Many African tax administrations have developed effective strategies, but strategies that work in one country may not be as effective in another. For example, tax administrations in countries such as Nigeria and Angola have more experience in dealing with oil revenue, while administrations such as SARS and the Tanzanian Revenue Authority can share more on taxation of the mining sector.
We have recognised that we can learn much from one another. So ATAF provides a platform for the regular sharing of experiences among tax administrations. Important is that this sharing of experiences can only be descriptive, and not prescriptive. Each tax administration has to cut its own teeth in practice to increase its tax performance.
How important are taxes for the ATAF member states’ economic development?
Taxation is central to the development agenda of every state in the world. Domestic resource mobilisation is the financial bedrock on which sustainable, long-term development is built. The raising of tax revenues is arguably the most central activity of any state. Revenue from taxation is what literally sustains the existence of the state, and provides the necessary financial resources for all social and economic activity. Taxation therefore lies at the administrative heart of government and provides the basis by which public goods are made available and effective regulation is implemented.
The 2002 Monterrey Consensus and the 2008 UN Doha conference on Financing for Development both recognised that taxation provides a predictable and stable flow of revenue to finance development. If transparently and effectively designed and implemented, taxation:
a) provides an essential financial platform for sustainable development;
b) reduces possible reliance on aid and mineral rents; and
c) improves the environment in which business is carried on, by encouraging international trade and domestic & inward investment, and consequently promoting economic growth.
So for African countries, facing their own developmental challenges, building effective tax systems is a vital and central part of the development process. ATAF is therefore committed to playing its part in building tax administrations in Africa that will contribute significantly to the improvement of the lives of the peoples of the continent.
What are the biggest challenges for the tax administrations of the ATAF member states?
One of the most pressing issues facing the African continent is to reduce countries’ dependence on foreign assistance and indebtedness. We need to develop a renewed focus on enhancing domestic revenues through broadly-based taxation, alongside higher aid flows at least in the medium term. Experience has shown that this will both increase and enable greater predictability of revenues. It will also help ensure that aid-funded investments are sustainable, and prepare for gradual exit from aid in the long term. So for this to take place, we simply have to strengthen state capacity to increase the mobilizisation of its own domestic resources.
Most taxable capacity in Africa tends to be highly concentrated in a small number of people and companies that can often evade taxes by using their power and influence. The majority of the population does not have much political power and influence, and typically has low taxable capacity that is costly to collect, especially in rural areas. So the result is that, often, only middle-size firms tend to pay taxes because large firms can use their capital, influence and relations to evade taxes while small firms do so by staying in the informal sector. We therefore need to spend much time on dealing with issues around these two sectors.
The establishment of ATAF comes at a crucial time for the development of effective and efficient state institutions in Africa. Through our collective effort, we will be able to develop a comprehensive and sustainable strategy to face the challenges and give new direction for African tax policy and administration in the 21st Century.
And how do you assess the situation in South Africa?
The economic downturn last year had hit the South African government revenue significantly, worsening the budget deficit. Despite the recession, government continued its spending in order to help the economy recover, knowing that it would have to gradually cut the deficit and reduce debt. The budget deficit is expected to remain relatively large for the next 3 years due to a still weak global economy that may also curb local growth.
South Africa’s economy shed almost 900 000 jobs last year, but we anticipate that the general recovery and the hosting of the Soccer World Cup will help to create jobs. While the economy had contracted by 1.8% in 2009, it is expected to grow by more than 2% this year, yet still way off the average 5% of the five years until 2008. Strong wage pressures and high oil prices remain risks to the South African economic outlook.
In the February 2009 budget speech, the former Minister of Finance had set SARS’ initial revenue collection target at R648 billion. However, the target was revised down to R590bn as a direct result of the impact of the global economic crisis on the South African economy. Speaking to Parliament’s Portfolio Committee on Finance just a few weeks ago (on 14 April 2010), Minister Pravin Gordhan said that the South African government may have to consider raising taxes if the economy does not recover enough to boost tax revenue.
To counteract the full impact of falling revenue collections due to the economic downturn, SARS took a number of special steps for the 2009/10 financial year. This included starting preparations for the financial year-end campaign much earlier and the establishment of revenue steering committees in the Large Business Centre and regions comprising delegates from all business areas. This approach resulted in SARS collecting R598.5 billion in revenue for the 2009/10 financial year, exceeding its revenue target by R8.1 billion.
We attribute our successful 2009/10 revenue collection efforts to vigorously implementing the SARS compliance model. The interplay of service provision, taxpayer education and enforcement factors resulted in a significant boost in compliance, providing a strong impetus to our revenue collection.
“No taxation without representation” was a slogan in the USA’s independence struggle in the 18th century. Does this statement play a role in the current revenue situation in African countries?
We have all come a long way since the American War of Independence but, nevertheless, an important aspect of ATAF’s work, as stated in its objectives, is to work towards developing key relations with civil society, and improving good governance and accountability between state and citizens.
Taxation is the avenue through which citizens are most directly connected to the state, making it an important catalyst for public demands with regard to a government’s responsiveness and accountability. So governments relying mainly on tax revenue are likely to be more accountable than those that rely on non-tax revenue sources, such as natural resource rents or foreign aid.
Effective taxation underpins effective state-building. It promotes accountability of governments to citizens by encouraging a greater involvement of citizens as taxpayers, integrates citizens into the formal economy, and provides a model for improvements elsewhere in public administration and government. The perceived fairness of the tax system is crucial to building an effective state based on citizens’ consent. The willingness to pay taxes is a good indicator of the legitimacy of the state and what citizens and governments are themselves prepared to pay for may be the best indication of genuine political ownership of development objectives and reduce the dependence on aid and dominant resource revenues.
Are taxes an alternative to financial development assistance?
Official development assistance (ODA) has had limited development effectiveness that can, to some degree, be attributed to the inefficient (and ineffective) manner in which it was used for actual development purposes. And foreign direct investment (FDI) flows to Africa, though having increased in recent years, are still too limited in geographical coverage and focused on extractive industries to have a significant effect on employment creation and poverty alleviation on the continent.
On the other hand, harnessing domestic financial resources, through equitable, efficient and effective taxation, could help raise additional financing in order to narrow Africa’s resource gap and accelerate the process of economic development and poverty reduction. It therefore stands to reason that reducing dependence on donor funds and the associated conditionalities would increase “ownership” of the national development process whereby these resources could be used to fund countries’ own priorities rather than those of the donors.
But resource mobilization will not by itself solve all the problems faced by African countries, particularly considering that many of them lack the sufficiently-developed institutions and adequate human resources necessary to make development work. However, in the medium to long term, the ability of African countries to finance an increasing share of their development needs from domestic sources would give them much-needed flexibility in the formulation and implementation of policies that address their economic, social and other developmental challenges.
It is necessary to develop a renewed focus on enhancing domestic revenues through broadly-based taxation, alongside higher aid flows – at least in the medium term. We have already seen that this both increases and enables greater predictability of revenues.
By developing their tax administrations, African countries will have the potential to increase their total domestic resource pool and thus reduce dependence on external resources (namely ODA) and diversify their development resources. It also helps to prepare for gradual exit from aid in the long term.
Currently, ATAF has 29 member states. Do you expect other countries to join?
The ATAF Inaugural Conference in Kampala was an event that exceeded all our expectations, demonstrating that Africa, in spite of the impact of the global financial and economic crisis on the continent, was taking its destiny into its own hands. Those countries joining ATAF at its launch showed concrete commitment to developing their tax administrations and their countries, through leveraging best practices, sharing information and developing their technical capacity. They gave a clear indication that African revenue administrations were getting on with the business of mobilising their own domestic resources.
The practical nature of the ATAF technical events already held, the research and projects being conducted, as well as the mechanisms being developed for sharing information and best practices are being widely recognised as significant benefits to be derived from the organisation, and we have already received indications that more countries intend to join ATAF in the near future.
What role do you want South Africa to assume in the forum?
The ATAF membership has shown confidence in South Africa in that, at the Inaugural Conference, they unanimously elected the country to be the permanent seat of the Secretariat. In these early days of the organisation, the South African Revenue Service (SARS) is therefore providing some resources to ATAF until such time that it is able to operate independently. South Africa was also elected not only as a member of the first ATAF Council, but also to chair the Council. Apart from the afore-mentioned, the country is a regular member of the organisation and takes full advantage of what it has to offer in order to improve SARS as a tax administration. It ultimately comes down to – the more you put in, the more you are able to benefit from the organisation.
Which role have international organisations and donors as for instance the African Development Bank (ADB), the Organisation for Economic Cooperation and Development (OECD) or the German Agency for Technical Cooperation (GTZ)?
While ATAF is driven by its African membership, the importance of its partnerships with other tax administrations, and technical and development institutions cannot be overstated. The organisation has developed its work programme of strategic dialogue, research and capacity building to take advantage of (and build on the work of) full partnerships with these institutions. Establishing ATAF in the short-term will require much assistance but, in the longer-term, through a shared vision of state-building, governance and domestic resource mobilisation, continuing interaction will assist both ATAF and its development partners to make Africa a better place for its people.
We fully support events which are delivered by development partner institutions in the context of regional or other initiatives and which reinforce ATAF’s work. In doing so, it both avoids duplication of events and increases ATAF’s presence. We regularly engage with our partner organisations, who have expressed interest in supporting ATAF in the areas of:
a) Establishing the permanent Secretariat;
b) Conducting research on tax systems in Africa;
c) Providing technical expertise and support for capacity building events;
d) Assisting with conducting diagnostic studies; and
e) Working towards the establishment of an African Tax Centre.
In order to work particularly towards achievement of the above four areas, we have actively developed relations with the African Development Bank (ADB) and the GTZ. The two organisations have supported ATAF from its inception and we are at the stage where long-term, sustainable cooperation is being established through the finalisation of agreements. We are also similarly pursuing relations with other organisations that would be of great benefit to the ATAF membership, namely the OECD and the IMF, to name but two.
Concerning tax evasion: Do you expect more cooperation from countries outside Africa?
There is a strong call for greater cross-border cooperation on tax matters, particularly on issues of tax evasion, avoidance and the exchange of information. For Africa, ATAF provides us with an optimal structure through which to engage with other organisations on these matters. For example, we have already had formal contact with the OECD regarding Africa’s involvement in the Global Forum on Transparency and Exchange of Information for Tax Purposes (GFTEOI).
The exchange of tax information to counter tax evasion has become a hot topic following the global economic crisis, raising the question of the extent to which the crisis could have been averted had there been greater, including tax, information available. With African countries feeling the effects of the financial crisis, ATAF supports the efforts of the GFTEOI and has proposed that the OECD (a) considers ATAF’s participation (as an organization) within the Global Forum as well as (b) collaborating with the ATAF Secretariat in arranging a seminar for senior tax officials from African countries on Exchange of Information to build greater understanding of the issue.
Should African governments formalize the informal sector to raise more tax revenues? Please elaborate.
In one of the previous questions, I mentioned that small firms often evade taxes by staying in the informal sector. So, given the realities of African economies, it is necessary for tax administrations to spend time on dealing with issues around the small and informal sectors.
Most African countries have a high percentage of small businesses operating in the informal sector, resulting in a rather narrow tax net. In addition, there are increasing concerns that even larger businesses with a higher revenue potential hide in the informal economy. Broadening the tax net therefore has become a strategic objective of tax administration operations in Africa.
We recognise that the small business is both large in number and tends to have only a limited revenue potential. African tax administrations should nevertheless spend energy and resources to manage and facilitate compliance of the sector. But developing a successful small business compliance management strategy requires acquiring a good understanding of the economic, social and organizational specifics and particularities of small businesses in Africa.
Compliance management in this sector should be aimed at an increase in the level of voluntary tax compliance for it to be successful. So efforts to facilitate such voluntary compliance must be devised to target those small businesses that do not deliberately aim at evading taxes, but face difficulties and need assistance to comply with tax obligations. Effective education and service programs need to be in place to help small taxpayers comply with tax obligations and to reduce compliance costs. And for those small taxpayers unwilling to pay taxes, there should be efficient measures to enforce tax registration.
All in all, the need for a special approach to small taxpayer administration is evident from their limited contribution to revenues, and the challenge they present to ensuring compliance. However, their shear numbers and the potential to make significant inroads in developing a culture of compliance make this sector an extremely important one.
Questions by Claudia Isabel Rittel
