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Results Briefs September 9, 2019

Mobilizing Tax Resources to Boost Growth and Prosperity in Sub-Saharan Africa

MULTIMEDIA

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VIDEO

West African Tax Officials Work to Meet Basic Needs, Improve Equity

Many countries in West Africa struggle to collect the revenue needed to provide basic services to their citizens: clean water, education, electricity. And citizens are watching – many pay taxes and want to see those services improve.

Achieving the Sustainable Development Goals by 2030 requires a big increase in investment. That poses a challenge for many countries in Sub-Saharan Africa, where most economies collect taxes that amount to less than 15 percent of GDP—barely enough to carry out the most basic state functions. The World Bank Group is helping these countries mobilize domestic resources fairly and efficiently—with a focus on administering value-added taxes, removing cost-ineffective tax expenditures, increasing excise taxation, improving property taxation, and closing international tax loopholes for multinationals and wealthy individuals.

Challenge

Mobilizing tax revenue is key if developing countries are to finance the investments in human capital, health and infrastructure necessary to achieve the World Bank Group’s goals of ending extreme poverty and boosting shared prosperity by 2030. To achieve the Sustainable Development Goals, low-income countries face an estimated annual financing gap of half a trillion dollars, 0.5 percent of global Gross Domestic Product (GDP). The International Monetary Fund (IMF) estimates that extra tax revenues could finance one-third of this gap.

Sub-Saharan Africa remains the region with the largest number of economies below the minimum desirable tax-to-GDP ratio of 15%. At that level, revenues are inadequate to finance basic state functions. Non-oil-rich countries in the region saw their tax-to-GDP ratios increase to 16% in 2018 from 15.3% in 2010. Due to fluctuating oil prices, tax collections are more volatile in oil-rich states. In these countries, tax revenues increased from 9.2% of GDP in 2010 to 15.2% in 2015, after which taxes fell back to 10.2% in 2018.

Relatively low tax collections in the region reflect weaknesses in revenue management, including widespread tax exemptions, corruption, and shortfalls in the capacity of tax and customs administrations. Given the region’s relatively large agricultural sectors and less open economies, the capacity to raise tax revenues is also lower. The maximum tax revenue potential for countries in the region is estimated to average 19.6% of GDP, which is 7.5 points lower than in the rest of the world.

Approach

Most African economies have the potential to mobilize more in taxes. This can be done through better tax administration (including value-added taxes), broadening the tax base by removing cost-ineffective tax expenditures, and increasing excise taxes (including on alcohol, tobacco, and soft drinks). In addition, it’s important to introduce efficient carbon-pricing policies and effective property taxation while and closing international tax loopholes that permit aggressive tax avoidance and evasion by multinationals and wealthy individuals. Reducing structural bottlenecks is also part of suite of tools to consider in improving revenue outcomes, including by improving taxpayers’ trust and by moving tax administrations to the digital frontier. 

Results

Sierra Leone: Moving Customs and Tax Administration to the Digital Frontier. The World Bank Group is supporting the country’s effort to modernize revenue administration through automation of the Customs and Domestic Taxes Departments. Automated System for Customs Data (ASYCUDA World) was commissioned in January 2019. As a result, revenue collections doubled in the first quarter of 2019 over the same quarter in 2018.  

Democratic Republic of Congo: Support to the Provincial Tax Administration Helps Mobilize Funds for Social Services. Through the Public Financial Management and Accountability Project, the Bank provided support to the province of Nord-Kivu to establish a taxpayer register, undertake an awareness campaign, and improve the mobility of tax officers (through motorbikes). These activities helped increase the province’s revenues by over 70 percent between 2014 and 2017, allowing it to fund from its own budget investments in basic physical and social infrastructure such as roads, health, and education.

Uganda: Developing a Medium-Term Revenue Strategy.  In 2016, even after two decades of sound macroeconomic performance, Uganda’s tax-to-GDP ratio was a meager 13 percent—the lowest in the East African Community and below the government’s own goal of 16 percent. A Domestic Resource Mobilization (DRM) Committee was established, including the Ministry of Finance, Planning and Economic Development, the Uganda Revenue Authority, and development partners to guide the development of the DRM strategy and coordinate interventions to support revenue mobilization. The World Bank Group supported the development of this strategy with an assessment of Uganda’s domestic revenue gaps, an excise duty diagnostic, and undertook a range of assessments on DRM institutional needs, customs and Information and Communication Technology (ICT). Uganda’s draft DRM Strategy aims to increase the tax-to-GDP ratio by 0.5 percentage point of GDP per year while enhancing fairness, transparency, and accountability in the tax system and lifting the capacities of the revenue administration entities. A transformational agenda was proposed to help URA address performance gaps, build on its areas of strengths, and work toward implementing MTRS processes. The multi-year agenda is composed of six sub-agendas, including: 1) tax policy; 2) institutional framework; 3) human resources; 4) core function operations; 5) new technologies; and 6) non-technical drivers of DRM.

Tackling Aggressive International Tax Planning and Evasion.  World Bank Group technical assistance (now under the Global Tax Program) has allowed to introduce strengthened anti-abuse rules in several countries, including Senegal, Nigeria, Liberia, Cape Verde, Mauritania, and Kenya. Revenue collections from audits have been substantial. In Kenya, tax officials who received training successfully negotiated transfer-pricing audit adjustments that brought in additional tax revenue of $135 million in 2016. In the Economic Community of West African States (ECOWAS) region, additional assessments from international tax audits exceeded $100 million in pilot countries in a single year (2017).

Somalia: Sustained Support Helps Increase Revenue Collection in a Fragile State. Since 2015, the World Bank Group has provided support on tax policy and administration as well as taxpayer education to improve voluntary taxpayer compliance. During this period, revenue collection more than doubled, from $76 million in 2013 to $183 million in 2018, exceeding the target under the IMF Staff Monitored Program.

 



Bank Group Contribution

The World Bank Group is the largest provider of development finance for Domestic Resource Mobilization (DRM), supporting more than 100 countries and territories through an active portfolio of $1.8 billion in loans and technical assistance (as of May 2019). The Bank is active in 22 of the 36 countries and territories in fragile situations, 48 of the 76 poorest countries and economies eligible to receive concessional IDA resources, and in the 16 middle-income countries with very low tax collections (below 15 percent of GDP.)

Since 2017, the Global Tax Program (GTP) has provided an umbrella framework for DRM support across the Bank Group. It builds upon ongoing programs focused on strengthening tax institutions and mobilizing revenues at the international and domestic level. The program is currently funded by eight development partners (Australia, Denmark, Japan, Luxembourg, Netherlands, Norway, Switzerland and the United Kingdom) and, as of today, total secured contributions amount to more than US$ 60 million (2017-2022). Sub-Saharan Africa is one of the program’s priority regions.

Partners

Publishing and implementing country-led medium-term revenue strategies (MTRS) is one of the main mechanisms used by World Bank Group to ensure collaboration on DRM support. Generally, the IMF focuses on upstream support, which includes diagnostics and strategic design, whereas the Bank Group works on downstream activities. The Bank Group plays a fundamental role in providing capacity building and human resources and in supporting institutional design building and business processes including digitalization. For example, in Senegal, the Bank Group is providing support on tax policy and administration—including international taxation (transfer pricing, anti-abuse, and treaty policy), risk-based audit selection, small-businesses taxation, and excise taxation (e.g., tobacco).    

Besides joint regional workshops and country missions, the Bank Group also has regular briefings with other international (the IMF, the OECD, and the United Nations) and regional organizations (including the African Tax Administration Forum (ATAF), Cercle de Reflexion et d'Echange des Dirigeants des Administrations Fiscales (CREDAF); OADA: Organisation for the Harmonisation of Corporate Law in Africa (OADA), and ECOWAS). This allows for efficient division of labor, consistent messages/recommendations, and also helps stimulate peer learning, exemplify best practices, and leads to peer pressure for collective tax reforms. The almost weekly meetings of the Platform of Collaboration for Tax (PCT)—which includes the IMF, the OECD, the UN, and the Bank Group as partners—also allow for regular updates.

The Bank Group also works with the IMF and other partners on developing and implementing tools and analytical instruments, such as the Tax Administration Diagnostic Assessment Tool (TADAT) and the Tax Policy Assessment Framework (TPAF), as well as toolkits on international tax issues in weak capacity contexts.

Moving Forward

World Bank Group technical assistance and lending in Sub-Saharan Africa is expected to grow under commitments to help reduce tax evasion and mobilize resources in IDA countries and countries with tax-to-GDP ratios below the 15 percent threshold. This also includes work on customs and tax administration in countries with Fragility, Conflict and Violence (FCV) contexts, recognizing that mobilizing greater domestic resources can enhance accountability and state-building, particularly if such efforts are explicitly linked to providing public goods (World Development Report (WDR), 2017).

In addition to IDA19 funding, the World Bank has secured trust funds under the Global Tax Program to provide DRM support (2019-2022) with the objective of boosting domestic resource mobilization while strengthening tax policy and administrative capacity (including customs) in selected countries. World Bank Group teams are currently in conversations about such engagements with the governments of Benin, Burkina Faso, Chad, Côte D'Ivoire, Ethiopia, Ghana, Kenya, Liberia, Niger, Nigeria, Senegal, Sierra Leone, and Somalia. In addition, the teams are also designing a WAEMU-wide engagement on tax administration reforms.

Technical assistance programs on international taxation and tax transparency are currently being implemented in Benin, Cabo Verde, Lesotho, Senegal and Zimbabwe. In addition, Bank Group teams are exploring country programs with Cameroon, Gabon, Madagascar, and Mali. At the regional level, a regional loan project (Debt Policy Operation) is under preparation with West African Economic and Monetary Union (WAEMU), as well as regional work on tax transparency with ECOWAS countries. The World Bank is also joining efforts with ATAF and the OECD to prepare a toolkit on Digital VAT Policy Design and Implementation for Africa (to be launched by the end of this fiscal year).

Beneficiaries

Stephane Essaga, Head of Tax Inspectors in the Cameroon Tax Administration, believes in “the need for a (challenging) balance between the constant need for resources and the potential disincentive that increasing the tax burden can have on investment”.  

Matine Kouda Pabeyam, Director of Legislation and Litigation at the Tax Office in Burkina Faso, believes that “the government should be accountable. Whatever I pay, I should know how it is used, where it goes”. She promotes the need to “have clear accountable procedures … to gain the support of a bigger proportion of the informal sector that better understand where the money goes."

The Tax Commissioner in Togo, Esso-Wavana Adoyi, confirms that the government efforts to better track beneficial ownership of properties is helping to improve “tax fairness” in the country.