This is the 17th post in a blog series to be published in 2022 by the Secretariat on behalf of the AU High-Level Panel on Emerging Technologies (APET) and the Calestous Juma Executive Dialogues (CJED)

Taxation is the process through which the government of a country can collect money from its people to pay for the country's expenditures.[1] Paying taxes is a prerequisite for socio-economic development as it generates coffers for governments to fund and build infrastructural, policy, and developmental projects. Tax fosters a conducive climate for businesses and wealth generation as it influences the governmental budgetary strength and development plans. Furthermore, governments can sufficiently support economic activities such as public health and education, agriculture, generating electricity, and building roads and airports, among other developmental aspirations.

Comparatively, most African governments are able to collect approximately 15% of their GDP in taxes against the 40% that is being collected by European, Asian, and North American countries.[2] However, given the massive demands of developing African countries, this low level of tax collection jeopardises the African continent's socio-economic developmental progress. Low taxes generated and collected by these African countries are partly attributable to the underdevelopment of African countries' tax management systems. These inefficiencies are impeding efficient tax collection and management.

One other of the several factors that limit the collection of adequate domestic taxes in Africa is the predominant and massive informal economic sector that can barely be taxed. The International Labour Organization estimated that approximately 85.5% of Africa's labour is within the informal economic sector, whilst the World Bank has reported that this share of informal economic activities is approximately 90% within the Sub-Saharan African countries.[3] This is common in Africa because the informal economic sector and independent businesses are barely registered as companies and in tax revenue agencies. As a result, self-employed Africans will rarely contribute to their country's taxes and social security.

Corruption, money laundering, tax evasion, and misappropriation of funds are other crucial factors that have impeded the realisation of the collected tax targets across the African continent.[4] For instance, within the extractive economic sector, the revenue losses at the expense of their citizenry are attributable to the corrupt acts across the extractive value chain. Regrettably, the proceeds from these corruptive acts are subsequently hidden through money laundering and tax evasion. These factors have been described as significant impediments to sustainable socio-economic development and growth for the African countries of the mineral, oil, and gas.

Unfortunately, some African government agencies have inadequate capacity to address these challenges because of their lack of transparency, excessive secrecy, and limited institutional responsiveness to well-coordinated and well-structured tax collection and management processes. Thus, the impact of corruption, money laundering, and tax evasion are intertwined with illicit financial flows and bribes that result in capital outflows to tax havens to hide embezzled payments and syphon off the revenue intended for the fiscus. In addition, these corruption acts are not only reducing the tax-to-GDP ratio but also harming the economic strength and capacity by discouraging investment, expanding the underground economy, distorting tax arrangements, and corroding taxpayer morale. Thus, the economy's long-term revenue-generating potential is substantially impeded.[5]

The African Union High-Level Panel on Emerging Technologies (APET) realises that many African governments have been eagerly adopting emerging digital technologies to address these tax collection and management challenges in the last decade. These smart technologies are meant to address these difficulties and streamline tax collection and management systems to positively impact local tax revenue generation and management. For example, Rwanda and South Africa have developed and implemented digital systems such as point of sale devices (POS) and e-tax filling systems to simplify the tax remittance systems and provide greater convenience for taxpayers.[6]

Consequently, these technological investments and advancements, combined with tax changes, have exhibited impressive early results. This includes the significant increment of Rwanda's tax-to-GDP ratio and the substantial boost of the country's position in the World Bank's ease of doing business ranking.[7] This is particularly observed in tax payments, collection, and management. Specifically, Rwanda's tax-to-GDP ratio improved by 4.5 percentage points in 2004 to  16.6% by 2016. Furthermore, Rwanda moved from 67th place to the 38th in the World Bank's ease of doing business report of 2020.[8] This was the second-highest score for a Sub-Saharan African country. Rwanda has also gained 22 places to 38th in the category of Paying Taxes since 2010. In 2010, this is when the country's tax digitisation project was still being implemented.[9]

South Africa adopted a computerised tax return filing referred to as e-filing. The e-filing system has enhanced the tax payment captures and expanded the tax management procedures.[10] For instance, the e-filing system increased the tax returns filing from only 1.6% that were handled within 48 hours in the year 2007 to 34% in 2008.[11] This trend was subsequently observed in the coming years.[12] On the other hand, the Kenyan Revenue Authority (KRA) generates the Taxpayer Identification Numbers (TINs) certificates by using an online method.[13] The taxpayers can receive their online TINs certificates using an iTax system. The iTax system utilises an electronic registration module and can be carried out in the comfort of the taxpayer's home, without the need for tax consultants.[14]

Tunisia uses an online filing and payment system that minimises the frequency of payments. This is done promptly, minimising the burden on taxpayers and potentially discouraging tax evasion.[15] Reports have demonstrated that tax collection and payments reforms have decreased tax evasion and expanded the overall tax revenue collection. For instance, Tunisia's tax collection increased from 12.3% of GDP in 2007 to 19% in 2008.[16]

APET notes that the digital transformation of the world economy, including the African economy, has significantly benefitted from the advances in the digital economy over the past few years. As such, a wide variety of socio-economic sectors such as financial services, trade, healthcare, transportation, and education have substantially altered the way companies do business and introduced more efficient and far-reaching business models.[17] For example, online platforms such as Google, Facebook, and Amazon and platform-enabled services such as Uber and Airbnb have expanded in the last few years in Africa. Furthermore, the trade in electronic transmissions that include online delivery of software, music, e-books, films, and video games, as well as mobile technology and applications such as money transfer, borrowing, and saving services, has expanded across the African continent. Because of this digitalisation, companies are able to conduct business in places where they previously couldn't.

For the purposes of international tax law, a company's location in one country is a primary factor in determining its tax obligations. As a result, taxing the digital economy is difficult. Taxing digital commerce is, therefore, a major concern in African countries.[18] This has led to the introduction of digitalised business models of international tax to define the taxable presence and the allocation of business profits for multinational enterprises (MNEs) among the diverse jurisdictions in which they operate.

Notably, APET observes that the exceptional development of the digital economy has heightened the complexity of mobilising tax revenues from national and transnational transactions. Even though the obscure nature of digital transactions propagates tax evasion and avoidance, these untapped revenues can be minimised by drawing and implementing strategic policy and regulatory frameworks for collecting revenues from these economic activities. Thus, African governments, policymakers, academics, tax bodies, and development organisations could consider strategic digital tax policies to impose and undertake direct and indirect taxes on digital transactions. However, APET advises that African countries should amalgamate around their already existing tax collection and management structures to improve adherence to the standards of taxation opportunities and address implementation challenges and consequences.

APET also believes that the tax collection technologies being developed by African countries should address the legislative and administrative structures of digital service taxes as per the canons of taxation. Thus, APET proposes that the technologies surrounding the principles of taxation should be linked to the variations of the economic, political, and social contexts of the varied African countries and between developed and developing countries. Most importantly, APET recommends that African countries tap into the digital service taxes of the tax revenues from the digital economy by ensuring equity, neutrality, economy, and efficiency to balance their fundamental roles in tax policy.

The challenge for most businesses, more especially small businesses, is data management and collection to consolidate financial reports for tax reporting and compliance. Therefore, by enhancing data collection on transactions, businesses can easily consolidate their domestic and international transactional activities to compile their financial reports.[19] Thus, digital technologies can help easily formulate financial reports when reporting their tax returns, particularly among businesses. Therefore, a smartphone registration application can be introduced through digital tax collection methods to improve tax collection, management, and reporting.[20]

For example, employing comprehensive and next-generation procurement software solutions such as PLANERGY can provide essential financial technology components for procurement and accounts payable, including financial reporting.[21] This technology uses artificial intelligence (AI), robotic process automation, and advanced data analytics. Additionally, establishing these digital technologies can provide immediate centralised cloud-based data management and optimisation systems of procure-to-pay processes to improve precision, speed, and transparency.[22]

Notably, the digital tax collection technology can allow African governments to collect taxes from their informal economic sector. For example, some African countries, such as South Africa, are promoting the Regulation of Interception of Communications and Provision of Communication-Related Information Act (RICA) to regulate the interception of communications and associated processes such as applications for and authorisation of interception of communications.[23] Similar laws are being implemented in other African countries such as Nigeria and Kenya.

Such provisions can enable African countries to track their business activities and encourage tax compliance from digital transactions. For example, with the know-your-customer verification provisions, tax authorities can subsequently deliver the facilitated compliance nudges to the taxpayers' phones.[24] In addition, the information collected from the SIM cards can be used by taxpayers who can repopulate the tax returns paperwork collected from their smartphones to simplify the tax payment and audits.[25]

APET also encourages African countries to respond with various strategies to reverse the trends of tax noncompliance. Thus, strengthening the capacity of digitalisation can simplify tax payment and compliance. Further, APET underscores that implementing these computerised systems for reporting and collecting taxes can enable African governments to enhance their efficiency by reducing compliance costs, minimising leakages, and expediting the tax collection processes. This can also enhance Africa's tax capacity through digitalised formal and informal enterprises and further broaden their tax bases. Thus, African countries should develop strategic interventions and initiatives to promote access to financial services, as well as business support services and training for entrepreneurs.

Finally, APET challenges African countries to invest and create an enabling environment through digital policy and infrastructure to enhance domestic and transnational tax collection and management. This can enhance the incorporation of digital technologies in collecting and managing taxes across all African countries. Thus, by integrating smart technologies into their taxation systems, African countries can improve tax compliance and management mechanisms.

Featured Bloggers – APET Secretariat

Justina Dugbazah

Barbara Glover

Bhekani Mbuli

Chifundo Kungade

 

[1] https://dictionary.cambridge.org/dictionary/english/taxation.

[2] https://www.imf.org/Publications/fandd/issues/2018/03/Akitoby.

[3] https://www.dw.com/en/africa-could-earn-billions-in-unpaid-taxes/a-62141604.

[4] https://www.pulp.up.ac.za/images/pulp/books/legal_compilations/good_tax_governance/Chapter%205%20GOOD%20TAX%20GOVERNANCE.pdf.

[5] https://www.u4.no/publications/exploring-the-relationships-between-corruption-and-tax-revenue.

[6] https://btca-production-site.s3.amazonaws.com/documents/507/english_attachments/Tax_Digitalization_in_Rwanda_Success_Factors_and_Pathways_Forward.pdf?1606765795.

[7] Tax Digitalization in Rwanda: Success Factors and Pathways Forward. https://www.betterthancash.org/explore-resources/tax-digitalization-in-rwanda-success-factors-and-pathways-forward.

[8] https://www.oecd.org/ctp/tax-policy/revenue-statistics-africa-rwanda.pdf.

[9] https://btca-production-site.s3.amazonaws.com/documents/507/english_attachments/Tax_Digitalization_in_Rwanda_Success_Factors_and_Pathways_Forward.pdf?1606765795.

[10] https://www.sars.gov.za/about/sas-tax-and-customs-system/efiling-system/.

[11] https://www.gov.za/sites/default/files/gcis_document/201409/complete3.pdf.

[12] Jauharia Hatta Hambali, Atika. (2020). The Success of E-Filing Adoption during COVID 19 Pandemic: The Role of Collaborative Quality, User Intention, and User Satisfaction. Journal of Economics, Business, & Accountancy Ventura. 23. 10.14414/jebav.v23i1.2233.

[13] KRA EXCEEDS REVISED TARGET, RECORDS HIGHEST REVENUE GROWTH IN HISTORY. https://www.kra.go.ke/news-center/press-release/1752-kra-exceeds-revised-target,-records-highest-revenue-growth-in-history.

[14] https://www.ey.com/en_za/tax/why-tax-collection-remains-a-challenge-in-sub-saharan-africa.

[15] https://www.u4.no/publications/approaches-to-curbing-corruption-in-tax-administration-in-africa.pdf.

[16] https://www.imf.org/Publications/fandd/issues/2018/03/akitoby.

[17] https://www.ibanet.org/Taxing-the-digital-economy-sub-Saharan-Africa.

[18] IN BRIEF, OECD and Taxation of the Digital Economy, April 4, 2022. https://pro.bloombergtax.com/brief/oecd-taxation-digital-economy/.

[19] GUIDANCE NOTE, Compliance Risk Management: Managing and Improving Tax Compliance. https://www.oecd.org/tax/administration/33818656.pdf.

[20] SPECIAL FEATURE: Electronic services in tax administration. https://www.oecd-ilibrary.org/docserver/9789264278943-4-en.pdf?expires=1658125231&id=id&accname=guest&checksum=A12CAAF8B9FE14D8EA55BF6D407C2DBE.

[21] Patrick Whatman, 9 procurement tools for modern businesses, January 14, 2022, https://blog.spendesk.com/en/procurement-tools.

[22] The Future of Finance: A Look at Innovation in the Financial Services Industry, Jun 23, 2022. https://www.getsmarter.com/blog/market-trends/the-future-of-finance-a-look-at-innovation-in-the-financial-services-industry/.

[23] https://www.gov.za/documents/regulation-interception-communications-and-provision-communication-related-information--13.

[24] https://www.oecd.org/tax/transparency/documents/Tax-Transparency-in-Africa-2021.pdf.

[25] https://www.ey.com/en_za/tax/why-tax-collection-remains-a-challenge-in-sub-saharan-africa.