Large informal sector slows tax growth
October 17— African countries have made significant efforts to strengthen their tax policy and tax administration capacity, but the presence of large informal sectors, and a narrow tax base, particularly in resource-rich countries, makes them vulnerable due to unstable domestic revenues.
‘A major obstacle to tax revenue collection in Africa is the size of its informal sector, that is many companies and workers are not reporting taxable income and mostly not engaging in public administration more generally. Efforts to increase the tax base are undermined by the large informal sector estimated at 38% of the GDP in sub-Saharan Africa,’ reads part of a new report, ‘Revenue Statistics in Africa’.
The countries covered in the report are Cabo Verde, Cameroon, Democratic Republic of Congo, Côte d’Ivoire, Ghana, Kenya, Mauritius, Morocco, Niger, Rwanda, Senegal, South Africa, Swaziland, Togo, Tunisia and Uganda.
The report states, ‘There are many factors responsible for this. The informal sector tends to be high in countries where the cost of tax and other regulatory requirements are higher’.
It was jointly published last week by the Organization of Economic Cooperation and Development (OECD) Centre for Tax Policy and Administration and the OECD Development Centre, the African Union Commission (AUC) and the African Tax Administration Forum (ATAF). The European Union paid for the research.
However the future is not all bleak. The same report shows that the mobilization of domestic resources is improving steadily in African countries. Kenya, South Africa and Swaziland obtained about half of their tax revenues from taxes on income and profits in 2015, while the average revenue from these sources among the other 13 countries varied from 18.6% in Togo to 37.6% in Rwanda.
The OECD said: “In 2015, taxes on goods and services were the largest contributor to total tax revenues in the African countries (57.2% on average), mostly in the form of Value Added Tax (VAT); followed by taxes on income and profits (32.4%).”
The average tax-to-GDP ratio for the 16 countries covered in this second edition of the report was 19.1% in 2015, an increase of 0.4 percentage points compared to 2014. Every country has experienced an increase in its tax-to-GDP ratio compared to 2000, with an average rise of 5 percentage points. All countries except Kenya, Tunisia and Morocco increased their ratios between 2014 and 2015.
The tax-to-GDP ratios in 2015 ranged from 10.8% in the Democratic Republic of the Congo to 30.33% in Tunisia, with an average of 19.1%.
Cabo Verde recorded the highest increase between 2014 and 2015 of 1.8 percentage points followed by Uganda and South Africa (both 1.1 percentage points). The increase in Cabo Verde were driven by tax reforms and tax administration modernization. In South Africa, the rise was driven by increases in personal income tax revenue following a tax reform. In Uganda , the rise were across the main tax categories .
Since 2000, the African average tax-to-GDP ratio has gone up by five percentage points. The predominant drivers of the growth in tax-to-GDP on average were up from VAT and taxes on incomes and profits. Whereas changes in social security contributions, property tax revenue and other consumption taxes were much smaller.
‘African countries are attempting to increase their tax base, but it’s not always easy. Over the last decade, the 16 African countries that the report studied have sustained their tax revenue on a weighed average base. This promising trend shows that their tax collecting capacity is robust and not dependent on of volatility of international commodity prices,’ the report states.