Africa Under Pressure to Reform Tax Regimes

Tuesday, 25 February, 2014

Africa is under increasing pressure to overhaul its tax regimes as governments and civil society claim they are simply not redistributive enough. A newly published Christian Aid report, title ‘Africa Rising? Inequalities and the essential role of far taxation’, coupled with the OECDs ‘Fragile States 2014’ report have both advocated stronger measures for domestic revenue organization.  

Christian Aid notes that despite the high growth rates Africa has enjoyed in the past 15 years, “there is a broad consensus that progress in human development has been limited given the volume of wealth created.”

The mounting emphasis on taxation will bring commodities and extractive companies directly under the spotlight, with many of the tax issues highlighted relating to their activities in the continent. Last week Jacob Zuma’s wife, the chairwomen of the African Union, directly addressed the industry in calling it to partner with Africa’s development, and not simply wince at higher tax rates.

The Christian Aid report targets the extractive industries in particular for its part in ‘aggressive’ tax avoidance, leaving Africa with too little a share of the value in the ground.

According to the report most Africans believe that mining companies choose their own corporation tax, and through practices such as trade mispricing, are able to “reduce the revenue they declare in the production country”, avoiding established tax rates in doing so.

Looking at Nigeria, Ghana and Sierra Leone’s success in bolstering their respective tax bases, Christian Aid concluded that

“Nigeria’s non-oil tax system is barely functioning, such is the dependence on oil revenue. Ghana’s tax collection is far below the acceptable level for a lower-middle income country. Sierra Leone has extremely poor tax collection levels and is making no progress.”

It is a similar conclusion to the less firebrand OECD Fragile States 2014 report, who claimed

“Many fragile states rely heavily on only one source of domestic revenue: non-renewable natural resources. Ensuring robust and transparent systems to capture, manage and distribute these resources fairly is a challenge…Over-generous tax exemptions awarded to multinational enterprises often deprive fragile states of potential revenues that could be used to fund their most pressing needs”

The report goes on to suggest several remedies, such as the basic need to expand the tax base, but also more nuanced solutions such as “boosting citizens’ tax morale by establishing clear links between tax revenue and local benefits”.

But with the end of a 'supercycle', and a chronic lack of capital in the extractive industries, how will the sector respond? Many of the mining projects out there are made out to be so financially precarious that all loose change found is reinvested straight back into production. There are many companies who embrace fair taxation as part of their overall CSR strategy. But there are some, who are more ‘aggressive’ - as Christian Aid defined it – in their pursuit of lower tax contributions.

With EITI growing, transparency on how much governments receive from extractive companies is emerging. To build on this, a comparison metric could be established to see how much the tax contributions companies make tally up with the value of the minerals extracted from a particular country (something which governments such as Botswana did with De Beers back in the 1950s, for example). This way a more democratic consensus on fair taxation could be reached.