The African Tax mix
Investors establishing enterprises in an African nation or nations will soon find that the tax mix throughout Africa varies greatly from country to country, with some countries relying almost solely on one type of tax, while others have a more balanced approach to taxation. While the tax landscape is indeed evolving, with numerous governments making a concerted effort to deepen the tax sector, there is currently no united approach or philosophy across the continent.
Post-2009 Africa redoubling taxation efforts
The 2009 economic crisis sharply highlighted the need for many African nations to consolidate their own internal sources of revenue for development purposes, as relying on export revenue, FDI, international aid and other external sources of development finance has led to undue vulnerability. Accordingly African nations are refocusing their efforts on tax collection and are in many cases rethinking their tax mix.
While tax revenue has been on the rise in Africa since the 1990s, more needs to be done if real and sustainable development goals are to be achieved. For instance, in many nations taxation has had an excessive weighting towards resource-related tax revenue while more politically sensitive forms of taxations, such as corporate and personal income tax and VAT, have been overlooked.
Not only is a deepening of the tax base required, but accompanying this is the need for better taxation collection systems. The only way for this to take place, particularly with regard to excise tax, VAT and income tax and without the political party in power losing ground, is for stringent accountability and transparency to be established.
The predominance of resource taxation
One of the primary differences in taxation regimes exists between the oil and non-oil countries. Resource taxation is overly inflated in the former, while small countries such as The Gambia and Swaziland rely on it not at all. These nations understandably rely on trade tax more than on any other form of taxation.
Ethiopia and Uganda, with their recently discovered oil and gas caches, can be expected to mobilise their previously non-existent resource taxation. The danger however is that they let their other sources of tax revenue stagnate, as was the case in Chad and Libya after their oil booms (Libya now relies on oil for 90 percent of its tax revenue).
According to the AEO, government tax revenue accounted for 26.8 percent of Africa’s GDP in 2011, a slight increase from 2010’s 26.6 percent. Resource taxation is the backbone of African taxation, and is on the increase, accounting for 40 percent of total tax revenue between 2008 and 2011, after a figure of 35 percent between 2000 and 2004. The trouble here is the volatility of international commodity prices, so such heavy weighting towards resource taxation can leave national economies vulnerable.
South Africa and Egypt, while also resource rich, rely on direct tax more than any other African nation, with such taxes accounting for over 50 percent of their tax mixes. Côte d’Ivoire, Cameroon and Guinea have three of the most balanced tax mixes, with direct, indirect, trade and resource taxes all playing a significant role in their respective government’s tax revenue.
South Africa, Nigeria, Algeria and Angola together can claim 75 percent of taxation collection increases in 2011.
The 2014 edition of WEF which kicks off this Wednesday will have salient points as panel discussions. KPMG Africa will be well represented on the floor to cover the sessions; our blog http://www.blog.kpmgafrica/wef-africa – and twitter handle – @KPMGAfrica will be veritable source of WEF details during the event.