Policy changes shouldn’t be abrupt or inconsistent, says Cosma. That principle applies to indirect taxes as well as direct ones. In Nigeria in 2015, the Government aimed to use tax policy as a tool to boost domestic automotive production by hiking tariffs on imported used vehicles, but the result was a surge in used vehicles smuggled into the country.6 Hiking tariffs on rice had the same effect.7
Those policies are tied to goals other than boosting tax revenue, including import replacement and job creation. But if the goal is simply to collect more revenue, the focus should be on value-added taxes (VAT), says Eyinla. “Africa has the room to raise rates, and you can keep doing it without angering people,” he says. Nigeria boosted its rate from 5% to 7.5% in February 2020. The change happened without protest and still leaves Nigeria well below the 20% threshold at which fraud tends to rise.8
VAT gaps are significant: a 2018 study by UNECA analyzed VAT data from 24 African sovereigns and found a gap of 50% or more in 12 instances. Gaps were caused by compliance issues and a lack of enforcement ability, and from policy challenges such as large volumes of exemptions. The report found that if Nigeria were to address compliance issues, and had it raised its rate to 10% instead of 7.5%, it would have doubled VAT revenues from 0.8% of GDP to 1.6%.9 “Tax authorities have greater capacity now, and part of that comes from technology addressing VAT challenges,” says Eghan.
The e@asyFile system from the South African Revenue Service (SARS) is a model for the continent, says Hlophe. The system features real-time submissions from a company’s enterprise resource planning software to the SARS system, with monthly reconciliations to process refunds within 48 hours of the month’s close. Participation is voluntary but popular, with about 90% of eligible businesses opting in. “Speed is the incentive, especially for small businesses,” says Hlophe. “The alternative is a painful process that takes longer to produce your refund.”
The VAT gap of 13.3% was the lowest in Africa, according to the UN study. The next lowest rate was that of Cape Verde, the island state in the Atlantic Ocean, at 15.3%. All others had gaps of 27.5% or more.10
The Rwanda Revenue Authority is another digital leader on the continent, having introduced a digital VAT-collection system in 2013. A study found that the average firm increased its VAT payments by about 8%, but also found compliance issues that shrank the total.11 United Nations data shows that the country’s tax-to-GDP ratio broke above the 15% threshold in 2015 and 2016, but slipped back below that level in 2017.12
For the Kenya Revenue Authority (KRA), an emerging focus is on speeding up dispute resolution. Rather than rely solely on its Tax Appeals Tribunal and courts, it offers taxpayers mediation as an option after the 60 to 90 days it takes the KRA to evaluate an assessment the taxpayer wants to contest. Mediation offers an outcome within a further 90 days, as well as the option to revert to the conventional methods at any point.
Two companies tried it in its first fiscal year of availability, in 2015-16. In the following two periods the figure rose to 139 and 155, and in 2018-19 it jumped to 502. Though the system resolved almost as many cases as the tribunal and courts, the revenue total was about a third less.13
As tax authorities explore their options with the current tools, the Prosperity Collaborative aims to give them new ones. It is pursuing applications of blockchain, machine learning and other technologies to increase transparency, reduce friction and boost social trust in the taxing system – often referred to as “tax morale”. There’s an emphasis on creating open-source technology solutions.
“The existing procurement model features the transfer of IP rights to bespoke software, but we think tax authorities can scale up faster and more effectively through reliance on digital public goods. That lowers the cost of implementation and enhances interoperability,” says Saviano.
As tax authorities evolve, long-term investors have as well. “The old model is gone. We’re seeing investors who are interested in a fair policy narrative,” says Eghan. “They want to pay the right amount of tax and to be able to say it.”