This article was first published in the July 2012 International edition of Accounting and Business magazine.
It is part of the accountancy profession’s faith that good, honest financial reporting and dealings can promote economic growth because of the commercial trust that it engenders. The case can be made in few places more strongly than in Africa. Here, the launch of a Tax Inspectors Without Borders initiative by the Organisation for Economic Cooperation and Development (OECD) is particularly relevant.
Announced at an OECD tax and development taskforce meeting in Cape Town, South Africa, in May, the initiative aims to help developing countries increase public revenues by making their tax systems ‘fairer and more effective’. Much of Africa has a reputation for poor tax collection as governments, especially those that are resource-rich, are reluctant to press populations and corporations hard on tax for fear of fanning demands for better governance and accountability.
The OECD is working to set up an independent foundation and secretariat by the end of next year to run the latest initiative. Tax Inspectors Without Borders will provide international auditing expertise and advice on countering tax base erosion, tax evasion and tax avoidance. The goal is to fill a gap in the existing provision of audit assistance.
At the Cape Town meeting, OECD secretary-general Angel Gurría said: ‘Countries helping each other is the only way to effectively fight global tax evasion and avoidance. Tax Inspectors Without Borders will match demand from developing countries for outside help with complex international tax audits by supplying international experts, drawn mainly from cadres of tax inspectors serving in other tax administrations.’ Joint teams will operate under the local leadership in each country, using a ‘learning by doing approach’, he added.
The programme hopes to complement efforts by donor agencies, notably USAID, to mobilise tax expertise. Key officials will include Oupa Magashula, commissioner general of the South Africa Revenue Service (SARS), Nhlanhla Nene, South Africa’s deputy finance minister, and Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration.
Magashula called on the taskforce to mobilise experts and make them available to developing countries swiftly, and get an inspectors’ group secretariat in place ‘so the work can begin in earnest from 2013’.
Saint-Amans told delegates at the Cape Town meeting: ‘The initiative will deliver advice on audit techniques and project management tools and prepare audit cases for potential litigation. Domestic resource mobilisation in developing countries is receiving increased international attention, reversing an era of neglect of taxation as a development priority.’
The initiative dovetails with the existing taskforce (created in 2010), which has four key objectives. These are to help state building, accountability and effective capacity development; to ensure more effective transfer pricing regimes in developing countries; to increase transparency in the reporting of financial data by multinational firms, and to fight international tax evasion/avoidance and improve transparency and the exchange of information.
All this work has been inspired by the assumption that boosting tax receipts and stamping out corruption are central to Africa’s development.
‘In sub-Sahara Africa, there is a great role that taxation, decent accounting and proper audits can play in bringing about economic development,’ Rodney Ndamba ACCA, director of the Centre for Environmental Accountability and Transparency (CENAC) in Zimbabwe, told Accounting and Business. ‘The region needs to have the right legal frameworks that will compel private and public sector companies to be highly efficient, accountable and keeping pace with global and technological trends when it comes to accounting, audits and tax.’
Tax avoidance is a key area. ‘Some of the key challenges faced by the region on tax are wide tax avoidance gaps in many countries and regional economic blocs like [southern Africa’s] SADC and [west Africa’s] ECOWAS,’ added Ndamba. ‘There is also a lack of enabling tax legislations, skill capacity, poor application of tax systems, weak fiscal policies and lack of transparency in taxation process.’
The OECD’s initiative should also boost the number of tax officials working for African governments who can properly implement tax laws and obligations. ‘There are practical skills lacking in transfer-pricing audit procedures and this will require special assistance from the OECD and development partners,’ Edward Larbi-Siaw, tax policy adviser at Ghana’s finance ministry, told the Cape Town meeting.
African governments also need to take policy development and implementation more into their own hands. Ndamba said the region needs aggressive tax planning to support strong fiscal policies that target economic growth: ‘While tax systems exist to a certain extent, the region will need to improve on tax skills, monitoring and modes of tax collection.’
Other challenges include managing transfer-pricing taxation. In South Africa, SARS has decided that transfer pricing by large businesses will be targeted through a comprehensive review. SARS also intends to improve the training of its own staff and boost cooperation with other revenue administrations to improve its handling of transfer pricing.
Meanwhile, double taxation deals will be fundamental in curbing and eliminating tax avoidance within blocs such as the SADC. There is also a need to develop a culture of paying tax, especially among small to medium enterprises (SMEs), and better civic oversight of how tax revenue is managed and spent. Local authorities, SMEs and state-owned companies have a patchy record of complying with International Financial Reporting Standards. Auditing of small companies is generally weak.
‘To promote decent accounting systems and proper audits, legislation needs to be updated to capture not only financial information properly but also non-financial information such as sustainability issues,’ said Ndamba.
South Africa, the regional powerhouse, has shown the way to some extent. Since democracy in 1994 it has expanded the tax base, improved tax compliance and boosted tax receipts. The number of registered individual taxpayers increased from 1.7 million in 1994 to more than 6 million by 2010; and that figure doubled when all formally employed individuals were registered in 2011. Tax revenue rose from ZAR113.8bn (US$13.4bn) in the 1994/95 tax year to over ZAR742.7bn (US$87.9bn) in 2011/12.
The number of companies registered for income tax also rose from 422,000 in 1994 to over 2 million in 2011/12.
Better risk detection and technology has allowed SARS to identify non-compliance better, and 5.2 million penalty notices (up from 1.7 million in 2010) were issued to 637,965 taxpayers (up from 123,402 in 2010) with outstanding returns.
Matching this will be tough for the rest of the continent. Africa’s most populous country, Nigeria, has barely tapped into its tax potential and the government appears content to rely on oil and gas revenues to maintain government and pay for social spending. Africa’s newest country, South Sudan, also has its work cut out to build a tax base and ensure proper auditing of its oil revenues.
In his meeting with South Africa’s president Jacob Zuma in Cape Town, Nigeria’s vice president Mohammed Namadi Sambo reiterated the need for cooperation between countries for the sustainable development of Africa.
George Stone, journalist based in Cape Town