Cooperation and exchange of information could boost revenue collection in Africa

Generating sufficient revenues helps countries meet the basic needs of their citizens and businesses, yet many face steep challenges in collecting taxes due to avoidance and evasion. According to UNCTAD’s 2020 Economic Development in Africa Report, the continent loses an estimated $89 billion, or 3.7% of its GDP, each year in illicit capital flight.

How can countries tackle this issue? Our recent paper highlights the importance of international cooperation for combating tax evasion and stimulating tax collection in Africa.

In addition to moral considerations, fighting tax evasion and avoidance is crucial for macroeconomic stability, service delivery, and social equity for the following reasons:

1. Evading and avoiding taxes entail significant revenue losses for governments. This became more pronounced during the COVID-19 pandemic which highlighted shortfalls in service delivery in Africa and increased expectations from people.
2. Tax evaders negatively affect tax morale because they are associated with perceptions of corruption in public institutions and unfair tax systems within a society. For example, people and companies siphon funds and tax bases through offshore accounts to low-tax jurisdictions to minimizing the overall tax burden on their incomes.

Ultimately, paying the salaries of teachers and health workers, providing medicine, and having accessible roads is not possible without optimizing domestic resource mobilization.

Reducing information asymmetry for improved taxation

When national tax authorities have limited competencies and means to go after evaders hiding money outside of their jurisdiction, it is difficult to tax them. This can be addressed when tax authorities exchange information that allows them to reach out to offshore sources.

There are essentially two types of standards for the exchange of information for tax purposes:

1. The exchange of information on request (EOIR) standard where the tax authority of a requesting jurisdiction asks for information from a partner jurisdiction to investigate and enforce its tax laws.
2. The automatic exchange of information (AEOI) standard is the exchange of information between countries without having to request it. This requires financial institutions to report account information of non-residents to their tax authorities, who in turn automatically exchange this information with the tax authorities of the account holders’ country of residence under the globally agreed Common Reporting Standard (CRS). This has been spearheaded by the OECD’s Global Forum, with some support from the World Bank.

EOIR is based on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAAC). In 2021, 22 countries had joined the MAAC with 592 requests sent and 618 received (Figure 1). According to the Global Forum on Transparency and Exchange of Information for Tax Purposes, African countries identified more than $35.1 million in additional taxes due to EOIR in 2020, and $37.2 million in 2021.  As for AEOI, five African countries have begun exchanges, and five more are due to start before 2025.

Figure 1: EOI requests sent and received by African countries since 2014

Source: Tax Transparency in Africa 2022: Africa Initiative Progress Report, OECD (2021)

The potential of international cooperation

While there exists anecdotal and case-by-case evidence of the benefits of structured international cooperation, our empirical review finds that EOI levels the playing field in terms of information asymmetry and boosts tax collection from 5 to 19 percent.  Gains could come from tax audits based on actual information received which could lead to ‘catching’ fraudsters and evaders. Another benefit is the indirect compliance effect, i.e., people will have less recourse to tax avoidance strategies due to the information exchanges which imply an increase in the risk of being caught.

But these results should not be seen in isolation. They are contingent upon a variety of factors which need to be tackled simultaneously. These include the following:

1. Capacity of tax authorities to process the data received via the exchanges. Many countries face functional and capacity constraints in their tax administrations which should be addressed concurrently to efforts made on exchange of information.
2. The absence of political involvement blocking audits. Evaders are often part of a business or political establishment; they may lobby against the country’s participation in the global forum and they can have power to escape scrutiny. To mitigate this, having anticorruption strategies in place to improve transparency and accountability, and empower civil society could offer improvements.
3. Cooperation from all parties. While many countries that are considered tax havens follow Common Reporting Standards and the Multilateral Convention, several African countries still need to join and cooperate.
4. Deepen beneficial ownership registries and processes. These are important reforms to lift the veil of anonymity behind economic actors. Transparency in beneficial ownership reveals who ultimately owns or controls a legal entity.

International cooperation on tax matters is critical to ensure greater tax fairness and revenue mobilization. Considering its potential on the latter, it should be seen as a key component of tax reforms across the continent.