African Tax Administration Forum (ATAF), a regional confederation of African countries tax collection bodies has penned down a memorandum of understanding with the World Bank to roll out the red carpet for collaborative engagements and partnerships on strengthening Africa’s tax systems.
The two organizations met in Washington DC last week to commence the partnership which will entail numerous technical assistance programs and frameworks. Key to this partnership will be leveraging on the World Bank is cutting edge expertise and resources to assist African countries build a strong tax regime for the development of their countries. The African Tax Administration Forum has in many instances underscored that African countries’ biggest loophole in domestic revenue mobilization was that tax collection revenues lack capacity and thus were not fully effective and efficient in delivering their mandates.
The General Assembly of the Africa Tax Administration Forum (ATAF) held in Gaborone early this year underscored regulatory constraints and limited internal capacity of African tax collection bodies as key factors that continue to hinder effective and efficient domestic resources and revenue mobilization through tax by relevant authorities.
At the memorandum signing ceremony in DC ATAF Executive Secretary, Logan Wort and the World Bank Group represented by its Global Director Macroeconomics, Trade and Investment Global Practice, Marcello de Moura Estevão Filho noted that under the MoU, the two organizations intend to share knowledge, and pool their expertise and resources to jointly deliver technical assistance and build capacity across Africa.
Logan Wort said the World Bank is a traditional ally of ATAF, noting that the two organizations have in the past, cooperated on numerous projects, including AFTAF’s programs aimed at building the capacity of ATAF’s Members and improving their efficiency in tax revenue mobilization. “As we are about to step into the next decade of ATAF, consolidating ties with like-minded organizations such as the World Bank Group can only be beneficial to our membership across the continent,” he said.
The ATAF Head said African countries lose over $100 billion to illicit capital and illegal financial flows annually. He highlighted that building tax administration capacity was needed to help spur development in Africa. Tax revenues account for over a third of GDP in developed economies while contributing far less in developing countries, particularly in sub-Saharan Africa, where they correspond to less than a fifth of GDP.
Deliberations at ATAF forum early this year underscored that more tax revenue would not only help the African countries to function and pay for goods and services, but would open the way for other market and state reforms that would promote economic, social and environmental development.
“Raising tax burdens might seem like an odd proposition to policymakers, but when taxes account for 10 to 15% of GDP, a well-designed increase in tax is exactly what many developing countries need: just as an excessively heavy tax burden might crush activity, an excessively low one can starve an economy of the oxygen it needs to advance,” said Mr. Logan Wort Executive Secretary of African Tax Administration Forum.
Wort says institutional arrangements were another issue which can have an impact on the effectiveness of tax administration. He shared that revenue bodies in most African countries follow a relatively unified, semiautonomous model, meaning that they have considerable freedom to interpret tax laws, allocate resources, design internal structures and implement appropriate human resource management strategies. “At the same time, they are responsible for tax, customs and non-tax revenue operations, this can cause some resources stretch and result in gross inefficiencies,” said Logan Wort.
THE WORLD BANK ON AFRICAN TAX SYSTEMS.
The World Bank says mobilizing tax revenue is key if developing countries are to finance the investments in human capital, health and infrastructure necessary to achieve the World Bank Group’s goals of ending extreme poverty and boosting shared prosperity by 2030. “To achieve the Sustainable Development Goals, low-income countries face an estimated annual financing gap of half a trillion dollars, 0.5 percent of global Gross Domestic Product (GDP).”
According the Washington Based Global lender Sub-Saharan Africa remains the region with the largest number of economies below the minimum desirable tax-to-GDP ratio of 15%. At that level, revenues are inadequate to finance basic state functions. The Bank says relatively low tax collections in the region reflect weaknesses in revenue management, including widespread tax exemptions, corruption, and shortfalls in the capacity of tax and customs administrations.
Given the regions relatively large agricultural sectors and less open economies, the capacity to raise tax revenues is also lower. The maximum tax revenue potential for countries in the region is estimated to average 19.6% of GDP, which is 7.5 points lower than in the rest of the world. Experts say most African economies have the potential to mobilize more in taxes. This according to the World Bank can be done through better tax administration including value-added taxes, broadening the tax base by removing cost-ineffective tax expenditures, and increasing excise taxes including on alcohol, tobacco, and soft drinks.
“In addition, it’s important to introduce efficient carbon-pricing policies and effective property taxation while closing international tax loopholes that permit aggressive tax avoidance and evasion by multinationals and wealthy individuals,” proposes the global lender. The World Bank is also of the view that reducing structural bottlenecks is also part of suite of tools to consider in improving revenue outcomes, including by improving taxpayers’ trust and by moving tax administrations to the digital frontier.
BOTSWANA‘S TAX ADMINISTRATION
Like many African countries, the taxation structure in Botswana was basic at the time of its independence in 1966 comprising mainly of the Income Tax department. However, five decades later, the country’s fiscal landscape has transformed, guided by orderly legislative reforms and institutional transformation.
Over the past five decades, a number of tax laws were put in place aimed at improving the country’s tax regime. In addition to the review of the old Income Tax and Customs Act, the Government adopted the Value Added Tax Act of 2002, and Botswana Revenue Service Act of 2003. The latter culminated in the establishment of the Botswana Revenue Service (BURS).
As a result of these measures, Botswana is currently financing over 60 percent of its budget from the domestic tax revenue, while the balance comes from the customs duties and other revenues. The contribution of ODA to the budget is less than one percent. The tax to gross domestic product (GDP) ratio is around 20 percent, which, though lower than in OECD countries, Botswana boast of it as very competitive among the Sub-Saharan countries.
OEDC ON AFRICAN TAX SYSTEM
Organization for Economic Cooperation & Development (OEDC) has in the past noted that African countries tax system was one of the weakest in the world going on to name some African countries such as Botswana in the past ‘tax haven’. Botswana has since cleansed itself off the tag. However the OECD still maintains that tax exemptions such as IFSC fiscal framework in the case of Botswana and many Africa countries has little impact on investment attraction but only cripple the country‘s revenue collection vehicles
“Under pressure to offer internationally-competitive tax environments, developing countries offer generous tax breaks that undermine their domestic resource mobilization efforts with little demonstrable benefit in terms of increased investment,” says OECD. Botswana has been cited as one good example for such. The underlying concern by OECD is that low income countries often face acute pressures to attract investment by offering tax incentives, which then erode the countries’ tax bases with little benefit even after running for several years. OEDC is of the view that these arrangement do not output significant and desirable results but only cripple the country‘s revenue collection vehicles.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”