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.
Despite Covid-19 interrupting trade worldwide, exporting companies in Botswana which benefited from the Botswana Investment and Trade Centre (BITC) services realised P2.96 billion in export earnings during the period from April 2020 to March 2021.
In the preceding financial year, the sale of locally manufactured products in foreign markets had registered export revenue of P2, 427 billion against a target of P3, 211 billion BITC, which celebrates 10 years since establishment, continues to carry out several initiatives targeted towards expanding the Botswana export base in line with Botswana’s desire to be an export led economy, underpinned by a robust export promotion programme in line with the National Export Strategy.
The main products exported were swamp cruiser boats, pvc tanks and pvc pipes, ignition wiring sets, semi-precious stones, veterinary medicines, hair braids, coal, textiles (towels and t-shirts) and automobile batteries. These goods were destined mainly for South Africa, Zimbabwe, Austria, Germany, and Namibia.
With Covid-19 still a problem, BITC continues to roll out targeted virtual trade promotion missions across the SADC region with a view to seeking long-lasting market opportunities for locally manufactured products.
Recently, the Centre facilitated participation for Botswana companies at the Eastern Cape Development Council (ECDC) Virtual Export Symposium, the Botswana-Zimbabwe Virtual Trade Mission, the Botswana-Zambia Virtual Trade Mission, Botswana-South Africa Virtual Buyer/Seller Mission as well as the Botswana-Namibia Virtual Trade Mission.
BITC has introduced an e-Exporting programme aimed at assisting Botswana exporters to conduct business on several recommended e-commerce platforms. Due to the advent of COVID-19, BITC is currently promoting e-trade among companies through the establishment of e-commerce platforms and is assisting local companies to embrace digitisation by adopting e-commerce platforms to reach export markets as well as assisting local e-commerce platform developers to scale up their online marketplaces.
During the 2019/2020 financial year, BITC embarked on several initiatives targeted at growing exports in the country; facilitation of participation of local companies in international trade platforms in order to enhance export sales of local products and services into external markets.
BITC also helped in capacity development of local companies to compete in global markets and the nurturing of export awareness and culture among local manufacturers in order to enhance their skills and knowledge of export processes; and in development and implementation of trade facilitation tools that look to improve the overall ease of doing business in Botswana.
As part of building export capacity in 2019/20, six (6) companies were selected to initiate a process to be Organic and Fair Trade Certified. These companies are; Blue Pride (Pty) Ltd, Motlopi Beverages, Moringa Technology Industries (Pty) Ltd, Sleek Foods, Maungo Craft and Divine Morula.
In 2019 seven companies which were enrolled in the Botswana Exporter Development Programme were capacitated with attaining BOBS ISO 9001: 2015 certification. Three (3) companies successfully attained BOBS ISO 9001:2015 certification. These were Lithoflex (Pty) Ltd, General Packaging Industries and Power Engineering.
BITC’s annual flagship exhibition, Global Expo Botswana (GEB) to create opportunities for trade and strategic synergies between local and international companies. The Global Expo Botswana) is a premier business to business exposition that attracts FDI, expansion of domestic investment, promotion of exports of locally produced goods and services and promotion of trade between Botswana and other countries.
The portal also provides information on; measures, legal documents, and forms and procedures needed by Botswana companies that intend on doing business abroad. BITC continues to assist both potential and existing local manufacturing and service entities to realise their export ambitions. This assistance is pursued through the ambit of the Botswana Exporter Development Programme (BEDP) and the Trade Promotion Programme.
BEDP was revised in 2020 in partnership with the United Nations Development Programme (UNDP) with a vision to developing a diversified export-based economy. The programme focuses mostly on capacitating companies to reach export readiness status.
Prices for goods and services in this country continue to increase, with the latest figures from Statistics Botswana showing that in May 2022, inflation rate rose to 11.9 percent from 9.6 percent recorded in April 2022.
According to Statistics Botswana update released this week, the largest upward contributions to the annual inflation rate in May 2022 came from increase in the cost of transport (7.2 percent), housing, water, electricity, gas & other Fuels (1.4 percent), food & non-alcoholic beverages (1.1 percent) and miscellaneous goods & services (0.8 percent).
With regard to regional inflation rates between April and May 2022, the Rural Villages inflation rate went up by 2.5 percentage points, from 9.6 percent in April to 12.1 percent in May 2022, according to the government owned statistics entity.
In the monthly update the entity stated that the Urban Villages inflation rate stood at 11.8 percent in May 2022, a rise of 2.4 percentage points from the April rate of 9.4 percent, whereas the Cities & Towns inflation rate recorded an increase of 1.9 percentage points, from 9.9 percent in April to 11.8 percent in May.
Commenting on the national Consumer Price Index, the entity stated that it went up by 2.6 percent, from 120.1 in April to 123.2 in May 2022. Statisticians from the entity noted that the transport group index registered an increase of 7.3 percent, from 134.5 in April to 144.2 in May, mainly due to the rise in retail pump prices for petrol and diesel by P1.54 and P2.74 per litre respectively, which effected on the 13th of May 2022.
The food & non-alcoholic beverages group index rose by 2.6 percent, from 118.6 in April 2022 to 121.6 in May 2022 and this came as a result of increase in prices of oils & fats, vegetables, bread & cereal, mineral waters, soft drinks, fruits & vegetables juices, fish (Fresh, Chilled & Frozen) and meat (Fresh, Chilled & Frozen), according to the Statisticians.
The Statisticians said the furnishing, household equipment & routine maintenance group index rose by 1.0 percent, from 111.6 in April 2022 to 112.7 in May 2022 and this was attributed to a general increase in prices of household appliances, glassware, tableware & household utensils and goods & services for household maintenance.
The prices for clothing & footwear group index moved from 109.4 to 110.4, registering a rise of 0.9 percent during the period under review. Bank of Botswana has projected higher inflation in the short term, associated with the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices and added that the possible increase in public service salaries could add also upward pressure to inflation in this country.
In the latest June 2022 global economic prospects, released last week the World Bank has warned that low global economic growth and economic activity in global commodity markets such as China and Europe could negatively affect export revenues for Botswana and other Sub Saharan countries.
Recent data from Statistics Botswana show that Botswana’s exports destined to the global markets such as Asia and the European Union (EU) on monthly basis accounts for around 60.1 percent and 20.1 percent respectively.
The World Bank last week lowered its 2022 projections of global economic growth and indicated that the new forecasts could be bad news for countries like Botswana who are dependent on export mineral revenues. The Bank noted that just over two years after COVID-19 caused the deepest global recession since World War II, the world economy is again in danger and stated that this time it is facing high inflation and slow growth at the same time.
In the recent June projections, the bank lowered its forecast of global economic growth from the January 4.1 percent to 2.1 percent. “Our June forecasts reflect a sizable downgrade to the outlook: global growth is expected to slow sharply from 5.7 percent in 2021 to 2.9 percent this year. This also reflects a nearly one-third cut to our January 2022 forecast for this year of 4.1 percent,” a team of World Bank economists noted in the June 2022 Global Economic Prospects.
The World Bank indicated that exports from Botswana and other Sub Saharan countries could suffer from a substantial deceleration of activity in China and Europe. The Bank noted that exporters of industrial metals, crude oil, and ores such as Angola, Democratic Republic of Congo, Republic of Congo, South Africa, and Zambia could suffer from a substantial deceleration of activity in China.
On the other hand a sharp contraction of growth in the euro area could hurt exporters of agricultural products such as beef, coffee, tea, tobacco, cotton, and textiles from Botswana, Ethiopia, Madagascar and Malawi. “The faster-than-expected deceleration of the global economy and increased volatility of commodity prices could hurt many SSA commodity exporters,” said World Bank President David Malpass.
Malpass indicated that subdued growth in the global markets for Botswana and other Sub Saharan exports will likely persist throughout the decade because of weak investment in most of the world.
He noted that with inflation now running at multi-decade highs in many countries and supply expected to grow slowly, inflation could remain higher for longer than currently anticipated. “Even if a global recession is averted, the pain of stagflation could persist for several years— unless major supply increases are set in motion. Amid the war in Ukraine, surging inflation, and rising interest rates, global economic growth is expected to slump in 2022. Several years of above-average inflation and below-average growth are now likely,” said Malpass.