Revenue authorities struggle to scoop informal sector into tax net

THE LATEST African Tax Outlook report indicates that most countries are still grappling with the challenge of pulling the informal sector into the tax net.

The report, released yesterday, said revenue authorities were foregoing massive amounts of revenue due to the inability to correctly tax informal businesses.

According to the report, the informal sector accounts for 50 percent to 80 percent of the gross domestic product, around 60 percent of employment and as much as 90 percent of new jobs in the 21 countries, which contributed to data collection for the second edition of the report.

The report is produced and published by the African Tax Administration Forum (Ataf). Its release coincided with its inaugural tax dialogue in Kampala, Uganda, where several African finance ministers and tax administrations discussed the relationship between tax policy and tax administration.

Ataf executive secretary Logan Wort said if tax legislation was too complex for a tax administration to implement, it would not be effective. “More simplified legislative approaches may in some countries be needed to ensure the tax administration can implement and enforce the law.”

The report stated that the informal sector was growing in some African countries due to high tax rates and transaction costs, complex legislation and costly procedures for creating and registering a company. At the meeting in Kampala the relationship between tax authorities and small businesses was addressed.

Mary Baine, the head at Ataf, said revenue authorities acknowledged that the conduct of their officials contributed to small companies preferring to remain “incognito”.

“Many countries realise the importance of keeping the tax system for small businesses as simple as possible, and some, especially in the eastern part of the continent, have achieved it.”

Baine said companies which did come into the tax net required a lot of “hand-holding” and taxpayer education. Revenue authorities must understand their role and obligation in this regard. Because of their reluctance to register for tax, it was impossible to quantify the size of the informal sector or revenue foregone from it.

Another issue that African countries had been battling with was transfer pricing – the price charged by one part of a company for products and services it provides to another company in the same group.

The price should reflect a price the company would have charged to an unrelated company or person. Multinationals have been accused of eroding the tax base of African countries through the abuse of transfer pricing.

The lack of proper transfer pricing documentation, which should assist with curbing the abuse of pricing policies, has highlighted the need for specific rules relating to document keeping.

“Many African countries have no such rules and this severely impedes the ability of the tax administration to counter abuse of transfer pricing,” said Wort.

Michael Hewson, the founder of Graphene Economics and transfer pricing expert, said several African countries had introduced transfer pricing legislation over the past five years. Since then there had been a significant increase in the number of disputes between revenue authorities and companies relating to assessments or additional assessments on transfer prices.

He said officials from African revenue authorities, dealing with transfer pricing, have undergone training programmes, and authorities have developed better risk profiling with the help of Ataf.

Hewson said although transfer pricing had a subjective element to it, it was crucial for revenue authorities to have an understanding of the business model to get a view of what an appropriate price was.

According the African Tax Outlook more than 50 percent of the participating countries’ revenue comes from large taxpayers, which include multinational companies and high net-worth individuals.

In South Africa the contribution of personal income tax to total tax revenue amounted to 32 percent. The average contribution of personal income tax to total tax revenue in the participating countries was 20 percent.

Corporate income tax revenue is considered “volatile” and according to the report of all the tax revenues it is the one which shows the widest disparities between countries.

While it grew by 32.6 percent in Togo and 21.8 percent in Mozambique, it fell by more than 11 percent in Nigeria and