Can Africa’s cash make eco­nomic sense?

Chronicle (Zimbabwe) - - Business Chronicle - Taun­gana B Ndoro

THE in­for­mal sec­tor in Africa is full of cash. The cash trans­ac­tions that are largely un­recorded gob­ble at least 38 per­cent of the con­ti­nent’s GDP in terms of un­ac­counted tax.

This rev­enue prej­u­dice to the African econ­omy is quite de­press­ing. Prompted by the lack of eco­nomic sense that the con­ti­nent’s cash trans­ac­tions yield, at least 38 African states con­vene for an ac­tion plan to har­ness the cash econ­omy un­der the aus­pices of the African Tax Ad­min­is­tra­tion Fo­rum (ATAF) in Dur­ban. The meet­ing starts to­day and ends on Fri­day.

Chiefs of tax ad­min­is­tra­tions in Africa and other rep­re­sen­ta­tives, will be lay­ing the foun­da­tion for de­vel­op­ment of ac­tion plans to be pur­sued by African tax ad­min­is­tra­tions in or­der to con­trib­ute to­wards ex­pan­sion of the African tax base.

The fourth ATAF Gen­eral As­sem­bly will run un­der the theme: “Har­ness­ing the African Cash Econ­omy: Con­tribut­ing To­wards Ex­pan­sion of the African Tax Base.” Dis­cus­sions will mainly cen­tre on the African cash econ­omy and its im­pli­ca­tions for do­mes­tic re­source mo­bil­i­sa­tion.

With so much cash in Africa chang­ing hands, why is Africa still poor and why is it not mak­ing eco­nomic sense that a con­ti­nent full of cash still strug­gles to raise the stan­dard of liv­ing of its im­pov­er­ished cit­i­zens? Is it not just a mat­ter of putting sys­tems in place to en­sure that when­ever cash moves from one pro­pri­etor to an­other it should make eco­nomic sense and con­trib­ute to the fis­cus?

The tax meet­ing will fo­cus on pro­vid­ing prac­ti­cal so­lu­tions in deal­ing with a cash econ­omy in or­der to broaden the tax base in Africa in a bid to max­imise rev­enues within the cur­rent cash en­vi­ron­ment as well as en­cour­age mi­gra­tion to the for­mal econ­omy that has trace­able trans­ac­tions for in­stance the bank­ing sys­tem.

Most coun­tries in Africa at­tempt to con­trol the cash econ­omy through in­ves­ti­gat­ing tax eva­sion.

Ef­fi­cient con­trol is how­ever based on re­li­able sta­tis­tics that pro­file who is likely to en­gage in the cash econ­omy. From a tax per­spec­tive the in­abil­ity to ef­fec­tively tax the cash econ­omy raises as­pects such as skewed tax­a­tion which re­sults in the re­duc­tion of the pro­vi­sion of pub­lic goods and ser­vices.

For Africa’s cash to make eco­nomic sense, African tax ad­min­is­tra­tions need to re­alise that they are part of a so­ci­ety in which cit­i­zens, busi­nesses, or­gan­i­sa­tions and pub­lic bod­ies re­act to each other’s ac­tions. Cer­tain ac­tions on the part of a tax ad­min­is­tra­tion lead to a re­ac­tion from the tax­payer and vice versa. In or­der to in­flu­ence tax­payer be­hav­iour a tax ad­min­is­tra­tion needs to be aware not only of its own be­hav­iour but also of the be­hav­iour within so­ci­ety.

In ef­fect, what is it that makes the tax­payer pre­fer to use cash in­stead of for­mal au­to­mated sys­tems? It is im­por­tant too, to know what causes non-com­pli­ant be­hav­iour by cit­i­zens and busi­nesses. This un­der­stand­ing is cre­ated through a com­pli­ance risk man­age­ment ap­proach, which is a sys­tem­atic process through which African tax ad­min­is­tra­tions should make de­lib­er­ate choices to ef­fec­tively stim­u­late com­pli­ance and pre­vent non­com­pli­ance, based on the knowl­edge of all tax­pay­ers be­hav­iour and re­lated to the avail­able ca­pac­ity of the rev­enue author­ity.

It is clear that for Africa’s cash to make eco­nomic sense, the scope of au­to­ma­tion and mod­erni­sa­tion can­not be un­der­em­pha­sised.

In 2016, ATAF mem­bers have now re­alised that a par­al­lel econ­omy has been cre­ated, which only uses cash in or­der to evade the au­to­mated tax radar hence the call for har­ness­ing the cash econ­omy dur­ing its fourth Gen­eral As­sem­bly.

The OECD Hand­book, clas­si­fies a range of ac­tiv­i­ties deemed to con­sti­tute the cash or non-ob­served econ­omy: un­der­ground pro­duc­tion: de­fined as those ac­tiv­i­ties that are pro­duc­tive and le­gal but are de­lib­er­ately con­cealed from the pub­lic author­i­ties to avoid pay­ment of taxes or com­ply­ing with reg­u­la­tions, il­le­gal pro­duc­tion, de­fined as those pro­duc­tive ac­tiv­i­ties that gen­er­ate goods and ser­vices for­bid­den by law or that are un­law­ful when car­ried out by unau­tho­rised pro­duc­ers; in­for­mal sec­tor pro­duc­tion, de­fined as those pro­duc­tive ac­tiv­i­ties con­ducted by un­in­cor­po­rated en­ter­prises in the house­hold sec­tor that are un­reg­is­tered and/or are less than a spec­i­fied size in terms of em­ploy­ment, and that have some mar­ket pro­duc­tion; pro­duc­tion of house­holds for own fi­nal use, de­fined as those pro­duc­tive ac­tiv­i­ties that re­sult in goods or ser­vices con­sumed or cap­i­talised by the house­holds that pro­duced them.

If African tax ad­min­is­tra­tions can pur­sue this non-ob­served econ­omy, the im­pli­ca­tions for in­creased do­mes­tic re­source mo­bil­i­sa­tion will be phe­nom­e­nal.

Glob­al­i­sa­tion re­quires that global so­lu­tions and a global di­a­logue be es­tab­lished which goes be­yond OECD and the G20 coun­tries. The strong in­ter­est ex­pressed by de­vel­op­ing coun­tries through their par­tic­i­pa­tion in the Base Ero­sion and Profit Shift­ing (BEPS) Project should be sus­tained by the es­tab­lish­ment of an even more in­clu­sive frame­work, which will con­tinue to in­clude other in­ter­na­tional or­gan­i­sa­tions and re­gional tax or­gan­i­sa­tions such as ATAF.

Draw­ing on the suc­cess­ful ex­pe­ri­ence of the Global Fo­rum on Trans­parency and Ex­change of In­for­ma­tion for Tax Pur­poses, in early 2016, OECD and G20 coun­tries worked to­gether to de­sign and pro­pose a more in­clu­sive frame­work to sup­port and mon­i­tor the im­ple­men­ta­tion of the BEPS pack­age, with coun­tries and ju­ris­dic­tions par­tic­i­pat­ing on an equal foot­ing.

Such work con­tin­ues to in­clude con­sid­er­a­tion of the man­ner in which nonOECD non-G20 coun­tries and ju­ris­dic­tions can com­mit to the agreed stan­dards and their im­ple­men­ta­tion.

It is there­fore pru­dent that at its fourth gen­eral as­sem­bly ATAF will also re­view the im­pli­ca­tions of the OECD BEPS process as well as the in­clu­sive frame­work in a bid to de­ter­mine what this de­vel­op­ment means for African Gov­ern­ments, pri­vate sec­tor and other busi­ness.

By putting their heads to­gether African tax ad­min­is­tra­tions stand to rel­a­tively make Africa’s cash make eco­nomic sense much sooner rather than later.

Taun­gana B Ndoro is a me­dia and com­mu­ni­ca­tions of­fi­cer for the African Tax Ad­min­is­tra­tion Fo­rum (ATAF).

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