Can Africa’s cash make economic sense?
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).