En route to AEO 2010: Experts meeting on public resource mobilization and aid in Africa
14 December 2009
At the International Energy Agency
9, rue de la Fédération
75739 Paris Cedex 15, France
The 2010 African Economic Outlook (AEO) will have as its special focus, public resource mobilization and aid. A key part of the study will be to take stock of taxation policy and administration across the African continent with the aim of identifying structural problems, key political issues and best practices. The final product— a comprehensive chapter in the 2010 AEO—will be based primarily upon on on-the-ground country investigations and expert opinion collected during this December meeting on taxation in Africa.
The AEO partners – the African Development Bank, the OECD Development Center and the UN Economic Commission for Africa — invited leading authorities from African and OECD countries to take stock of the progress achieved by African countries in collecting taxes. Experts will assess the extent and sustainability of the sector’s contribution to Africa’s development; review best practices in taxation policies, tax administration and multilateral agreements; and make recommendations for meeting future challenges.
The 2010 AEO will be launched during the Annual Meetings of the African Development Bank, in May 2010 in Abidjan, Côte d’Ivoire.
Overview of Meeting Sessions
Session I Tax Administration and Taxation Policy in Africa
Session I.A Taxation and administrative capacity
Administrative capacity severely constrains Africa’s capacity to mobilize public revenues. However, several African states have demonstrated that it is possible to build effective tax administration systems that make a critical difference in revenue collection. Regardless of the degree of autonomy of the tax administration, a consensus is emerging that one of the keys to success lies in strong support from political leaders, cooperation with the rest of the government and strong local ownership of reforms.
Session I.B Informality and taxation in Africa
Many African economies are characterized by being dominated by the agricultural sector and having high and rising degrees of informality even in urban centres. Best practices to formalize the informal sector need to be identified. At the same time strategies to extend the reach of the state to the informal sector, protect vulnerable workers from informal taxation, be it at a net cost, need to be analyzed.
Session I.C Taxation and inequality
In the search for alternatives to trade taxes, value added tax (VAT), in particular, is often touted as the most efficient— sometimes the only — substitute. The regressive nature of VATs is hard to redeem as multiple rates and exemptions tend to defeat the advantage of its relative administrative simplicity. Given the continent’s very severe level of inequality and the importance of poverty reduction, best practices to stimulate direct taxation have to be investigated.
Background reading and presentations
Session II: The Political Economy of Taxation in Africa
Session II.A Fiscal legitimacy and public expenditure
Beyond tax collection efficiency issues lurks the much bigger issue of the political credibility of the state and the extent to which potential taxpayers feel there is a valuable “social contract”. More specifically, the importance of the quality of public expenditure (and thus services a taxpayer is granted access to) need to be assessed and practical strategies to move forward analysed.
Session II.B Fiscal decentralization: challenges and opportunities
Africa has witnessed a steady trend towards the decentralization of public services down to the municipal level. Tax collection at the local level, however, poses more serious challenges in terms of administrative capacity and fiscal legitimacy than at the national level. On the other hand, the geographical proximity of public expenditure relative to where tax money is collected offers the opportunity to build fiscal legitimacy from the ground up.
Session II.C Taxation and Governance
Helping African states to broaden their tax base will incentivize them to engage more directly with their citizens and better consider their needs. On the other hand, corruption among economic and political elites acts as a strong disincentive to tax compliance by the general public. The role that taxation can play in fragile states is important as is the role that OECD countries can play in reigning in corruption among its multinationals.
• Martin Brownbridge
Session III The taxation of Multinationals in Africa
Session III.A Fiscal competition and profit repatriation
The proliferation of tax exemptions either by rule or by decree means that too often foreign companies operating in Africa get away with low levels of taxation on their profits. In addition, the use of transfer pricing often allows them to pay taxes either in the country of origin, in some tax havens or where they base their regional headquarters. At the heart of these practices lies the very weak hand that Africans have — or believe they have — in negotiating with multinationals.
Session III.B The fight against capital flight to tax heavens
According to some estimates, nearly one-third of Africans’ wealth is parked outside Africa, a proportion ten times higher than in South-East Asia. The loss in tax revenues is considered by some analysts to be enough to fund the full achievement of the MDGs. The fact that the same financial institutions that are being bailed by OECD-taxpayers out benefit from the absence of tax and financial information disclosure treaties between African and OECD countries is becoming increasingly untenable.
Session III.C Taxing extractive industries for shared development
Once discovered, extractive resources provide a considerable source of (unearned) income for African states. They also come with the risk of dispensing the political elites of having to consult with citizens on public expenditure and the broader social contract. On the other hand, shortage of resource mapping capacity is such that multinationals that are often able to negociate scandalously low taxes on their profits.
Session IV Taxation and Aid for Domestic Resource Mobilization
Session IV.A Aid: Helping or harming Domestic Resource Mobilisation in Africa?
Aid flows remain volatile and uncoordinated, adding to the difficulty of macroeconomic management in developing countries. Realistic ways to improve the dynamics between development partners and African states are needed with a view to spurring domestic resource mobilization and the gradual move away from aid. Moreover, there is a widely held suspicion that aid can make recipient countries less accountable to citizens and, at worst, create an incentive to remain underdeveloped.
Session IV.B Aid and capacity building strategies for domestic resource mobilization
Taxation is touted as the way for developing countries to afford themselves higher ownership of development and eventually less dependence on foreign aid. Questions then arises as to how development partners can help with this process and what is the proper sequencing of tax reforms as a function of a country’s economic and political development. Domestic resource mobilisation and the role of aid in fragile states should also be tackled.