Increasing tax collection in African countries — Role of information technology
Taxes are important for economic development. Taxation lies at the crucial intersection of public good provision, income redistribution, social safety nets and government accountability.
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Tax revenues also allow countries to be less reliant on foreign aid and natural resource revenues. However, many African countries struggle to collect an adequate amount of taxes.
This paper examines how African countries may use recent advances in technology to improve tax administration.
While digital transformation across different sectors has been occurring over the past few decades, the surge in remote work experiences and the need for social distancing precipitated by COVID-19 has accelerated the adoption of many technologies that already existed and spurred the development of others.
As different sectors of government adopt technology solutions to increase efficiency and improve service delivery to citizens, tax administration presents an important application.
The paper begins with an overview of the challenges faced by African economies in maximising key tax categories: consumption taxes, real estate taxes, trade taxes and income taxes. It then describes the ways in which technology may be deployed to address these challenges.
In particular, it applies the framework in Okunogbe and Santoro (2022) to each of these tax categories to examine how technology may be used to define compliance, that is, to identify the tax base; to monitor compliance, that is, to detect evasion when it occurs; and to facilitate compliance, that is, to make it easier for people to comply with their tax obligations.
It combines an overview of the literature with case studies highlighting specific country examples.
As a unique feature, the paper concludes with insights from interviews with senior tax administrators across the continent on their practical experiences and challenges in adopting technology for tax administration.
Features of taxation in Africa
Tax collection in Africa is low, but similar to other regions at a similar income level.
In 2018, the most recent year with wide data coverage, Sub-Saharan African countries collected 14 per cent in taxes as a share of GDP (UNU-WIDER Government Revenue Dataset, 2021).
This continent-wide average masks significant variation across countries.
High- and upper-middle-income countries like Seychelles, Namibia and South Africa have rates as high as 28–33 per cent whereas low-income countries like Chad, Democratic Republic of Congo and Ethiopia have rates as low as 7 per cent.
These numbers have remained stagnant over the past three decades, with African countries collecting an average of 12–15 per cent of GDP as taxes from 1990 to 2020.
Both the South Asia region and the Middle East and North Africa region have similarly low rates as Sub-Saharan Africa of about 14 per cent.
In contrast, the Europe and Central Asia region has the highest rate of 32 per cent (UNU-WIDER Government Revenue Dataset, 2021). Across all countries, on average, higher income countries collect a higher share of GDP as taxes.
The composition of taxes in Africa is also roughly similar to that of countries at similar income levels. Figure 2 presents evidence on the reliance of countries on different tax instruments: taxes on consumption, personal income, corporations, payroll, trade and property.
As in almost all regions, the greatest component of taxes in Sub-Saharan Africa is consumption taxes (49%), which consist of sales tax, value added taxes (VAT) and excise taxes.
Some striking differences of African countries, even compared to countries at a similar income level, are that African countries collect a minimal amount in payroll taxes, possibly a reflection of the low share of the economy employed in the formal sector.
In contrast, African countries collect more trade taxes than countries at a similar income level.
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With regards to tax rates, the tax rate on income, profits and capital gains in African countries range from 3percent to 48percent.
On average, African countries have a higher tax rate on income, profits and capital gains, compared to other countries, even those at similar income levels. However, VAT rates, which range from 5percent to 20percent across the continent, are comparable to other countries with an average rate of 15percent.
The data is from International Monetary Fund (2022), Tax Policy Assessment Framework (TPAF) in 2018 over 214 countries. IMF country groups: Low income SSA: Burkina Faso, Burundi, Central African Republic, Chad, Comoros Islands, Democratic Republic of the Congo, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, Sierra Leone, Somalia, South Sudan, Tanzania, Togo, Uganda, Zimbabwe. Lower-Middle Income SSA: Cameroon, Cape Verde, Republic of the Congo, Cote d'Ivoire, Djibouti, Eswatini, Ghana, Kenya, Lesotho, Mauritania, Nigeria, Sao Tome and Principe, Senegal, Zambia. Upper-middle Income SSA: Angola, Botswana, Gabon, Mauritius, Namibia, South Africa. High Income SSA: Seychelles, Equatorial Guinea.
Taxpayers in Africa face higher tax compliance costs, even compared to countries at similar income levels.
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Figure 4 presents how much time, measured in hours per year, firms spend preparing and paying three major types of taxes: the corporate income tax, the value added or sales tax, and labour taxes, including payroll taxes and social security contributions.
African countries spend on average 273 hours per year on taxes, a greater burden than the average of 220 hours in other regions (World Development Indicators, 2018).
Tax administration patterns in African countries feature lower reliance on technology and greater reliance on manual systems and in-person interactions between taxpayers and tax collectors. In African countries, 72 percent of firms report being required to meet with tax officials, and for those affected, 3.2 meetings are held on average each year (World Bank Enterprise Surveys, 2010–2020).
In contrast, 37percent of firms in Europe and Central Asia are required to meet with tax officials and of those affected, 2.1 meetings are held on average.
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The high frequency of meetings is also correlated with corruption indicators in taxation. On average, 17percent of firms in Sub-Saharan Africa report that they are expected to give gifts in meetings with tax officials.
However, only 7percent report the same in Europe and Central Asia.
Similarly, 28percent of firms in Sub-Saharan Africa cite tax administration as a major constraint, compared to 16percent in Europe and Central Asia (World Bank Enterprise Surveys, 2010–2020).
Along the same lines, the use of information technology (IT) in tax administration, such as e-filing, increases with national income.
For example, as of 2016, 85percent of high-income countries, 65% of middle-income countries and 32percent of low-income countries had adopted e-filing (World Bank, 2016). Its prevalence has since continued to grow rapidly.
IT adoption in Africa
The use of IT continues to rise substantially across the continent. In 2008, less than 5percent of Africans were using the internet.
That fraction had increased fivefold to 25percent by 2018 (World Development Indicators, 2018) and continues to grow.
Mobile cellular access, in particular, has large penetration across the continent with about 90 subscriptions per 100 people across the continent, more than double the prevalence rate a decade earlier.
Africa has achieved striking successes in some aspects of technology innovation, particularly in the adoption of mobile money with services like M-Pesa being able to leapfrog the technology frontier, with users bypassing traditional financial service providers.
Kenya has been a leader with more than half of the adult population having a mobile money account. Other countries like Uganda, Zimbabwe, Gabon, Namibia and Ghana also have high levels of mobile transactions.
While the most common use of mobile money is for sending remittances, commercial uses such as paying utility bills and receiving wages are starting to emerge.
This holds promise for Africans using technology services for tax purposes as well.
The use of IT is also growing across different sectors of government in Africa. In many countries, tax administrations often lead technology adoption and digitalisation, compared to other government bodies (World Bank, 2016).
Role of IT in increasing tax mobilisation in Africa
Robust adoption of technology is designed to move tax administration from manual systems characterised by tax official discretion across taxpayers, tedious and error-prone data entry and case-by-case detection of evasion to a reliance on electronic systems, where there is a more consistent and predictable experience across taxpayers, timely data for decision making and automated detection of suspicious activity.
Using the framework developed in Okunogbe and Santoro (2022), this paper examines how technology may help to improve core tax administration functions for the main tax types: consumption taxes, property (real estate) taxes, trade taxes and income taxes (personal income, corporate income and payroll taxes).
Define Compliance: In order to tax, the government must be able to identify the tax base. Tax authorities can use technology-based tools to collect information to identify taxable entities (such as individuals or property during registration drives) as well as to collect information on the tax liability that may otherwise be concealed by the taxpayer. For example, tax authorities may require firms to use electronic billing machines (EBMs) that record sales transactions, or they may collect information from third-party sources like employers, vendors, customers or financial institutions.
Monitor Compliance: Technology can also help the tax authority detect evasion when it occurs. Technology provides tools for collecting and analysing large amounts of data to automatically detect inconsistencies, such as mismatches between self-reported and third party–reported tax liability. Analysing different indicators of evasion allows a tax authority to have a data-centric approach to targeting audits by building a risk profile for each taxpayer and prioritising those with higher risk of evasion.
Facilitate Compliance: Technology can be used to simplify procedures and improve service delivery to taxpayers. Services like electronic filing and payment can make the taxpaying experience less time consuming and more consistent across taxpayers. EBMs reduce the costs of compiling and submitting information. Electronic modes of communication such as email and SMS provide a timely and cost-effective way of providing information to taxpayers. These technologies also reduce the level of in-person interactions between taxpayers and tax officials, thus reducing opportunities for extortion and collusion.
Besides these three core functions, technology may also improve the ability of tax administrations to make timely and data-based decisions such as forecasting revenues, measuring progress and monitoring staff performance.
However, these internal functions have limited empirical evidence in the literature, and we do not include them in the scope of this paper.
Instead, we focus on technology applications that directly affect interactions between taxpayers and the tax administration. The rest of this paper proceeds as follows.
Sections 2, 3, 4 and 5 provide an overview of consumption taxes, real estate taxes, taxes on trade and income taxes, respectively, in Africa, and discuss the possible role of technology in improving the administration of these taxes.
Section 6 provides insights from interviews with revenue administrators in Africa on their practical experiences and challenges in implementing technology solutions. Section 7 concludes.
Technology and consumption taxes
Consumption taxes include sales tax, VAT and excise taxes. VAT is becoming increasingly common in Africa, as in the rest of the world, accounting for about 40% of total tax revenue (ATAF, 2019).
Albeit quite sophisticated and complex to administer (Slemrod and Velayudhan, 2022), the VAT holds great potential to improve compliance, mostly due to its in-built self-enforcing mechanism as buyers must report their input purchases to be able to deduct the VAT they paid from their own VAT liability from their sales.
This generates opposite incentives for buyers and sellers in reporting the same transaction: buyers have an incentive to maximise the amount paid, whereas sellers have an incentive to minimise the amount received, thereby creating less room for evasion.
Importantly, the VAT generates a paper trail or a record of transactions from the different trading partners in the value chain. Especially when digitised, such a trail provides a wealth of information to tax administration that they can use in their monitoring function.
Technology can significantly help in the correct administration of such a complex tax as the VAT. In most African countries, the introduction of VAT has been accompanied by the launch of electronic fiscal devices (EFDs), such as EBMs (Mascagni et al., 2022). EFDs are machines that automatically record transactions as they are performed and communicate this information electronically to the tax administration. Such machines hold potential to boost tax compliance in different ways. First, they help in defining compliance, in the sense that they provide information about the amount of sales made in a given period, that may then be cross-checked with self-reported sales amounts from both VAT and income tax returns.
Second and quite interrelated, this information may then be used for monitoring compliance by having data-based, automatic flags of irregularities and discrepancies, on which the authority can build its audit strategy to ensure proper enforcement.
Third, EFDs are also thought to facilitate compliance, helping tax-paying firms with their record-keeping. Especially in its more sophisticated version (see the case of Rwanda in Mascagni et al., 2022), EFDs can store valuable information on sales, purchases and inventory that taxpayers can access when filing their returns. Likewise, more sophisticated, software-based EFDs, especially when integrated with e-filing platforms (as in Rwanda), can provide additional information to taxpayers around deadlines, VAT rates and the like. Ongoing research is evaluating whether these benefits then translate into higher VAT compliance in Rwanda (Hakizimana and Santoro, forthcoming).
Against these important theoretical benefits from EFDs, the existing evidence on their impacts in Africa is rather mixed. On the one hand, it is true that such technology improved VAT revenue collection as also shown in other contexts beyond Africa. Some positive evidence comes from Ethiopia, where two studies evaluate the impact of the electronic sales register machines (ESRMs)—as EFDs were named there—on VAT compliance. Box 1 summarises the key lessons learned from these evaluations.