Speech by Commissioner Oupa Magashula at the special meeting of SADC tax Commissioners on the African Tax Administration Forum ATAF)Pretoria
23 Sep 2009
Commissioners and colleagues
Representatives of the SADC Secretariat
Our guest from the International Tax Dialogue (ITD) and friends
Good afternoon and once again thank you for responding to our invitation. Commissioner General Modise of Botswana and I have invited you here today to inform you of an exciting, timely, and long overdue development on our Continent. My colleague, Mr Logan Wort, will provide you with a comprehensive overview of the ATAF process leading up to the launch in Uganda this coming November. So allow me to simply make a few remarks on the background and context in which the ATAF development takes place.
Africa’s hard-earned economic gains over the past decade are at serious risk because of the current global financial and economic crisis. Like the rest of the world, the Continent is feeling its impact. Demand for our exports has fallen; commodity prices have declined; and remittance flows may be weakening. Tighter global credit and investor risk aversion have led portfolio flows to reverse, deterred foreign direct investment in our countries; and made trade finance more costly. Following half a decade of above 5 per cent economic growth, the Continent can now expect only 2.8 per cent in 2009, less than half of the 5.7 per cent expected before the crisis. These figures are taken from the recently-published Africa Economic Outlook. The IMF, however, provides even graver news in its regional outlook, released on 24 April this year. The Fund predicts that growth in sub-Saharan Africa is projected to decline from just under 5.5 percent in 2008 to 1.5 percent in 2009, before recovering to about 3.75 percent in 2010 — still below its pre-crisis level.
The economic slowdown is also likely to increase credit risk and non-performing assets, weakening the balance sheets of financial institutions and corporations. The squeeze on the financial flows implies that the continent will once again rely greatly on the International Financial Institutions, that is, the IMF, the World Bank and the African Development Bank. Naturally, the pledges by the G20 Summit of 2 April 2009 in London are a welcome, if not optimal, development. The crisis could nevertheless eventually cause donors to reduce their aid to Africa.
Against this background, the continent is faced with two opposing challenges: On the one hand, there is limited policy space to cushion and shorten the impact of the current crisis and to prepare our economies for growth and resilience once the crisis is over. On the other hand, we are presented with opportunities for long-term solutions to the crisis through advancing greater integration of our economies, increased intra-Africa trade, and the mobilisation of more domestic resources. Building capable and responsible states are key actors in confronting and overcoming today’s global developmental challenges. Governments around the world recognise that mobilising domestic revenue is central to this goal and their ambitions to achieving the UN Millennium Development Goals.
The amount and efficiency of government spending is an essential part of making domestic resources the engine of African development. Taxes account for almost all of government revenue in most African countries. Increasing tax revenue can therefore have a significant impact on improving domestic resource mobilisation provided it does so without discouraging private economic activity. Public revenue should be mobilized in a way that preserves incentives for private sector actors to work and save. However, Africa loses significant amounts of its own much-needed resources through capital flight. Estimates of this capital flight from Africa vary considerably: according to the African Union, US$148 billion leaves the Continent every year because of corruption. Other researchers have estimated that Africa has suffered a net accumulated outflow, including loss of interest earnings, amounting to over US$600 billion since 1975. Most analysts agree that the outflows of illicit money originating in Africa tend to be permanent, indicating that between 80% - 90% of such flows remain outside the Continent.
We therefore need to help countries retain and tax the profits attributable to them from multinationals, to increase transparency and to implement internationally agreed standards on exchange of information to counter tax evasion and other abuses. One of the most pressing issues facing the African continent is to reduce countries’ dependence on foreign assistance and indebtedness. An indispensable condition of this is the strengthening of the capacity to mobilise domestic resources. Domestic revenue should be one of the main sources for fiscal space expansion because of its sustainability, thereby reducing dependence on donor assistance.
We need to develop a renewed focus on enhancing domestic revenues through broadly-based taxation, alongside higher aid flows at least in the medium term. Experience has shown that this will both increase and enable greater predictability of revenues. It will also help ensure that aid-funded investments are sustainable, and prepare for gradual exit from aid in the long term. An optimal tax system should strive for equity, efficiency and administrative convenience. Applying criteria of efficiency, effectiveness and fairness, not only to the tax system, but also to the use of government resources can create a virtuous cycle of improving fiscal performance, service delivery to our people and state legitimacy. Poor countries often lack the resources and capacity to build effective tax collection systems. Developing the institutions and the human capacity to implement tax policy in a way which enables transparency and certainty is a key challenge.
The tax reforms that many African countries have undertaken in the past two decades have tended to treat taxation as a technical and administrative exercise, ignoring its political nature. These reforms have mainly been donor-driven and have sought to change the composition of taxation to favour taxes that are easier to collect and perceived to be less distorting to the economy. Typically, this has translated into a focus on indirect taxes such as value added tax, a reduction of direct tax rates combined with measures to increase their reach, and a reduction of the importance of taxes on international trade. On the administrative side, reforms have concentrated on trying to enhance the institutional capacity of tax administration by increasing the number and salary of staff, training, technical equipment and simplification of procedures.
These reforms, however, have had limited success in increasing the tax revenue of African countries. It is, of course, essential to improve the technical and administrative aspects of taxation, especially improving the capacity of tax administrations and tackling corruption. However, by focusing exclusively on those aspects, the reforms have ignored the fact that taxation represents a political relation between the State and society. Low tax rates also represent a relative weakness of the State with regard to certain sections of the society.
Taxable capacity in Africa tends to be highly concentrated in a small number of people and companies that can often evade taxes by using their power and influence. The majority of the population, while it may not have much political power and influence, typically has low taxable capacity that is costly to collect, especially in rural areas. The result is that, often, only middle-size firms tend to pay taxes. Large firms can use their influence and relations within the State to evade taxes and small firms can dodge taxes by staying in the informal sector. The raising of tax revenues is arguably the most central activity of any state.
Revenue from taxation is what literally sustains the existence of the state, and provides the necessary financial resources for all social and economic activity. Taxation therefore lies at the administrative heart of any government and provides the basis by which public goods are made available and effective regulation is implemented. At the same time, taxation is also the avenue through which citizens are most directly connected to the state, making it an important catalyst for public demands with regard to a government’s responsiveness and accountability. In similar vein, governments relying mainly on tax revenue are likely to be more accountable than those that rely on non-tax revenue sources, most notably natural resource rents or foreign aid. There is general agreement that effective tax systems are able to:
1. mobilise the domestic tax base as a key mechanism for developing countries to escape aid or single resource dependency
2. reinforce government legitimacy through promoting accountability of governments to tax-paying citizens, effective state administration and good public financial management
3. promote economic growth, reduce extreme inequalities, and thereby significantly improve the lives of our citizens and
4. achieve a fairer sharing of the costs and benefits of globalisation.
At the conference in August 2008 in Pretoria on “Taxation, State Building and Capacity Development in Africa”, Commissioners and Senior Officials of 28 African Tax Administrations clearly recognised their responsibility to play an important and robust role in providing the required strategic leadership to build the integrity and autonomy of their respective administrations. They therefore resolved to develop the required capacity and specialised skills for their administrations to perform their functions optimally, and to establishing the African Tax Administration Forum (ATAF). There is a strong call for greater cross-border cooperation on tax matters, and ATAF provides us with an optimal structure through which to do so. In essence, the forum will be an African initiative reflecting African needs and strategies related to taxation.
African countries will drive and manage the programme priorities, supported by several development partners, other tax administrations and international organisations. ATAF will be the voice of African Tax Commissioners and provide a vital opportunity to develop joint strategies and programs. It will also develop active relations with existing African multilateral institutions such as the African Development Bank, NEPAD and the African Union, as well as regional economic bodies. Already the initial stages of the establishment of ATAF have led to expressions of support from the African Ministers of Finance, the Heads of State of the Group of Eight (G8) countries, as well as the Secretary General of the Organisation for Economic Cooperation and Development (OECD). Through the strategic dialogue among senior tax administrators, the research to be conducted through its Secretariat, and the capacity development interventions provided to you officials, ATAF will be of tremendous benefit to your administrations, your governments and, in turn, your citizens.
We have already had the first ATAF Technical Event hosted by the Uganda Revenue Authority on 21 to 23 July 2009 on the Implementation of Transfer Pricing, attended by 28 participants from 14 African countries. And three more events are planned for the remainder of this year that will focus on developing specialised skills to African tax officials. The next event will be on the “Taxation of Natural Resources” on 12 to 14 October in Gaborone, Botswana.
The SADC region has already provided significant input to the establishment of ATAF through the membership and Chair of the Steering Group by South Africa and Botswana. We need to maintain this level of guidance to ATAF, and we therefore strongly urge you to join the organisation and participate in the forthcoming Inaugural Conference in Kampala, Uganda. Furthermore, we, as the SADC Heads of Tax Administrations, need to do more to enhance the tax dialogue in the region by elevating the work being done in the Sub-committee on Tax Matters. It is imperative that we give greater attention to the SADC tax agenda, and feed that into the work of ATAF for the benefit of the region. In conclusion, and to borrow from Francis Fukuyama in his book “State Building Governance and World Order in the 21st Century”, who said: “What is urgent for the majority of developing countries is to increase the basic strength of their state institutions to supply those core functions that only government can provide.” In the same way, we should ensure that SADC and ATAF are committed to building tax administrations in Africa that will contribute significantly to the improvement of the lives of our peoples.
Source: South African Revenue Services
Issued by: South African Revenue Service
23 Sep 2009
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