Many African countries have tax-to-GDP ratios well below 15%, a threshold commonly seen as the limit for sustainable fiscal management, but there is good potential to improve revenue mobilisation without directly raising taxes, delegates heard at the G20 Finance Minister’s meeting in Cape Town.
The discussion is particularly relevant for South Africa at this time because, last week, in an unprecedented event, the South Africa government postponed the tabling of its Budget due to political opposition to a proposed 2% hike in VAT. It became clear that other sources of raising government revenue might be required. No quick-fix solutions were provided by the meeting delegates, however.
Speaking at the meeting that was held in Cape Town on Wednesday, South African Revenue Services commissioner Edward Kieswetter said that much had been done by various global institutions such as the World Bank and OECD (Organisation for Economic Co-operation and Development) over the past decade to achieve more efficient, transparent, and fair tax dispensations.
He said the introduction of the global minimum corporate tax was an important goal in this respect. The OECD and G20 Inclusive Framework have set this tax rate at 15%, ensuring that large multinational enterprises pay a minimum level of tax on their income in each jurisdiction where they operate. This tax also reduces profit shifting to low-tax jurisdictions.
Delegates heard that potential other global taxes are under discussion, such as the possibility of a global tax on ultra-high-net-worth individuals. This idea is part of an effort to prevent tax avoidance and ensure fair taxation across countries.
International Monetary Fund (IMF) MD Kristalina Georgieva said that these discussions were being held against a backdrop of “worrying trends in medium-term growth prospects on the low side,” while at the same time, government debt levels were high and rising.
She said that in this context, the need to better mobilise domestic resources and find ways to achieve the best use of resources takes on even greater importance. As an example of where revenue could be used better, she said that over 30% of resources allocated to infrastructure in developing countries are often lost to inefficiencies.
“People are more happy to pay taxes if they see their money is spent wisely,” she said. However, indications are that the public appetite for increased taxes is at a historic low, she added.
She suggested that countries should consider improving their tax potential before raising taxes as a means to generate more revenue. One way to achieve this is by curtailing tax exemptions, deductions, and credits, which could raise significant additional funds. Better tax administration has been shown to boost tax revenue by 3.6% over a number of years.
Digitalisation of revenue administration and collection has also been shown to improve tax collection rates by almost 1% of GDP. Additionally, having “pro-growth” tax systems has been shown to improve tax collections, she said.
United Nations Deputy Secretary-General Amina Mohammed said that sustained investment is required to strengthen tax capabilities in countries, but the UN is still seeing insufficient political will from many countries to invest enough in tax administration capabilities to support revenue mobilisation.
World Bank President Ajay Banga highlighted that the focus should be on broadening the tax base. Key to this is modernising tax administration systems through digitisation and the use of AI, while ensuring that revenues are better spent.
He said the World Bank would review the tax administration systems of 14 countries, with 18 country reviews already completed. Over the next three years, they intend to provide support for tax and revenue collection activities in up to 40 countries.
Delegates noted that some of the challenges facing tax administrations included an ageing workforce, institutional loss of memory, underfunding, and low investment in administrative capacity. In some African countries, there is even a lack of electricity.
Indonesia’s Vice Minister of Finance Suahasil Nazara said that their current tax reforms are based on five principles: human resource development, organisational restructuring, business process transformation, simplification, and integration of technology and regulatory reforms.
He said regulatory reform needs to provide legal certainty and a good investment climate. “It’s not just about revenue collection, but about fostering a sustainable investment environment.”
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