As one of the most under-developed regions, the African continent must find new ways to reduce its dependence on aid and ensure the sustainable development of the continent’s resources.

“A significant part of those resources have to come through taxation,” South African Finance Minister Nhlanhla Nene said on Tuesday.

Speaking at the African Tax Administration Forum (Ataf) Conference on Cross Border Taxation in Africa, Nene noted that new ways of doing business in a globalised economy called for a rethink on how taxation of new forms of business should take place.

He said that the new globalised economy held a number of key tax challenges, including the increased mobility of capital and people and the rapid adoption of technology to improve communications, which resulted in restructuring of multinational enterprise (MNE) business models and operations.

“Such restructurings offer the opportunity to contractually shift risk and valuable intellectual property (IP) from, for example, local distributors to a central entrepreneurial company (the principal) in a low-tax jurisdiction.

“This ability to contractually shift risk and IP among the members of an MNE, but not outside the MNE group as a whole, allows MNEs to plan where profits are reported and, thus, where tax is paid,” he noted.

Further, Nene said developing countries’ tax administrations were seeing many such restructurings and challenging them frequently involved the interaction of a number of international tax rules – transfer pricing rules, tax treaties, the taxation of nonresidents, and rules concerning the transfer of intangible assets.

“What does this mean for taxes in sub-Saharan Africa?” he asked, noting that tax revenues in Africa continued to increase external financial flows and continued to be an important contributor to Africa’s development.

“To fund Africa’s development, mobilising domestic resources and developing a sound revenue generation capability is crucial. Strengthening domestic resources offers an antidote to aid dependence and increases the country’s ownership of its development and growth agenda,” Nene said.

However, he highlighted that, beyond its fiscal role, the tax system had a more substantive role in Africa: it was an important tool for good governance, democracy and the basis for the social fiscal contract between governments, citizens and corporations.

For Africa as a whole, the tax burden stood at 26% of gross domestic product (GDP) in 2012, compared with 24.4% in 2011. In 2011, tax accounted for 26.8% of Africa’s GDP, up from 26.6% in 2010.

The tax-to-GDP ratio peaked at 31.1% in 2008 as the financial crisis hit, which suggested that there was room to increase tax revenues.

In 2012, low-income African countries, on average, mobilised only around 16.8% of their GDP in tax revenues, below the minimum level of 20% considered by the United Nations as necessary to have achieved the Millennium Development Goals.

Lower-middle-income African countries fared little better, with an average tax burden of 19.9% in 2012. With an average tax burden of 34.4% in 2012, upper-middle-income countries came closer to the average in Organisation for Economic Cooperation and Development countries of 35%.

Nene added that the reliance on a single source of revenue contributed to an inadequate tax-mix. “Resource-related tax revenues typically distract governments from generating revenue from more politically demanding forms of taxation such as the corporate income tax (CIT) on other industries, the personal income tax (PIT), the value-added tax (VAT) and excise taxes.

“In addition, this makes Africa’s resource revenue vulnerable to highly volatile international commodity prices and external shocks. For example, during the commodity price boom between 2002 and 2008, resource revenues increased from about $45-billion to $230-billion.

“But as the global economic crisis hit Africa in 2009, resource taxes fell back to $129-billion. So it is important to get the tax-mix right for us to develop more resilient and sustainable economies,” he stated.

BEPS CHALLENGES
Nene noted multinational corporations tended to use tax reducing financial strategies to shift profits across borders to take advantage of favourable tax rates.

He added that, while base erosion and profit shifting (BEPS) was a problem affecting almost all developed and developing countries alike, profit shifting was not the only driver of the erosion of the African tax base.

Factors contributing to erosion of the continent’s tax base were exacerbated when, for instance, governments signed away their tax revenues through ill-conceived tax incentives, an insufficient tax mix or an overreliance on single source taxation; through poorly negotiated contracts and nontransparent concessions; and the inadequate taxation of high-net-worth individuals.

“It has been suggested that weaknesses in Africa’s tax regimes give away so much of the tax base that some of these new international tax rules may not even matter,” he said.

Having identified these contributors, Nene said it was imperative that an impact was made at an international level. “Therefore, it is imperative that all African and other developing countries be involved in the BEPS process to ensure that sufficient attention is given to the different levels of readiness of developing country tax administrations and the resource and capacity limitations they face.”