African governments let too many taxpayers off the hook

TAX collection in Africa resembles an exasperating fishing expedition, in which the big fish wriggle into tax havens and the tiddlers hide in the informal sector. It is made even harder by a self-inflicted problem. Governments give out a range of exemptions, thereby poking holes in their own nets.

Consider “tax expenditures”, a measure of the revenue lost by deviations from usual tax rates. Taxmen in Kenya and Uganda let about 5% of GDP slip through their fingers in this way, according to the World Bank. In the few African countries where data are available, governments forgo revenues worth a third of those they actually collect. The cost is felt in crowded classrooms and on rutted roads.

Not all that money should, or could, be recouped. The figures include concessions for items like textbooks and medicines. And not every tax expenditure is a giveaway, argues Maya Forstater of the Centre for Global Development, a think-tank. For example, firms that export goods or import capital equipment may be entitled to value-added-tax refunds, but the process can be so unworkable that some governments just grant exemptions instead.

The full range of tax breaks is bewildering, however. Incoming foreign aid, from the salaries of consultants to the fees collected by subcontractors, is often tax-exempt. Special economic zones are popping up like volcanic islands, forming a low-tax archipelago that stretches across the continent. In Ghana a single factory can be declared a “free zone”, which entitles it to a ten-year tax holiday and exemptions on import duties. Rwanda gives a corporate-tax holiday to big investors such as Volkswagen, which has opened a new assembly plant in the country.

Such incentives rarely bring the investment or jobs that are promised, says Ousmane Sonko, a former tax inspector who is now a member of parliament in Senegal. When surveyed, most businesses in African countries say they would have invested even without tax breaks. They tend to rank other factors, such as stability and the cost of raw materials, more highly. Firms congregate in industrial parks for the reliable electricity and decent roads. Paying for these means taxing more, not less.

Meanwhile ordinary citizens often foot the bill, argues Jason Braganza of Tax Justice Network Africa, a campaign group. Uganda, for example, has slapped new levies on cooking oil, mobile money and even social media—all measures approved by politicians who have exempted their own allowances from tax.

Some governments see tax breaks as a tool of industrial policy, East Asian-style. Others dish out goodies to reward allies or create political leverage, says Mick Moore of the International Centre for Tax and Development. Tax expenditures come under less scrutiny than conventional spending. In four-fifths of sub-Saharan African countries, for example, governments have the discretion to negotiate bespoke tax breaks with individual companies. Businesses lobby hard against any tightening of rules.

Mounting debt may be the one thing that forces a rethink. Median public-debt levels in the region are over 50% of GDP, up from 30% in 2012. The IMF and World Bank are urging governments to close up fiscal holes. So too are civil-society groups. Some countries, such as Ghana, are trying to streamline exemptions. A good place to start would be to audit tax breaks and strip away the most indulgent. Those that remain should be temporary and transparent. Taxmen will catch more fish with stronger nets.

This article appeared in the Finance and economics section of the print edition under the headline “Slipping through the net”