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African Tax Transparency Enters Its Next Stage

Posted on June 7, 2021

In 2020 the OECD reported that tax transparency initiatives across the African continent were quickly expanding and helping tax authorities generate hundreds of millions of dollars in new revenue. Its newest findings, released in May, revealed that the COVID-19 pandemic ate into that trend. Some African tax authorities continued to collect millions while others, hit by COVID-19 lockdowns, saw their programs stall, according to the OECD’s new Tax Transparency in Africa 2021 report.

In a vast continent in which development is uneven, tax transparency progress has been lopsided, underscoring a great challenge for the OECD’s Africa Initiative: bringing disparate countries up to the same baseline on tax transparency. While some countries struggle to get started, other, more advanced countries in this area are looking for ways to push the needle forward.

Although capacity building is, and should remain, the initiative’s main focus, this emerging split presents a good opportunity to expand the Africa Initiative’s reports. There’s an opportunity to provide more analysis on how the initiative’s tax transparency work interfaces with the ever-growing global fight against illicit financial flows on the continent — an issue that has become even more important in light of the COVID-19 pandemic.

Background

Tax revenue accounts for an average of 16.5 percent of gross domestic product for African countries according to the OECD’s latest findings (OECD Revenue Statistics in Africa 2020). Over the past few years, it’s been on a downward trend — a troubling development because any reduction in tax revenue is problematic for African countries. To put things in perspective, 15 percent is the generally established minimum amount to fund basic public and social infrastructure like healthcare and roads. For OECD countries, tax revenue generates nearly 34 percent of GDP.

The Africa Initiative, which is now approaching its 7th year is supposed to help solve this problem. Thirty-two of 54 African countries are members, and 11 international partners are supporting the group’s work, including the African Union Commission, the EU, the Norwegian Agency for Development Cooperation, Switzerland’s State Secretariat for Economic Affairs, the West African Tax Administration Forum, and the World Bank.

The initiative primarily helps member countries build their exchange of information (EOI) capacity, first through traditional EOI systems then through automatic exchange of information (AEOI) systems. The good news is that the COVID-19 pandemic failed to dampen African EOI activity. In fact, the number of requests sent by African countries increased 21 percent. The even better news is that Africa, for the first time, became a net sender of EOI requests. The Africa Initiative’s members sent 460 requests and received 439.

The OECD speculates that EOI activity remained strong, on average, because there’s a growing awareness that EOI is important for improving domestic resource mobilization. But it’s too early to definitively tell. In 2022 the OECD will discuss whether the recent activity is related to the COVID-19 pandemic. The reality, however, is that there’s a lot of ground to cover. Since the initiative started in 2014, African countries have received more than double the number of requests they have issued — 3,263 incoming requests versus 1,462 outgoing.

Is EOI Still Lopsided?

Last year’s Tax Transparency in Africa 2020 report found that there was a sharp rise in EOI activity on the African continent, but it was lopsided and concentrated among a small number of countries. It reported 3,262 bilateral relationships, up from 685 in 2013. Within a five-year period, four initiative countries sent 74 percent of outgoing requests, according to the OECD. Five received the majority of EOI requests.

It appears that the COVID-19 pandemic made EOI activity even more lopsided, based on this year’s report. In 2020 four countries — Tunisia, Kenya, Uganda, and Nigeria — sent 91 percent of all outgoing requests. Tunisia alone sent 62 percent of Africa’s requests. Four countries — Mauritius, Morocco, Kenya, and Tunisia — received 90 percent of all incoming requests that year. Mauritius and Morocco received the majority of those requests — 68 percent.

As of 2020 Africa Initiative members have 3,752 bilateral relationships, but establishing relationships is only half the battle. Encouraging member countries to fully integrate EOI into other parts of tax administration is another issue that is still evolving. The report noted that EOI might not be a priority in some countries that use it, considering that several are sending “very low” numbers of EOI requests despite having broad EOI networks and appropriate infrastructure. The OECD suggests that EOI strategy and management should be handled from the top down, by top tax authority management or a ministry of finance.

On the other hand, the pandemic was a factor. Some countries sent fewer EOI requests because their audit activities were suspended. Nearly a third of Africa Initiative countries said that their EOI capabilities — either receiving and processing requests or issuing requests — were affected by the pandemic.

One takeaway from the report is that African countries looking to extend their EOI networks have the best odds if they sign the OECD’s convention on mutual administrative assistance in tax matters (MAAC). The OECD found that 98 percent of African EOI relationships established between January 2019 and January 2020 came through that convention, and that signatories maintained at least 100 exchange partners while other countries averaged only around 10. That is still true based on the latest report.

Ultimately, what’s the benefit for tax administrations? What are the revenue numbers looking like? For countries able to fully integrate EOI, the monetary benefits are real. The report highlights that two African countries identified over $43 million in additional tax via their information requests. Since 2009 African countries have identified over €1.2 billion in additional tax, interest, and penalties through offshore tax investigations, according to the report.

Gradual Adoption of AEOI

Countries are gradually committing to AEOI and creating specific implementation timelines. South Africa, Mauritius, Ghana, Nigeria, and Seychelles now have AEOI regimes. Morocco and Kenya are scheduled to begin in 2022. Senegal and Tunisia are planning, but no launch date has been set.

There’s a lot of room for expansion beyond seven countries, and AEOI is going to be a core objective for the Africa Initiative’s current session, not just for countries considering AEOI, but for countries that already have it. Reciprocity is an ongoing concern. Seychelles, South Africa, and Mauritius have reciprocal exchanges, but Ghana and Nigeria are still exchanging on a nonreciprocal basis. This means they can share information but not request it because of confidentiality concerns. The COVID-19 pandemic prevented the OECD from performing in-country confidentiality and data safeguards assessments, but once the OECD is able to do so, there’s an expectation that both countries will move into a reciprocal status.

Raising the Stakes

At the end of September 2020, stakeholders voted to renew the Africa Initiative through 2023. This iteration is different than the others; it will have a core stage of seven elements and accompanying “enhanced building blocks.” The seven parts of the core stage are:

  • setting up operational EOI units with adequate resources, including delegated competent authority powers and an EOI internal procedure or manual;

  • defining a clear strategy to use EOI as a tool to improve tax audits, sensitize relevant stakeholders, and actively make and increase requests with treaty partners;

  • signing and ratifying the MAAC;

  • receiving a satisfactory rating in the second round of EOI peer review;

  • committing to AEOI and benefiting from technical support, including on confidentiality;

  • increasing the number of African countries implementing the common reporting standard and AEOI on a practical time frame; and

  • measuring the impact and benefit of EOI through periodic collection and tracking of statistical information.

All members are expected to work toward these goals. The enhanced building blocks are:

  • wider use of EOI data;

  • effective use of AEOI data;

  • cross-border assistance in recovery of tax claims; and

  • other areas of interest.

From there, the next steps are raising political awareness and generating strong political buy-in, publicizing the gains governments have received through EOI participation, and moving into an impact and assessment period supported by a new EOI Impact Assessment Form to help competent authorities assess their EOI programs and tailor them accordingly.

The Fight Against Illicit Financial Flows

The COVID-19 pandemic is giving governments and stakeholders an opportunity to prove their seriousness when it comes to combating illicit financial flows. The U.N. estimates that the African continent loses $88.6 billion annually to illicit financial flows, and U.N. Secretary General António Guterres has designated fighting illicit financial flows as a priority issue for COVID-19 recovery.

What exactly will that battle look like? One of the core problems with tackling illicit financial flows is that there’s no universally agreed-upon definition. There are several definitions floating around, but it’s proven difficult to pinpoint the specific contours, especially the border between tax avoidance and tax evasion. It’s hard to wage a battle when the force you’re fighting is, at times, phantasmic.

Even without a universal illicit financial flow definition, enhancing basic tax transparency has proven to be particularly useful, heightening its importance and the importance of the Africa Initiative in post-COVID-19 pandemic recovery.

There’s a long tail to this work — the African Union’s goal is to corral illicit financial flows and boost domestic resource mobilization for its Agenda 2063, a campaign to boost development, security, and trade on the continent by that date. In reality, illicit financial flows work needs to be done long before that — African countries can’t wait another 42 years to get the issue under control. Nor should they, especially in light of the pandemic.

The question is what opportunities can be exploited post-COVID-19? Now that the Africa Initiative has been extended for a few more years, things come to mind for an ambitious, post-COVID-19 pandemic wish list. Considerable work is being done in the tax transparency and illicit financial flows space, some of it overlapping. It might be helpful if the Africa Initiative provides more information on how the group’s tax transparency work intersects with transparency efforts promoted by other stakeholders like the Financial Action Task Force (FATF), EU, and African Development Bank, and how its work generally intersects with the OECD’s broader work on beneficial ownership transparency.

South Africa is the only Africa Initiative member that belongs to the FATF, but the African Development Bank is a task force observer, and other African countries engage with the organization through FATF-style regional bodies throughout the continent. The African Development Bank is approaching the end of a four-year action plan that engaged the FATF and regional bodies on combating illicit financial flows and tax evasion. That mandate is likely to be renewed, and there’s space for feedback on how the OECD’s tax transparency work may have contributed to that project.

Meanwhile, the EU and German Federal Ministry of Economic Development and Cooperation in December launched a €7 million multi-donor action with the African Union aimed at combating illicit financial flows on the continent. The money will be used to support an African Union campaign to secure member states’ taxing rights. All three are Africa Initiative sponsors, and their projects blend into the OECD’s tax transparency work.

Beneficial ownership transparency is a priority item for the Africa Initiative; the OECD wants to ensure that African countries have an effective framework for collecting and holding beneficial ownership information. As part of that work, the OECD conducted trainings for Africa Initiative members and promoted the use of its beneficial ownership implementation toolkit. While this year’s report briefly discusses some of that activity, it would be helpful to see more specific analysis about how members are tackling the issue, and the impact of that activity, especially because there’s been significant movement among some African Initiative members.

For years, several African countries concentrated on beneficial ownership transparency around the extractive sector and related standards created by the Extractive Industries Transparency Initiative. This is gradually changing. Despite the COVID-19 pandemic, both Ghana and Kenya opened general business beneficial ownership registers in October 2020. In August 2020 Nigerian President Muhammadu Buhari signed into law the Companies and Allied Matters Act 2020 — which requires the government to maintain a central register of persons that hold significant control in Nigerian companies.

Meanwhile, Botswana, Egypt, Mauritius, and Seychelles have all updated their beneficial ownership rules spurred in part by the FATF, according to research from the Tax Justice Network. Given that all these countries are Africa Initiative members, it would be helpful to see how these developments will impact tax transparency in each jurisdiction over the coming year. For those that have AEOI, like Ghana, Nigeria, Mauritius, and Seychelles, a potential case study on how beneficial ownership transparency has contributed to their networks would be illuminating.

Additional analysis is also important because beneficial ownership transparency is partially holding some countries back. So far, six Africa Initiative countries have been peer reviewed by the OECD twice on their EOI systems, and only two were rated as compliant or largely compliant. The rest were all scored as partially compliant because of a lack of available beneficial ownership information.

Conclusion

Transparency trends on the African continent look promising. But the next few years — and the work of the COVID-19 pandemic recovery — will shed light on the durability of the progress. However, even if there are setbacks because of pandemic stressors or other factors, the long arc of the OECD’s work is moving toward transparency, especially when considered with other continentwide trends and developments. That part of the story deserves more discussion and analysis, and, hopefully, given the Africa Initiative’s newest mandate to raise political awareness and publicize country experiences, that information will appear in subsequent Africa Initiative reports.

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