African leaders advised to focus on tax policies

SOUTH Africa’s Finance Minister Nhlanhla Nene says African leaders need to focus more on tax policies and the diversification of tax resources in order to foster growth.

Speaking at an African Tax Administration Forum conference on Tuesday, he said the global focus on international taxation offered a unique opportunity for African leaders to consider factors such as giving consideration to the establishment of a tax policy and tax administration commission.

This commission, which he said was glaringly missing from the African Union, would deal with harmonising the continent’s tax policy, legislation and administration, as well as seeking ways to improve cross-border cooperation and thereby optimising continental revenue mobilisation.

The minister spoke at length about what he called significant risks and challenges to African countries caused by tax-base erosion and profit shifting (BEPS).

Some multinational corporations use tax-reducing financial strategies to shift profits across borders to take advantage of favourable tax rates, much to the disadvantage of countries from which the monies are being shifted.

Mr Nene said multinationals were able to take advantage of outdated international tax laws to minimise their tax liability.

There is now a move globally to address BEPS, through the group of 20 (G20) and the Organisation for Economic Co-operation and Development (OECD). Mr Nene urged authorities in African countries to be involved in the processes.

“It is therefore critical that African countries use all the opportunities to make their inputs into the BEPS project to ensure that the views and experiences of African countries shape the development of the potential BEPS-related solutions,” he said.

South Africa has been participating in the process through inputs from interested parties to the Davis tax committee. The country’s Treasury has already been addressing BEPS over the last number of years, according to tax director at law firm Cliffe Dekker Hofmeyr, Emil Brincker.

The Treasury had some time ago started implementing anti-avoidance provisions, such as hybrid equity instruments, hybrid debt instruments and non-deduction of interest in the context of group transactions, he said.

Mr Brincker noted that South Africa was also in the process of concluding agreements with other countries on the exchange of information, which would further help address profit shifting by companies.

Speaking on sources of tax revenue, Mr Nene said countries needed to diversify tax revenue sources.

“It is important to get the tax-mix right, in order for us to develop more resilient and sustainable economies,” Mr Nene said.

Resource-related tax revenues typically distracted governments from generating revenue from other forms of taxation such as corporate income taxes in other industries, personal income taxes, value-added taxes and excise taxes.

Resource revenues increased from about $45bn to $230bn during the commodity price boom from 2002 to 2008. The global economic crisis of 2009, however, reversed this and resource taxes fell back to $129bn.

There was still room to increase tax revenues in Africa to help further develop the economies of countries on the continent, Mr Nene said.

The African Economic Outlook’s data showed that low-income African countries on average mobilised only around 16.8% of their GDP in tax revenues in 2012, which was below the minimum level of 20% considered by the United Nations as necessary to have achieved the Millennium Development Goals.

Upper-middle-income countries came closer to the average in OECD countries of 35% with an average tax burden of 34.4% in 2012.

Mobilising domestic resources would allow countries to reduce dependence on aid and take charge of their own development and growth agenda, Mr Nene said.