African Nations Urged to Rethink VAT Reliance Amid a $1.6 trillion Financing Gap
By Patience Ikpeme
At the recently concluded 2023 Africa Tax Administration Forum (ATAF) Annual Meeting in South Africa, concerns were raised about the sustainability of African countries’ heavy dependence on Value Added Tax (VAT) for tax revenue, especially given its regressive nature.
VAT, deemed regressive as it disproportionately affects low-income individuals, is considered inefficient in many African nations. Delegates highlighted the pressing need for alternative and sustainable funding sources to achieve the Sustainable Development Goals (SDGs) by 2030.
The communiqué issued at the end of the meetings emphasized the USD 1.6 trillion financing gap in Africa which has hindered the realisation of SDG objectives. In addition, to meet the annual USD 194 billion needed for SDGs, Africa faces a challenge as the tax-to-GDP ratio is declining.
The communiqué further noted that the heavy reliance on consumption taxes, particularly VAT, is unsustainable. The meeting proposed strengthening tax administrations as a key strategy to bridge the financing gap.
However, challenges such as high diagnostic costs, simplifying processes, leveraging data and technology, adequate resourcing, and ensuring tax certainty were acknowledged.
Tax incentives, crucial for attracting foreign direct investments (FDI), were also discussed. The emphasis was on cost-based incentives, such as accelerated depreciation and investment allowances, over profit-based incentives like tax holidays. Delegates advised African countries to shift from profit-based to cost-based incentives.
Digital assets emerged as a focal point, presenting both challenges and opportunities for revenue collection. Delegates stressed the need for effective taxation without hindering industry growth.
The meeting explored revenue mobilization from the green economy, urging African governments to diversify approaches to environmental taxes. These taxes were seen as a tool to penalize harmful activities while generating funds for sustainable ventures.
Transparency took center stage, with a call for enhanced interagency cooperation and cross-border exchanges. Delegates urged African countries to adopt legal instruments like the African Agreement on Mutual Assistance in Tax Matters to facilitate information exchange and combat illicit financial flows.
The development of the Anti-Illicit Financial Flow (IFF) Policy tracker was applauded as an innovative tool to measure interventions against set parameters, contributing to ATAF’s technical assistance work in member countries. The conference highlighted the need for increased efforts to ensure the automatic exchange of information, a crucial tool against illicit financial flows, is implemented widely across the continent.
