Enabling the development of Africa by Africa through increased tax revenue
8 June 2015
Over the years, African countries have been relying on international aid to finance their national budget and their development. Financial assistance from developed countries may have been justified at a given time, but its disadvantages now seem to outweigh its advantages. It was established that aid funds and revenue collection were inversely proportional and that, generally speaking, the Official Development Assistance was minimal compared to the resources of the countries that benefit from it.
This assessment of the foreign aid situation on the continent may have led Rwandan President Paul Kagame to state, at the opening of the 8th annual meeting of African Economy and Finance Ministers, that Africa should stop relying on developed countries for its development and should instead mobilize its own financial resources. Such a statement implies that the continent has the capacity to finance the greatest portion, if not all, of its development budget, which is indeed the case. National resources constitute the largest pool of funds available to developing countries, mostly through taxes, customs fees and the concession of natural resources.
According to a study presented during the meeting, internal taxes alone bring in more than US$520 billion to African governments each year. This figure may seem satisfactory, but the truth is, it could be a lot higher. Indeed, a great deal of improvement is still needed in terms of tax base in Africa. At 10 to 14% only, the contribution of the developing countries' tax revenue to the GDP remains far below the 20% recommended by the OECD to allow the States to meet their development goals.
The sheer size of the informal sector and the illicit cash flows traveling from Africa to the other continents (up to US$800 billion per year to the World Bank) are to blame. Tax fraud currently deprives African governments of revenue that, on its own, would allow them to balance their budgets and to finance most of their expenses, while reducing both their debt and their dependence on foreign aid. Shockingly, If tax compliance was efficiently enforced in all African countries, the sum thus collected by the governments would represent 10 times the total aid budget for Africa (source: study by Forum Syd, 2012).
All tax fraudsters in Africa have something in common: they take advantage of the weaknesses of the existing tax systems, which are mostly paper-based. Of course, no country in the world can boast a non-existent level of tax fraud. However, a shift from the Paper Age to the Electronic Era is one of the non-negotiable conditions for truly effective taxation in Africa. In countries where electronic sales recording methods are widely used, the authorities can easily access the data they need to counter tax fraud more efficiently.
The provision of reliable, accurate and real-time tax-related data to the authorities concerned is one of the many advantages of the Electronic Fiscal Device (EFD) solution developed by Avatar Technologies for use in the retail sector. The collection of VAT and other taxes indeed remains problematic in this sector.
However, what really makes this solution stand out among other systems of its kind is the fact that it can be adapted to the environment of the different African countries. The EFDs that feed the transactional data to the central platform in real time are affordable, robust, as well as highly autonomous and resilient. Furthermore, the solution provides free access to a Cloud-based accounting application that greatly simplifies the management of invoices and inventories, as well as bookkeeping processes.
These features and characteristics make the solution attractive to traders, and easy for them to adopt, thus putting tax compliance within their reach. But even such an advanced solution will have limited benefits if the consumers omit to demand their receipt after making a purchase. That is why Avatar Technologies has equipped its EFD solution with a VAT lottery component, which automatically enters the customers who ask for a receipt into a lucky draw.
By providing African tax authorities with the technological means to enforce tax compliance, and to make it both verifiable and controllable, Avatar’s EFD solution contributes to improving the fiscal performance of the States. The increased tax revenue can then be used to realize the vision of a financially independent Africa that is able to meet its own development needs.