Tax information exchange key in boosting revenues – report

Implementation of tax information exchange mechanisms, voluntary disclosures and rigorous offshore investigations among African countries have great potential towards additional revenues, African Development Bank now says.

In its recent Tax Transparency report, the lender says countries in the continent generated additional revenues worth Sh256 billion in the one-year period to December 2022.

This from tackling tax evasion and illicit financial flows on the back of the aforementioned mechanisms.

“Since 2009 through to 2022, these measures have effectively boosted tax revenue, interest, and penalties, underscoring a substantial progress in tax transparency across the continent,” the report reads.

African countries have been noted for their continued efforts to bolster domestic resource mobilisation in the face of economic headwinds that include global inflation and mounting debt levels.

In Kenya, tax reforms have seen the government record historic additional revenues in the 2021/22 Financial year, with further additional projections in coming years.

For the first time in Kenya’s history, the annual revenue collection for FY 2021/22 hit and surpassed the two trillion mark, defying the difficult economic environment brought about by Covid-19.

Kenya Revenue Authority (KRA) collected Sh2.03 trillion, compared to Sh1.67 trillion collected in the previous year, 2020/21.

This was the first time the taxman surpassed its original target in 14 years, since FY 2007/08.

Early this year a gazette notice showed the total tax revenue collected in the first half of the fiscal year 2022/23 stood at Sh1.1 trillion, which is 53.3 per cent of the targeted full-year amount of Sh2 trillion.

The performance is further attributed to ongoing reforms in tax policy and revenue administration.

Nevertheless, the country is looking forward to collecting Sh2.9 trillion in the current FY.

According to Treasury CS Njuguna Ndung'u, the country seeks to further scale its revenue collection to a target of Sh4 trillion by 2027.

Reiterating the importance of the cross-border tax enforcement mechanisms, Zayda Manatta, head of the Global Forum Secretariat, noted that participation in exchange of information mechanisms could increase African countries’ tax revenues from five to 19 per cent of GDP.

“The more familiar countries are with this tool, the more they exploit this tool, the more revenue should be collected," Manatta said.

The report shows the 38 African countries that responded to the survey made a total of 531 Exchange of information (EOI) requests in 2022 compared to 592 requests made the previous year.

Exchange of information on request is used when additional information for tax purposes is needed from another jurisdiction.

Although African countries became net senders for the first time in 2020, they received more requests than they sent in 2022 and 2021.

However, the gap between requests sent and received is narrower than the pre-Covid 19 pandemic levels.

"Nonetheless, this highlights the need for continuous efforts to make tax auditors and investigators aware of the benefits of using EOI in cases with a cross-border element," the report says.

While the total number of EOI requests slightly decreased, the number of African countries making requests rose to 19 in 2022 from 15 in 2021.

Four countries: Kenya, Nigeria, South Africa and Tunisia accounted for 86 per cent of all requests sent in 2022.

Out of the four, Kenya accounted for 28 per cent.

The report further reiterates the importance of the mechanisms in the fight against Illicit Financial Flows that are costing developing countries billions, impeding their growth.

Although the actual value of IFFs has been a hard-to-find value due to its secret nature, the reports note it is generally accepted that the value of IFFs most certainly surpass aid flows and investment in volume in Africa.

The African Union Commission in 2019 estimated that the amount of IFFs from Africa ranged between $50 billion (Sh6.9 trillion) and $80 billion (Sh11 trillion) annually.