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Boosting Africa’s tax revenues

(Africa Business) Taxes on corporates and individuals have steadily declined in Africa just as national budgets are being stretched. How can Africa boost tax revenues?

In late August, South African telecoms giant MTN, Africa’s biggest mobile operator, was stunned by an $8.1bn demand from Nigeria’s Central Bank, which had accused the firm of illegally sending money abroad. With executives and investors in a state of disbelief and shares plunging to a nine year low, the firm barely had time to respond before the country’s attorney general – an unusual outlet for such orders – demanded a further $2bn in taxes and charges from the company in an unrelated case just days later.

For MTN, the charges represent just the latest challenge it has faced while operating in the volatile Nigerian market following a multi-billion dollar fine levied on the firm in 2015 in a dispute over unregistered simcards. “It’s completely unfounded,” MTN group president and chief executive Rob Shutter told African Business after the moves wiped some $6bn off the company’s share price. He argues that Nigeria’s allegations are incorrect and takes issue with the attorney general’s role in the affair………………………………….

The dangers of onerous tax systems

Yet there are counterarguments against a general crackdown on cross border flows, with some firms arguing that it puts legitimate business models at risk. Antoine Maillet-Mezeray, chief financial officer of Nigerian e-commerce firm Jumia, argues that regulators in Africa may jump to the wrong conclusion by targeting corporate capital flows, especially in emerging sectors like e-commerce and technology. Certain Jumia operations, he explains, are centralised in Europe and therefore the company requires some cash flow to and from Europe and its African markets.

“Some governments will always think that we are trying to escape taxes,” he says. “But I think as they are getting more and more familiar with e-commerce this will change.” In many cases, Jumia must spend time and energy explaining to the regulators what they actually do. The company has two business models: one where Jumia buys and resells products online and the other where the company acts as the market intermediary between buyer and seller. Most African governments are unaccustomed to this business model and therefore struggle to regulate the sector.

“Not all the countries have the relevant expertise,” says Maillet-Mezeray. “They are getting up to speed but it takes time and meanwhile it creates some friction.” During this interim period African regulators must take care not to spook nascent sectors or startup companies, but to engage in clear conversation in order to find regulation that works for both parties. Jumia’s troubles and MTN’s battle in Nigeria highlight the importance that African regulators should place on responding fairly to new and lucrative sectors like e-commerce, fintech and telecoms, as well as the use of new tools like blockchain.

If regulators and central bank governors slap heavy taxes and restrictive legislation on firms due to unfamiliarity, or to make a fast buck, any opportunity for Africa to leapfrog in new technologies is cut short. Nigeria, for example, has blocked mobile money due to protest from established banks. Elsewhere unfamiliarity with cryptocurrencies has seen the potentially transformative technology barred from markets. Critics say that this cornering of the market will only serve to stifle wealth creation, arguing that services are best and profits more equally distributed when competition is rigorous.

Read the entire article on Africa Business