Ms. Mary Baine Addresses Africa's Financing Gap at ATAF Annual Meeting
This session delved into comprehensive strategies aimed at constructing agile and robust institutions capable of effectively implementing DRM strategies.
CAPE TOWN, South Africa - Deputy Executive Secretary of the African Tax Administration Forum (ATAF), Ms. Mary Baine, emphasized the critical need to address Africa's financing gap and strengthen institutional capacity for Domestic Resource Mobilization (DRM) during the second session on the first day of the ATAF Annual Meeting in Cape Town, South Africa, writes Winston Mwale.
This session delved into comprehensive strategies aimed at constructing agile and robust institutions capable of effectively implementing DRM strategies.
A key focus was on enhancing the knowledge and skills of tax administrators to ensure efficient and effective tax collection.
The Financing Gap, as highlighted by Ms. Baine, refers to the substantial shortfall in funding required to achieve sustainable development objectives.
Despite considerable progress towards the United Nations Sustainable Development Goals (SDGs), the financing gap remains significant.
Developing countries are grappling with financing challenges, and recent data suggests that the current gap has widened to at least $4.2 trillion, up from the pre-pandemic estimate of $2.5 trillion, according to the Organisation for Economic Co-operation and Development (OECD). Notably, one-third of these countries are at high risk of a fiscal crisis.
As per Ms. Baine, high dependence on tax revenue in ATAF countries underscores the pivotal role of taxation in financing development across the African continent.
The declining tax-to-GDP ratio since 2019 has spurred the need for enhanced Domestic Revenue Mobilization (DRM), which can potentially lead to an increased tax-to-GDP ratio and help bridge the development financing gap.
Strengthening institutional capacity is fundamental to revamping the tax system, thereby improving DRM.
One of the focal points highlighted by Ms. Baine was the dependence on indirect taxes, with Value-Added Tax (VAT) as the primary contributor to total tax revenue at 30.68%.
While this revenue source is significant, Ms. Baine drew attention to its efficiency.
The average VAT C-efficiency, standing at 37.87% in 2021, remains relatively low when compared to a benchmark of 69.00%, suggesting inefficiencies in the tax system.
This indicates potential policy or compliance-related inefficiencies that need to be addressed in detail.
Evaluating the quality of tax administrations, the Tax Administration Diagnostic Assessment Tool (TADAT) revealed that African tax administrations ranked lower compared to the rest of the world.
This suggests underlying inefficiencies within these administrations, including weak structural and governance frameworks, limited understanding of comprehensive tax administration practices, political economy challenges, and insufficient reform initiatives.
Furthermore, Ms. Baine outlined a series of issues affecting jurisdictions' capacity to generate tax revenue optimally.
These issues encompass national and international systems that facilitate tax evasion, tax avoidance, and tax havens; non-payment of a fair share of taxes by multinational corporations and wealthy individuals, lack of a fair, progressive, transparent, and sufficiently resourced tax administration, inconsistency and inefficiency in fulfilling the social contract between governments and citizens, political interference, resistance to change, and corruption within tax institutions.
Addressing these issues is paramount for building institutional capacity, said Ms. Baine.
Ms. Baine also shed light on the elements that have worked well in improving domestic revenue mobilization in ATAF countries.
These include deepening the tax base, addressing challenges related to taxing High Net Worth Individuals (HNWI), implementing tax audits and post-clearance audits, combating tax evasion, recovering tax arrears, taxpayer education, deploying technology to enhance efficiency, and minimizing human interference. Stakeholder engagements and targeted taxpayer education have played a vital role in enhancing compliance.
South Africa's success story was presented as a beacon of efficient tax management. In 2022, the South Africa Revenue Service leveraged data-driven insights to manage Value-Added Tax (VAT) amid rising fraud risks.
As a result, the administration processed 4.3 million VAT returns, with 90% assessed through an automated system using data and machine learning.
Only 10% of these returns required verification, and remarkably, 75% of verifications were completed within 21 days.
In her concluding remarks, Ms. Baine emphasised the need for ongoing technical assistance and capacity-building efforts in African countries.
The ATAF is dedicated to supporting these initiatives by setting standards, conducting research, and publishing technical guidelines, said Ms. Baine
Strengthening tax administration processes, fostering data-informed policymaking, and promoting a holistic approach to tax policy and legislation are critical steps towards bridging the financing gap and achieving sustainable development goals.