6th Annual Tax Summit: Enhancing tax administration for economic sustainability
04 November 2020
The COVID-19 pandemic has so far prompted some $12 trillion in fiscal action globally -- close to 12 percent of global GDP. But the fiscal response in lower income countries has been smaller, at less than 2% of their GDP, due to tighter financing constraints. Poorer countries need more space to expand these measures that save lives, safeguard economic activity & support vulnerable people and firms. Yet this spending isn’t happening given the massive consequences for public finances, amplified by the revenue loss from the tax base contraction.
Tax measures such as health-focused tax concessions, business-survival measures and direct income protection have helped. But to avoid public debts spiralling out of control, national governments must find additional ways to mobilize domestic revenues. With many countries facing a wall of repayments on their sovereign debt, this is even more urgent for Africa where government revenues at 30% of GDP are lower than in developed economies (40% of GDP), with collection in the poorest African countries down to 20%.
We at UNCTAD believe that international production networks and global value chains can play a stronger role in mobilizing revenue in Africa. We estimate that foreign affiliates of MNEs contribute about 15% of total government revenues, or one fourth of the total business sector tax contributions. This is significantly higher than developed economies. GVCs and international production also stimulate domestic production, supporting revenue collection from domestic enterprises as well – which means they play a role in total in roughly half of total government revenues.
But the disruptions to GVCs and international production caused by the pandemic are putting at risk this pool of domestic revenues for African governments. FDI inflows to Africa declined by almost 30% in the first half of 2020. Greenfield project announcements, indicative of future investment in new productive capacity, fell by around 65%, with cross-border M&As in the region going down by some 45%; the number of deals in international project finance decreased by 50%. This suggests investors are putting a sharp “brake” on vital infrastructural investment in the continent.
African governments therefore need to stay innovative to sustain revenues from international production and GVCs. We believe three major transformations underway hold significant opportunities for enhancing revenue collection by African government.
First, the digital transition merits more attention. Governments can look closely at taxes on digital transactions and digital business. The crisis has accelerated the shift from face-to-face to online interactions. Digitalization across GVCs will become ever more prominent over the coming years. The importance of data provided by developing countries and managed by developed countries MNEs will increase exponentially. The profits of the digital mega-MNEs are expected to skyrocket, boosted by strong network effects. African governments must get their fair share – and they can, by taxing digital transactions and digital business generally – untapping a new revenue pool for Africa.
Secondly, the sustainability imperative must be explored as a new source of revenue. “Pro-SDG” taxes are an important possibility to be considered. MNEs are increasingly adjusting their operations to the sustainability imperative. For transition to the green and blue economy to further accelerate, governments can tax less sustainable MNE activities, such as taxes and royalty payments on depleting natural resources, taxes on emissions and pollution and “sin” taxes on tobacco, alcohol, etc.
Third, more should be done to crack down on illicit financial flows out of Africa. African government can more closely together to close gaps in international corporate taxation and trade mis-invoicing. We estimate illicit financial flows generate nearly $90 billion in lost financing in Africa alone every year, accounting for nearly half the SDG investment gap in the region. We working together to increase transparency in customs systems and tax collection, and by forging a common African position in the international tax debate, governments can renew efforts to bring that $90 billion in lost revenue back to Africa.
