Faced with some of the worse debt levels in over a decade, African countries are struggling to find ways to balance their books. Increasing revenue sources from their citizens is an obvious place to look.
A good starting point for African countries would be to focus on the tax contribution of wealthy citizens. This is because the most under performing taxes across the African continent are those bearing on the income of wealthy individuals, namely personal income and property taxes.
The reasons for this are two fold: People who are better off in some countries often remain invisible to tax authorities. This is even though they have higher tax liabilities. Compare this with citizens who have formal labour contracts. Think of public school teachers or supermarket clerks. Their taxes are withheld by their employers. This makes tax evasion impossible. Most taxes on personal income in Africa are paid by citizens in these forms of employment.
In contrast, prior to 2015, only one of the top 71 Ugandan government officials and 17 of the country 60 most successful lawyers paid any personal income tax. Similarly, only 16% of all landlords identified in Freetown, the capital of Sierra Leone, during a registration drive in 2021 had registered for taxes.
This shows that wealthy Africans face lower effective tax rates than average citizens, replicating a trend already demonstrated for the relative tax burden of small and large companies.
This situation is disheartening. But there are immediate steps that African revenue authorities can take to address this unfairness.
Research led by the International Centre for Tax and Development, to which I have contributed, shows that revenue increases from wealthy citizens can be obtained by focusing on better enforcement of existing taxes rather than by introducing new ones or hiking tax rates.
An effective approach to increase wealthy citizens tax contribution relies on three strategies:
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their identification
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a simplification of tax compliance processes, and
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the effective enforcement of existing taxes.
While these suggestions might seem banal, they can lead to some quick revenue gains: as much as US$5.5 million in Uganda or US$900,000 in a single Nigerian state in one year, or tripling property tax revenue collection in Sierra Leone.
But these improvements require changes in the way African revenue authorities operate.
Tax collection services need change of focus
Revenue services in all African countries need to be better resourced. A typical tax officer on the continent might be responsible for as many as 10 times the number of taxpayers than a tax officer in the Global North.
First, their efforts need to be redirected away from the registration of small informal businesses. These efforts have been shown to contribute little revenue in countries as diverse as South Africa and Sierra Leone.
Instead their efforts should be directed a developing a definition of high-net-worth individual appropriate for their domestic context. In Uganda this includes criteria such as having performed land transactions of approximately US$300,000 over five years, or earning approximately US$150,000 in rental income in any given year.
Due to its federal structure, criteria in Nigeria vary across states, for example including an yearly income above Naira 2 million in Borno and Kano state, with the threshold raising to Naira 15 million in Imo state, Naira 20 million in Niger state and Naira 25 million in Lagos state.
However, in both countries criteria also cover less directly measurable assets, such as owning high-value commercial forestry or animal ranches in Uganda, or having received contracts from the government in Nigeria’s Kaduna state.
Property taxes are especially important. Research in Ethiopia and Rwanda shows that investing in real estate represents one of the main strategies to store wealth when inflation and foreign exchange fluctuation make bank deposits unattractive.
These properties then contribute to increasing the income of wealthy citizens who rent them out or resell them for profit. While we lack granular data on capital gains or rental income taxes, there are good reasons to think they are also significantly underperforming. Capital gains refers to the additional value which an investor accrues when disposing of assets such as houses or companies share previously bought at a lower price.
Second, this should be followed by the creation of an office to follow the affairs of high net-worth individuals. This already happens for large taxpayers. Most countries, including the majority of anglophone African countries, have a dedicated office following the tax affairs of large companies active in their territory.
Having dedicated resources for high net-worth individuals would be useful because using the international definition (a net worth of US$1 million) might be hard to operationalise. The reason for this is that most revenue authorities lack detailed data on assets owned by their taxpayers. Even when they know some information, such as the number of houses, estimates of their market value might be lacking.
African countries are better off relying on data already in their possession as they seek to collect further useful information on their taxpayers. This allows the establishment of a set of multiple core and non-core criteria.
Third, high-net worth individual units require substantial backing. In the first instance from revenue authorities’ senior management, who in turn needs to have the support of the government in pursuing often well-connected individuals. This backing is needed for actions as apparently easy as obtaining data from other government agencies, without which identification efforts could be quickly thwarted, and becomes crucial when its time to move to enforcement.
However, a cooperative approach should be the initial choice. One approach is voluntary disclosure programmes with associated tax amnesties. These are useful to obtain information about the assets of wealthy citizens. Additionally, they contribute substantial revenue – as much as US$296 million in South Africa and US$192 million in Nigeria.
Fourth, requiring candidates running for public office to obtain tax clearance certificates can also be an important source of information and revenue. This has been shown to work in both Uganda and Nigeria.
This set of actions represents an optimal starting point for African countries looking to improve the tax contribution of wealthy citizens.
Efforts to produce suitable guidance for wealth taxation for low-income countries by the United Nations, or to introduce a global wealth tax on billionaire by the Brazilian G20, are important to highlight the role of fiscal redistribution in addressing inequality. But many African countries are better off by first being bold about the basics of their tax systems, which can already make them more effective and progressive.
The International Centre for Tax and Development, where Dr Giovanni Occhiali works, receives funding from the United Kingdom Foregin, Commonwealth and Development Office (FCDO), the Gates Foundation, and the Norwegian Agency for Development Cooperation (Norad).
