The GFG Round-up includes a summary of interesting stories drawn from the latest news, blogs and debates relating to public financial management in Africa. It will also cover the work of the GFG in Africa portfolio, as well as debates taking place in the world of public finance and international development. This month we cover five recent stories relating to offshore tax evasion, debt, state fragility, payroll fraud and taxing of high net worth individuals in Africa.
By Rudzani Manenzhe
1. High tax rates for the wealthy
South Africa has raised a tax on high income earners to strengthen public finances by creating a new top income tax bracket of 45%.A recent blog by Public Finance International reports that the new top tax income bracket is expected to raise an additional R16.5 billion for the National Treasury in the 2017/18 tax year. South Africa’s new tax may also do something to address its highly unequal income distribution. Most studies reveal that taxing the rich is not enough to significantly reduce income inequality. A recent report by the IMF,Fiscal Monitor, indicates that an appropriate combination of fiscal policy, which takes into account country-specific factors, can tackle income inequality. A book by Thomas Piketty, a French economist, points out that the capital to income ratio will continue to increase when the rate of return on wealth significantly exceeds the economic growth rate and therefore suggests a global tax on wealth to address unequal distribution. Good Financial Governance in Africa programme stresses the importance of boosting compliance of high net worth individuals as taxing the wealthy generates revenues, and may increase the welfare of a society through redistribution of wealth.
2. Mozambique government debt crisis
Mozambique is under financial pressure following a debt scandal that revealed undisclosed loans provided to state-owned companies over the value of USD 2 billion. As a result of the hidden debt, financial aid from IMF and other 14 donors has been put on halt. IMF stood firm on reinstating its economic programme on condition that the government publishes an audit report by the state appointed audit firm Kroll LLC. Strikingly,the audit report, published June 2017, shows that the companies failed to account for about USD 500 million. The IMF rated the report unsatisfactory, demanding the companies to come clean. This case raises important questions as to how African countries can manage their debt. A blog post by CABRI shares insights on how debt can be accumulated at the lowest possible rate and at an acceptable level of risk, were they highlight that effective management of public debt and funding of a country’s annual borrowing requirements ensures financial stability.
3. Tackling government payroll fraud
In 2016, Nigeria’s pilot audit programme used Bank Verification Numbers (BVN) to identify approximately 24 000 non-existent workers or “ghost workers” that were on the government’s payroll. Consequently, the wage bill had reduced by 2.29 billion naira (USD 11.5 million). The finance ministry will continue using BVN to verify the government’s payroll database (Public finance International). This is not only limited to Nigeria, it is a problem faced by most governments and businesses in Africa. Ghost workers are hard to detect once they are in the system; it is therefore important to have the right preventive processes in place. A study (p75-81) by Katuka Yaki highlights that ghost workers can be avoided when strong internal controls are in place (controls over inventory management, cash disbursement and receipts of revenue, etc.) through separation of duties.
4. Fragile states: strong fiscal institutions vs. state-building
Capacity building in fragile states is no easy task. Many countries classified as fragile states remain vulnerable to recurrent political, social, environmental and economic instability and conflicts. The OECD (2010) argued that development partners tend to focus more on the technical side of reform (institutional and capacity development) and pay less attention to state-building (security, justice and political reform), which they perceive plays a more critical role in strengthening public finance of fragile states. However, a policy paper by the IMF , which shows how states can build capable fiscal institutions, finds that fragile states that have received technical assistance have shown improved fiscal performance. The paper stresses that developing a reform strategy depends on the stage of fragility. When countries emerge from conflict or disaster stage, IMF recommends country to put effort in obtaining control over the budget, and thereafter focus on developing medium-term revenue and expenditure strategies once they become more stable. Similarly, a study by GIZ Sector programme found, among other findings, that achieving progress is possible in acute crises and institutional change can be better supported through responsive and flexible methods that allow for an iterative approach to change. A recent paper by the ODI points out that even though there is no causal evidence of a positive effect of fiscal governance on state-building and vice versa, most countries that show progress or stability had, at some point, capable fiscal institutions. Most research concludes that although most countries have progressed over the years, most of them have not made their way out of fragility as it is a process that yields sustainable results over a long period of time.
5. Offshore tax evasions
A new leak,Paradise papers, reveals 13.4 million documents from more than 19 tax secrecy jurisdictions including multinational enterprises and high net worth individuals. This comes second to the Panama papers that were leaked over a year ago. Although there are legal reasons for using offshore accounts, some companies use them to commit tax fraud. A recent study on tax evasion and inequality found that wealth that is hidden away is 10 per cent of the global GDP .They also found that tax havens are a major contributor to wealth inequality. The top 0.01% if households in Britain, France, and Spain hold 30-40% of their wealth in tax havens. In light of these papers, there are a number of tools that have been developed to deal with tax abuse. The OECD’s CRS (Common Reporting Standard) is one tool to fight tax evasion, which recently signed 102 jurisdictions (Panama included) to commit to automatically exchange information on offshore financial accounts to the tax authorities of the accounts holders’ residence country. However, Tax Justice Network found loopholes, such as faking residency to bypass the CRS. African Tax Administration Forum (ATAF)’s African Tax Outlook (ATO) 2017 which includes inputs of 21 national tax authorities provides evidence-based recommendations to reform tax policies and tax administrations in Africa.
Contact: Mr Yanis Kuehn von Burgsdorff (email@example.com)