International Tax Justice Academy (ITJA) 2014

Facilitator

Cephas Makunikecmakunike@taxjusticeafrica.net

TJN-A

Presentation Overview

SUB TOPICS

• Introduction• What is tax coordination• Harnessing Regional

Cooperation• Tackling harmful tax

competition: Continental and sub-regional Efforts

• Areas of convergence• Areas of divergence and

threats• Conclusion

TAX COORDINATION IN AFRICA

Introduction• The EU is seen in many parts of the world as

the benchmark for economic integration, and consequently as an example of tax coordination among sovereign states

• Tax coordination is increasingly being seen as an enabler for national governments to collect and redistribute funds into projects and programmes that benefit a country, region and the continent as a whole

Introduction cont’d (1) • Involves cooperation in taxation and related

matters with e.g. the creation of a tax database containing detailed information on the tax policies of each country.

• The WAEMU Treaty goes further than the EU; in addition to coordinating the setting of tax rates and bases for the major taxes through regional directives, it mandates the convergence of the tax revenue-to-GDP ratio to at least 17 percent, and the convergence of tax revenue structure

Introduction cont’d (2) • Each country shows to which bilateral tax

agreements they belong and include statistical breakdowns of that country’s revenues from taxation, specified as direct and indirect levies.

• Creation of tax database intended to provide visitors with extensive tax information about each country in order to guide investment in the region among other things

• It also provides a starting point for further research into regional/ African tax data.

Definition of Tax Coordination

• Tax harmonisation, synchronisation, integration, convergence, standardisation, compatibility

• Common policies on taxation• Cooperation in taxation and related matters• co-ordination of policy formulation and

administration

Definition Cont’d (1)• The IBFD International Tax Glossary (Larking,

2005) defines tax harmonization as the elimination of differences or inconsistencies between the tax systems of different jurisdictions, or making such differences or inconsistencies compatible with each other.

• Peggy Musgrave (1989: 14) defines tax harmonization as “the process of adjusting national fiscal systems to conform with a set of common economic aims.”

Examples of Tax Coordination• Examples are based on EAC, SADC & WAEMU• Promotion of the use of excise duty on an ad

valorem basis on luxury goods and services as an alternative to the application of multiple VAT rates or sales tax rates (SADC FIP Annex 3, Article 6, Paragraph 4, );

• Harmonisation of the application of excise duty rates, with particular regard to tobacco products, alcoholic beverages and fuel products (SADC FIP Annex 3, Article 6, Paragraph 5);

Examples cont’d

• WAEMU Directives on value-added tax (VAT) and excises introduced in 1998; and, by 2009, the region completed a set of directives in relation to capital income taxation

Harnessing Regional Cooperation

• As a step towards common policies on taxation, SADC released its Memorandum of Understanding (MOU) on Cooperation in Taxation and Related Matters in 2002

• This document sets out SADC policy on taxation as it relates to the ultimate goals of economic development and regional integration - also appears in Annex 3 of the Protocol on Finance and Investment

Tackling harmful tax competition: Continental and Sub-regional Efforts

• Tax schemes aimed at attracting investment can create harmful tax competition between States, carrying risks of distorting trade and investment and could lead to the erosion of national tax bases

• Tax coordination tackles this by: – establishing and regularly maintaining an online

tax database that provides comprehensive information about countries national tax structures.

Tackling Harmful Tax Competition cont’d (1)

– collaborating on tax incentives that encourage investment, rather than those that reduce transparency or purely act as a vehicle for tax minimisation

– these measures aim to create a clear and transparent system of taxation that harmonises policies to prevent investment barriers and to avoid double taxation

– Development of the expertise of tax officials with support for training programmes and seminars on tax design, policy, and best practices

Tackling Harmful Tax Competition cont’d (2)

– discouraging the spread of tax havens and harmful preferential tax regimes and encouraging those countries which presently engage in harmful tax practices to review their existing measures

– Helping countries move towards the “level playing field” which is so essential to the continued expansion of regional and continental economic growth.

– Development of regional tax guidelines/directives and commentaries which shape good and common tax designs and systems

Areas of Convergence

• There is a general acknowledgement of the benefit of common approaches to taxation with an eye toward dissemination of tax information, capacity building, and agreements on tax incentives that foster investment

• Establishment of a Model Tax Agreement that acts as a common policy for dealing with international partners

• Setting of minimum standards on tax structure and design

Areas of Divergence and Threats• Different tax systems/designs across countries

e.g. some countries have VATs whilst others have sales taxes; for excise duties-different products are excisable across countries

• Different fiscal policies e.g. in extractives, use of specific/ ad-valorem tariff rates for excise duty

• Different economic sizes and priorities

Areas of Divergence and Threats (1)

• Different tax rates e.g. In SADC, at March 2014 the VAT standard rates of Member States ranged between 12% and 20% with eight Member States with rates between 14% and 16%.

• Special Tax Regimes: The Achilles’ Heel of Tax Coordination – investment codes

Divergence cont’d

• coordination framework approach broadly based on the European Union (EU) model of coordination, but differs from it in many regards, including the limited powers and resources of regional institutions

• Different GDPs, inflation rates, tax capacity, tax bases

Conclusion• Tax coordination is envisaged to:– create necessary conditions for long term

establishment of regional/ continental common markets

– facilitate legitimate business and regional/continental trade through fair and efficient tax regimes

– to sustain and enhance African countries’ domestic tax revenues on an equitable, economically efficient basis, economically and neutral way

Conclusion Cont’d

– terming tax competition hence fighting the race to the bottom and tax incentives which result in revenue losses

– succeed in converging tax systems, particularly statutory tax rates,

– contributing to improving revenue mobilisation• The credibility of the coordination framework

depends in large part on the credibility of its regional institutions

THE END

THANK YOU!!