Large Informal Sector Affecting Revenue Collection in Africa

While African countries have made significant efforts to strengthen their tax policy and tax administration capacity, they continue to face the challenges of large informal sectors, and a narrow tax base, particularly in resource-rich countries that makes them vulnerable to unstable resource revenues.

This is according to a new data report from ‘Revenue Statistics in Africa 2017’ released Thursday in Addis Ababa for 21 African countries hosted by the Department of Economic Affairs of the African Union Commission (AUC).

“A major obstacle to tax revenue collection in Africa is the size of its informal sector, that is many companies and workers are not reporting taxable income and mostly not engaging in public administration. Efforts to increase the tax base are undermined by the large informal sector estimated at 38% of the GDP in sub-Saharan Africa,” part of the report reads.

It continues; “there are many factors responsible for this. The informal sector tends to be high in countries where the cost of tax and other regulatory requirements are higher.”

According to the report, the demand for countries to increase their tax bases is even higher if they are to meet the sustainable development goals (SDG) for 2030.

SDG has established ambitious international development goals that demand additional resources to be put forward hence the need for African countries to find solutions on how to reduce its informal sector and also find alternative sources of tax revenue.

However, the future is not bad.

The same report shows that the mobilization of domestic resources is improving steadily in African countries.

The average tax-to-GDP ratio for the 16 countries covered in this second edition of the report was 19.1% in 2015, an increase of 0.4 percentage points compared to 2014.

Every country has experienced an increase in its tax-to-GDP ratio compared to 2000, with an average rise of 5 percentage points.

“African countries are attempting to increase their tax base but it’s not always easy. Over the last decade, the 16 African countries that the report studied have sustained their tax revenue on a weighed average base. This promising trend shows that their tax collecting capacity is robust and not dependant on of volatility of international commodity prices.”

The publication Revenue Statistics in Africa is jointly undertaken by the OECD Centre for Tax Policy and Administration and the OECD Development Centre, the African Union Commission (AUC) and the African Tax Administration Forum (ATAF) with funding by the European Union.

It compiles comparable tax revenue and non-tax revenue statistics for 16 countries in Africa: Cabo Verde, Cameroon, the Democratic Republic of the Congo, Côte d’Ivoire, Ghana, Kenya, Mauritius, Morocco, Niger, Rwanda, Senegal, South Africa, Swaziland, Togo, Tunisia and Uganda.

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