AFRICA: Africa states turn to information exchange to boost tax revenues

Amid increasing fiscal pressures and debt sustainability in African countries, governments are now making use of exchange of information agreements available to them more than ever.

Last year, the amount of tax revenue raised by countries on the continent from exchange on information (EOI) requests increased steeply from $71.5 million in 2022 to hit $2.3 billion, the highest level in over 10 years, according to the Tax Transparency in Africa Report 2024 published by the Africa Initiative last week.

This was a result of increased use of EOI and automatic exchange of information (AEOI) between countries to net tax cheats stashing money and other assets in offshore accounts to evade taxes in their home countries.

In 2023, the number of exchange of information requests sent to other jurisdictions around the globe by African countries increased by 67 percent to 888, up from only 531 in 2022.

Exchange of information requests are appeals by a country’s tax authority to another country for disclosure of data on the financial accounts, assets held or income earned by their citizens in foreign countries.

Traditionally, African countries have utilised the avenues available for such EOI arrangements much less that others. The requests Africa has received over the years has been significantly larger than those they sent, highlighting their slow adoption of the agreements.

For instance, in 2022, countries on the continent made only 531 requests, but received about 683 requests from other jurisdictions requesting information on their nationals. Ten years ago, Africa made only 38 requests, but received 279 requests on average.

This is no longer the case.

“In aggregate, African countries also became net senders of EOI requests in 2023 making a total of 888 EOI requests, the highest number since the Africa Initiative was established,” the report says.

Africa Initiative is a project started by the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2014 to boost Africa’s ability to utilise EOI avenues for them to curb tax evasion and boost revenues.

At least 19 countries utilised EOI avenues last year, up from 15 in 2022, an indication that countries on the continent are increasingly appreciating the need for the tax transparency platforms available to them.

While the data on how much each country raised in additional revenue from EOI is not disclosed, the Global Forum has previously disclosed that four countries — Kenya, Tunisia, Algeria, and Nigeria, dominate the requests made, accounting for over 90 percent of all the requests.

The increased use of these EOI frameworks comes at a time when most African countries are suffering a cash squeeze, as debt servicing costs soar and grants from rich nations dwindle.

According to the Global Forum, utilising these EOI avenues is a crucial way of boosting tax revenues in Africa, and also combating illicit financial flows (IFFs) across the globe to end financial crimes and tax evasion.

“The remarkable additional revenues identified by African countries in 2023 emphasises the relevance of EOI to fighting IFFs from Africa and its potential to generate substantial resources domestically and support other DRM (domestic resource mobilisation) efforts,” the organisation noted in the report.

Latest data from the International Monetary Fund (IMF) reveals that most African countries are expected to narrow their fiscal deficits this year, which will only be made possible if tax revenues increase as their headroom for more borrowing has also grown small.

On average, the budget deficit for the continent is expected to slim to 3.7 percent of gross domestic product (GDP) this year, from about 4.1 percent last year and 4.4 percent in 2022.

At the same time, the IMF expects the continent’s average debt-to-GDP ration to drop from 60.1 percent in 2023 to 58.5 percent in 2024, an indication that most countries will be taming their appetite or debt financing this year compared to previous years.

But these projections by the multilateral lender appears to have put more and more countries on the continent to raise tax revenues as other sources of financing, including aid from richer countries, have also been on a downward trajectory in most countries.

In the region, countries appear to be overstretching their limits to raise more money from domestic revenue mobilisation efforts. Kenya, for instance, last year introduced a raft of new taxes that were expected to lift its ordinary revenues from Ksh2 trillion ($15.4 billion) in the 2022/23 financial year to Ksh2.6 trillion ($20 billion) in the current financial year.

In the coming financial year, Nairobi expects additional tax measures to generate at least Ksh324 billion ($2.5 billion), raising its total tax revenues to Ksh2.9 trillion ($22.3 billion).

In Uganda, the government has introduced several new tax measures for the coming 2024/25 financial year, intended to raise tax revenue by Ush1.9 trillion ($488 million) to fund the Ush58.3 trillion budget for the coming year.

Other countries in the region are also exploring new ways to raise tax revenues to finance their coming year’s budgets, and the EOI approach seems to be gaining momentum amongst them.