Fiscal woes, global trends driving tax policy reforms

The world is in the midst of a major transformation from an international tax perspective.

Major bodies such as the Organisation for Economic Co-operation and Development and the UN are at the centre of these changes that are meant to seal the gaps that may have been occasioned by globalisation, among other economic changes.

Tax transparency and co-operation are also central to the ongoing discussions as domestic revenue mobilisation takes centre stage.

The Africa Tax Administration Forum (ATAF), supported by other bodies, has been instrumental in empowering revenue authorities across the continent. This is through the provision of training, audit support, and toolkits, among other forms of support, to increase their capacity to administer and collect taxes.

Notably, there is a wave of tax reforms taking place across several countries in Africa. The reforms are driven by a myriad of reasons, including modernisation of the tax laws and simplification, among other factors.

A key factor that cuts across all countries is growth in tax collections. Faced with the reality of constraints in access to grants and aid, numerous governments have resorted to debt-financed economic growth.

Access to debt has, over time, been constrained by a narrow fiscal space as well as the high cost of repayment.

The maturity of historical loans has forced governments to deploy a significant amount of tax collections towards debt repayments. This has left countries with very minimal resources to use towards development. The review of the tax systems is thus largely intended to increase tax revenue collections.

Countries such as Nigeria, Tanzania and Rwanda have in the recent past instituted, while others are in the process of rolling out, major tax reforms.

One of the most notable fiscal and tax policy reform initiatives in the continent has been conducted by Nigeria. In July 2023, Nigeria established the Presidential Committee on Fiscal Policy and Tax Reforms, with one of the key objectives being to address the country’s low tax-to-gross domestic product ratio. Another key objective was the modernisation and simplification of the tax system, including the use of technology for revenue administration.

The committee was also required to harmonise the multiple taxes and levies at all levels of government to a few that are broad-based and easy to administer. In a bid to spur economic growth and promote the operating environment for businesses, the committee was mandated with the responsibility of removing tax provisions that impede business and economic growth.

The mandate of the committee was not limited to tax matters. It was required to address broader fiscal responsibility by ensuring effective utilisation of tax and other revenues for social good to boost citizens’ tax morale, promote tax culture and drive voluntary compliance.

Some of the notable outcomes of the tax reform process include the exemption of small companies from corporate income tax, capital gains tax and levies. Small companies are defined as companies with an annual gross turnover of 50 million naira ($32,507) and below, and total fixed assets not exceeding 250 million naira ($162,535).

Several overlapping levies have been collapsed and consolidated into a single unified development levy.

This simplifies compliance and eliminates overlapping levies. Kenya is also facing the challenge of multiple and potentially overlapping fees and levies imposed by the national and county governments.

The country could devise a unified levy for businesses that meet a certain threshold that is then shared between the national and county governments in an agreed formula.

The Kenya Revenue Authority (KRA) has, over time, highlighted resource constraints as a major hindrance in executing its mandate. Nigeria perhaps provides a learning point for the Treasury as it pushes the taxman to increase tax revenue collections.

The Nigeria Revenue Service will receive a statutory funding equivalent to four percent of total revenue (less petroleum royalty) collected, plus other sources. Such a clear basis of funding for the revenue authority is likely to assist in planning and deployment of the relevant revenue collection measures.

A Tax Ombuds office has also been introduced to liaise with the tax authorities on behalf of taxpayers and serve as an independent arbiter to review and resolve complaints relating to taxes, levies, duties or similar regulatory charges.

The role of the Ombud does not, however, expand to matters that would typically be handled by the Tax Appeals Tribunal, such as the interpretation of tax laws and the determination of liabilities, among others.

Kenya, in 2024, in line with the Medium-Term Revenue Strategy, attempted to undertake a major overhaul of the tax laws, targeting to raise an additional Sh344 billion. The government, however, faced resistance that led to the abandonment of the Finance Bill 2024.

Perhaps the government should learn from the approach taken by Nigeria in overhauling its fiscal policy and instituting tax reforms without resistance from its citizenry. This will ensure that the country achieves its objective of economic growth while carrying along the populace.

The writer is an Associate Director at Ernst & Young LLP (EY)