Cross-Border Exchange of Information and Tax Revenue Mobilization in Africa

2023-02-15 10:03:57 · World Bank

Tax evasion and avoidance generate distortions in tax systems and cause significant revenue losses for African economies. International cooperation is one of the most effective methods of combating tax evasion and tax avoidance. As such, many countries are participating in global initiatives toward the exchange of information between national administrations for tax purposes. This paper provides the first empirical evidence on the revenue effects of tax-related exchange of information for African countries. The regressions are carried out on a sample of 54 African countries on data from 1990–2020. The findings indicate that the exchange of information for tax purposes between national tax jurisdictions has a positive and statistically significant impact on tax revenue. The estimation results show that exchange of information could increase tax revenue collection by a magnitude ranging from 5 to 19 percent. These findings reiterate the importance of international cooperation for combating tax evasion and stimulating tax collection in Africa.

1. Introduction

Tax evasion and avoidance are particularly acute in African countries and deprive governments of significant revenues. The amount lost annually by Africa through illicit financial flows – much of it due to tax evasion – was thought to exceed USD 89 billion in 2020, or 3.7% of the continent’s GDP (UNCTAD 2020). While monetary amounts are daunting amounts per se, they are even more so at a time when domestic resource mobilization has become crucial to face post-COVID-19 increased demands for social expenditure and higher debt loads.

The fiscal stress raised by the COVID-19 pandemic (Coulibaly, 2021), the conflict in Ukraine and climate change adaptation policies suggest that it is imperative for African countries to redouble efforts to increase domestic revenue mobilization (Coulibaly and Camara, 2022). The combat against tax evasion and tax avoidance through strengthened national regulation and increased international cooperation constitute one of the policy options to stimulate tax revenue mobilization (Johannesen and Zucman, 2014).

In fact, informational asymmetry between taxpayers and tax authorities creates opportunities for abuse of the tax system. Accordingly, international tax cooperation through exchange of information (EOI) between tax authorities is a powerful response to the issue, which allows tax authorities to reach out to offshore information sources (Johannesen and Zucman, 2014). The mere availability of information to tax authorities also carries a deterrent effect by reducing the risks of evasion. This in turn enhances public belief in the fairness of the tax system and thus strengthens the motives for tax compliance.

As part of the package of EOI for stimulating self-tax compliance, some countries launched voluntary asset and income declaration before tax administrations activated EOI mechanisms, 3 an initiative that may stimulate tax collection. The impact of the implementation of AEOI has been tangible with around EUR 102 billion in additional tax revenue collected through voluntary compliance mechanisms and offshore investigations prior to the commencement of the first AEOI exchange; approximately 1 million individuals have come forward to disclose offshore assets worldwide (OECD 2019). 4 However, African tax administrations may not have fully exploited revenue potential from the cross-border exchange of information. This may be due to shortcomings in legal frameworks as in the case of Nigeria (Obanina 2016), or because of a lack of technical and human capacities for data mining and data analysis for tax audits (Hearson 2018). In addition, taxpayers may hide relevant information from cooperative external tax jurisdictions when they anticipate that these tax jurisdictions may share this information with a host country tax administration. Taxpayers could also shift their assets that they want to hide from a host tax jurisdiction engaged in the AEOI to tax jurisdictions that are not participating in the international exchange of information for tax purposes.

The rest of the paper is structured as follows: Section 2 presents the stylized facts on crossborder exchange of information (EOIR) for tax purposes in Africa. Section 3 contains the empirical analysis. Section 4 provides key results of our study in detail. In Section 5, we conclude.