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Tax evasion : Africa enters a new era of transparency

Tax fraud costs African economies dearly. Illicit financial flows from Africa are estimated at around $60 billion per year, according to the OECD. These funds, diverted through illicit means, could otherwise be used to finance development and reduce poverty on the continent. While significant progress has been made, challenges remain.

By the Editorial Team

According to the findings of the latest Mo Ibrahim Foundation report, illicit financial flows (IFFs) cost Africa about $100 billion per year. The OECD estimates it at $60 billion per year. Tax fraud remains a major challenge for African countries.

African governments are intensifying their efforts to mobilize domestic resources in the face of economic headwinds such as global inflation and rising debt levels. According to data from the International Monetary Fund (IMF), most African countries are expected to reduce their budget deficits this year, which will only be possible if tax revenues increase, as their room for borrowing is limited.

On average, the continent’s budget deficit is expected to shrink to 3.7% of Gross Domestic Product (GDP) this year, down from around 4.1% last year and 4.4% in 2022. At the same time, the IMF projects that the continent’s debt-to-GDP ratio will decrease from 60.1% in 2023 to 58.5% in 2024, indicating that most countries will be reducing their reliance on debt financing this year compared to previous years.

Significant progress has been made through increased use of Exchange of Information (EOI) agreements and Automatic Exchange of Information (AEOI) between countries

Tax revenue losses due to tax evasion and avoidance undermine development efforts and the provision of essential public services. However, significant progress has been made through increased use of Exchange of Information (EOI) agreements and Automatic Exchange of Information (AEOI) between countries, as highlighted by a recent OECD report,  Tax Transparency in Africa 2024: Africa Initiative Progress Report

In 2023, tax revenues collected by African countries through EOI requests increased sharply from $71.5 million in 2022 to $2.3 billion, according to the Tax Transparency in Africa 2024 report published by the Africa Initiative. This dramatic rise is the result of increased use of EOI and AEOI to track down tax evaders hiding funds and other assets in offshore accounts.

Last year, the number of EOI requests sent by African countries to other jurisdictions increased by 67%, reaching 888 requests, up from only 531 in 2022. These requests allow tax authorities to ask other countries for information on the financial accounts, assets held, or income earned by their citizens abroad.

Traditionally, African countries have used EOI mechanisms less compared to other regions. In 2022, they sent 531 requests but received about 683 requests from other jurisdictions. Ten years ago, Africa had issued only 38 requests while receiving an average of 279 requests.

However, this situation is changing. “In 2023, African countries became net senders of EOI requests with a total of 888 requests, the highest number since the Africa Initiative was established,” the report states. Launched in 2014 by the Global Forum on Transparency and Exchange of Information for Tax Purposes, the Africa Initiative aims to strengthen African countries’ capacity to use EOI to reduce tax evasion and increase tax revenues.

In 2023, at least 19 African countries used EOI mechanisms, up from 15 in 2022, demonstrating a growing appreciation for the importance of available tax transparency platforms. Although detailed data on additional revenue for each country is not disclosed, the Global Forum has previously revealed that four countries—Kenya, Tunisia, Algeria, and Nigeria—dominate the requests, accounting for over 90% of all requests made.

This increase in the use of EOI mechanisms comes at a time when most African countries are under financial pressure, with rising debt servicing costs and dwindling aid from wealthier countries. According to the Global Forum, using EOI mechanisms is a crucial way to boost tax revenues in Africa and combat illicit financial flows (IFFs) to end financial crimes and tax evasion.

Progress and ongoing initiatives

In 2023, African countries generated additional revenue through voluntary disclosure programs, the implementation of information exchange mechanisms, and rigorous offshore investigations. Since 2009, these measures have significantly boosted tax revenue, interest, and penalties, highlighting substantial progress in tax transparency across the continent.

The Tax Transparency in Africa 2024 report, released at the 15th Meeting of the Africa Initiative in Lomé, Togo, shows that African countries collected more fiscal revenue in 2023 through tax transparency and information exchange than in the combined 13 preceding years. With €2.2 billion in additional revenue reported by 7 African countries last year, the report underscores the growing importance of tax transparency and international tax cooperation.

Since 2014, 22 African countries have joined the Global Forum, including 5 since March 2023 (Angola, Democratic Republic of the Congo, Sierra Leone, Zambia, and Zimbabwe). Through the Convention on Mutual Administrative Assistance in Tax Matters (MAAC), African countries have established over 3,400 EOI bilateral relationships to foster tax cooperation, covering more than 140 jurisdictions.

Twelve African countries are committed to starting automatic exchanges of financial account information by 2026, and 5 have already begun these automatic exchanges. Eight out of 12 African countries fully reviewed in the second round of EOIR peer reviews received a satisfactory rating (“Compliant” or “Largely compliant”).

More than 2,700 tax officials have been trained on information exchange by the Global Forum Secretariat between 2020 and 2023, including through flagship programs such as “Train the Trainer” and “Women Leaders in Tax Transparency.”

The report emphasizes that international cooperation in tax matters is essential for combating tax evasion and other forms of illicit financial flows. African countries are reaping the benefits of their investment in tax transparency for the benefit of their people.

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