Many African countries can no longer depend on natural resources and foreign aid to supplement their economies. African leaders are increasingly relying on tax collection to offset dwindling revenue, but implementing effective tax collection has remained a perennial problem for the continent. Nigeria has 300 times the population of Luxembourg, but collects less tax. Ethiopia’s tax revenue, if split among all its citizens, would amount to only US$80 per person. Almost every African nation has a similar example of insufficient tax revenue.
The African Tax Administration Forum reports that 78 percent of continental tax revenue is derived from just 6 percent of tax-paying firms. Further study by Giulia Mascagni of the International Centre for Tax and Development and Andualem Mengistu of the Ethiopian Development Research Institute found that small firms end up paying the highest effective tax rate, largely due to an inability to find loopholes in the tax code by hiring accountants.
An Afrobarometer poll found that more than half of all Africans view tax collection as a corrupt racket, with 56 percent believing it “very likely” that a rich person could bribe a tax collector or leverage personal connections to evade taxes. Their suspicions aren’t misplaced: in Uganda, only one out of seventy-one government officials paid any income tax during the 2013 to 2014 tax season, and only 5 percent of directors at principal Ugandan enterprises paid any income tax.
Authorities have begun moving towards administrative reforms with marked success, but these strategies only go so far. Bilateral tax treaties, which in practice hamper effective taxation of cross-border income, cost African countries 15 percent of their corporate tax revenue on average without increasing investment. Tax exemptions also drive down total collected revenue, up as high as 40 percent.
The International Monetary Fund estimates that Africa could increase its revenue by 3–5 percent of total GDP, which is more than they receive through foreign aid. Yet instituting effective reforms has made little to no progress over the years.