New and emerging taxes in Africa and beyond

​published on october 8, 2018 / reading time approx.: 4 minutes

Over the past few years we have seen several initiatives implemented by different governments in Africa and around the world to increase their tax revenues. These new taxation measures have been implemented  to adapt to a dynamic, modern and globalized business landscape environment. In some cases new taxes have been adopted to address gaps in legislation that do not include new sources of income that the government seeks to obtain revenue. Although some countries may have similar tax laws, each country will often adopt different tax regimes tailored to their own individual economic circumstances and government agenda. In this article we'll examine the reasons and rationale behind some of the new tax measures introduced by countries in both the developed and developing world.

Kenya recorded its lowest growth in tax revenue in a decade for the 2016-2017 financial year as per a World Bank report released in 2017. The report noted that while  Kenyan tax revenues grew by 13.3 percent, the tax-to-GDP ratio reduced  to 15.8 percent from 16.9 percent recorded in 2014. The Organization for Economic Cooperation and Development (OECD) estimates that sub-Saharan countries' tax revenues only account for less than a fifth of the GDP, significantly less than that in developed countries. Developed countries' tax revenues account for over a third of GDP on average. As a general guideline, the International Monetary Fund (IMF) contends that a minimum tax-to-GDP ratio of 15 percent is the threshold indicating significant growth and development.

Kenya with its tax-to-GDP ratio of 15.8 percent still lags considerably behind other more prosperous countries in Africa like South Africa and Botswana with ratios of 24.7 percent and 30.3 percent respectively. OECD estimates that half of the countries in sub-Saharan Africa have a tax-to-GDP ratio of 17 percent. OECD also notes that there is a considerable amount of untapped tax revenues in Africa which could greatly assist in fulfilling development agendas of different governments in the region.

For its second term in office, Kenya's ruling Jubilee party adopted the "Big Four" agenda focusing on four key areas. The "Big Four" agenda is estimated to cost KShs 400 billion (US$ 4 billion) and strives to ensure food security, affordable housing, affordable healthcare and promote manufacturing. The government has set ambitious tax revenue targets in order to fund the Big Four agenda. Several tax laws in Kenya have been reviewed and repealed in the past few years in order to streamline the tax administration, improve compliance and increase tax revenues.

In order to fund the government's development agenda, there have been several  changes to tax laws to increase tax revenue. After much wrangling in Parliament, the government passed the Finance Act 2018 which introduced VAT of 8 percent on petroleum products that were previously exempt. The new Finance Act  has also increased  excise duty on mobile money transactions from 10 percent to 20 percent as well as introducing excise duty of 15 percent on telephone and internet data services. A new presumptive tax has also been introduced to replace turnover tax. Presumptive tax will be 15 percent of trade licence fees charged by a County government. The new tax targeted towards businesses that fall outside the annual revenue threshold of KShs 5 million (US$ 500,000) required to register for VAT. All these new changes are designed to expand the tax base and increase tax revenue to cover the government's recurrent and development expenditure.

Across the border, Uganda introduced new taxes in July targeting social media use and mobile money transactions. Ugandans are required to pay a flat excise duty (US$ 0.05) to be allowed to access different social media platforms through the telecommunication operators. The new legislation also provided for 1 percent excise duty to be levied on the total value of mobile money transactions. The new taxes provoked furious opposition from the general public however the government argued that the revenue raised from the new taxes will be used to develop infrastructure, provide free education and free healthcare. However it remains to be seen if the additional revenue will be used for development or to ease the Uganda's national debt burden that has been steadily increasing.

Meanwhile there have also been new taxes proposed in developed countries around the world. In Europe, for instance, there have been proposals introduced designed to target technological firms with significant digital revenues derived from the continent. In March of this year the EU proposed a tax of 3 percent on turnover on various online services in the European Union. The EU estimate that the additional revenue raised from the new turnover tax will amount to US$6.1 billion. The tax is intended to apply to tech companies with annual worldwide revenue of over US$ 920 million and taxable European revenue above US$ 61 million. The EU seeks to increase tax revenues from value-adding activities such as online advertising and online trading that were previously not within the scope of existing tax laws.

These examples of new taxes introduced illustrate some of the ways different countries will seek to obtain additional revenue in the new future. As outlined in this article, developing and developed countries have contrasting approaches to tax administration as well as different uses for additional tax revenue. While developing countries would ideally use increased tax revenue to contribute to development projects, there's also the risk of reducing economic output if new taxes are not applied to the appropriate sectors. In developed regions like Europe new taxes introduced also have the potential to make the business environment unfavourable and thus susceptible to making the region unattractive due to its tax regime. It is therefore important that any new tax measures introduced take into account many different factors to avoid creating unintended economic consequences.

The additional taxation measures introduced in Kenya over the past few years has led to an onerous tax burden being shouldered by businesses and individuals. Furthermore, Kenya's tax-to-GDP ratio has been steadily decreasing over the past few years implying that not enough of the tax revenues are being directed towards growth and development projects that can expand the country's economic base. There should therefore be a more thoughtful and considered approach to the taxation regime to ensure more revenues are directed towards projects that will result in greater economic prosperity for Kenya.