A framework for assessing and reporting tax expenditures in Africa: Economic Governance Report II

Abstract

Africa is grappling with recovery from the triple crises of Covid-19, the Russia-Ukraine conflict and climate change. Mobilizing the resources to facilitate this recovery effort warrants a holistic approach, looking within and outside the continent, to maximize domestic resources and optimize external resources in line with Africa’s priorities. The focus in this report is on tax expenditures, where governments provide allowances to potential taxpayers that reduce the effective tax base and actual tax revenues collected. The revenue lost through tax expenditures could have been more judiciously allocated among the country’s different development priorities under prudent oversight, ensuring that no one is left behind. This report provides a framework for the effective governance of tax expenditures, including the assessment of the fiscal costs of tax expenditures and reporting. The framework has the potential to inform government consideration of the value-for-money propositions of the expenditures, and to result in expunging unproductive incentives thereby boosting revenue collection. It can also contribute to boosting the continent’s domestic resource mobilization, reducing its vulnerability to debt and volatile external financing, and improve the prospects of meeting its development goals. The report reflects that however tax expenditures are provided (whether through the ministry of finance, line ministry or subnational government), weak governance often affects the process of selecting the right projects to attain the targeted economic and social goals. This report argues that African countries can increase tax revenues by up to 15 per cent of GDP by reforming the governance of tax expenditures with a strategic policy framework. The tax expenditure governance framework should be underpinned by sound legislative and regulatory frameworks for formulating and managing tax expenditure systems.