TJN-A Newsletter

Africa Ta x

2012, second quarter, volume 3

SpotlightQuarterly newsletter of the

employees, though most are really just self- employed individuals. The International Labour Organisation (ILO) thus defines the informal sector as one characterized by ease of entry, reliance on indigenous resources, family ownership of enterprises, small scale of operation, labour-intensive and adapted technology, skills acquired outside the formal school system, and unregulated and competitive markets. There is however need to broaden these definitions to reflect the reality of many Africa countries.

When talking of the informal sector the first picture that comes to mind for many is the micro and small business such as hawkers and street vendors. The truth however is that the informal sector in many African countries encompasses a wider section of the economy

Taxation and the Informal Sector

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In this issue, we bring you discussions, cases of international best practices and experiences from around Africa and beyond, on how best to rope into the tax bracket this vital sector of the economy. Most African countries are losing out on this crucial source of revenue yet it contributes greatly to their GDPs. The East Africa, Ghana, and Zambia cases presented in this edition all highlight this fact.

There seems to be a consensus that African governments and their tax authorities would have to work around the clock to bring the informal sector into the tax bracket. Efforts by governments to widen the tax base will greatly increase revenue leading to a reduction in the reliance on donor funding and also in incidences where governments are forced to increase taxes on basic commodities. But a large chunk of this sector continues to slip through the noose of tax authorities, even as governments grapple with the complex problem of how to avoid this. Some recommendations have been put forth in the highlighted cases, on how to address this issue.

What then is this tricky informal sector? In layman terms, the informal sector can be defined as income generating enterprises that operate on small scale using simple skills and are not tied to any government regulations. The difference with the formal sector is mainly the regulation bit. The informal sector mainly operates on small scale on a subsistence level with fewer

Welcome to the 10th edition of the Africa Tax Spotlight, themed Taxation and the Informal Sector. In

his book, A tale of Two Cities, English novelist Charles Dickens writes, “It was the best of times, it

was the worst of times, it was the age of wisdom, it was the age of foolishness…. it was the spring

of hope, it was the winter of despair…”. How apt this statement seems to be in describing Africa in these

times of global recession, economic boom on the continent, and decreasing foreign aid. It indeed seems to be

times of economic uncertainty. In the midst of it all, taxing the booming informal sector presents the hope of

generating extra income to make up for the deficit in tax revenues, yet (as you would find), this is not without

its problems. The famous example of Mohammed Bouazizi comes to mind. He is the Tunisian fruit vendor who

self- immolated in protest of harassment by the authorities, and whose death led to the Arab spring.

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Contents

Guest editor: Ann NjeruSupporting Editor: Sally Deffor

Email: infoafrica@taxjustice.netPublished by the Tax Justice Network Africa, Nairobi Secretariat©TJN-A www.taxjusticeafrica.netLike us on Facebook: http://www.facebook.com/TaxJusticeNetwork-Africa(TJN-A)Follow us on Twitter: https://twitter.com/TaxJusticeAfric

For free circulation

the informal sector in Africa as a percentage of GDP was 42 percent in 2000, and accounted for 48 percent of the official labour force on the continent. Zimbabwe, Tanzania and Nigeria had by far the largest informal economies with 59.4, 58.3 and 57.9 percent respectively, and Mozambique, Côte d’Ivoire and Madagascar in the middle with 40.3, 39.9 and 39.6 percent. At the lower end are Botswana with 33.4 percent, Cameroon 32.8 percent and South Africa with 28.4 percent.

The benefits of taxing the informal sector are two-fold: it increases government revenue as well as recognizes the sector as a legitimate source of economic activity which in turn increases economic participation. This means that the sector will be included in economic infrastructure, service provision and other development initiatives all which in the long run, will spur economic growth.

For Africa to achieve tax justice, government would have to focus on broadening the tax base. One of the ways to achieve this would be to tax the informal sector. A move to tax the informal sector will most likely encounter resistance, but when governments are more accountable to taxpayers through the provision of essential services such as water, sewerage systems and security, this resistance is likely to be significantly reduced.

In my opinion, most of these enterprises pay fees to local authorities in the areas where they operate, so it shouldn’t really be hard to net them. This said, the cash-based system that leaves no paper trail makes it difficult for tax authorities to estimate exactly how much revenue is earned thus making non-compliance easy on the part of actors in this sector.

In this edition, we explore the different modalities of taxing this sector which will surely bring us closer to an understanding of taxation issues and tax justice in Africa. A research paper presents the challenges, possibilities and remaining questions of taxing this sector while taking a political view. An article by Apronius Mbilinyi takes us through the growth of the sector, the importance of taxing it as well as ways of doing it, in presenting the case of Tanzania. Nana Yaw Saa Aboagye from Ghana draws linkages between gender and the informal sector in taxation while making reference to a study conducted by the Ghana Integrity Initiative (GII).

In the News and Events section, we bring you the launch of the tax competition studies in East Africa as well as the launch of the Malawi Tax Justice Platform. Semkae Kilonzo, in the Profile Section, tells us more about the Policy Forum- a member of TJN-A.

Enjoy. Ann Njeru Tax Justice Network-Africa

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Editorial

• Whyweshouldtaxtheinformalsector

Report

• TaxingtheInformalEconomy:Challenges,Possibilities andRemainingQuestions

Articles

• Taxationintheinformalsector:thecaseofSubSaharanAfrica

• TaxingtheInformalSectorinGhana

• MakingEffectiveTaxationoftheInformalSectoraReality

• Taxingtheinformalsector:WhatshouldZambiado?

TJN across the globe: News and Events

• 12thAWID(AssociationforWomen’sRightsin Development)InternationalForum

• LaunchoftheTaxCompetitionStudiesinEastAfrica

• RegionalLaunchoftheTaxCompetitionStudyinEast Africa

• LaunchoftheKenyaCountryReport

• LaunchoftheTanzaniaCountryReport

• LaunchoftheMalawiTaxJusticePlatform

Profile

• MemberProfile:PolicyForum

beyond the above mention group. Increasingly many Countries in Africa businesses in sectors such as housing, public transport and other related service industry operate under the guise of informal sector purposefully to escape the tax net. Many of this business draw incomes much higher than those in the formal employment such as teachers and other civil service employees and yet do not pay the due taxes.

Several methodologies are used to measure the informal sector, including statistical, household and operational (size and non-regulation) methodologies. According to Schneider (2002) the average size of

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Challenges, Possibilities and Remaining Questions1

In recent years, there has been increased attention paid to the question of taxing the informal economy. Despite the growing interest, our survey of the literature on taxation of the informal economy suggests that it has largely focused on technical issues. In this paper we argue for research to take a more political view of the need for, and challenges to, taxation of the informal economy in addition to the technical perspective that focuses on economic and administrative considerations. Understanding the politics of taxation, the incentives for various stakeholders and the institutions that underpin tax regimes is key to successful taxation of the informal economy where questions of legitimacy and willingness loom large. Potential benefits of successful taxation in this arena include advancing the policy agenda of tax reforms and revenue, the economic agenda of encouraging growth and the governance agenda of strengthening accountability and legitimacy of the state.

This paper correspondingly has three main aims: i) to survey the literature on what we do know about taxing the informal sector and take stock of the state of the debate; ii) to analyse some recent, relatively unexamined attempts to extend taxation to the informal economy, particularly in Africa and iii) to tap into new thinking about how to strengthen informal sector taxation and identify key agendas for future research.

The paper begins by tracing the historical evolution of the term ‘informal sector’ and outlines its present, widely accepted meaning as: firms that fail to comply with legal requirements of registration, taxation and meeting various labour, environmental etc. standards. We show how there is a continuum between very small subsistence level enterprises and larger, almost legal enterprises. The paper is focused on taxation options appropriate for small firms and self-employed businesses with potentially taxable profits that are above subsistence level and yet smaller than fully formal firms for whom standard tax regimes are appropriate.

We then ask the question, should governments devote scarce resources to raising revenue from this micro, small and medium enterprise sector? There are three main potential benefits of informal

sector taxation: revenue, growth and governance. The sector forms a large and growing share of the GDP, and, given the fiscal constraints of developing country governments, is an attractive option for raising additional revenue. Moreover, taxing the informal sector may be essential to sustaining ‘tax morale’ and a sense of fairness in taxation among the formal sector firms as well. With respect to growth, there is some evidence to suggest that formalization of informal sector firms may accelerate growth and may have broader benefits for existing formal sector firms as well. Finally, with respect to governance the payment of taxes by firms in the informal economy may be a way of engaging with the state, and could lead to better governance and improved political accountability.

Turning to the practice of informal sector taxation, we argue that relatively standard international advice has focused on a combination of taxing firms indirectly, imposing withholding taxes and developing specialized presumptive tax regimes. The simplest option for taxing small informal sector firms has been to reach them indirectly, relying on the fact that they will bear the costs of VAT and trade taxes paid higher up the value chain. An alternative strategy has been reliance on withholding taxes, with larger firms required to withhold taxes on their transactions with small firms, which is then remitted to government and credited against the future tax liabilities of those small firms. Finally, most governments have now implemented simplified presumptive tax regimes,

Taxing the Informal Economy:

1 This paper was prepared for the DFID-funded International Centre for Taxation and Development at IDS. We are grateful for comments from participants at the ICTD annual conference in June 2011 on a presentation based on an earlier version of the paper. Special thanks are particularly due to Mick Moore for comments on an earlier draft. Matthew Benson provided excellent research assistance.

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which rely on simplified calculations of tax liabilities based on the observable characteristics and turnover of small businesses. These various strategies are unified in seeking to find solutions to the joint problems of high mobility and weak record keeping among small firms, though specific models of presumptive taxation in particular vary significantly across countries.

While these broad strategies are widely accepted, our review of the literature suggests that they have made limited progress in strengthening taxation of small informal sector firms in practice. In seeking to understand this continuing challenge, we consider a growing literature that focuses on the barriers to tax compliance among informal sector firms. Most notably, there has been increased attention to the costs and benefits to firms of tax compliance and broader formalization. Increasing numbers of surveys in particular have shed light on the costs of tax compliance and on the potential costs and benefits of formalization for small firms. This ‘cost-benefit’ approach has argued for reducing costs while increasing benefits in order to encourage compliance, but in practice most attention has focused on reducing the direct costs of tax compliance, through, for example, simplified registration, to the neglect of broader costs and benefits. The ‘empowerment’ approach to formalization offers a partial alternative; highlighting the need to strengthen the ability of informal sector firms to operate in the market through policy measures such as improved information and skills, secure property rights and legal empowerment.

While these frameworks offer a starting point to understand the practical difficulties of expanding informal sector taxation, we argue that they also leave many questions unanswered. In terms of encouraging compliance, two big questions demand attention. First, what types of positive inducements to tax compliance – such as access to credit and training, greater security of property or protection from harassment by police and local officials – are most important to micro and small firms? Second, how can states and governments more effectively promote collective action among informal sector operators, and provide institutional channels for bargaining with them, in efforts to build trust and encourage tax compliance and formalization? Together,

these questions represent important directions for extending existing research and policy practice.

However, we argue that an understanding of the barriers to more effective informal sector taxation equally demands broader attention to political incentives and institutional factors. Quite simply, as it stands neither taxpayers, tax administrators nor politicians have strong positive incentives to strengthen informal sector taxation; there is a corresponding opportunity to think about how these incentives may be shifted. One possibility is that the adoption of policies aimed at increasing the benefits of voluntary tax compliance may,

by addressing the needs of informal sector operators, also make reform more politically feasible and attractive. Efforts to foster effective collective action among informal sector associations, and open up institutional channels of negotiation between informal operators, larger businesses and governments may similarly ease expanded taxation.

It is equally possible that administrative and institutional reform related to the collection of informal sector taxes may be able to not only address narrow administrative shortcomings, but also shift incentives among taxpayers, political leaders and administrators alike. Recent years have seen several countries experiment with different approaches. In Tanzania, the revenue authority is piloting the Block Management System that concentrates resources on one geographically defined block at a time, with the aim of identifying potentially taxable firms and nurturing a culture of taxpaying. In Rwanda and Cameroon, governments have focused on improving taxpayer services for small enterprises and engaging through newly created institutional spaces. Strengthening tax and expenditure linkages through budget transparency is another strategy currently pursued in Sierra Leone. The Ghanaian government has attempted what we call ‘associational taxation’—negotiation with informal sector trade associations to help

An alternative strategy has been reliance on withholding taxes, with larger firms required to withhold taxes on their transactions with

small firms, which is then remitted to government and credited against

the future tax liabilities of those small firms

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collect presumptive income taxes. Uganda and India have experimented with auctioning tax collection rights in the informal economy to private firms. In Cameroon and Ethiopia, national tax authorities are talking of ceding tax collection of small and micro enterprises to local governments. Despite this flurry of trials, apart from a few cases, there is little empirical research into the motivation for these efforts, and their outcomes, making this an important area for future research.

While we thus speak to possible strategies for strengthening taxation of the informal sector, we equally highlight much that remains to be learned about the broader development implications of such taxation. First, there is some evidence that taxing informal sector operators is important to building ‘tax morale’ and a culture of compliance, both among small firms and within the economy more broadly, though there remains scope for more detailed evidence to support this highly intuitive claim. Second, there is growing evidence that taxing the informal sector can be important to economic growth, by encouraging the growth of small firms, and creating a better overall business environment

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for formal sector firms. However, there remains scope for greater research to understand how large these effects are, which firms are most likely to benefit and, perhaps most interestingly, what specific policies for encouraging formalization may be most important to promoting longer term gains in growth. Finally, significant recent discussion has focused on the potential for informal sector taxation to prompt state-society bargaining and broader governance gains, but evidence remains relatively limited. There is thus significant scope for research looking at the potential for informal sector taxation to spur collective action and bargaining. There is equally a need for research into the potential for informal sector taxation to spur broader investments in building related state capacity, be it in the realm of policing, the provision of basic services or the development of institutions of dispute settlement.

‘The report can be downloaded at http://www.ictd.ac/en/publications/taxing-informal-economy-challenges-possib ilities-and-remaining-questions-publication’

Taxation in the Informal Sector:

In most Sub-Saharan African (SSA) countries, revenue collection is negatively affected by the existence of a large and growing informal sector, high tax evasion, and weak tax administration (ESRF, 1997; Tadesse and Taube, 1997). Raising tax revenue is a major concern for most developing countries; this is because not only is their tax revenue collection level small, but also the tax compliance is said to be low (Tripp, 2002). Much of the economic activities in developing countries occur in an informal sector that is beyond the control of the government (Peñalosa, 2004). Many scholars have tried to define the informal sector concept as the economic activities/transactions which are not captured or are under-reported in the official statistics.

The 1972 ILO report on Kenyan unemployment was the first step to popularize the informal sector concept, the report defined informal activities as ‘all economic activities that are neither monitored nor taxed by the government, and are not included in the government GNP statistics’ (ILO, 197�:�).’ However, up to the present time, there is no universally accepted definition for informal sector; s because of its diverse characteristics. There are other names associated with informal activities such as, black economy or activities, shadow economy, the hidden economy, irregular, unofficial economy, etc. The sector is informal in the sense that actors are mostly un-registered, so mobile, small-scale, not recorded in the official statistics, have little or no access to the formal markets for goods and services etc.

The Case of Sub Saharan Africa

Anuradha Joshi (IDS, Sussex) Wilson Prichard (University of Toronto) Christopher Heady (University of Kent)

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One of the overriding consequences of structural adjustment programs (SAP), in Tanzania and other developing countries that started in 1980’s, has been the shrinking of the formal sector employment and the expansion of the informal jobs (World Bank, 2007)3. This has arisen particularly as a result of economic reforms that started in the 80’s (Tripp, 2001 &2002). This resulted in among other things, the public sector reform that led to massive retrenchment of labour as most of the Government enterprises were privatized, since then the sector has been burgeoning over time. In Tanzania for instance, the increase of the sector has been a result of several factors: first, the public sector changing from being the major employer and subsequently retrenching a mass of employees who joined the informal sector as self-employees. Secondly, the inability of most workers to survive from the low income generated from the formal jobs. Third, the inability of the labour market to absorb college graduates and rural-urban youth migrants as new employees, hence joining the informal sector as well. Further, lack of social safety nets such as unemployment insurance and low pension schemes, as well as the absence of a conducive business environment which may include cumbersome procedures for business registration

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2.0 Growth of the Sector

The informal sector in Tanzania and other East African countries consists of mainly the unregistered hard-to-tax groups of activities such as small scale traders, famers, small-scale manufacturing operations, craftsmen, businesses in the service sector; tax and truck drivers, motorcycles drivers popularly known as Boda-boda and Bajaji in Tanzania, garage owners, repair workshops, restaurants and foods vendors, barbers, and small scale miners. However the current trend indicated that individual professionals such as lawyers, doctors, accountants, economists, engineers also work informally. The sector growth in many developing countries such as Tanzania and other EAC members is estimated to be very large2 indicating that when they are not taxed, a substantial revenue may be forgone (Taube, et al., 1996). Due to the features and characteristics of the sector that include among others, mobile nature, small scale operation, cash transaction and unwillingness to keep business records; it is very hard to tax the sector’s actors (that is why the sector is also known as ‘the hard –to- tax sector’).

to make the businesses formal, stringent business regulation, existence of unfriendly tax regimes, and inadequate formal business premises etc. (ESRF and TBC, 1997).

According to Tanzi (1982&1999), the key determinant factor for the increase in informal activities is the rise in tax and social security’s burdens (see also Kemal, 2007 and Christopoulous 2002). The increase in tax rates forces people to involve in activities where they can earn more income and pay less taxes. Schneider and Enste (2000)4 found that the bigger the difference between the total cost of labour in the official economy and after-tax earnings, the greater the incentive to avoid this difference and work informally. The difference mainly depends on the social security system and the overall tax burden.

Johnson et al.(1998) observed, inter alia, that countries with more regulation tend to have higher share of unofficial economy in total GDP. Friedman, et al. (1999) proved that more regulation is correlated with large informal sector, while Johnson, Kaufmann, and Zoido-Lobóton (1998) find that countries with better rule of law tend to have smaller unofficial economy, and transitional countries have higher level of regulation leading to higher bribery incidence, tax rate on official activities and large discretionary framework of regulation and consequently large informal activities (Kemal, 2007).

2 The ILFS 2006 indicates that the sector has grown from 35% to 40% of the GDP between 2001 and 2005 (URT, 2006) 3 A study on economic growth in Africa found a decline or stagnation of formal sector employment and increase in informal sector activities in the 1990s (World bank, 2007) 4 According to Penalosa and Turnovsky (2004) , excessive taxation in the formal sector is distortionary as they shift capital and labour towards the informal sector.

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(i) Revenueneeds – According to Joshi and Ayee (2008), research has indicated that the revenue lost from not taxing the informal sector amounts to 35-55 per cent of the total tax revenue in some countries (also see Alm et al.(199�)). In Tanzania, the study conducted by ESRF and TBC indicated that tax revenue collected is about 30-40 per cent of the potential revenue amount (ESRF&TBC 1997). There is no recent study to know the current status. Taxation in this sector could help reduce the government-donor budget dependence5.

(ii) SizeandGrowthofthesector – Though the statistical figures do not exist, are controversial or contested, the sector is growing in absolute and relative terms (Joshi and Ayee 2008 & World Bank, 2007). Studying the sector in Tanzania, Bagachwa and Naho (1990) discovered that

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3.0 Why Tax this Large and Highly Growing Sector?

Many scholars working on tax policy regard taxation in the informal sector as difficult, hence less attention and interest is given to it. This because taxing this sector requires enormous effort and limited returnsare realized (Joshi & Ayee 2008). The following factors explain why taxation in this sector is to be given more attention in the EAC countries at this moment:

the size of the informal economy constitutes almost half of the real official GDP; the figure ranging from 25% in 1969 to 51% in 1985, and currently estimated to be 40% of the official GDP (URT,2006), it employs many people and grows rapidly. In Kenya, it is estimated at more than 30% of the GDP and grows more than the formal sector. Hence it is clear that the informal sector is important to our economies as it employs more of the labour force.

(iii) ImpactofInformalsectorintaxcompliance – Ignoring the informal sector activities lowers tax payment morale and increases the risk of tax non - compliance in the formal sector (Josh and Ayee 2008). This is because researches have indicated that formal tax payers perceive the state as being unfair by not taxing the informal sector (see World Bank, 2007))6. The experience from Latin America indicated that tax compliance is inversely related to the size of the informal sector. In Tanzania, studies indicated that, one of the reasons why some people work informally is because they don’t have to pay income (direct taxes) tax and other regulatory costs. If this is true, this may lower tax compliance in other sectors.

(iv) DemandfromtheInformalsector - Researches and other evidences show that tax evasion is not the primary reason for

5 According to the Government Budget Estimates for FY 2011/12, 18% of the overall government budget and 70% of the development budget is to be financed by Donors. 6 Gloppen and Rakner,(2002) In their study in Tanzania, Uganda and Zambia they found that the business community feels that the tax administration has concentrated on only few known corporate taxpayers rather than on effort to widen the tax base; This leads to general perception that the tax system is unfair and tends to reduce tax compliance for large businesses(World 2007).

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people working informally7. Informal sector participants are willing to pay taxes especially when the payment is exchanged with their legitimacy, predictability and protection from arbitrary harassment from state agents (Baro et al., 1992).

(v) Statelegitimacy- Broadening the tax base to include the informal sector may not only increase revenue to the developing countries such as Tanzania and other EAC countries8, but also increases compliance, accountability and improves states legitimacy (Bräutigam et al., 2008

&World Bank, 2007). This will make the government more responsible to the citizens as it is run from locally-earned revenue; more revenue collection enhances capacity for the state to provide public goods. In this case therefore, taxation acts as a link between the state and the citizens; when this sector is not taxed that link might not exist.(Easter,2002).

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4.0 How can we Tax the Informal Sector?

Despite the hard-to-tax nature of this sector in Africa and other developing nations, Joshi and Ayee (2008) suggested that among others, direct presumption taxation, could be applied to fit the informal sector characteristics. Various presumptive taxation systems have been applied in many developing countries in the past and still are; where standard, estimated and minimum lump sum tax assessment systems are common methods of taxation for informal activities.

The occupational and sector-specific standards assessment is a fixed lump sum tax payment to be paid by persons or enterprises engaged in a certain business or profession. Ghana was among the first countries to apply this method in 1963, followed by countries such as Nigeria in some states; Mozambique, Lesotho, Sierra Leone and Ethiopia applied this approach for more than 150 different businesses (Taube et al 1996).In Burkina Faso, this was applied to collect specific amount from all businesses activities with a turnover less than a stated amount as informal sector tax contribution, while in Gabon, a lump sum standard assessment (impot forfaitaire sur le revenue) was used to tax small businesses, traders, and individual transport operators. The Standard assessment system stated above seems to be a solution for informal taxation. However, it is not a favoured taxation system in public finance literature and by tax administrators as it results in poor revenue performance in almost all developing countries, due to the fact that the method is based on average income on occupational groupings and not true averages. Moreover, the levies were rarely indexed to inflation or changing economic conditions.

The Estimated lump sum Assessment System is another way to tax informal activities. This is an indicator based system where the tax liability is estimated on observed features or indicators such as business size, premises, skills of and number of employees, location, energy and water bills, service

7 The ILFS 2000/01 indicated that many informal employees work in the sector because they can’t find jobs in the formal sector and for businesses participants, the reasons was that informal business does not require much capital for establishment. Moreover a study in some local government authorities in Tanzania has indicated that tax payment willingness is not a big problem for revenue collection, but trust, misuse of funds and poor public service delivery are among problems negatively affecting tax compliance (Fjeldstad, 2004). 8 The absence of well design tax system to include the informal sector and SMEs creates a missing link from narrow tax base and weak citizenship prevalent in many developing countries, such link exist in OECD strong Democracies (Lledo et al. 2003 and World Bank 2007)

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capacity of the business such as a restaurants, hotel rooms, number of seats in transport vehicles etc. From African country’s experience, this method has been applied in Angola, Tanzania, Kenya, Uganda, Chad, Zambia, Malawi and Madagascar. Although this system is favored to standard assessment, it has a number of disadvantages. First, it tends to rely on indicators such as capital and labour, this means that excessive application leads to not taxing income but factors of production. The incidence of tax falls on factors of production that may limit application of capital and in case of labour, may limit employment. Moreover, the method involves some element of discretion on assessments that may invite corruption and inconsistencies, such that taxpayers with similar level of income may end in different tax burdens or equivalently, taxpayers with different income levels required to shoulder the same tax liability; hence presumption taxation may violate horizontal and vertical equity considerations.

The presumptive minimum taxes were being levied based on the assumed minimum income level in a given year, in some countries. This tax system was

used to assess the minimum corporate profit tax liabilities which may be graduated yearly and was known as a lump sum levy. For instance in the 1980s in Benin, all companies regardless of their size or volume of operation had to pay a minimum tax of CFA F 200,000. But in Cote d’ Ivoire, the amount was a bit higher. In contrast, for countries like Equatorial Guinea, Malawi, and Senegal, the amount was uniform for all companies but rose gradually depending on turnover. Another type of minimum lump sum tax is based on percentage rate on gross receipts, where only few apply it; countries such as Ghana, Guinea, Niger, Sierra Leone and Togo apply this.

The other method is the lump-sum minimum plus a percentage of gross receipts applied in few countries such as Madagascar. The greater of the lump-sum levy and a specified percentage of gross receipt was applied in some Francophone West and Central African countries such as Burkina Faso, Cameroon, Comoros, Congo and Gabon. This is calculated as % of gross profit, % of net assets, paid up capital, turnover, whichever is the highest (Taube, et al., 1996). Some countries applied this system to tax individuals’ incomes, i.e. professionals and the self-employed. These countries include: Burkina Faso, Burundi, Zambia, Chad, Gabon, Niger Nigeria, Cameroon, Tanzania, Uganda, Kenya, Ghana, Central Africa, Congo and Equatorial Guinea, where minimum taxes and individual’s assumed ‘personal income of professionals’ turnover is applied as a base. This method was motivated by the fact that government could get substantial income tax from lucrative activities that seem profitable such as mining activities and multinational companies that often show loses for income tax purposes; it also acts as a safeguard against complete tax evasion and underreporting of profits (Alm, et al., 2004).

Although presumption minimum taxation is regarded as an effective instrument to raise more revenue in informal businesses, employment and lucrative businesses, more innovation in this taxation method is still needed to suite the current environment. Measures may include improving the business environment, improving tax audits, monitoring and enforcement for tax compliance, and incentives to informal operators can be given for tax registration. Education on tax compliance and more importantly, education on how tax revenue contribution can improve public goods provision could also help.

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Although broadening the tax base to include the informal sector is a challenging issue, Joshi and Ayee (2002), provided the Ghanaian case study where associational taxation for informal transport operators was applied to collect tax revenue from informal activities. The government of Ghana employed the use of a Sticker System, tax stamp, offering incentives and also use of presumption taxes. However, all could not produce the expected results, as concluded “there is no single mechanism for taxing the informal sector, but a combination of approaches; prospects for making a significant advance is not bright, however, efforts must continue”.

allows individuals or firms to pay previously unpaid taxes without being subject to criminal penalties.

VII. For curbing tax evasion and enhancing voluntary compliance by tax evaders (including informal actors), TRA has taken deliberate initiatives to receive information from different parts of the country (known as Whistle- blowers Mechanism)

VIII. Close monitoring and rigorous enforcement for tax compliance by all taxpayers etc.

The theories and the empirical literature have indicated the importance of taxing this large and highly burgeoning sector. However, due to the hard-to-tax nature of the sector there are many challenges for taxing the sector, hence tax evasion and non-compliance is a common problem for many of informal sector actors. This challenge is also linked to a governance problem, and hence suggests the presumption taxation as a way to tax the sector. Although it may not be a perfect solution, the application of presumption taxation and other measures stated above could be a starting point to extend income taxation in the informal sector in Africa. Moreover, it is believed that through the presumptive taxation method, there may be substantial spillover effects in terms of facilitating a gradual shift of informal small-scale and business enterprises into the formal sector (Taube, et al., 1996). Other measures may include: improving the business environment, using physical surveys i.e. door-to-door surveys to identify and register liable taxpayers who are not currently in

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Case of Tanzania

5.0 Progress in Taxing the Informal Sector:

Tanzania is among several countries whose tax reform has tried to include informal activities in the tax net. Currently the Tanzania government in cooperation with the Revenue Authority (TRA) has established a Block Management System (BMS) where one tax collection officer works at the grassroots level or streets (called blocks) to identify businesses for registration and to ultimately include in the tax net. The other effort in Tanzania includes the registration and formalization of the informal sector assets (estimated at 98% of all assets are informally owned) by an institution known as MKURABITA. Other measures are: improving the business environment by reducing constraints that impede business registration and working, providing the informal SMEs with business premises (e.g MACHINGAs and Mama Lishe etc); all these efforts are geared towards assisting the informal activities graduate from informal to formal activities where they can legally contribute to GDP by paying taxes amongst others. Other measures taken by the Tanzania government through TRA comprise:

I. Taxation schemes (laws) Simplification

II. Geographical capturing of information and correct level of economic activities and gathering valuable tax information

III. Application for withholding taxation for operators with no Tax Identification Number (TIN) or informal operators for income taxation

IV. Providing SMEs with permanent trading sites and infrastructure.

V. Identifying, registering, training, and guiding SMEs on business management basics, such as bookkeeping, marketing and obtaining loan facilities.

VI. Encourage tax amnesties to traders. Tax amnesty

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the bracket. Others are simplifying tax systems, improving tax audits, monitoring and enforcement for tax compliance and more importantly, improve taxpayers education on how more tax revenue contribution can improve public goods provision.

This article is based on the paper by the same author, ‘Taxing the Informal Sector: Challenges for Revenue Enhancement in Tanzania’.

Mbilinyi Apronius Vitalis

Assistant Research Fellow

Economic and Social Research Foundation (ESRF)

comparatively slow. An important part of the explanation for this slow progress lies in the fact that key stakeholders are frequently resistant to reform.

Taxpayers may benefit in the long-term from formalization, but these benefits are dependent on governments adopting policies to benefit small firms, including increased access to credit, opening up new market opportunities, providing access to training or protecting them from harassment by public officials. In the absence of such benefits, taxation amounts simply to an additional business cost.

For their part, governments have been reluctant to expand taxation of the informal sector owing to the relatively limited revenue benefits, and fear of a public backlash against increased taxation. They have instead preferred to keep taxation low in exchange for political support in what researchers have called a “devil’s deal”.

Finally, tax administrators themselves, while aware of the potential benefits of taxing the informal sector, often face weak incentives to implement such changes. For one, they

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Making Effective Taxation of the Informal Sector a Reality

Historically, the taxation of small businesses operating in the informal sector has been given limited priority. The costs of collection are high relative to the limited revenue potential, while taxing small operators risks reducing the economic dynamism of small firms while imposing additional burdens on already vulnerable groups.

Despite these concerns, in recent years policymakers have taken a growing interest in taxing informal sector operators. This reflects at least four factors. First, a concern with revenue, as the informal sector continues to comprise a large share of many African economies. Second, a concern with equity in tax enforcement, as weak and uneven tax enforcement among small firms may damage the broader culture of tax compliance. Third, a concern with growth, as there is growing evidence that small firms that join the formal sector may grow faster as they gain access to new services and markets. Finally, fourth, a concern with governance, as the taxation of small firms can be a starting point for expanding political engagement and bargaining between small firms and governments, as small firms come to demand services in exchange for their tax payments.

However, while attention to taxing the informal sector has increased in recent years, progress in implementing more effective taxation has been

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often face significant pressure to meet government revenue targets, and this creates incentives for focusing on larger firms. As importantly, tax administrators themselves frequently view collecting taxes from small firms as a particularly unpleasant, demeaning and poorly rewarded posting.

The key message is that more effective taxation of the informal sector demands not only the design of better tax policies, but efforts to build support for reform by making the expansion of informal sector taxation more attractive to taxpayers, governments and tax administrators.

A key component of such efforts lies in developing approaches to improved compliance that move beyond coercion and threats to depend increasingly on bargaining and exchange between governments and taxpayers. That is, by providing reciprocal benefits to taxpayers in exchange for their tax payments, governments may encourage more voluntary tax compliance among small firms.

By reducing political resistance to informal sector taxation, strategies grounded to a greater degree in reciprocity may be able to shift the reform dynamics away from the “devil’s deal” and towards a more cooperative relationship. Such strategies depend on slowly building trust between taxpayers and governments, such that taxpayers trust that they will receive benefits in return for their tax payments and government trust that taxpayer will increasingly comply with tax demands. Fostering such trust is likely to depend, among other things, on increasing transparency in relation to taxation and on developing institutional channels for associations of small taxpayers to enter into more regular and open dialogue with government.

A second key component is likely to be institutional reform within tax administrations in order to strengthen incentives for tax administrators to emphasize informal sector taxation and the establishment of more positive relationships with taxpayers. At a basic level this means reforming administration in a way that rewards effective implementation of informal sector taxes, rather

than the taxation of small firms being treated as an activity of secondary importance. Efforts to create administrative units focused specifically on small taxpayers are a move in this direction.

A more novel alternative is empowering local governments to collect the bulk of taxes from small firms. Lacking other revenue sources, local governments have potentially stronger incentives to prioritize informal sector taxation, and to build closer relationship with small taxpayers. However, experience suggests that such an approach is only likely to be successful if central government play an important role in building capacity at the local government level.

Of course, the most appropriate solution in any particular context will vary, and depends on a careful understanding of the particular barriers to making effective taxation of the informal sector a reality. What is essential is a growing understanding that political and institutional barriers to reform are at least as important as limitation in technical understanding and capacity. Accelerating reform demands an approach to reform that emphasizes the need to engage with taxpayers, to strengthen reciprocity, to encourage more voluntary compliance and to develop institutions that provide better incentives to tax administrators.

Wilson Prichard University of TorontoA

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Taxing the Informal Sector in Ghana

entrepreneurs and women in economic endeavours, represented by the Ghana Association of Women Entrepreneurs (GAWE). The national and district tax officials were also captured under the survey to solicit from them, their mode of operation and challenges with respect to tax collection in the informal sector.

The study revealed that the tax system – at least for women in the informal sector - is not accountable, responsive or fair and is, therefore, not building a good relationship between the state (or local government) and its vulnerable citizens. The study found that 95% of the women surveyed pay some form of taxes/levies but 57% say they do not feel well informed on why they should pay tax and over 50% say they do not see their tax money going towards service provision or public works projects. This was elaborated and addressed in the focal group discussions, where women gave suggestions of how to improve public tax education.

Key suggestions include radio programmes in local languages, holding public meetings, meeting with various market groups and women on market

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sIn many developing countries, both the government and the people they govern have wide expectations with respect to development, albeit with little or no hope of achieving it. The principal duty of a government is the fiduciary role it has to play to bring development to the doorsteps of its people. In the quest to achieve this, many governments are faced with several challenges, one of which is the challenge of revenue generation and its encumbrances. In developing countries, there are many challenges facing the taxpayer as there are equal challenges facing the tax collector.

Even though there are two main avenues through which a government can generate revenue, which are external borrowing and internal generation of revenue through taxes and levies, the latter option is seen as the most reliable way of generating revenue. However, in as much as it is relatively easy to tax the formal sector, the informal sector, which serves as the hub of employment for a large number of people, poses a big challenge to tax officials. They are yet to find the cure in order to maximize revenue in that sector. Indeed, the informal sector has been estimated to constitute between 30% and 60% of the total economy in most developing countries.

Quite recently, a research, ‘Tax & Gender’ was conducted by the Ghana Integrity Initiative, the local chapter of Transparency International, to assess the impact of taxation on women in the informal sector but with the overall objective of influencing tax policy and practice for greater mobilization of domestic revenues in the informal sector and to improve the contribution of these resources to poverty reduction and active citizenship. The research sought to find out why the majority of women are engaged in the informal sector and to identify the barriers women face in the payment of taxes as well as the burden of taxation on them.

The concept of the ‘Tax and Gender’ research was initiated by Christian Aid Ghana as an offshoot of an earlier research ‘Taxation and Development in Ghana’. The findings of the latter research confirm that taxation is an important catalyst for political accountability and progress towards country-led development by reducing the state’s dependence on donors.

Setting this proposition against a further research which concludes that about eighty per cent (80%) of women are involved in the informal sector, the tax and gender research was designed to find, but not exclusively, the impact of taxation on women in the informal sector.

The project was targeted at small and medium scale businesswomen through national consultations with women

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days, and education on record keeping. The issue of expectations of national government and local assemblies was also addressed. The women were able to identify the benefits they expect from the payment of taxes (but which half of them currently do not see). These expected benefits include good drinking water, hospitals and clinics, schools within close reach, good roads, good sanitation and adequate and neat toilet facilities and clean markets.

About 30% of women say they encounter very harsh attitudes in their interactions with the tax collectors, and anecdotally, it showed that women do not feel they have a way to make complaints about tax collector behaviour or about service provision. The study also showed that the majority of women in the informal sector have very low levels of education, with only 28.4% of our respondents possessing more than basic education.

Just under half of the women surveyed report no challenges in interactions with tax collectors. The others, comprising roughly 50% of women, face challenges, with 30% saying they encounter very harsh attitudes from the tax collectors. Some women have their possessions seized and their shops locked up by the authorities if they are unable to pay, and others report being asked to pay bribes or other favours and in-kind payments. One complaint that women had about timing of tax payments was that sometimes national and local tax collectors would request payments very close to each other and it made it difficult for them to pay both.

It is important to remember here that tax collection in the informal sector in Ghana happens on a primarily face-to-face basis. Various tax collectors come to each shop or market and assess the amount of tax to be paid. This figure is not based on income, profits or amount of business that day. Rather, it is

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based on the type of business, size of business premises, and location of business, etc. This method of assessment leaves quite a bit of room for interpretation and it could mean that a seamstress in a wooden shack with 20 customers per week (and therefore a fair amount of income), will pay significantly less than the seamstress in a concrete structure who has only 2 customers per week and can barely cover her operating costs.

The findings provide that 75% of the women surveyed say they are never asked to show records of their accounts. Only 40% of those surveyed say they keep any record of their accounts, and the majority of those responses came from women with secondary or higher levels of education. These figures show two important issues: 1) that more education tends to lead to better business record-keeping, 2) if tax collectors are not asking to see records, then many women may not even know they should be keeping records, and 3) it also means that more payments than necessary are estimated on the above-mentioned scale.

Additionally, some of the local level tax collectors may not be well informed about the method of tax assessment and may not be able to answer questions from the women, which may lead to a confrontation on both sides.

In practice, the collection of taxes from the informal sector is difficult, as there are few records of accounts, many people earn very little income while others are often invisible to the authorities because they may work from their homes, work at night, or are part of a long chain of production. Because of factors such as these, it is difficult for tax authorities to determine how much tax – if any - should be paid.

The study also showed that the contribution of the informal sector to domestic revenues mainly through taxes and levies is limited due to several challenges such as limited government and local level administrative capacity, extremely small tax base, financial malfeasance and apathy among sections of the public towards payment of taxes.

In practice, the collection of taxes from the informal sector is difficult, as there are few records of accounts, many people earn very little income while others are often invisible to

the authorities because they may work from their homes, work at night, or are part of a long chain of production. Because of factors such as these, it is difficult for tax authorities to

determine how much tax – if any - should be paid.

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However, it is important to note that many self employed professionals such as lawyers, footballers, actors, photographers, masseurs, musicians, etc. are easily identified and yet do not pay taxes because of weak implementation of the tax system. In the 2011 Annual Budget, however, Ghana’s Ministry of Finance & Economic Planning (MOFEP) indicated that a special desk would be set up in the Domestic Tax Division (DTD) of the Ghana Revenue Authority (GRA) to monitor compliance of professionals to their tax obligations.

To help create awareness and build the capacity of women in the informal sector, the Ghana Integrity Initiative, in further collaboration with Christian Aid and the Institute for Democratic Governance (IDEG) is implementing another project, Action for ‘Local Employment, Accountability and Resource Mobilisation’ (LEARN), to address some of these cardinal issues through public sensitization, tax training, economic literacy training and advocacy work with major stakeholders.

The LEARN project seeks, among others, to help mitigate the many challenges that taxpayers, particularly women in the

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Taxing the informal sector:

In the recent past, there have been various debates about the need to tax the informal sector. Some observers view informal sector taxation as a way of improving the government’s fiscal revenue position. Others see it as a way of broadening the tax base and distributing the tax burden more equitably. Both the government and civil society organizations have at one point or another expressed the need to extend more taxation to the informal sector. These calls are not misplaced as studies have clearly pointed out that in addition to revenue and equity reasons, taxing the informal sector increases general tax compliance in the formal sector.

In its recent publication entitled: “Policy Insights into the Taxation of the Informal Sector in Zambia”, the Zambia Institute for Policy Analysis and Research (ZIPAR) analyzed the informal sector in Zambia, estimating its size and its potential contribution to tax revenues. The paper indicates firstly that the Zambian informal sector has not been entirely without taxation. Since 2004, informal sector taxation has been introduced, starting with a presumptive turnover tax on small and medium enterprises in 2004, a base tax on marketeers in 2005 and an advance income tax for cross-border traders in 2007.

informal sector, encounter while also empowering and encouraging them to pay appropriate taxes. It also seeks to open up the corridors for taxpayers and the revenue collectors to work together to foster revenue mobilization and promote accountability.

At one of its sensitization and capacity building workshops in Takoradi in the Western Region of Ghana, Mrs. Mary Awelana Addah, a Senior Programmes and Research Officer of GII, said that the training covered economic literacy training targeted at 120 women and youth entrepreneurs in 18 districts across the country; during which they were schooled on tax and development, book keeping, filing of tax returns, SMEs and Tax, and Tax reliefs among others.

Nana Yaw Saah Aboagye Programmes Officer

Ghana Integrity Initiative

What should Zambia do?

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Unsurprisingly, total revenue from these informal sector taxes – as a proportion of total income tax – has remained sluggish, only reaching a high of 2 percent in 2009. It is this under-performance of revenue that has fuelled the debate on the need to tax the sector more than currently exists. This of course has been driven by the belief that there exists appreciable taxable income in the sector and that the sector is currently ‘running away’ untaxed.

Of course the other side of the debate has not been without proponents. It has been argued that whatever transactions go untaxed in the informal sector are simply not significant enough to warrant the cost of collecting. It is therefore not surprising that the 2012 national budget speech did not propose any new tax measures on the informal sector. The question which has therefore been begging answers is whether indeed there exists significant taxable income in the informal sector and how worthwhile it is to follow this income. The answer to this question will start to lay a foundation against which future tax policy can be shaped.

Zambia’s informal sector is quite large!! The informal sector is subject to a wide range of varied definitions, depending on who is looking at it. In part, it is this attribute that makes measuring its size a challenge. Consequently, there are various methods for estimating the size of the sector, including so-called direct approaches that use surveys and indirect methods that try to make estimates based on macroeconomic relationships. The ZIPAR study (on which the aforementioned publication is based) used an indirect method called the Currency Demand method in estimating the size of the informal sector in Zambia for the period 1973-2010. Measured as a proportion of formal sector GDP, informality has averaged at 47.7

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percent per annum during the same period, reaching its peak during the 1991-2000 decade where it averaged 56.3 percent. As of 2010, the informal sector was as large as 40 percent of GDP. Furthermore, the sector has been increasing over time at an average growth rate of 2.7 percent per annum (compared to a 2.8 percent growth rate for the formal sector during the same period).

The amount of tax revenue that is forgone by not taxing the informal sector, assuming zero collection costs, was calculated at an average of 7.7 percent of GDP. This represents about 42 percent of total tax revenue collections yearly on average. For the year 2010, the estimated total amount of foregone tax revenue from the informal sector was 6 percent of GDP or 34 percent of Zambia’s total tax revenues. But is there any real potential for informal sector taxation? At a glance, the estimated size of the informal sector and the amount of tax revenue forgone from the informal sector (or potential tax amount) look quite appealing. But, if we take into account tax collection costs, the potential reduces. Collection costs can be significant in this sector, as demonstrated in our assessment of what the informal sector looks like.

The 2008 Central Statistical Office Labour Force Survey indicates that out of the 4.6 million employed persons in Zambia, 89 percent (4.1 million) were employed in the informal sector while the remaining 11 percent (0.5 million) were employed in the formal sector. Of the 4.1 million informal sector employees, 3.4 million basically worked in household-based activities. Furthermore, of the total informal sector employees, the largest number, 3.2 million, were employed in the agricultural sector while the second largest at 400,000 were working in trade. Thus, as of 2008, the informal sector in Zambia comprised over 70 percent of entities which can be classified as hard-to-tax entities. These are entities that are also likely to have incomes largely below any feasibly taxable threshold. Therefore, the most flagrant tax evasion is likely to exclude the bulk of informal sector participants. Rather, it is associated with small businesses operating close to taxable thresholds. In addition to this, ‘formal sector’ activities like free-lancing and moonlighting among a cross-section of professionals, untaxed house rentals from the growing high end of the housing market, and so on, are likely to contribute to the most flagrant evasion.

Consideration of the administrative capacity of the Zambia Revenue Authority (ZRA) shows that the bulk of income tax

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revenue contributions (about 75-80 percent) come from the large taxpayers though the large taxpayer office comprising of about 3.3 percent of total ZRA staff. The medium taxpayer office is roughly 10 percent of the total number of staff and they manage to rake in 18-23 percent of total income tax revenue collections. The small taxpayer office has the largest number of staff, at 14 percent, but only collects a meager two percent. This essentially means that reaping the potential tax revenues in the informal sector is bound to be a very costly exercise, enough to wipe out any tax revenue gains so anticipated.

What are the insights for policy? The informal sector estimated at over 40 percent of GDP is sizable and is typical of most developing countries. Its sheer size means that the informal sector cannot be ignored in tax considerations. At the same time, the characteristics of the sector mean that mere attempts of introducing more taxes are unlikely to yield significant net revenue. Therefore in order to tap into some of the informal sector resources currently escaping the tax net, a few policy options may be feasible in the short to medium term. Firstly, it will be worthwhile to fully exploit the personal income tax outside salary income by reducing levels of non-compliance and improving tax morale. The personal income tax is largely employees’ tax deducted at source (that is PAYE). The current heavy reliance on PAYE implies that regardless of individuals’ other incomes, tax deducted from their salaries mostly constitutes their total and only liability for tax. Furthermore, individuals who do not earn income deductible at source may escape the tax net completely. Good examples of this are freelancing by various professionals and rental income received by a growing housing market.

Secondly, enhancing incentives for the formalization of small businesses will be an important pursuit. Government has in the past used deterrent and punitive measures to compel businesses to register for Income Tax or VAT. For example, the Advance Income Tax (AIT) for traders was raised from three percent to six percent in 2009 to encourage registration for tax purposes

and increase compliance given that traders opted to remain unregistered even after the introduction of AIT.

Thirdly, strengthening VAT performance will also be important. Administration of VAT, particularly domestic VAT, needs to be improved further. As the most broad-based tax in Zambia, VAT captures some of the transactions of the informal sector when the informal sector purchases goods and services from the formal sector. Thus, overtime exemptions should be rationalized and streamlined.

In summary, the short-to-medium term measures aimed at addressing informal sector taxation in Zambia should not call for simply the introduction of more taxes but rather strengthening existing taxes and channels that foster formalization of the informal sector.

Pamela Nakamba-Kabaso Researcher and Policy Analyst

Zambia Institute for Policy Analysis and Research (ZIPAR)

Sidney Phiri MA Candidate

University of Zambia, Department of Economics

The paper is disseminated as part of the findings of research and policy analysis work in progress. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of ZIPAR or its affiliate organizations and collaborative partners.

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THEME: ‘Transforming Economic Power to Advance Women’s Rights and Justice.’

The 12thAWID (Association for Women’s Rights in Development) InternationalForum was held in Istanbul, Turkey from the 19th to the 22nd of April 2012. The event was attended by over 2000 women’s rights and justice advocates from all over the world. The forum marked the 30th anniversary of AWID.

The main input of TJN-A during the forum was the facilitation of a session titled ‘HowtoAdvocateforGenderEquitythroughTaxation’. TJN-A presented the basic tenets of tax justice, made linkages between taxation and other concepts like governance and development and finally, a deeper analysis between gender equity and taxation.

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12th AWID (Association for Women’s Rights in Development) International Forum

Istanbul, Turkey- 19th to the 22nd of April 2012

Regional launch of the Tax Competition Studies in East Africa

Kampala, Uganda- 13th April 2012

Tax Justice Network-Africa (TJN-A) and ActionAid International (AAI) jointly commissioned a study to examine the role and impact of tax incentives on the economies of the East African countries of Kenya, Uganda, Tanzania and Rwanda. According to this research governments in East Africa are providing a wide range of tax incentives to businesses to attract greater levels of foreign direct investment (FDI) into their countries. Such incentives include corporate income tax holidays, notably in export processing zones (EPZs), and reductions from the standard rate for taxes such as import duties and VAT. Yet this study shows that such tax incentives are leading to very large revenue losses for governments, are promoting harmful tax competition in the region, and are not needed to attract FDI. Following the re-establishment of the East African Community (EAC) in 1999, Kenya, Tanzania and Uganda created a customs union in 2005, and were joined by Rwanda and Burundi in 2009. This has created a larger regional market, and means that firms can be located in any EAC country to service this market. At the same time, however, countries are being tempted to increase investment incentives in

The main objectives of the event were to:

qFacilitate learning on the role and impact of economic power in diverse women’s rights agendas, experience and issues;

qSupport bridge-building across diversities among women’s groups and movements with other social movements;

qAdvance proposals on feminist visions and practices to resist, challenge and transform dominant forms of economic power; and

q Identify opportunities for participants to engage in concrete joint action beyond the forum.

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order to attract FDI and, they believe, increase jobs and exports.

The launch of the tax competition studies was jointly organized by the Tax Justice Network-Africa, ActionAid International, SEATINI Uganda and Uganda Debt Network (UDN).

The launch was attended by civil society representatives and media practitioners from the East African Region and beyond.

Launch of the Tax Incentives and Revenue Losses in Kenya Report

Nairobi, Kenya- 6th June 2012

On June 6th 2012, the report titled ‘Tax Incentives and Revenue Losses in Kenya’ was launched at an official event at the Sarova Stanley Hotel in Nairobi, Kenya.

The event brought together representatives from government institutions, civil society organizations, the private sector, the IMF, and the media. Hon. MP Martin Ogindo, member of the Parliamentary Budget Committee was the guest speaker and officially launched the report.

Furthermore, the event included a debate with a panel comprising the IMF Country Economist, Kethi Ngoka-Kisinguh; Co-ordinator of the National Taxpayers Association (NTA), Davis Adieno; Chairman of the Board of Tax Justice Network-Africa, Dereje Alemayehu; and the Associate Director of Tax Services at Ernst & Young, Francis Kamau. The programme for the day ended with a strategy meeting of the civil society network, the East Africa Tax and Governance Network (EATGN).

Some of the organizations that attended were PANOS EA, JENGA Africa, Centre for Trade Policy and Development, Children’s Forum Parliament, UPFFSPD Parliament, ISODEC Ghana, AWEPON, URA, Twaweza, CRADEC - Cameroon, Economic Justice, Uganda Network of Businesses, National Advocacy Coalition on Extractives- Sierra Leone, National Taxpayers Association among others.

The launch was covered by major media outlets in Kenya, including TV-coverage on CNBC Africa KBC, KTN, K24, , and NTV, as well as newspaper articles in the major dailies.

TaxJusticeNetwork-AfricaDirectorAlvinMosiomaandRangweMPMartinOgindooftheParliamentaryBudgetCommitteepresentingthereport.

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Theobjectivesofthelaunchwere:

• To launch the report ‘Tax Incentives and Revenue Losses in Kenya’

• To build public interest and understanding of the issue of tax competition in East Africa, the use of tax incentives in Kenya, and the revenue losses from tax incentives in Kenya

• To build a strategy among CSOs on how to advocate for change in relation to the use of tax incentives in Kenya

• To bring together key stakeholders who have influence on the tax issues in Kenya, particularly on the use of tax incentives in Kenya.

On June 17th June 2012, Policy Forum, Tax Justice Network-Africa and ActionAid International unveiled the report ‘Tax Competition in East Africa: A Race to the Bottom? Tax Incentives and Revenue Losses in Tanzania’ to 94 Members of Parliament at an official event at the Dodoma Hotel, in Dodoma where the Tanzanian parliament sits and had convened for the annual budget session.

The MPs who were mostly members of the Tanzania chapter of the African Parliamentarians’ Network Against Corruption (APNAC) were joined by 25 representatives of civil society, several parliamentary staff and media professionals. Hon. Dr. Mary Mwanjelwa, the Chairperson for APNAC officiated the event

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Launch of the Report Tax Incentives and Revenue Losses in Tanzania

Dodoma, Tanzania - June 17th 2012

Theoutcomesofthelaunchwere:

- The report was launched and distributed to a wide variety of relevant stakeholders

- A wide range of media covered the event and the report

- The advocacy messages of the report were supported by the representatives from Civil Society

- The launch brought together a range of relevant stakeholders with influence on tax policy in Kenya, including (but not excluded to) a representative from the Kenya Revenue Authority (KRA); a representative from the Economic Processing Zones Authority (EPZA); MP Ogindo of the Parliamentary Budget Committee, and the Country Economist from the IMF.

CAPTION:Hon.Dr.MaryMwanjelwaoftheAfricanParliamentarians’NetworkAgainstCorruption(APNAC)-TanzaniaChapterlaunchingthepublication.

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and officially launched the report. Mr. Godfrey Wawa, a member of the Policy Forum Board of Directors (and Country Director of Forum Syd) gave a speech on the significance and purpose of the report; and Dr. Honest Prosper Ngowi, who reviewed and finalized the report, made a presentation which gave the overview of tax incentives in Tanzania, its problems and gave recommendations of what the government should do.

The outcomes of the launch were:

• The report was launched and distributed to 94 APNAC MPs present at the event and more copies

have been left with the Office of Parliament to circulate to other MPs who were not present at the meeting. The Tanzanian parliament currently has 352 MPs.

• Members of Parliament showed eagerness to learn more about the concept of ‘race to the bottom’.

• Civil society representatives present at the event expressed interest to become involved in tax justice issues and some have pledged to volunteer on work involved in the popularization of the Tanzania (simplified version).

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Launch for the Malawi Tax Justice Platform.

Lilongwe, Malawi- 21st June 2012

The Malawi Economic Justice Network (MEJN) in partnership with AFRODAD (African Forum and Network on Debt and Development) and Tax Justice Network-Africa (TJN-A) organized the first meeting for the national platform for CSO in Malawi as a way of preparing for the research on the revenue benefits/ costs of foreign supported investments in the extractive industries. The meeting took place in Lilongwe on 21st June 2012. The meeting drew participants from a cross section of strategic CSO who have vast interest in the extractive industry and are or have done some work around the same.

This was a planning meeting aimed at bringing together all relevant CSO in Malawi dealing with tax justice and extractive industries.

The National Platform for CSOs also comes in the wake of the recent announcement of the 2012/2013 National Budget Statement which ushered in a new policy dimension in terms of tax incentives amongst them, increasing the initial investment allowance from 40% to 100%, increasing transport from 15% to 25% and the removal of VAT on machinery and financial services. Furthermore, the budget statement enunciated the removal of import duty, import excise and import VAT on raw materials imported under the industrial rebate scheme in order to encourage local production.

Kayerekera Uranium Mine has been identified as a case study for starting and a research is scheduled to commence on the same to establish some facts for lobbying and advocacy.

The main objective of the national platform is to create a podium for AFRODAD and CSOs in Malawi to find areas of synergies and collaborations in research, advocacy and campaigns on tax and capital flight. The following are auxiliary objectives:

qIdentify and collaborate with key CSOs working on tax, extractive industries, domestic resources mobilization and capital flight in Malawi.

qDiscuss the draft Concept Note and Terms of Reference for the research on revenue costs/benefits of foreign direct investment in the extractive industries: the case of Kayerekera Uranium Mine

qDevelop broader and vibrant CSO coalition on tax, capital flight and other development issues in Malawi

qStrengthen the work on extractive industries and domestic resource mobilization in the various CSOs through the cooperation between organizations

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qCreate a basis for broader public mobilization and a combined lobbying and advocacy strategy.

The platform is also built along the following expected outcomes and outputs:

qInformation is shared on what each CSO is doing on tax justice and extractive industries in order to

come up with a clear annual work programme for research and advocacy on tax justice and extractive industries in Malawi.

qA platform that will engage in issues of tax and extractive industries and provide direction in the work in Malawi.

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PROFILE

1. Please give us a brief background of the Policy Forum?

Policy Forum is a network of 106 CSOs that have been brought together in their interest in issues pertaining to Poverty Reduction, Equity and Democratization. Within this framework, the network sees governance and accountability as the area of its comparative advantage and hence it is the keystone on which most of its activities are devised. In appreciation of the immensity of Governance and Accountability issues therefore, and the need to maintain focus, Policy Forum limits its activities to three main areas. These are:

1) A focus on local governance including regional, council and sub-council levels;

2) A look at public money especially at issues relating to the acquisition, management and use of resources by government on behalf of its citizens; and

3) Augmenting the voice of citizens with the aim of empowering them to have an influence over how they are governed and how their resources are used.

2. What is your (academic and professional) background? What does your current job with the Policy Forum entail?

I hold a Masters degree in Journalism and Media Studies from Cardiff University, UK. I began work at Policy Forum in 2007 as the lead responsible for media, communication and advocacy at the network’s secretariat as part of the organization’s desire to see policy analysis information widely disseminated to policy makers, civil society and the general public. I have since assumed the role of Coordinator, heading the Secretariat. My role is principally to provide the overall conceptual and strategic leadership, coordination and facilitation of the network.

INTERVIEW WITH SEMKAE KILONZO OF POLICY FORUM

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3. What are the areas of interest to which you are personally dedicated? Why are you particularly interested on issues of tax justice in Africa?

Personally, I am dedicated to transparency in the extractive sectors, the national budget and taxation. I believe in responsible and accountable management of public money and that citizens and civil society need to be engaged in this processes. This requires access to information so that we can all participate in deciding how we can use our resources to drive development and national growth. Tax justice issues are of particular interest to me because I think it’s illogical that African countries should depend on foreign aid to provide health and education to citizens whilst tax havens undermine the tax base of nations enabling the siphoning of money from the continent that would have otherwise been used in these areas. For me, this is a contradiction that needs to be addressed.

4. In your opinion, what role should civil society organizations (CSOs) play in achieving tax justice in Africa?

Looking at a country like Tanzania, I think there is not much public awareness about the magnitude of the illicit capital flight problem, how it happens and its consequences on development and poverty reduction. Recently, when launching a report on tax incentives and revenue losses in Tanzania where we had over 90 MPs present, it was evident that even the political class did not appreciate the magnitude and impact of the problem. Therefore, I think civil society organizations should play a more active role to increase awareness on tax justice issues and work to push African governments to acknowledge how international tax rules and illicit capital flight is hampering our countries’ development. At the EAC, ECOWAS, SADC and AU levels, we can urge governments to develop proposals for automatic and multilateral information exchange that will help track down and take action against cases of tax evasion, for instance. CSOs in Africa can also support initiatives being devised in the north like the call for a country-by-country reporting by multinationals as a tool to uncover tax avoidance and evasion.

5. What in your view is the role of informal sector as far as taxation of this particular sector is concerned?

In Tanzania, there are so many impediments associated with collecting tax from the informal sector. Firstly, many informal traders and service providers do not have premises due to their peripatetic nature so it is difficult for tax authorities to locate them. This brings in the second point: the transactions costs for collecting tax in the informal sector consisting of a myriad of small traders, of whom authorities have very little information on (turnover, profits earned, etc.), is very high. Thirdly, there is the risk that in the course of integrating the informal sector in the tax system, the most vulnerable in society are affected by the potentially indiscriminate nature of taxation. These difficulties notwithstanding, Tanzania loses revenue from not taxing the informal sector and hence needs to find the most convenient, progressive and just ways of taxing those in the informal sector. Moreover, taxation enhances accountability as citizens demand returns in terms of quality public services and investments and their readiness to pay tax will increase with improved service delivery.

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This document has been produced with the financial assistance of Oxfam Novib. The

contents of this document are the sole responsibility of Tax Justice Network-Africa and can

under no circumstances be regarded as reflecting the position of Oxfam Novib

6. What in your view are the most urgent steps that must be undertaken to ensure that African countries can finance their own development? Who should undertake these?

I think African governments need a complete paradigm shift in the development discourse. it has to move away from development aid, foreign direct investments and foreign credit as the most consistent major sources of development finance to the recognition of domestic resource mobilization (tax) as the dependable and sustainable source. Together with this, we have to be cognizant of the fact that illicit financial flows out of Africa are denying us of cash that would have otherwise been used for development. This shift should also involve an overall ‘autocentric’ development mindset which will be based on domestic, human needs and which is participatory, led from the grassroots.

Thank you.