Building a Fair, Transparent and Inclusive Tax System in Sierra Leone

http://taxjusticeafrica.net/content/building-fair-transparent-and-inclusive-tax-system-sierra-leone

Building a Fair, Transparent and Inclusive Tax System in Sierra Leone

Introduction 

Building an effective tax system is among the most pressing challenges facing any state, as taxation provides the resources necessary to finance government activities and has equally important implications for economic growth, inequality and governance. 

Despite this reality, tax debates have tended to remain the preserve of a narrow, technocratic elite, while 

broader, popular engagement has remained very limited. This report provides an overview of the political 

economy of the tax system in Sierra Leone in order to support more extensive and informed public debate 

and advocacy around tax issues. It draws on a combination of official data, published sources and, most 

importantly, a wide array of interviews conducted with policy makers and other stakeholders in June–July 

2010 (see Appendix 1). Debate about tax issues has tended to focus overwhelmingly on generating additional revenue in a way that is also supportive of economic growth. This is a hugely important goal, but it is equally important to focus on building tax systems that are fair, transparent and inclusive. These goals are important in order to encourage broader development gains, and because they are essential to enhancing tax compliance and the legitimacy of the tax system.Sierra Leone faces particularly acute challenges in pursuing this goal. Not only were the economy and tax administration devastated by the civil war during the 1990s,but even prior to the civil war the tax system in Sierra Leone was among the weakest in the world. 

Against this background, significant progress has been made over the past decade, as the government 

has implemented substantial policy and administrative reforms. However, levels of tax collection remain low 

relative to other countries in the region, and below levels achieved by similar post-conflict countries (Table1). While only very limited research exists on the specifics of these different cases, it is important to note that all four countries in Table 1 have pursued similar trajectories of policy and administrative reform. As such, weaker than expected performance in Sierra Leone appears to be explained by the politicisation, and limited effectiveness, of implementation, particularly since 2004-2005. This message is reinforced by the disconcerting fact that the past five years have witnessed stagnation and even decline in revenue collection as a share of gross domestic product (GDP), reflecting the persistence of corruption, politicisation and poor tax 

enforcement among elites. There is thus an urgent need for public pressure for reform.

Table 1 : Tax as a percentage of GDP in Sierra Leone and other low-income, post-conflict countries

Region  2004 2005

Sierra Leone 11.2% 9.88%

Liberia 12.9% 13.2%

Mozambique 11.3% 10.8%

Ethiopia 11.6% 10.8%

Source: Data from assorted International Monetary Fund (IMF) 

Statistical Appendices.

The remainder of this report is structured as follows. 

Chapter 2 provides an overview of why taxation matters for development outcomes. Chapter 3 explores 

the history of taxation in the country in order to set the social, political and economic context for current 

reform efforts. Chapters 4 to 6 then turn to analysing the political economy of the contemporary tax system, 

focusing, in turn, on central government taxation, local government taxation and minerals taxation. Finally, Chapter 7 presents a series of recommendations for civil society advocacy and engagement. While the 

report presents detailed technical information about the tax system, it is focused on capturing the broad 

political economy of taxation, as political factors hold the key to building a fair, transparent and inclusive tax 

system moving forward.

Taxation and Development in Ghana: Finance, Equity and Accountability

Taxation  plays an important role in shaping the distribution of benefits, as it is the basis for redistribution from those with the highest incomes to those most in need, and allows government to encourage certain activities and discourage others by altering their
relative prices.

What is less frequently noted is the broader centrality of taxation to good governance, which encompasses the capacity, responsiveness and accountability of government. In the realm of capacity, taxation lies at the administrative heart of government and provides the foundation for the provision of public goods and the implementation of effective regulation. As importantly, taxation is the venue through which citizens are most intimately connected to the state and can be an important catalyst for public demands for responsiveness and accountability.

Despite this fact, attention to the issue of taxation in the developing world has been sorely lacking and generally limited to technocratic policy and administrative reforms. Public participation in debates about taxation has been particularly rare despite major issues of public interest related to tax system equity, tax avoidance and evasion and the broader drive for improved governance. This research forms part of a broader civil society effort to expand pubic participation in debates about taxation, and to correspondingly improve development outcomes.

The paper begins with a brief introduction to the economic, social and political context in Ghana, and this is followed by a detailed overview of the existing tax system and its limitations. The third section looks at tax avoidance and evasion in various forms in order to identify ways to both increase collection and improve equity. The fourth section looks at the relationship between taxation and the development of political responsiveness and accountability, focusing on the ways that taxation can become a catalyst for public demands for improved governance. The final section concludes and provides a set of recommendations for potential campaign targets and further research

Tax Us If You Can: Why Africa Should Stand Up for Tax Justice

Tax Us If You Can: Why Africa Should Stand Up for Tax Justice
Introduction
Tax is the foundation of all civilisations. The act of tracing tax policies and practices reveals the history of the
relationship between the ruler and the ruled, state and citizen.In Africa this relationship can be traced back over millennia. For instance, Egypt’s famed Rosetta Stone, created in 196 BC during the Ptolemaic era, was an agreement granting a tax exemption to priests, and certain reductions to the military and other ruling classes, including traders approved by the king.  it was an early example of the special privileges that continue to proliferate across the continent.Today, 80 per cent of Africa’s exports consist of primary commodities. African governments depend heavily on the resource rents from these commodities but many are exempt from taxation. Tax holidays and other hidden subsidies granted to multinationals in secretive
agreements deprive governments and their citizens of significant tax revenues.Similar exemptions to those that once governed trade along the Anu canal in ancient  Egypt continue today as foreign traders set up shop in the various  Free Zones along Africa’s coastlines where little or no tax is due, or Special Economic Zones (SEZ's) and International Financial Centres (IFC's) along the trade routes that cross the continent.

Tax injustices in Africa prevail for a number of reasons. Key among these are the world’s secrecy jurisdictions which provide services with high levels of confidentiality to facilitate hiding taxable incomes and to shelter criminal activities. It is not without irony then that the Rosetta Stone is housed in London, which is linked to more than a quarter of the world’s secrecy jurisdictions. (Secrecy jurisdictions are defined as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. See section 3.5) This report aims to help readers understand the issues behind Africa’s struggle for tax justice.

 In Section 1, the report begins by exploring the meaning of  tax justice in the African context before examining some of the main channels for tax leakage from the continent and the impact of these leakages in terms of government revenues.

 Section 2 sets out the key systemic causes of tax injustice in Africa, explaining firstly how decades of selective development or ‘maldevelopment’ in resource-rich states has left government funds depleted and many countries susceptible to conflict. The section goes on to examine the policies that have contributed to making taxes in Africa regressive, and
ends by looking at problems around ineffective tax and customs administrations.

Section 3 presents a ‘who’s who’ of  tax injustice in Africa. The tax avoidance industry is always keen to make a clear distinction between   tax evasion, which is illegal in most countries, and tax avoidance, which usually involves exploiting legal loopholes. This section looks at some of the key players involved in exploiting such loopholes: accountants, lawyers, bankers,  multinational companies and, crucially, secrecy jurisdictions.  It also examines the role of governments, parliaments and taxpayers, and asks what all stakeholders should be doing to help achieve tax justice.

Section 4 discusses how multilateral agencies, such as the World Bank and the International Monetary Fund (IMF), have influenced tax policy in Africa.  it shows how the ‘tax consensus’ promoted by these organisations has led to a reduction in government revenues in many countries. it then looks at some of the international organisations trying to tackle various aspects of tax injustice, particularly the United Nations and the Organisation for Economic Cooperation and Development (OECD), and discusses the role of a range of
African organisations and the growing contribution of civil society.

Section 5 emphasises the importance of taxation for Africa’s future and explores a series of options to help achieve tax justice. Key among these will be: raising awareness around tax issues and promoting a culture of tax compliance; increasing tax transparency among governments and  multinational companies; increasing international cooperation on tax matters; and enhancing international assistance to help African governments improve their tax affairs. Finally, a glossary of tax terms is provided to help readers understand some of the technical terminology around taxation. Tax revenues are necessary for any state to meet the basic needs of its citizens. In Africa, tax revenues will be essential for establishing independent states of free citizens, less reliant on foreign aid and the vagaries of external capital. We hope that many of the ideas presented here will be realised and that tax justice can help all African states achieve a greater degree of self-determination in Ahttp://taxjusticeafrica.net/sites/default/files/Tax%20Us%20If%20You%20Can%20-%20Why%20Africa%20should%20Stand%20up%20for%20Tax%20Justice.pdffrica.

Regards,
Alvin Mosioma,
Director, Tax Justice Network - Africa