African Cross-Border Trade Growth Demands Tax Transparency

In mid-July, hundreds of African business leaders descended upon Nairobi to discuss trade and investment across the African continent at the African Union High Level Private Sector Forum. The African Union brought them together to discuss public-private partnerships, and over the course of their three-day summit, one topic ranked highly: the African Continental Free Trade Area (AfCFTA
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It’s been two and a half years since African countries officially started trading under the AfCFTA, which is the world’s largest free trade area. Participation across the African Union has been nearly universal: All but one of the African Union’s 55 members have signed the AfCFTA. Expectations are high: The AfCFTA has been heralded as a system that could bring rapid investment and economic growth to the continent; however, it remains to be seen when that rapid change will happen.

So far, the AfCFTA has launched at a rather sluggish pace. But the free trade area is incredibly young, and stakeholders have great plans for it, as discussed during the Nairobi summit. Now that the AfCFTA has officially launched, governments and investors are looking at ways to boost intra-African trade and educate more people about the benefits of the system.

However, this anticipated progress could also come with traps for the unwary. Specifically, as cross-border trade increases, so could cross-border tax evasion.

The OECD’s Africa Initiative wants revenue authorities to be prepared, and it believes that the OECD’s exchange of information (EOI) standards could help African governments surmount those cross-border challenges. The problem is that African countries are slowly (and inconsistently) adopting exchange of information frameworks, according to the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes.

Some of the largest challenges are structural and political, as highlighted by this year’s Tax Transparency in Africa 2023 report, which surveyed 38 African countries about their transparency practices and progress. But large international projects and initiatives like the AfCFTA and developments like increased grey-listing by the Financial Action Task Force (FATF) could push governments forward on transparency.

EOI Update

In some respects, 2022 was a good year for African tax transparency. Among the group, countries reported a record €66 million in additional revenues from EOI requests. That is a 77 percent increase from what they collected in 2021. More countries are using EOI: In 2022, 19 African countries sent EOI requests, up from 15 countries the previous year.

In other ways, 2022 was an average year for African tax transparency. Ever since the Africa Initiative started tracking EOI activity on the continent, it has become clear that only a small group of countries have been able to use it on a substantial scale. 2022 was no different because four countries — Kenya, Nigeria, South Africa, and Tunisia — sent 86 percent of the continent’s EOI requests.

There are a few things African countries must improve if they want to leverage EOI for cross-border trade. First, they need more infrastructure. Currently, 30 out of the 38 African countries have EOI units. That’s about 79 percent of the group.

However, if we look at this across the entire African Union, which has 55 member states, it means that only about 54 percent of African Union states have EOI units. Formal EOI processes are also lacking because only 25 countries have a dedicated EOI manual, and only 23 have a tracking tool for EOI requests. This means that, overall, less than half of African countries have those two tools.

Second, they need more revenue tracking. Only 14 African countries told the OECD that they track how EOI affects their overall revenue collection, and they’re generally tracking that data informally — based on feedback they receive from tax investigators and auditors. Only five have a formal tracking process, either through the Global Forum’s impact assessment tool or an automated tracking system.

However, revenue tracking will be crucial for authorities as cross-border trade increases through the AfCFTA and authorities monitor and investigate potential tax evasion.

That tracking will also be crucial in the cross-border recovery of tax claims, which is one of the Africa Initiative’s key goals. It’s not a practice that is widely used; only five African countries sent eight requests for cross-border assistance, and three African countries received nine requests in 2022. But it’s a practice that African Initiative countries want to expand across the continent.

To do that, the Africa Initiative established a working group. In July the OECD released a toolkit on cross-border assistance in the recovery of tax claims, which is designed to help tax authorities build those functions within their departments.

Beneficial Ownership Transparency

Beneficial ownership transparency is a bedrock tenet of the OECD’s EOI standards, and countries exchanging information must make available:

• legal and beneficial ownership information of all relevant legal entities and arrangements, including companies, foundations, limited liability partnerships, and trusts;
• accounting records and underlying documents; and
• banking information, including information about the legal and beneficial owners of bank accounts.

African countries have struggled over the years to meet the OECD’s beneficial ownership standards, and this year’s report shows that they’re not faring well in Global Forum peer reviews.

At the time of the report, the group had recently evaluated nine African countries, and Mauritius was the only country to score a “compliant” rating. Four countries were rated “largely compliant” (Morocco, Nigeria, Tunisia, and South Africa), and four were rated “partially compliant” (Botswana, Ghana, Liberia, and Seychelles).

Overall, the group actually performed worse than they did in a 2018 review: Four countries received lower scores because of deficiencies in ensuring the availability of beneficial ownership information for legal persons and arrangements, as well as difficulties in requesting and providing beneficial ownership information in a timely manner.

In fact, none of the African countries scored compliant on the legal persons and arrangements requirement: Mauritius, Morocco, and Tunisia scored largely compliant, with the rest scoring partially compliant.

International pressure could help this dynamic improve. In February, the FATF placed South Africa and Nigeria on a grey list because of gaps in their anti-money-laundering frameworks and beneficial ownership standards. At the time, neither maintained a centralized beneficial ownership register for legal entities, and the FATF found that law enforcement authorities were having difficulty obtaining beneficial ownership information from either country in a timely manner.

In both South Africa and Nigeria, changes were already on the way at the time of the FATF’s grey listing. In December 2022 South African President Cyril Ramaphosa signed a broad sweeping anti-money-laundering bill into law, which included beneficial ownership provisions. That legislation, the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 requires South Africa’s Companies and Intellectual Property Commission to collect and maintain a central beneficial ownership information register accessible to law enforcement and authorities. The register went live April 1.

Under this legislation, South Africa now has a legal definition of a beneficial owner, which has been added to section 1 of the Companies Act No. 71 of 2008 as an individual who, directly or indirectly, ultimately owns a company or exercises effective control of that company, including through:

• holding beneficial interests in the company’s securities;
• exercising or controlling voting rights associated with the company’s securities;
• exercising or controlling the right to appoint or remove members of the board of directors;
• holding beneficial interests in the securities of its holding company or possessing the ability to control the holding company;
• materially influencing the company’s management.

A beneficial owner must have a minimum 5 percent interest in a company.

Nigeria took a different approach than South Africa and created a beneficial ownership register that is open to the public. The register, which went live May 25, was created under the Persons with Significant Control Regulations, 2022 and applies to Nigerian-registered companies and LLPs. It is maintained by the Nigerian Corporate Affairs Commission.

A “person with significant control” is the same as a beneficial owner and, importantly, must be a natural person. Also, the person with significant control must directly or indirectly:

• hold at least 5 percent of issued shares in a company or hold at least a 5 percent interest in an LLP;
• exercise at least 5 percent of the voting rights in a company or LLP;
• hold a right to appoint or remove the majority of either a company’s directors or partners in an LLP;
• exercise significant influence or control over the company or LLP; or
• actually exercise or have the right to exercise significant influence or control over a trust or firm (regardless of whether it is a legal entity) that, if it were an individual, would meet the first four parts of the person with significant control’s conditions.

Nigeria and South Africa aren’t the only African countries to advance beneficial ownership transparency in recent months. Cameroon, which also belongs to the Africa Initiative, created a new beneficial ownership transparency requirement in its Finance Law 2023. The country now obligates legal entities to identify their beneficial owners, keep a register of that information, and share it with the country’s Directorate General of Taxation.

The requirement applies to entities established under Cameroonian law or entities established in Cameroon under foreign law, irrespective of whether they are subject to corporate or personal income tax. Before this, the collection of beneficial ownership information was “rare,” according to the FATF, and mostly occurred when large international entities like banks requested the information for new business relationships.

Cameroon currently sits on the FATF grey list as well for other anti-money-laundering deficiencies, and now there’s added pressure on the trio to ensure that their new beneficial ownership transparency systems are working and meeting international standards.

Tax and the AfCFTA

Import duty collections don’t generate much revenue for African countries compared with value-added taxes or personal income taxes, according to data from the African Tax Administration Forum. Because of this, the AfCFTA holds quite a bit of promise for African revenue authorities, who are deeply interested in the tax and revenue implications of the AfCFTA.

While it’s important for African countries to exchange information with jurisdictions outside Africa, the OECD says they need to be able to exchange information on an intra-African basis if they are to tackle potential tax evasion enabled by the AfCFTA.

The problem is that intra-African EOI numbers aren’t high. Last year, about 21 percent of EOI requests were intra-African ones, and Côte d’Ivoire, Mauritius, and South Africa sent the most. Meanwhile, African countries are most interested in obtaining information from South Africa and Mauritius, according to the OECD. In light of these low numbers, the OECD is concerned about how this lack of activity could interface with the AfCTFA.

In September 2022 the African Tax Research Network, the African Tax Administration Forum, and the Ghana Revenue Authority organized a congress on this very issue and discussed avenues for cross-border collaboration and cooperation.

At that time, the groups called on countries to forge a “binding commitment” to coordinate their legal frameworks, rules implementation, and administrative capacities and practices. In this year’s Tax Transparency in Africa report, the OECD called for something similar, pointing out that countries can expand their intra-African EOI relationships by joining the OECD’s Convention on Mutual Administrative Assistance in Tax Matters, regional EOI agreements, and other multilateral arrangements. It appears that momentum on this issue is building, and it will certainly be one to watch in the coming months and years.

Conclusion

The convergence of the AfCFTA, beneficial ownership transparency, and the Africa Initiative’s campaign for the cross-border recovery of tax claims presents an opportune moment for African revenue authorities to do two key things:

First, reevaluate their transparency strategies; and second, capitalize on current political momentum, and use it to get much needed legislative and budgetary support to build new transparency programs or expand existing ones. That could help advance tax transparency on the African continent much faster than it has moved in recent years and help level the playing field amongst African countries.