In the previous article I explored the main drivers of tax evasion and avoidance in Zambia and assessed the government’s tax enforcement capacity.
The Financial Intelligence Centre Trends Report published in 2020 revealed that significant revenues are lost perennially on account of tax evasion and avoidance. According to the Zambia Revenue Authority (“ZRA”) the main sources of tax evasion include:
(i) repatriation of proceeds from mining companies in Zambia to offshore jurisdictions while declaring losses in Zambia.
(ii) false accounting techniques by corporations to reduce tax obligations.
(iii) non-declaration of exportation of resources; and
(iv) under valuation of precious stones and base metals that are exported to foreign jurisdictions.
In this week’s article I explore the various reforms and mechanisms that ZRA has undertaken in order to enhance its institutional capacity and the opportunities that exist to further improve its efforts.
The key reforms suggested are:
(i) developing a stronger and integrated Exchange of Information system;
(ii) investment in digitalization; and
(iii) harmonization of domestic and international legislation to enhance information exchange.
The capacity of a government’s tax enforcement is determined largely by information constraints, hence the emphasis on developing Exchange of Information (“EOI”) systems. Taxpayers, particularly multi-national corporations, operate globally, while revenue authorities are confined to their respective jurisdictions and domestic law. This requires transparency and co-operation between tax authorities in different countries in order to curtail harmful tax practices by taxpayers who have access to cross-border transactions.
A key challenge in implementing EOI is the delicate balance between domestic compliance and preserving the rights of individual taxpayers. African countries which host extractive industries, and which have limited digital infrastructure and administrative capacities, draw the short end of the stick in this regard. This is especially the case where multinationals operating in their jurisdictions are resident in countries with robust bank secrecy laws. Other challenges include insufficient legal instruments and domestic laws to enable EOI continue to pose a threat.
Encouragingly, ZRA with assistance from the African Tax Administration Forum, released Transfer Pricing Regulations in April of 2018. The regulations were supplemented by the Transfer Pricing Practice Note which sets out the Commissioner-General’s interpretation of Zambia’s transfer pricing rules and describes the changes introduced through the Income Tax (Transfer Pricing) (Amendment) Regulations, Statutory Instrument No. 24 of 2018. These instruments provide rules on appropriate transfer pricing methods and specify the supporting documentation that taxpayers should have to demonstrate arms-length dealing.
Aside from tax specific legislation, there are also other statutes which when properly implemented, support the functions of tax administration. An example being the Financial Intelligence Centre Act 46 of 2010 as amended by Act 16 of 2020 which has enhanced information requirements for persons (natural and juristic) participating in financial transactions (including the identification of intermediary institutions).
The ZRA has also invested a significant amount of resources over the last decade to develop digital platforms such as e-filing systems and online taxpayer registration to improve tax administration and compliance. However, effective EOI requires cooperation with global partners beyond the implementation of legal frameworks and improved technology.
In response to the high levels of illicit financial flows from African countries, the Global Forum on Transparency and Exchange of Information for Tax Purposes created the Africa Initiative in 2014 with the objective of unlocking the potential of tax transparency and exchange of information. The initiative includes raising resources to ensure that African countries are equipped to exploit the improvements in global transparency to better tackle tax evasion. (OECD 2021)
The Africa Initiative is implemented through a workplan that was developed and agreed by the member countries in order to foster transparency and EOI on request in African countries, and to progress towards the implementation of automatic EOI. It is open to all African countries and currently has 32 African member jurisdictions. Zambia is not a member of the African Initiative.
Notwithstanding, the progress that Zambia has made, not joining the initiative may a be missed opportunity given the resources available to member countries to implement effective EOI.
Countries such as Ghana that have implemented robust tax reforms including enhancing EOIs have recorded increases revenue (EITI 2018). In 2018 mining companies in Ghana contributed USD 475 million in revenue as compared to USD 4000 million in 2016.
Curbing illicit financial flows and increasing domestic resource mobilization are central to attaining key development goals, both domestically and regionally. As such it would be prudent to take advantage of platforms such as the Africa Initiative to supplement existing efforts.
About the Author
Chileshe G. Mange is a Researcher at CTPD, an Advocate of the High Court for Zambia and a part-time tutor with the University of Zambia.