Taxation and Cross-border transactions in Africa

A cross-border transaction is the transfer of property, goods or services between individuals or business entities who reside in different jurisdictions.

The African Continental Free Trade Area (“AfCFTA”)AfCFTA seeks to create a single market for goods and services facilitated by the movement of persons, liberalise markets in Africa, and boost intra-African trade and economic and industrial development on the continent. AfCFTA would facilitate more cross-border transactions within Africa.

Taxation and Cross-border transactions in Africa: More Perspective

The informal sector is a significant aspect of the African economy and the labour market, as it plays a huge role in production, employment and income generation. The informal economy refers to economic activities that are not regulated and do not comply with legal or tax obligations.

These informal sectors include micro, small and medium scale enterprises (MSMEs) that are not formally registered and do not keep proper records of accounts, as well as workers who lack basic social or legal protection and employment benefits. According to the International Labour Organisation(ILO), 85.8% of Africa’s employed population are in the informal sector. Informal employment in some countries in Sub-Saharan Africa accounts for over 90% of employment while informal output is as high as 62% of official GDP.

Tax authorities in different jurisdictions in Africa face various challenges in their attempt to tax and regulate the informal sector. The majority of MSMEs maintain little or no information about their daily transactions and business dealings which would have enabled them to keep accurate financial statements and compute the appropriate tax payable for the period.

The (AfCFTA) has the largest free trade agreement, as it connects 1.3 billion people across 55 countries with a combined Gross Domestic Product (GDP) valued at $3.4 trillion. With the huge potential of AfCFTA, there is no doubt that the agreement would play a significant role in boosting trade in the informal sector which is often neglected by the government. The AfCFTA agreement recognizes the need to improve the export capacity of both formal and informal service suppliers, with particular attention to MSMEs.

The AfCFTA, therefore, gives a good opportunity for governments in Africa to regulate informal cross border trade on the continent to generate revenue from the sector. The agreement can, for example, encourage the introduction of tax policies across its member countries that promote the formalization of the informal sector.

Given the economic impacts of the COVID-19 pandemic in Africa, it is clear that the formal sector is inadequate to generate sufficient revenue for governments and for improving the continent’s tax-to-GDP ratio. Accordingly, efforts must be geared towards widening the tax base and bringing more people into the tax net, particularly business owners in the informal sector.

Pan-African Payments and Settlements Systems(PAPSS), which is expected to boost intra-African trade significantly by making cross-border payments less reliant on third currencies would harness the full potentials of the informal sector, among other policies that would assist in bringing relevant stakeholders in Africa to the tax net to improve tax revenues in African countries.

With AfCFTA, the government can boost trade in the informal sector by implementing fair and transparent policies that will benefit operators of the sector, while also addressing the numerous challenges of the economy to ease its formalization.

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Olatunji is the founder Taxmobile.Online and Managing Partner/CEO of AOA Professional Services. Prior to this, Olatunji worked as Director, Tax & Regulatory Services at Nolands Nigeria Professional Services, Senior Manager -Tax, Regulatory & Advisory Services at Saffron Professional Services.


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