AEOI presents tax revenue growth opportunities in Africa

While many African countries struggle with relatively low tax collection, the introduction of transparency measures, such as the exchange of information on request (EOIR) and the automatic exchange of information (AEOI), can raise billions of dollars in additional revenue. 

The potential of information exchange initiatives remains largely untapped in Africa. As governments seek to strengthen public finances, a focus on transparency can unlock offshore assets and curb illicit financial flows. Countries are starting to introduce the automatic exchange of information (AEOI) and we can support authorities at all stages of implementation. 

The exchange of information helps reduce the abuse of the tax system and strengthens compliance. The implementation of EOIR and AEOI around the world demonstrates that taxpayers can be encouraged to voluntarily disclose previously hidden assets. 

Nearly 100 countries complied with the AEOI standard in 2019, enabling their tax authorities to obtain data on 84 million financial accounts held offshore by their residents, covering total assets of €10 trillion ($12.2 trillion), says an OECD report. This sharp rise from €4.9 trillion in 2018 was driven by an increase in the number of jurisdictions receiving information, as well as a wider scope of information exchanged. 

For African countries, information exchange presents a unique opportunity to encourage disclosure, strengthen tax compliance, and consequently increase tax revenue. However, the region still faces serious obstacles within their compliance frameworks. 

The number of offshore accounts is proportionately much greater in Africa than in more economically developed countries. It is estimated that 44% of Africa’s financial wealth is held offshore, equalling a €17 billion loss of tax revenue.  

Many jurisdictions in the region also struggle with illicit financial flows. This impacts the development of those countries negatively. An estimated $88.6 billion - equivalent to 3.7% of Africa’s GDP - leaves the continent as an illicit capital flight, according to a UN report. 

As a result, the AEOI on financial accounts has huge potential for Africa. This is where the OECD's Africa Initiative steps in - it specifically promotes information exchanges within African countries, as well as recognising regional challenges and how to overcome them. 

The interest, political will, and infrastructure regarding the exchange of information are already improving. The Africa Initiative report shows that an increasing number of African countries are looking to improve tax transparency. Furthermore, introducing EOI initiatives continues to be a priority; African countries are broadening their information networks and continuing to implement the EOIR requirements while beginning to adopt the AEOI standard. 

African tax authorities take steps towards AEOI 

When a country decides to fight tax evasion through the Africa Initiative, it goes through four key steps, which lead to the effective use of information exchange in tackling illicit financial flows: 

1. The first step is membership. During this step, countries are required to make a political commitment to implement exchange of information standards and undergo peer review. 
2. The second step is the induction programme which lasts for several years and involves technical assistance in introducing information exchange standards. 
3.  The third step focuses on the implementation of the EOIR standard. 

While the interest in AEOI continues to grow, only a handful of African countries have fully committed to this process - South Africa, Mauritius, Seychelles, and Ghana. Nigeria collected its first AEOI filings in 2020, Egypt is progressing, and Morocco has taken steps to start its first exchanges in 2021. 

The cost of committing to these information exchange standards explains the small number of countries adopting the initiative as introducing and implementing AEOI requires a significant investment. While it is cost-effective, the low domestic resource mobilisation in the region means it is hard for governments to find the resources needed for the shift to AEOI. 

Nonetheless, several African countries are showing interest and are dedicated to certain programmes or pilot projects alongside external partners. 

Helping  Nigeria move towards AEOI 

It is expected that the impact of the EOI on increasing tax revenue will be significant in Africa’s largest economy - Nigeria. Through the voluntary disclosure program, which lasted for 15 months, the initiative raised $82 million, as well as growing the taxpayer database from 14 million in 2016 to 19 million in 2018. 

In Nigeria, the EOI structure is in place and in the first round of review, the EOIR standard was found to be largely compliant. The country is in a leading position as a ‘First Mover’ in Africa for international tax information exchange schemes.  

Our AEOI Solutions partnered with Nigeria’s tax authority – FIRS – to upgrade the reporting system and ensure compliance, playing a pivotal role in delivering the necessary technology.  

‘’We selected this AEOI solution due to their expertise, not just in the area of IT, but also in international taxation obligations, as well as their prior experience of working with African government authorities,’’ says Femi Edgal, Deputy Director and Head of the Exchange of Information at FIRS. 

FIRS fully implemented the AEOI platform to fulfil its commitments set out under the OECD’s common reporting standard (CRS). This resulted in financial institutions filing their first annual returns for AEOI-CRS in Nigeria in September 2020. 

The Nigeria project was delivered fully remotely, making it the second after Oman, showing that even with physical and travel restrictions in place, we support tax authorities with developing their information exchange plans. 

“Despite the obvious challenges posed by the pandemic and the new world we now operate in, thanks to the excellent cooperation on both sides, we are delighted to see the project reach ‘go-live’,’’ adds Edgal. 

Encouraging African countries to actively participate in the tax transparency agenda will continue to be the main priority for the OECD. In addition, the African Union is committed to playing a leadership role in the implementation of the Africa Initiative on tax transparency and supporting the discussions at national level. 

While the number of countries engaging in AEOI remains small in Africa, the potential benefits are substantial. In a COVID-19 environment where pressures on government finances only continue to rise, transparency and technology initiatives will gain popularity.