East Africa lacks extractive industry taxation capacity

Article courtesy of OxfamAmerica

Dr. Prosper Ngowi

Dr. Prosper Ngowi, an economics professor from Tanzania, said that Tanzania has lost a lot of revenue from the gold sector because of its inability to monitor and collect taxes. “Are we going to miss it this time around with gas? If so, we’ll be the laughing stock of the world.” Ngowi was part of a study by NORAD, the Norwegian donor agency, which identified “huge gaps and huge needs for capacity building,” in the gas sector.

“The Tanzanian Revenue Authority doesn’t have capacity for extractive taxation generally but especially on oil and gas… While revenues will come seven to ten years from now, that’s not so far away and it is good to put things in place very early. If we don’t build the capacity to properly tax these resources all the revenues that should be used for pro-poor development would be a distant dream.”

Adriano Nuvunga

In Mozambique, world class gas discoveries have seen the “gas sector growing fast but expectations are growing faster” says Adriano Nuvunga of the Center for Public Integrity in Maputo.  Even though the big money won’t come in until the 2020s (some projections are for $200 billion to $400 billion) the discovery is a “game changer for a poor, aid -dependent country” that carries high risks of corruption.

Mozambique announced last week that it had gained $227 million in capital gains tax in the transfer of just one gas block from one company to another and the Mozambique Tax Authority said it had collected $802 million from oil and gas companies since 2012.

Godber Tumushabe 

In Uganda, the Uganda Revenue Authority is one of those “institutions that you fear” says Godber Tumushabe of the Advocates Coalition for Development and Environment (ACODE).

“Donor commitment is commendable” for supporting the institution, but it will be put to the test to develop new capacities in petroleum taxation. Uganda may receive more than $2 billion a year in oil revenues once production starts says Tumushabe, slightly more than half the size of Uganda’s budget in 2012 and more than all donor aid.

The pending Public Finance Bill should include appropriate safeguards and transparency provisions. Tumushabe credits Tullow Oil’s disclosure of the payments made to government, calling the move “incredible.” He says that Tullow’s disclosures of tax payments “presents a challenge to Uganda to be more open.” (Tullow’s Chairman Simon Thompson told the conference Tullow will disclose payments down to the project level this year – in advance of new EU requirements.)

Charles Wanguhu

Kenya’s oil finds will “change the face of development in Kenya,” says Charles Wanguhu of the Kenya Civil Society Platform on Oil and Gas. The Kenya Revenue Authority is one of the “more outstanding institutions,” says Wanguhu, but it will certainly be challenged by the more than 40 different contractual arrangements in the oil sector in Kenya.

John Omiti of the Kenya Institute for Public Policy Research and Analysis (KIPPRA) says Kenya must have “strong institutions that will enforce the realization production sharing arrangements … that will be really essential.”

Mohammed Amin Adam 

Ghana is a relatively new producer of oil – starting in 2010 – and has so far not met the test in oil revenue collection, says Mohammed Amin Adam of the Africa Center for Energy Policy, an Oxfam partner. The country has collected more than $2 billion in oil revenues to date – fully disclosed under the country’s landmark Petroleum Revenue Management Act – and the country is “determined to avoid the curse that prevented many countries from transforming their resource wealth into tangible development outcomes.”

Ghana’s tax authorities, though, “don’t have the capacity to hold companies to their tax obligations. Oil companies conduct self- assessment for the purpose of determining their tax liabilities and the government just accepts that,” says Adam. The Ghana Revenue Authority lacks the ability to “undertake cost audits of companies for tax purposes.” (Under production sharing arrangements, higher declared production costs reduce government take in the form of “profit oil” and other revenue streams.) Ghana’s government needs to support capacity of GRA to undertake serious cost audits. In addition, Ghana is losing out on millions of dollars as its antiquated Petroleum Income Tax Law doesn’t include capital gains tax.

To address weaknesses in tax collection and auditing some countries have outsourced some work to international audit firms. Angola, not seen as a paragon of good oil governance, has nonetheless effectively used international auditing firms such as KPMG to help in oil revenue collection. Donors have, of course, developed capacity building programs designed to help tax authorities deal with this complex sector (but low-paid civil servants may leave after training to join a big audit firm or oil company.) Another approach, introduced by Philip Daniel of the IMF at the conference last week, was to reduce demands on “scarce capacity” in governments such as through streamlining contractual arrangements to reduce administrative burdens.

This is not just a problem in Africa or other developing countries. In the United States and other developed countries agencies fail in their duties to taxpayers to collect extractive industry revenues and ensure a fair return. Lost revenues in Africa, though, could make a huge difference – think what $800 million could do to support farmers in Mozambique – and resource-rich African governments should not leave money on the table.

While obscure and unsexy, civil society, journalists, parliamentarians and others need to watchdog tax authorities to ensure they do their job well. Combining the “technical and analytical sophistication” among African civil society advocates called for by Tumushabe and the broad engagement of the citizenry and parliaments urged by Adam, an “active citizenship” approach toward tax collectors can help ensure that Africa doesn’t lose from the current oil boom.