Tax Systems and Revenue Mobilisation in Africa: Building Fiscal Capacity

The ability of governments to raise sufficient revenue to fund public services, infrastructure, and social protection without unsustainable borrowing is foundational to effective governance and long-term economic development. Across Africa, building more effective tax systems — ones that collect a fair share of economic activity reliably, equitably, and without excessive administrative burden on compliant taxpayers — is one of the most consequential domestic policy challenges. Progress on domestic resource mobilisation is widely seen as the most sustainable path to reducing dependence on external borrowing and donor aid, and as a prerequisite for the kind of long-term public investment that development requires.

The Revenue Gap

African countries on average collect a smaller share of their gross domestic product in tax revenue than peer economies in other regions at comparable income levels, though performance varies considerably across the continent, with some countries achieving respectable revenue ratios and others collecting very limited amounts relative to economic output. Several structural features of African economies make revenue collection intrinsically challenging: large informal sectors operating outside formal tax systems; significant agricultural activity by smallholders whose incomes are difficult to tax without administrative approaches that are either intrusive or expensive relative to the revenue generated; limited capacity to effectively tax wealth and capital gains; and the technical challenge of taxing multinational companies whose cross-border structures allow significant profit shifting away from African jurisdictions through transfer pricing and other arrangements.

Value Added Tax

Value added tax — a consumption tax applied at each stage of production and distribution, with businesses collecting tax from customers and remitting the net amount after crediting tax paid on their own purchases — has become the dominant broad-based consumption tax across most African tax systems, replacing older turnover taxes and generating a significant share of total tax revenue in most countries. VAT is generally considered an efficient tax because it minimises economic distortion and generates relatively stable revenue, but administering it effectively requires a reasonably sophisticated tax authority capability, since it depends on maintaining accurate records of business-to-business transactions across the economy. VAT compliance gaps — including businesses failing to register, underreporting sales, or fraudulently claiming input tax credits — are a significant source of revenue leakage in several African VAT systems and a priority target for tax administration improvement.

Corporate Income Tax and Transfer Pricing

Corporate income tax — taxation of company profits — is a significant revenue source but one where African countries often face particular challenges in taxing multinational company profits fairly. Transfer pricing refers to the prices at which transactions between related companies in different countries are conducted, and manipulation of these prices to shift profits from high-tax African jurisdictions to lower-tax locations elsewhere is a well-documented mechanism through which significant tax revenue is lost. Strengthening transfer pricing regulations and the capacity of tax authorities to audit and challenge abusive arrangements requires technical expertise that many African revenue authorities are still building, supported by international capacity-building programs and information-sharing arrangements between revenue authorities. Extractive industry taxation — ensuring that mining, oil, and gas companies pay a fair effective tax rate on profits from African natural resources — is a specific priority area given the scale of resource extraction activity in several countries.

Personal Income Tax and Pay-As-You-Earn

Personal income tax collected through employer withholding — the pay-as-you-earn system — is an efficient collection mechanism for the formally employed, since it collects tax at source before income reaches the employee and does not require self-assessment by individual taxpayers. This system is generally reasonably well-functioning in most African tax administrations for formal sector employees. Its fundamental limitation is that it reaches only the formally employed minority of the workforce in most African economies, leaving the majority of income earners in the informal sector outside the personal income tax net except to the extent that they are reached by presumptive or simplified tax regimes designed for the informal sector.

Property Taxation

Property taxation — levying regular taxes on the value of land and buildings — is widely advocated by tax policy experts as a potentially important and underutilised revenue source for African local governments, since property is a visible, immovable, and relatively straightforward asset to tax, and a well-designed property tax can generate significant local government revenue while also discouraging speculative land holding and encouraging productive land use. In practice, property tax systems across much of Africa are poorly developed, generating limited revenue due to outdated property valuations, limited coverage of the property stock, weak enforcement, and administrative capacity constraints in local government. Building more effective property tax systems is a technical and political challenge: it requires investment in property registration and valuation systems, and it faces the political economy challenge that property owners — who are disproportionately represented among politically influential groups — have strong incentives to resist effective property taxation.

Tax Administration Reform

Even the best-designed tax policy generates limited revenue if administrative implementation is weak. Tax administration reform — improving the operational efficiency, integrity, and technological capability of tax collection agencies — is therefore as important as tax policy design. Significant investment has gone into tax administration modernisation across many African countries over recent decades, including the establishment of semi-autonomous revenue authorities with greater operational independence and professional management than traditional government departments, the introduction of taxpayer identification number systems enabling better tracking of tax compliance, electronic tax filing and payment systems that reduce compliance costs for taxpayers and improve data availability for tax authorities, and risk-based audit selection systems that direct audit resources toward the highest-risk taxpayers rather than spreading attention evenly across the tax base.

Domestic Resource Mobilisation as Development Finance

The connection between improved domestic resource mobilisation and development financing is direct: every additional unit of tax revenue raised domestically reduces the gap that must be filled by borrowing or aid, and reduces the associated dependency, debt service burden, and policy conditionality that external financing often entails. International development institutions and bilateral donors have increasingly prioritised support for domestic resource mobilisation, recognising that helping countries build more effective tax systems may ultimately generate larger and more sustainable financing for development than direct aid transfers, by building the fiscal capacity that enables countries to finance their own development from domestic resources over the long term.

Looking Ahead

Building more effective tax systems across Africa is a long-term enterprise requiring sustained political commitment, technical capacity investment, and institutional development. Key priorities include extending the tax net to the informal economy through practical simplified compliance regimes, strengthening capacity to tax multinational profits fairly, modernising property taxation, and continuing to invest in tax administration technology and professional capacity. Progress on these fronts will be central to the fiscal sustainability of African governments and to the broader agenda of building development-capable states across the continent.