Governance, Taxation and Accountability

– Issues and Practices

Presented by
Mrs. Mildred Chiri
Comptroller and Auditor-General
 Governance, Taxation and
Accountability – Issues and Practices
 
 
Introduction
Empirical evidence has shown that there is a strong
relationship between corporate governance, accountability
and the taxation system of a country. Taxation systems
can contribute significantly to shaping accountability
relationships and strengthening state capacities. The
OECD/DAC, the Organization of Economic Co-operation
and Development and Development Assistance Committee
carried out a study on the developing world and
established that better governance may come about from
the way in which taxes are raised and tax systems are
implemented. Tax can also be a key driver in promoting
corporate governance and accountability.
Corporate Governance
Corporate governance is continuously gaining importance by the day. It is fast
becoming a sine qua non of any successful business entity or a not for profit
organization. According to a 1999 World Bank paper, the authors concluded
that : “there is new imperical evidence that there is a strong causal relationship
from good governance to better development outcomes such as higher per
capita incomes, lower infant mortality and higher literacy”. This type of
comment highlights the importance of good corporate governance. We all
know that corporate governance has assumed centre stage in this 21st century
partly because of the corporate failures that took place at the beginning of this
century such as Enron, WorldCom etc. Good corporate governance is now
being viewed as a panacea for the risk of corporate failures.
Elements of an effective corporate governance which should
help in creating business success comprise :

An effective independent board

A nominations committee
A remuneration committee
An audit committee
A risk committee
Internal audit
External audit
Code of ethics
Corporate governance is defined as “the system by which
companies are directed and controlled in the interests of
shareholders and other stakeholders”. The basic purpose of
corporate governance is to monitor those parties within a
company which control the resources owned by investors.
The primary objective of sound corporate governance in
turn, is to contribute to improved corporate performance
and accountability in creating long-term shareholder value.
Corporate governance rests on the following key underpinning concepts:

Fairness
Openness/transparency
Independence
Probity/honesty
Responsibility
Accountability
Reputation
Judgment
Integrity
In Zimbabwe, the Public Finance and Management Act was
promulgated in 2010. According to this Act, managers in the
public sector are expected to be more accountable than
before. Audit committees are going to be set up in
ministries in order to strengthen corporate governance.
The ministry of State Enterprises is in the process of crafting
a corporate governance code for parastatals and at national
level, a corporate governance code is being worked on.
Accountability

As already alluded to, accountability is one of the pillars of

corporate governance. Accountability can be described as
an obligation to answer for a responsibility that has been
conferred. It presumes the existence of at least two parties;
one who allocates responsibility and the other one who
accepts it with an undertaking to report upon the manner in
which it has been discharged.
In government, for example in Zimbabwe, a clear
distinction is made between the legislature, which holds
the purse strings and the administration, which spends the
money. The Administration receives money from taxes and
other sources for Parliament (i.e. for the people) and is
accountable to Parliament for its use. It is responsible for
ensuring that public money is properly collected; that
public assets are protected from loss; that expenditure is
made only for purposes approved by Parliament and that
value for money is obtained.
In accepting this trust, the administration accepts also the
responsibility for reporting to Parliament on how the trust has
been fulfilled. This is the principle of accountability and the
Accounting Officer (usually the Head of Ministry) is the person
whose responsibility this is. In other words, he is accountable
to Parliament for the proper discharge of the trust placed in
him. Accountability applies not only to government but to all
organizations in both public and private sectors. However, the
focus in this topic relates to taxation and accountability in the
public sector viz; government, local authorities, parastatals etc.
Taxation

According to the Wikipedia, the free encyclopedia, a tax

may be defined as a “pecuniary burden laid upon
individuals or property owners to support the
government and is a payment exacted by the legislative
authority”. A tax is not a voluntary payment or
donation, but an enforced contribution, exacted
pursuant to legislative authority and is any contribution
imposed by government whether under the name of toll,
tribute, duty, custom, excise, subsidy, aid etc.
Money provided by taxation has been used by governments and their
functional equivalents throughout history to carry out many functions. Some
of these include expenditures on water, the enforcement of law and public
order, protection of property, economic infrastructure (roads, legal tender,
enforcement of contracts etc.) public works and the operation of
government itself. Governments also use taxes to fund welfare and public
services. These services can include education systems, health care systems,
pensions for the elderly, unemployment benefits, and public transportation.
Energy, water and waste management systems are also common public
utilities. Governments use different kinds of taxes and vary the tax rates.
This is done to distribute the tax burden among individuals or classes of the
population involved in taxable activities such as businesses.
Four Main Purposes of Taxation
Taxation has four main purposes or effects: Revenue,
Redistribution, Repricing and Representation (the four “R:s).
The main purpose of taxation is revenue generation. Taxes
raise money to spend on armies, roads, schools and
hospitals, and on more indirect government functions like
market regulation or legal systems. The second purpose is
redistribution. This normally refers to transferring wealth
from the richer sections of society to poorer sections. A
third purpose of taxation is repricing. Taxes are levied to
address externalities : tobacco is taxed, for example to
discourage smoking, and a carbon tax discourages use of
carbon based fuels.
A fourth consequential effect of taxation is representation.
The American revolutionary slogan “no taxation without
representation” implied that : rulers tax citizens, and
citizens demand accountability from their rulers as the
other part of this bargain. Several studies have shown that
direct taxation (such as income taxes) generates the
greatest degree of accountability and better governance,
while indirect taxation tends to have smaller effects. This
fourth purpose of taxation, namely representation, forms
the gist of my presentation.
Historical Background
In Western Europe and North America, citizens accepted
obligations to pay tax in return for rights to be represented
in processes of decision-making about how public money
was raised and spent. American colonists in the 18th century
captured this in their famous protest, “no taxation without
representation”. There was bargaining between rulers and
taxpayers and this helped in meeting citizen’s demands. This
created the concept of a “fiscal social contract” which helps
explain how representative governments and democracy
emerged in Western Europe and the United States.
Historically, some governments such as Britain and the
Netherlands from the mid-17th century negotiated with
taxpayers in ways that created mutual gains to both rulers
and taxpayers. Since tax was negotiated, this meant that tax
collection became less costly to administer, less onerous and
more predictable. This helped governments to undertake
better long-term planning and businesses were encouraged
to invest. Governments developed systems for recruiting,
training and managing revenue-collection personnel.
Negotiations around tax issues simultaneously
increased government capability, accountability and
responsiveness. Thus both governments and
citizens benefited
Table : The effects on governance of state reliance on broad taxation
Immediate Effects
Effects on the state
 
The state becomes focused on
obtaining revenue by taxing citizens
Effects on citizens
The experience of being taxed
engages citizens politically
Intermediate Effects Direct governance outcomes
(i) The state is motivated to promote citizen More responsiveness
prosperity  
(ii) The state is motivated to develop More bureaucratic capability
bureaucratic apparatuses and information
sources to collect taxes effectively
   
(i)(Some) taxpayers mobilize to resist tax
demands and/or monitor the mode of taxation More accountability
and the way the state uses tax revenue

  (i)
Results of interaction
(ii)
 
States and citizens begin to bargain   political capability
over revenues. Taxpayers comply (i)
with tax demands in exchange for
some institutionalized influence over (ii)
the level and form of taxation and
the uses of revenue (i.e. public
policy)
Taxes are more acceptable and predictable, More responsiveness, political
and the taxation process more efficient and bureaucratic capability
Better public policy results from debate and 
negotiation More responsiveness and
Wider and more professional scrutiny of how  
public money is spent More accountability
The legislature (assuming one exists) is  
strengthened relative to the executive More accountability
 
 In East Asian countries, history shows that they
depended heavily on broad based tax systems. This
dependence on broad taxation gave governments
the leeway to extend into rural and remote areas of
their countries. This required governments to
develop a good taxation system which included basic
population registration systems.
Taxation and Natural Resources

There is the negative proposition that governments which do not

need to tax their citizens have little incentive to be accountable,
responsive or efficient. This is particularly true with countries
which are rich in natural resources such as oil and minerals. This
syndrome is called the “resource curse”. Countries which fall in
this category include states in the Middle East, the Caspian basin
and Africa. They earn large surpluses from exporting oil to rich
countries. The benefits from oil accrue to a small number of big
companies and the individuals who control them. Evidence
suggests that states dependent on oil tend to:
 Be independent of taxpayers, and therefore unresponsive to
them.
 Have few incentives to promote broad economic development
 Use oil revenues to buy off opposition, and to fund repressive
internal security
 Attract external military and political support
 Lack incentives for taxpayers to engage in the local political
process, because there is no political bargaining over sources
and use of public revenue
 Have untransparent revenues with low oversight from
legislatures
 Have few incentives to establish cadres to raise and manage
taxes
This relationship of bad governance and limited
reliance on taxes is found in many countries of the
world. However, there are some exceptions. For
example, countries such as Botswana have
managed their natural resources wealth with
success.
Taxation and Developing Countries

According to the OECD study, when it comes to taxation and

governance in developing countries, it’s a different story. The
study asserts that in many developing countries, governments
have little incentive to bargain with organized groups of
citizens.
This is the main source of poor governance. This goes back to
the history of colonization of the developing countries which
left power concentrated in the hands of a few elites. These few
elite individuals represent the major tax payers. They resist tax
reforms and are unresponsive to the interests of society at
large. The state tends to be too powerful in relation to its
citizens. In other words, there is no accountability to the
electorate.
Donor Aid and Taxation

Aid from donor countries can have negative effects on

taxation. It discourages governments from taking initiatives
to broaden the tax base. Substantial increase in aid flows
over a sustained period undermines a country’s efforts to
mobilize domestic resources and consequently cripples
institutional development. However, it is not clear how high
donor aid has to be, in order to depress domestic revenue
mobilization. Research in this area is inconclusive.
Challenges of Developing Countries and Taxation
Poor developing countries have big challenges regarding
taxation. The mechanisms of raising the tax as well as the
quantum of tax are of great concern. The biggest challenge is
to tax a larger number of citizens and enterprises more
consensually. Generally citizens are unwilling to pay tax
because of the long-held perception that governments
consistently misuse public funds. When it comes to low
income and agrarian economies, taxation is even more
difficult without applying coercion. With the low income
bracket, taxable units are small, there are no records ; use of
banks is limited, incomes are seasonal and unstable and all
this increases the costs of collection.
Challenges of Developing Countries and Taxation

Poor developing countries have big challenges regarding taxation. The

mechanisms of raising the tax as well as the quantum of tax are of great
concern. The biggest challenge is to tax a larger number of citizens and
enterprises more consensually. Generally citizens are unwilling to pay tax
because of the long-held perception that governments consistently misuse
public funds. When it comes to low income and agrarian economies,
taxation is even more difficult without applying coercion. With the low
income bracket, taxable units are small, there are no records ; use of banks
is limited, incomes are seasonal and unstable and all this increases the
costs of collection. The other bracket that is also difficult and costly to tax
is the informal urban sector which is found in many developing countries.
Another challenge faced by poor countries is lack of resources and capacity
to build comprehensive tax collection systems. In spite of the benefits that
accrue from broadening the tax base, revenue authorities still tend to focus
their efforts on a very small number of large taxpayers who generate most
revenue at the exclusion of many other groups which include professionals
and a large number of workers in the informal sector. This sounds
economic sense from the view-point of containing administrative costs of
collection, but has adverse consequences on governance. Since its only a
small number of the population which is taxed, demand for the judicious
use of the funds by the handful of individuals will be drowned and their call
will be faint because the rest of the citizens will not be affected. Therefore
their demand for good corporate governance and accountability will be
ineffective.
In most sub-Saharan African countries, tax
revenue has increased over the last few years.
Research showed that most of the improvement is
due to more effective tax administration and
collection, rather than to broadening the tax base.
A 2006 study carried out by the French Foreign Affairs Ministry based
on surveys in Benin, Cameroun, Ghana, Mali and Mauritania, revealed
that people often refused to pay tax because they could see little in
return in terms of government services or investments. The study
showed the reasons for low quality goods and services to citizens as
being lack of resources and lack of capable local administration staff.
The study also concluded that some actions can improve attitudes
towards taxation. In the case of local authorities, these actions could
include communicating and explaining efforts made to provide
services. Exchanges between local authorities and people took place
during public meetings or through radio broadcasts to inform citizens
of the latest service delivery performed, such as building a market or a
Zimbabwe and Taxation

Zimbabwe as a developing country is also bedeviled by the respective

challenges that haunt the third world countries. After independence in
1980 a number of tax reforms were instituted as follows:-

(i)Married women became taxpayers in their own right. Prior to

independence men and single women were the only recognized
taxpayers. Formerly employed married women’s income was deemed
to be their husband’s income hence taxed at maximum tax rate, forcing
most of them to stay at home. Since then, many such women were
motivated to take up formal jobs and this somewhat widened the tax
base.
ii. In an effort to improve its revenue collection system, the
Zimbabwe Revenue Authority (ZIMRA) became an
autonomous entity in 2001.
iii. The final deduction system was introduced. This brought
transparency in the determination of tax liability and assets.
iv. In 2004 the sales tax was removed and replaced with VAT to
improve on the tax base and also adapt a tax method that
responded directly with the level of economic activities. This
fostered accountability.
v. Currently the government in consultation with various
stakeholders is working on amending Income Tax Act to make
it more user friendly.
During this same time, the economy opened up to the
rest of the world after the removal of sanctions imposed
during the colonial era. The revenue increased
significantly during that period as the country traded with
the outside world, thereby increasing the tax contribution
to the fiscus. The contribution of taxes to the fiscus since
1979 has been fluctuating between 82% and 98% in 2007.
Zimbabwe has been experiencing serious economic challenges for the
past ten years. A number of companies have closed down and thus
reducing the tax base. Workers have been retrenched and forced some
to enter the informal sector. The informal sector in Zimbabwe has
grown big. This sector is still a challenge for ZIMRA in terms of getting it
all into the tax net.

The informal sector is characterized by lack of records, limited use of

the banking system and the collection system by ZIMRA is sometimes
face to face and this proves costly. The shrinking of the tax base in
Zimbabwe has perverse effects on accountability and corporate
governance. With few citizens into the tax net, the demands and calls
for corporate governance and accountability is low and does not go far.
According to the Organization for Economic Cooperation and
Development (OECD)/Development Assistance Committee (DAC)
Guidelines, too much donor aid can compromise domestic
resource mobilization. The experience in Zimbabwe is that donor
aid has actually been dwindling. Projects and programmes have
been shelved due to lack of resources mainly from the donor
community. For example in the state budget of 2009, the donor
community promised to provide aid amounting to almost $700
million but they did not honour their promise. The budget had to
be revised downwards in line with the resources mobilized
through taxation and other sources.
Suggested Way Forward for Zimbabwe

foLike any other third world country, Zimbabwe is not

yet operating optimally in so far as accountability and
corporate governance which is fostered by taxation is
concerned. There are still challenges and the following
suggestions from the DAC guidelines are worth
considering with a view to implementing them:
(i) Taxpayer awareness/education. ZIMRA together with the Ministry
of Finance need to inform the public about the sources of the tax,
the use of money and the outcomes from the use of the taxes. This
should turn the current system of coercion to pay tax into
pursuasion. When the payment of tax is consensual, tax evasion
will be minimized and revenue flows should increase.
(ii) ZIMRA should be linked to other arms of government to create a
shared database and so reduce or eliminate tax evasion. Such
linkages could include the following :-
 Ministry of Transport – for the registration of transporters
 Central Vehicle Registry – for all registered vehicles in the country
 Ministry of Mines – for all mining claims in the country
 Registrar of companies – for all companies registered in the country
The foregoing measures should go a long way in increasing the
tax base and ultimately the tax revenue inflows. These reforms
will help to conscientize citizens about their rights to
accountability and good corporate governance on the use of
their moneys. This will also help in enforcing both accountability
and governance and hopefully the issue of corporate failures
especially within public enterprises, local authorities etc should
be minimized.

 
I thank you