IFRS adoption and tax revenue performance in Africa: does Africa need tax-targeted IFRS reforms?

What is it about?

This paper examines the sensitivity of tax revenue performance to IFRS adoption in Africa and the implications for tax policy. The study investigated how IFRS adoption affects the level of tax revenue performance in Africa. This study is one of the foundational studies, which has investigated IFRS adoption and tax revenue performance at both macro and cross-country levels. This approach presents better inclusive evidence to support tax reforms and provides the basis to validate tax regulatory apprehensions and suspicions of the adverse impact of IFRS adoption. The paper uses data from six African countries: Botswana, Ghana, Namibia, Nigeria, Sierra Leone, and South Africa for the analyses. The data are sourced from World Bank, International Monetary Fund, and Organisation for Economic Co-operation and Development (OECD). Annualised data from 1996 to 2020 are used. The paper employs Pooled Mean Group (PMG) as the primary estimator and is validated by Panel Dynamic Ordinary Least Square (DOLS). The results showed that IFRS adoption could pose a significant risk to tax revenue mobilisation in Africa as evident by the significant negative long-run estimates. The results further revealed short-run positive IFRS effects. This is affirmed by the country-level analyses and trajectory of tax revenue performance across the sample periods of 1996 to 2020 for the selected countries during the pre- and post-IFRS era. It is therefore safe for African countries to pursue tax-targeted IFRS reforms to minimise the possible adverse effect of IFRS on tax revenue

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Why is it important?

There has been some apprehension about IFRS-based financial reports as the basis for tax returns and assessments. For instance, the Canada Revenue Agency (CRA) views IFRS-based financial reports with suspicion in meeting their revenue targets. CAR believes that IFRS compliance could impact the risk of inappropriate tax reporting and adjustments in corporate tax reporting (Canada Revenue Agency, CAR, 2010, 2012). Similarly, tax authorities in the Czech Republic have also declined to accept tax reporting based on IFRS for fear of adverse tax collection and possible deterioration in revenue targets (Jirásková & Molín, 2015; Procházka, 2014). Hungarian Tax Authorities (HTA) have also issued concerns about accounting adjustments for tax purposes and cautioned against tax returns, which are inconsistent with Hungarian accounting requirements. Due to these regulatory concerns, many of these countries have implemented tax-targeted reforms where local accounting standards are used as the bases for tax returns rather than IFRS (Deloitte, 2021; Haag, 2022; KPMG, 2020). Some countries in Europe have tax accounting rules separate from IFRS so as not to upset tax calculation. However, African countries are rather realigning their tax laws with IFRS making IFRS rules the basis for taxation. Practically, Africans are not pursuing tax-targeted IFRS reforms. National tax authorities in Africa have increasingly relied on IFRS treatments to determine the tax treatments of some specific transactions (Adegbite, 2020; Egbunike & Okoye, 2017; Zwan, 2020). While the realignment of local tax rules to IFRS rather than tax-targeted reforms to separate tax accounting rules may lessen the administrative burden on the taxpayers, harmonise and simplify accounting-tax treatments, to some extent this may be slippery especially when there are tax regulatory concerns that IFRS could disturb tax revenue targets. These tax regulatory concerns and tax-targeted IFRS reforms from even developed countries where it is believed to be fundamental beneficiaries of IFRS adoption (Daske et al., 2008) raise some fundamental question about the tax revenue performance impact of IFRS in the developing economies such as those in Africa. In fact, except for South Africa, which is one of the largest and most developed economies in Africa, the three high-performing tax revenue countries such as Seychelles, Tunisia, and Morocco have not fully adopted IFRS (operation and Development OECD, 2019, 2020). Thus, IFRS adoption may contribute to explaining the weakness in tax revenue performance in Africa. Although IFRS adoption likely contributes to or is one of the main drivers behind much of the observed country-level tax revenue performance bottlenecks, causality cannot be inferred (Akitoby et al., 2020). The only scientific basis for affirming or disaffirming the IFRS apprehension and suspicion is through empirical investigation. This paper, therefore, builds on and makes contributions to the IFRS-tax literature in Africa

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