Trade misinvoicing effects on tax revenue in sub‐Saharan Africa: The role of tax holidays and regulatory quality

Abstract

AbstractThe first target of Goal 17 of the Sustainable Development Goal (SDG) emphasizes the need to strengthen domestic resource mobilization and improve revenue collection. However, the average tax‐to‐GDP ratio is much lower than the optimal threshold required to finance development. Meanwhile, Africa is losing a significant amount of its capital through illicit financial flows, primarily driven by trade misinvoicing, but at the same time offering fiscal incentives and improving governance to create an environment for increased domestic revenue. Using random and fixed effects models, the study examines the tax revenue effects of trade misinvoicing, and further examines the extent to which tax holidays and regulatory quality dilute or deepen the revenue effects of trade misinvoicing for 13 African countries over the period 2000 to 2015. The results suggest that trade misinvoicing reduces tax revenue. While tax holiday strengthens the effect of trade misinvoicing, regulatory quality dilutes the effect of trade misinvoicing on tax revenue. The study, therefore, recommends that the governments of SSA should promote good governance, reduce trade misinvoicing and review existing tax incentives as critical components of the ongoing efforts to increase domestic resource mobilization for development.