Another taxing challenge for the world’s newest country

20/09/2015

By Iain Nelson

South Sudan’s president recently signed a peace deal aimed at ending a 20-month brutal conflict. But he had “serious reservations”.

The peace deal comes after a civil war which erupted when a political crisis provoked fighting between forces loyal to the president and rebels allied to his former deputy.

The peace deal has been heavily scrutinised and the UN Security Council has even pre-empted the agreement collapsing by announcing it is ready to impose an arms embargo if it fails.
Whilst opposing factions continue to squabble, an important facet of South Sudan’s development has been overlooked: tax revenue.

In South Sudan, the need for a better tax system is clear. It is ranked as the world’s most fragile state, the fourth worst for doing business and its economy has suffered greatly from collapsing oil prices. Its total revenues account for an alarmingly small 3.7% of its GDP; one of the lowest in the world. Such a dramatic shortfall means the Government cannot provide even basic services for its indigent population.

A revenue authority is a government agency tasked with managing all revenues due under a country’s tax laws. South Sudan currently doesn’t have one. A new revenue authority – which has been promised in nine months as part of the peace deal – would have the potential to quickly raise tax yields and foster a better business environment.

Here’s why:

1. Revenue authorities, in theory, don’t suffer from the same level of political interference as tax departments within ministries. This gives them freedom to pursue tax evasion more effectively, create their own staffing policies and imbue the organisation with a perception of political impartiality. Apart from making the organisation more effective it increases trust and compliance in the tax system.

2. The ability to hire and fire their own staff and pay salaries at a higher level than other civil service departments gives revenue authorities an organisational edge. Incentivising staff and recruiting top quality managers from outside the civil service improves employee performance and morale. Accountability is increased too as revenue authorities’ escape public service regulations often used to protect corrupt or incompetent civil servants.

3. Establishing a revenue authority allows restructuring and integration of revenue functions within one agency. In developing countries, where there is often a shortage of skills and a small tax base, the case for integration is strong. By merging departments (like tax and customs) and support functions (like HR and IT) economies of scale flow to the organisation and efficiency is improved.

Their advantages are clear but ultimately revenue authorities are only as good as the people and processes that govern them. If they do not remunerate staff appropriately, foster a merit-based HR management system and possess enough political autonomy, they will suffer the same problems as any other tax administration.

In establishing a revenue authority, South Sudan would be following a model used by many countries in the region. Uganda, Kenya, Tanzania, Rwanda and Ethiopia all now have revenue authorities. A similar move for South Sudan could help facilitate its entry into the East African Community. Revenue authorities are increasingly the norm across Africa, especially in countries where revenue collection is already chronically low, like South Sudan.

Nine months is an ambitious target to build a new revenue authority, especially in a place fraught with every imaginable adversity. Whilst it may not be a silver bullet, a new South Sudan Revenue Authority has the potential to quickly bring significant improvements to the country’s public finances, and help it move on after years of instability and conflict.

Adam Smith International is a world leader in tax reform and setting up revenue authorities. In Burundi, we helped set-up the Office Burundais des Recettes. Streamlining registration processes, recruiting over 200 senior and middle level staff and providing expert training, among other things, ensured overall tax receipts have increased by more than 75%. In Sierra Leone, we are supporting the National Revenue Authority by improving transparency, operating culture and taxpayer compliance.