Fintech and tax in Sub-Saharan Africa: taxation versus financial inclusion

ABSTRACT

The rise of digital financial services has attracted growing attention from governments in Sub-Saharan Africa seeking to raise tax revenue. In the context of global concerns around how governments can tax the digital economy and fintech, we evaluate recent debates over mobile money taxation in Africa as fundamentally political, rather than technical matters. We assess in depth three such debates, in Kenya, Uganda and Malawi. In doing so, we draw on a critical reading of recent political economy literature on taxation, state-business relations, and the ambiguity of financial inclusion. Our research highlights how political questions about tax materialize as technical ones, how governments’ tax bargaining is influenced by business interests, and how the ambiguity of financial inclusion allows qualms over adverse effects on financial services to frustrate and supersede other policy concerns.

KEYWORDS:

• Digital financial inclusion
• mobile money
• taxation
• tax bargaining
• political economy
• Sub-Saharan Africa

Disclosure statement

The authors report no financial conflicts of interest. The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article.

All three authors were contracted in 2021 by the International Centre for Tax and Development (ICTD) to contribute to the ‘DIGITAX' research programme, which is funded by the Bill and Melinda Gates Foundation (BMGF), to review the evidence landscape on the impacts, drivers and constraints of mobile financial services usage. At the time of writing and revising this article, Philip Mader was a member of the DIGITAX Advisory Board. After this article’s final revisions, Philip Mader was appointed as DIGITAX Programme Lead.

The article was written without funding from ICTD and BMGF and does not claim to represent their views.

Notes

1 The IMF and World Bank (2018, p. 7) understand fintech, or financial technology, as ‘advances in technology that have the potential to transform the provision of financial services spurring the development of new business models, applications, processes, and products.’

2 See for example: https://digital-strategy.ec.europa.eu/en/consultations/fair-taxation-commission-launches-public-consultation-digital-levy.

3 As also shown by a recent evidence gap map (https://egm.financedigitalafrica.org/) focusing on mobile money, which suggests mixed results and thin impact evidence.

4 Gupta was deputy director of the Fiscal Affairs Department of the IMF.

5 Ronald Reagan famously relied on Arthur Laffer’s claim that lowering tax rates would raise tax intake to justify tax cuts, suggesting that tax rates were in the ‘prohibitive’ range beyond a hypothesised optimum; see Mirowski (1982) for an early and still valid refutation.

6 Their regression of local survey data, however, offers at best weak evidence for this claim.

7 As per World Development Indicators, figures for 2020. Differing methods for classifying registered ‘accounts’ (Kenya), ‘subscribers’ (Malawi) and ‘customers’ (Uganda) may explain some differences between countries, including registered accounts exceeding people in Kenya but not elsewhere.

8 The assumption is also inconsistent with the simultaneously-made argument that users would switch back to cash, which would suggest demand is elastic.

9 These figures are from calculations on 18 DFS providers and include some in South Asia.

10 A balanced technical analysis should, for instance, also extend to the expenditure side: ‘Even regressive taxes can have redistributive effects if they fuel progressive patterns of public spending’ (Moore et al. 2018, p. 8).

11 As argued in July 2020: Kenya’s tax plans would bring ‘costly outcomes on tax revenues, market price distortions, and a negative impact of [sic.] market developments’ (Ndung’u 2020).

12 Including most MNOs, the world’s largest digital enterprises (such as Amazon and Facebook), hardware producers and automobile manufacturers (https://www.gsma.com/membership/, 8 August 2021).

Additional information

Notes on contributors

Philip Mader

Philip Mader is a Research Fellow at the Institute of Development Studies, and (since June 2022) Programme Lead of the DIGITAX research programme at the International Centre for Tax and Development (ICTD).

Maren Duvendack

Maren Duvendack is Professor of Evaluation in Economics at the School of International Development at the University of East Anglia.

Keir Macdonald

Keir Macdonald is a Research Officer at the Institute of Development Studies in the Business, Markets and State research cluster.