Transcript South Africa: Taxation and Growth
Agenda
Background Doing Business Indicators for Tax METRs Agriculture Mining Manufacturing Tourism Financial Services Small Business Customs Licensing
Background
FIAS series of studies across Africa (Mozambique = # 8) Previous FIAS Admin Barriers work in Mozambique, in 1996 and 2001 Rise of tax as an IC issue, partly due to rise of independent RAs in Africa Mozambique has strong P-P engagement (e.g. CTA Bolnick Report 2004) FIAS work: more ‘grist to the mill’; sector analysis; additional role of licenses, fines etc.
Mozambique: Doing Business (Tax) Indicators
SA Mauriti us Africa Moz Payments (number) Time (hours per year) Total tax payable (% of gross profit)
35 230 50.9
32 350 43.8
7 158 38.2
41.4
394 58.1
Marginal Effective Tax Rates (METR)
Summary measure of the impact of the tax system on the incentive to invest in capital Captures the impact of the statutory tax rate, investment allowance, depreciation, and various other taxes imposed on the return to capital • Can be amended to incorporate local taxes etc.
What is the METR?
NOT the AVERAGE Effective Tax Rate (AETR)!
• AETR is the share of total income required to pay taxes AETR = Taxes/Income METR is the share of the before-tax rate of return on a marginal investment required to pay taxes
Example
Say shareholders demand an after-tax rate of return of at least 10% on an investment In order to earn this after-tax rate of return the investment must earn a before-tax rate of return of 12% METR = (12%-10%)/12% = 16.7%
What does this mean?
16.7% of the before-tax rate of return on a marginal investment is required to cover its taxes The higher the METR the more the tax system discourages investment
Aggregate METRs for Mozambique
Manuf.
Agric.
Mine Finance Tourism 40% 16% 51% 57% 40% Manuf.
Agric.
CPI Regime
Mine Finance Tourism 11% 6% 5% 20% 16%
Mozambique vs Peer Economies
Rwanda South Africa Tanzania (with cess) Lesotho Mozam bique Mozambique (investment through CPI)
Agriculture Manufac turing Tourism Finance 7% 7% 13% 28% 5.7% 21.3% 13.9% 29.8% 23.1% 15.3% 14.9% 28.9% 18% 11% 43% 51% 16% 40% 40% 57% 6% 11% 16% 20%
Agriculture
Tax not the investment issue.
Yet still (as is common) receive significant tax benefits.
Biggest tax burden remains fuel.
Crop specific tax issues (cashews, sugar).
Large exporters face many common problems (VAT refunds, customs, etc).
METR of 16% (no CPI) 6% (with CPI)
Mining
Mining METR of 51% for non-CPI, 5% CPI. Issues: • Many incentives such as accelerated depreciation can’t be used because of 5-year limit on loss carry-forward.
• Almost all companies can negotiate own tax rate and royalty payments. System is untransparent and uncertain Proposed new mining fiscal regime corrects most of these problems: 10-year loss carry-forward, standardized royalties and taxation, reduced disparities in taxation of mining compared to other sectors, liberalized ring-fencing provisions, reduced withholding tax. Reduces disparities with taxation of other sectors.
Manufacturing
Overall sectoral METR of 40% (non-CPI) or 11% (with CPI) Issues are common to general regime: • Uneven application of tax regime (negotiated incentives, selective targeting for inspections) • Lack of guidelines/information for tax compliance (disallowed expenses, improper VAT invoices) • Complex and time-consuming procedures • Continued delays/lack of refunds (VAT, advance tax) but some progress • Breaks in VAT chain Special customs regime
Comparative METRs in Manufacturing
Tanzania South Africa Zambia Rwanda Lesotho Mozambique
15% 21% 30% 17% (no incentives) -7% (incen tives) 11% 0% (Exporters) 40% 11% (CPI)
Tourism
Overall sectoral METR of 40% (non-CPI) or 16% Incentives look generous on paper but offer little benefit in practice High imports and VAT reduce profitability, competitiveness and viability of projects Irregular administration and fines troublesome especially in outlying tourist areas Tax not only factor impacting growth VAT simply and effectively applied Tourism industry impacted by 20% withholding tax on un-registered purchases. Discourages informality and promotes formalization
Financial Services
Relatively low sectoral METR of 57% (non CPI) and 20% (with CPI).
Issues • Stamp duty – different rates for each transaction, hard to administer (especially for DGI), increases cost of borrowing • Inability to use overpayments/credits in one tax (e.g. stamp duty) to offset other tax liabilities (e.g. IPRC) • DGI lack of capacity to understand complex financial transactions and tendency to impose harsh and arbitrary fines • Capital gains treated as ordinary income • Exemption of listed securities and T-bills from tax
Small Business
High overall sectoral METR of 71-78% Tax system creates incentives for informality (fixed cost of complying with tax system; risk of severe penalties and illicit payments) No harmonized definition for small business.
No special income tax regime • Simplified accounting system exists; indirect assessments • Withholding for unregistered suppliers to encourage formalization Simplified VAT regime • 5% on sales • 40% of all VAT registered, mainly sole-proprietors • No ‘option’ to register for general VAT system; breaks in VAT chain Municipality taxes Lack of adequate outreach and education
Customs Administration
Trade policy, liberalization, tariff reduction are all good, better than most SADC countries Customs clearance delays are main problem: 41 days clearance time (exports and imports) • Physical congestion at border posts • Low skills base and capacity • High percentage of cargos inspected/no real risk profiling system • Possibly inappropriate information system • Continued reliance on pre shipment inspection Main needs for future assistance: • Recruit, train, retain Customs officers, agents, brokers • Increase automation, reduce physical documentation requirements • Develop dry port at Ressano Garcia • Adopt ASYCUDA or other compatible MIS and train officers in its use • Harmonization with neighboring countries, especially RSA
Licensing
Previous FIAS work in 1996 & 2001 Some progress (OSS, provisional license);
Municipal Licenses, Fees & Taxes
• Annual business tax; • Daily business tax for small businesses; • Property tax; • Other activity licenses.
Licensing on a National Level
General Business License from the Ministry of Industry and Commerce:
Environment; Health; Industry and Commerce; City Council.
Line-Ministries
Issues
Municipality taxes, fees and activities are not considered as problematic; However, input approval from municipalities for license from Ministry of Industry and Commerce is discretionary Time-consuming (at least 4 weeks) despite OSS and provisional license Requirements and decision criteria are non transparent; Unreasonable inspections; Wrong incentives for inspectors; High fines.