## cr17252 ## Source details **Canonical URL:** [cr17252](https://www.imf.org/-/media/files/publications/cr/2017/cr17252.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17252.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17252.pdf.json) --- ### Introduction - Public spending at 40 percent of GDP. - Spending cuts introduced from 2014 left the public-sector wage bill untouched; cuts focused on goods, services, and non-oil investments. - The wage bill is the largest component of recurrent spending and the most rapidly growing item since 2005. - Public expenditures are heavily skewed towards the wage bill and welfare transfers; spending on goods and services is below the regional average of 3.5 percent of GDP and below the emerging markets average of 5.1 percent of GDP. - Iraq’s social spending is above the regional average of 3.4 percent of GDP and closer to the emerging markets average of 6.9 percent of GDP, but comparisons are compromised by wage subsidies to state owned enterprises. ### Public Sector Wages — Findings - Close to 3 million people are employed in the public sector, representing approximately 42 percent of all jobs. - Including state-owned enterprise (SOE) employees raises public sector employment to 3.5 million, close to one-half of all jobs. - The core public sector’s wage bill is estimated at approximately $28.8 billion (ID 34 trillion) in 2016. - Between 2004 and 2016, the wage bill’s share of the government budget rose from 7 to over 40 percent. - The largest employers: education, defense, and interior ministries — close to 2 million employees or 67 percent of the total payroll. - Of 2.9 million public employees, 46 percent are employed in civilian ministries, 30 percent work for defense and interior ministries, and 24 percent were unclassified. - Defense-related employment shows no growth since 2011 (assuming unclassified workers are security sector). - Real value of average total compensation for public employees grew by 60 percent between 2006 and 2016. - Allowances range between 35 percent and 150 percent of the base salary; relative weight of allowances grows with grades. - Wage premium (including allowances and supplements) remains approximately 11 percent in all grades. ### Public Sector Wages — Recommendations - Implement a staff reduction plan through natural attrition and eliminate vacated positions. - Effectiveness depends on age structure and the scope for exceptional overrides. - Link expiration of partial hiring freeze to predetermined staffing targets where clear targets exist. - Complete a payroll census and design a simple but robust human resource management system. - Establish a risk-based audit timetable to inform the Board of Supreme Audit where fraud is most frequent. - Standardize action plans for fraud cases with clearly established legal and financial consequences. - Conduct a functional and procedural review and build an HR strategy based on needs assessment. - Ensure hiring, firing, and promotion decisions are merit-based and limit sectarian hiring practices. - Review public sector compensation policies to reduce public sector wage premiums and boost private sector interest. ### Health and Education — Findings - Iraq underperforms comparators on various health care indicators (2015 comparisons with MENAP, EMs, OECD). - Insufficient health spending translates into poorer outcome indicators (e.g., infant deaths, life expectancy). - Primary enrollment ratios remained high despite adverse conditions, but secondary enrollment has dropped below comparators and Iraq’s earlier indicators. - Teacher numbers remained high relative to outcomes. ### Social Welfare Schemes — Pensions: Findings - Pension system is notionally universal, but coverage disparities exist: - State Pension Fund (SPF) coverage for public sector is close to universal. - Social Security Department (SSD) covers approximately 3 percent of private sector workers. - About 5 million people out of a total labor force of 8 million are without pension insurance. - Main drivers of fiscal unsustainability: - Statutory retirement age of 50 is low. - Minimum full-career pension obtainable after 15 years of service and equal to approximately 60 percent of the average wage. - Accrual rates at 2.5 percent are high, producing high replacement rates. - Pensions are based on final earnings and can exceed average career salaries. - Survivor pensions generate multiple, potentially life-long benefits based on a single contributor’s entitlement. - Number of non-contributory pensions paid to survivors of martyrs and victims of political persecution have more than tripled since 2010; claims expected to increase as liberation progresses. - Law on Martyr’s Foundation uses a broad definition of martyrs and extends survivor benefits to a large group (parents, siblings, spouses, children, grandchildren), potentially extending benefits decades into the future and making verification difficult. - Benefits and privileges under the law are broad: pensions, housing, land, construction grants, civil service job placements and transfers, free domestic and international transportation for education and health, tax easements, tuition and entry examination waivers, etc., with scope and complexity that may lead to undue discretion. ### Social Welfare Schemes — Pensions: Recommendations - Improve the draft unified social insurance law of November 2016, especially by increasing retirement ages to 63 years for both men and women. - The draft has commendable features (retirement age increase, lower accrual rates, survivor benefit ceilings, introduction of regular benefit indexation from 2023 onward) but leaves the earliest retirement age at 50 and the minimum service time increase to 25 years is insufficient to raise effective retirement age. - Abolish the full career minimum pension and replace it with a means-tested cash benefit. - The draft maintains the full career minimum pension level (ID 400,000 or $340 per month), which is fiscally costly and weakens the contribution-benefit link. ### Retirement age and early retirement — Findings - The draft permits early retirement; as a rule, early retirement should be limited to no more than 5 years, with appropriate deductions. - Deductions typically range between 0.4 and 0.6 percent of pensions per every month of early retirement, depending on retiree mortality. - The draft stipulates a mandatory retirement age of 65. - The mandatory retirement age is considered unnecessary for the private sector, where employers can assess productivity. - In the public sector, high levels of job protection make separation difficult; mandatory retirement age is used to facilitate separations. ### Retirement — Policy Recommendations - Limit early retirement to no more than 5 years and apply actuarially neutral deductions to discourage early labor force withdrawal. - Remove the mandatory retirement age of 65 for the private sector; allow employer discretion based on productivity. - In the public sector, replace mandatory retirement age with less stringent job protection so employers can decide on continued employment based on expertise—this would allow retaining highly experienced workers and may encourage longer working lives. ### Survivor pensions — Findings and Recommendations - Most social insurance systems award pensions to surviving young spouses only temporarily to allow adjustment in labor supply and consumption. - Current rules prohibit employment while receiving a (temporary) survivor pension and include siblings among eligible survivors. - Recommendation: - Remove prohibition of employment while in receipt of a (temporary) survivor pension. - Revise the definition of eligible survivors to exclude siblings. ### Benefits for martyrs and politically persecuted persons — Findings - Existing benefits and privileges for martyrs and politically persecuted persons include broad eligibility and one-off and quasi-cash transfers, plus education, health care privileges, and tax easements not available to other pensioners. - Administration of the Martyr’s Foundation currently outside standard government agencies. ### Martyrs/politically persecuted persons — Policy Recommendations - Critically review and reform benefits and privileges by: - Limiting eligible relatives to spouses and children. - Abolishing one-off cash and quasi-cash transfers. - Terminating education and health care privileges, and tax easements not available to other pensioners. - Transferring administration of the Martyr’s Foundation to government agencies. ### Social welfare schemes — SPN (main cash welfare transfer) - The SPN underwent a comprehensive overhaul; previously based on categorical targeting with large inclusion errors. - A new Proxy Means Testing (PMT) targeting formula was introduced in 2015–16 with World Bank technical assistance to address inclusion errors. - Recommendations: - Develop information systems enabling regular targeting assessments; World Bank technical assistance provides a solid foundation but long-term success depends on local capacity for regular assessment and revision of targeting criteria. - Enlarge the network of social workers to improve control over eligibility and uptake, ensure access, and accommodate on-site visits and assessments. ### Subsidies — Public Distribution System (PDS) Findings - PDS entitles ration card recipients to selected commodities (flour, sugar, cooking oil, and processed milk for children) at subsidized prices based on household size. - In 2016, PDS reached approximately 33 million people, 90 percent of households, and accounted for over 70 percent of total caloric intake for the bottom two consumptions deciles. - The program’s overall cost to the budget was reported at 0.6 percent of GDP in 2016. - PDS also functions as an agricultural subsidy because local produce is purchased at administratively set prices. - From 2016, public and private sector workers earning above 1.5 million IRD per month were excluded from PDS receipt; this change made only a minor impact on fiscal cost and distributional impact. - Coverage is expected to increase when areas controlled by ISIS are liberated; coverage likely to climb back to its pre-conflict level of close to 99 percent. ### PDS — Shortcomings Identified - Lack of targeting leads to high outlays and inequitable distributional impact. - Quantities and quality of PDS components may exceed caloric needs; wheat allocation reportedly exceeds actual needs by approximately 20 percent, fueling a secondary market and generating unnecessary expenditures of approximately 0.3 percent of GDP. - Timing and procurement of imported goods are suboptimal given observable seasonal demand and international price trends. ### PDS — Policy Recommendations - Improve targeting efficiency. - Estimated savings of about ID 1.1 trillion (0.4 percent of GDP) assuming current coverage is cut by one-fifth (proxy assumption in absence of income distribution data). - Given that approximately 40 percent of SPN recipients were found to be ineligible under PMT criteria, the estimated savings appear achievable. - Revise the PDS basket in terms of quantity, quality, and composition to better match recipient caloric and nutritional needs. - Improve timing and procurement of imported goods using risk-based projections and derivative contracts to reduce costs without jeopardizing food security. - Coordinate eligibility and benefit levels between SPN and PDS starting from 2018 onward as improved targeting mechanisms are applied. ### Subsidies — Energy (fuel and electricity) Findings - Fuel subsidies in Iraq are complex, span production to distribution, move in tandem with global oil prices, and complicate budget policy. - Explicit (on budget) and implicit (opportunity) costs of low energy prices amounted to 1.7 percent of GDP in 2016. - Because local fuel prices are administered, fuel subsidies increase when global oil prices rise and fall when oil prices decline, creating volatility that complicates budget management. - Electricity sector: a more progressive tariff structure was introduced in January 2016; tariffs collected will cover only 11 percent of costs. - Subsidies with all inputs valued at market price are projected to be 5.2 percent of GDP in 2017. - Production costs for power generation could be minimized by reducing gas flaring and using captured gas for power instead of costlier imported gas or fuel. - The reform is expected to have minimal effect on lifeline consumption and a limited social impact, according to the World Bank. ### Energy Subsidies — Policy Recommendations - Revisit the fuel pricing formula while global oil market prices are low to ease transition toward a more efficient energy sector. - Embed an automatic price adjustment mechanism tying local fuel price adjustments to changes in global fuel prices to instill budgetary discipline, clarify the move toward market pricing, and better guide expectations. - Accompany pricing reform with structural reforms for the energy sector to identify structural deficiencies, restructure some companies, and revisit pricing along the entire energy chain. - Reduce the large gap between electricity tariff collection and production costs by: - Increasing collection rates. - Using currently flared gas for power production. - When collection and production improvements bring tariffs above production cost, introduce a price formula to maintain tariff collection above production costs. ### Personal Income Tax (PIT) — Findings - PIT is levied on wages of both public and private sector employees, as well as professional income and income from business activity. - It has a progressive schedule with five rates: 0, 3, 5, 10 and 15 percent. - Where certain professions are suspected of underreporting taxable income, the authorities operate a presumptive system. - Total tax revenue from personal income in Iraq amounts to less than 0.5 percent of GDP (1 percent of non-oil GDP), compared to an average of 4 percent of GDP for a comparator set of countries with similar economic attributes. - Many deductions erode the tax base: pension contributions are fully deductible from taxable income, while retirement income is tax exempt. - Accumulated investment income and capital gains are not subject to taxation. - Multiple allowances and deductions (contingent on gender, marital status, and number of children) create a schedular PIT system with multiple effective tax rates, complicating tax administration and reducing collection. ### Personal Income Tax — Reform Priorities - Consider reducing the number of rates from 5 to 3, while preserving progressivity. - Address enforcement and compliance weaknesses: simplify the system by removing exemptions, rather than raising tax rates. - Introduce single basic income exemption (consolidate allowances). - Subject retirement income to personal income tax. - Analyze revenue and distributional implications of reducing rates and streamlining allowances. - Enhance ability to collect existing PIT before imposing new taxes or raising existing rates. ### Corporate Income Tax (CIT) — Findings - The tax rate on corporate income (profits) is set at 15 percent. - The taxable base suffers from many exemptions, tax incentives, holidays, and exemptions, especially for investments. - Total tax revenue from CIT in Iraq amounts to less than 0.2 percent of GDP (0.4 percent of non-oil GDP), compared to 5–8 percent of GDP for comparators in recent years. ### Corporate Income Tax — Reform Priorities - Preserve low rate (15 percent) for competitiveness. - Discontinue tax holidays (no need, given carry forward of losses are allowed for up to 5 years). - Remove tax exemptions for certain public sector enterprises to create a level playing field. - Consider levying a minimum tax on turnover (e.g. for large companies, whose turnover exceeds a certain threshold). - Enhance ability to collect existing CIT before imposing new taxes or raising existing rates. ### Indirect Taxes — Sales Taxes and Excises: Findings - Indirect tax collection—from sales taxes, excises, and customs duties—is very low, with weak legal basis and coverage, various tax exemptions (in customs), and feeble enforcement capacity. - There is no sales tax law in Iraq. Several taxes and excises are levied as part of an administrative decree (Instruction no. 5, 2015). - Levies covered airline tickets (at a rate of 15 percent), cigarette products and alcoholic beverages (300 percent, on domestic production and on imports), automobile sales (15 percent on import value), mobile telephone services (20 percent on scratch cards and phone bills), subscriptions for internet usage (20 percent), and a sales tax on hotel and restaurant services (10 percent). - Most taxes were enacted through the annual budget law, with no separate legal basis, creating weaknesses in enforcement. - Some taxes have been repealed in the past; many underperformed except for the sales tax on telecommunications. ### Indirect Taxes — Reform Priorities - Implement selective sales taxes or excises on a few items that are relatively easy to tax: - Telecom and hotels, at a single rate (e.g. 10 to 15 percent tax a hotel’s “turnover”, not a hotel’s number of “stars”). - Automobiles, at a rate of 15 percent of value (or at a “specific” rate based on engine size, if valuation proves difficult). - Sugar-sweetened beverages, at a specific rate (e.g. $0.05 or $0.10 per liter). - Tobacco products, at 25 percent of value; and cigarettes, at a specific rate (e.g. $0.25–0.50 per pack). - Alcohol products, at 25 percent of value or at various specific rates (depending on the alcohol content). - Fuel products (at specific rates, per liter). - Advantages cited: - Simple to administer. - Revenue collection is easy; levy on “volumes” (excise per packet, per liter, etc.) avoids valuation issues. - Can be achieved with existing tax administration resources. ### Customs Duties — Findings - Custom duty collections are minuscule compared to the size of imports. Iraq’s annual import bill was estimated at around $53 billion in 2016, equivalent to one-third of GDP. - Customs duties collected amounted to less than $600 million, entailing an effective tariff rate of just 1 percent. - Constraints include a complicated customs code with many exemptions, weak administration, and porous borders. - Up to 2015 the customs code applied a unified tariff rate of 5 percent on most imports. - The Customs Law of 2010 (introduced in 2016) replaced the simple code with a complex structure levying multiple rates (10 rates in total, ranging generally from 0–80 percent by tariff lines), increasing incentives for under-valuation, mis-classification, smuggling, trade diversion, and corruption. - Continued implementation of the pre-2010 Customs Law by the Kurdistan Regional Government (KRG) has complicated revenue collection by the Federal Government. ### Customs Duties — Key Revenue Figures - $ 436 mn — 20 % of tax revenue — 0.3 % of non-oil GDP - $ 353 mn — 29 % of tax revenue — 0.3 % of non-oil GDP - $ 548 mn — 14 % of tax revenue — 0.5 % of non-oil GDP ### Customs Duties — Reform Priorities - Reduce the number of tariff rates to between 2–4, with a moderate top rate (e.g. capped at 30 percent for final goods) and a zero/low rate on capital goods. - Review the many exemptions in the customs law and limit ministerial power to change the rate structure or provide exemptions through decrees or other executive orders. - Unify the rates between the federal government and the KRG. ### Other Proposals to Raise Non-Oil Tax Revenue — Institutional and Administrative Reforms - Improve management of the large taxpayer community by expanding the existing Large Taxpayer Unit into a fully functional Large Taxpayer Office (LTO) that would: - Ensure comprehensive responsibility over LTO affairs (e.g., administer all national-level taxes large taxpayers are due to pay or withhold). - Carry out all taxation functions in respect of its taxpayers, and provide all the services they require to comply with tax obligations. - Organize the LTO along functional lines (registration, tax assessment, compliance management) rather than based on tax type. - Implement computerized information systems both for taxes and customs to improve efficiency and effectiveness of revenue collection, enable better information gathering and analysis, proactively manage workloads, foster cooperative engagement and standardized treatment of taxpayers, facilitate uniform application of the tax law, and enable scenario analysis and quantification of potential reform impacts. - Stop introducing new, incremental, or ad hoc taxes through the annual budget process once proper tax laws are in place; proposals should be designed and costed centrally and clearly defined in tax laws following budget approval. - Develop analytical capacity for tax reform within the Ministry of Finance to research and study reform proposals adequately with appropriate legal and technical expert advice. - Sequence reforms carefully; combine difficult reforms with positive signals (e.g. implement new sales tax while simplifying the PIT). - Communicate clearly through a comprehensive media campaign about the need to increase non-oil tax revenue and the expected benefits of tax policy and administration reforms. - Assess reform efforts along the way and adjust policies in line with lessons learnt from implementation. *International Monetary Fund — excerpt from CR17252 (Iraq country report).* ### References _______________________________________________________________________________ 15 ### cr17252 - References _______________________________________________________________________________ 15 ### Introduction - Iraq’s public spending is high: public spending at 40 percent of GDP. - Spending cuts introduced from 2014 left the public-sector wage bill untouched; cuts focused on goods, services, and non-oil investments. - The wage bill is the largest component of recurrent spending and the most rapidly growing item since 2005. - Public expenditures are heavily skewed towards the wage bill and welfare transfers; spending on goods and services is below the regional average of 3.5 percent of GDP and below the emerging markets average of 5.1 percent of GDP. - Iraq’s social spending is above the regional average of 3.4 percent of GDP and closer to the emerging markets average of 6.9 percent of GDP, but comparisons are compromised by wage subsidies to state owned enterprises. ### Public Sector Wages — Findings - Close to 3 million people are employed in the public sector, representing approximately 42 percent of all jobs. - Including state-owned enterprise (SOE) employees raises public sector employment to 3.5 million, close to one-half of all jobs. - The core public sector’s wage bill is estimated at approximately $28.8 billion (ID 34 trillion) in 2016. - Between 2004 and 2016, the wage bill’s share of the government budget rose from 7 to over 40 percent. - The largest employers: education, defense, and interior ministries — close to 2 million employees or 67 percent of the total payroll. - Of 2.9 million public employees, 46 percent are employed in civilian ministries, 30 percent work for defense and interior ministries, and 24 percent were unclassified. - Defense-related employment shows no growth since 2011 (assuming unclassified workers are security sector). - Real value of average total compensation for public employees grew by 60 percent between 2006 and 2016. - Allowances range between 35 percent and 150 percent of the base salary; relative weight of allowances grows with grades. - Wage premium (including allowances and supplements) remains approximately 11 percent in all grades. ### Public Sector Wages — Recommendations - Implement a staff reduction plan through natural attrition and eliminate vacated positions. - Effectiveness depends on age structure and the scope for exceptional overrides. - Link expiration of partial hiring freeze to predetermined staffing targets where clear targets exist. - Complete a payroll census and design a simple but robust human resource management system. - Establish a risk-based audit timetable to inform the Board of Supreme Audit where fraud is most frequent. - Standardize action plans for fraud cases with clearly established legal and financial consequences. - Conduct a functional and procedural review and build an HR strategy based on needs assessment. - Ensure hiring, firing, and promotion decisions are merit-based and limit sectarian hiring practices. - Review public sector compensation policies to reduce public sector wage premiums and boost private sector interest. ### Health and Education — Findings - Iraq underperforms comparators on various health care indicators (2015 comparisons with MENAP, EMs, OECD). - Insufficient health spending translates into poorer outcome indicators (e.g., infant deaths, life expectancy). - Primary enrollment ratios remained high despite adverse conditions, but secondary enrollment has dropped below comparators and Iraq’s earlier indicators. - Teacher numbers remained high relative to outcomes. ### Social Welfare Schemes — Pensions: Findings - Pension system is notionally universal, but coverage disparities exist: - State Pension Fund (SPF) coverage for public sector is close to universal. - Social Security Department (SSD) covers approximately 3 percent of private sector workers. - About 5 million people out of a total labor force of 8 million are without pension insurance. - Main drivers of fiscal unsustainability: - Statutory retirement age of 50 is low. - Minimum full-career pension obtainable after 15 years of service and equal to approximately 60 percent of the average wage. - Accrual rates at 2.5 percent are high, producing high replacement rates. - Pensions are based on final earnings and can exceed average career salaries. - Survivor pensions generate multiple, potentially life-long benefits based on a single contributor’s entitlement. - Number of non-contributory pensions paid to survivors of martyrs and victims of political persecution have more than tripled since 2010; claims expected to increase as liberation progresses. - Law on Martyr’s Foundation uses a broad definition of martyrs and extends survivor benefits to a large group (parents, siblings, spouses, children, grandchildren), potentially extending benefits decades into the future and making verification difficult. - Benefits and privileges under the law are broad: pensions, housing, land, construction grants, civil service job placements and transfers, free domestic and international transportation for education and health, tax easements, tuition and entry examination waivers, etc., with scope and complexity that may lead to undue discretion. ### Social Welfare Schemes — Recommendations - Improve the draft unified social insurance law of November 2016, especially by increasing retirement ages to 63 years for both men and women. - The draft has commendable features (retirement age increase, lower accrual rates, survivor benefit ceilings, introduction of regular benefit indexation from 2023 onward) but leaves the earliest retirement age at 50 and the minimum service time increase to 25 years is insufficient to raise effective retirement age. - Abolish the full career minimum pension and replace it with a means-tested cash benefit. - The draft maintains the full career minimum pension level (ID 400,000 or $340 per month), which is fiscally costly and weakens the contribution-benefit link. *Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17252.pdf* ### 19. In addition to the standard retirement age, the draft also creates exemptions ### 19. In addition to the standard retirement age, the draft also creates exemptions permitting early retirement and maintains the current regulation’s mandatory retirement age. ### Retirement age and early retirement—findings - The draft permits early retirement; as a rule, early retirement should be limited to no more than 5 years, with appropriate deductions. - Deductions typically range between 0.4 and 0.6 percent of pensions per every month of early retirement, depending on retiree mortality. - The draft stipulates a mandatory retirement age of 65. - The mandatory retirement age is considered unnecessary for the private sector, where employers can assess productivity. - In the public sector, high levels of job protection make separation difficult; mandatory retirement age is used to facilitate separations. ### Retirement—policy recommendations - Limit early retirement to no more than 5 years and apply actuarially neutral deductions to discourage early labor force withdrawal. - Remove the mandatory retirement age of 65 for the private sector; allow employer discretion based on productivity. - In the public sector, replace mandatory retirement age with less stringent job protection so employers can decide on continued employment based on expertise—this would allow retaining highly experienced workers and may encourage longer working lives. ### Survivor pensions—findings and recommendations - Most social insurance systems award pensions to surviving young spouses only temporarily to allow adjustment in labor supply and consumption. - Current rules prohibit employment while receiving a (temporary) survivor pension and include siblings among eligible survivors. - Recommendation: Tighten eligibility for survivor pensions. - Remove prohibition of employment while in receipt of a (temporary) survivor pension. - Revise the definition of eligible survivors to exclude siblings. ### Benefits for martyrs and politically persecuted persons—findings - Existing benefits and privileges for martyrs and politically persecuted persons include broad eligibility and one-off and quasi-cash transfers, plus education, health care privileges, and tax easements not available to other pensioners. - Administration of the Martyr’s Foundation currently outside standard government agencies. ### Martyrs/politically persecuted persons—policy recommendations - Critically review and reform benefits and privileges by: - Limiting eligible relatives to spouses and children. - Abolishing one-off cash and quasi-cash transfers. - Terminating education and health care privileges, and tax easements not available to other pensioners. - Transferring administration of the Martyr’s Foundation to government agencies. ### Social welfare schemes—SPN (main cash welfare transfer) - The SPN underwent a comprehensive overhaul; previously based on categorical targeting with large inclusion errors. - A new Proxy Means Testing (PMT) targeting formula was introduced in 2015–16 with World Bank technical assistance to address inclusion errors. Recommendations for SPN - Develop information systems enabling regular targeting assessments; World Bank technical assistance provides a solid foundation but long-term success depends on local capacity for regular assessment and revision of targeting criteria. - Enlarge the network of social workers to improve control over eligibility and uptake, ensure access, and accommodate on-site visits and assessments. ### Subsidies—Public Distribution System (PDS) findings - PDS entitles ration card recipients to selected commodities (flour, sugar, cooking oil, and processed milk for children) at subsidized prices based on household size. - In 2016, PDS reached approximately 33 million people, 90 percent of households, and accounted for over 70 percent of total caloric intake for the bottom two consumptions deciles. - The program’s overall cost to the budget was reported at 0.6 percent of GDP in 2016. - PDS also functions as an agricultural subsidy because local produce is purchased at administratively set prices. - From 2016, public and private sector workers earning above 1.5 million IRD per month were excluded from PDS receipt; this change made only a minor impact on fiscal cost and distributional impact. - Coverage is expected to increase when areas controlled by ISIS are liberated; coverage likely to climb back to its pre-conflict level of close to 99 percent. ### PDS—shortcomings identified - Lack of targeting leads to high outlays and inequitable distributional impact. - Quantities and quality of PDS components may exceed caloric needs; wheat allocation reportedly exceeds actual needs by approximately 20 percent, fueling a secondary market and generating unnecessary expenditures of approximately 0.3 percent of GDP. - Timing and procurement of imported goods are suboptimal given observable seasonal demand and international price trends. ### PDS—policy recommendations - Improve targeting efficiency. - Estimated savings of about ID 1.1 trillion (0.4 percent of GDP) assuming current coverage is cut by one-fifth (proxy assumption in absence of income distribution data). - Given that approximately 40 percent of SPN recipients were found to be ineligible under PMT criteria, the estimated savings appear achievable. - Revise the PDS basket in terms of quantity, quality, and composition to better match recipient caloric and nutritional needs. - Improve timing and procurement of imported goods using risk-based projections and derivative contracts to reduce costs without jeopardizing food security. - Coordinate eligibility and benefit levels between SPN and PDS starting from 2018 onward as improved targeting mechanisms are applied. ### Subsidies—energy (fuel and electricity) findings - Fuel subsidies in Iraq are complex, span production to distribution, move in tandem with global oil prices, and complicate budget policy. - Explicit (on budget) and implicit (opportunity) costs of low energy prices amounted to 1.7 percent of GDP in 2016. - Because local fuel prices are administered, fuel subsidies increase when global oil prices rise and fall when oil prices decline, creating volatility that complicates budget management. - Electricity sector: a more progressive tariff structure was introduced in January 2016; tariffs collected will cover only 11 percent of costs. - Subsidies with all inputs valued at market price are projected to be 5.2 percent of GDP in 2017. - Production costs for power generation could be minimized by reducing gas flaring and using captured gas for power instead of costlier imported gas or fuel. - The reform is expected to have minimal effect on lifeline consumption and a limited social impact, according to the World Bank. ### Energy subsidies—policy recommendations - Revisit the fuel pricing formula while global oil market prices are low to ease transition toward a more efficient energy sector. - Embed an automatic price adjustment mechanism tying local fuel price adjustments to changes in global fuel prices to instill budgetary discipline, clarify the move toward market pricing, and better guide expectations. - Accompany pricing reform with structural reforms for the energy sector to identify structural deficiencies, restructure some companies, and revisit pricing along the entire energy chain. - Reduce the large gap between electricity tariff collection and production costs by: - Increasing collection rates. - Using currently flared gas for power production. - When collection and production improvements bring tariffs above production cost, introduce a price formula to maintain tariff collection above production costs. *International Monetary Fund — excerpt from CR17252 (Iraq country report).* ### 6. Taxes on personal income are progressive, and the most straightforward and simplest ### 6. Taxes on personal income are progressive, and the most straightforward and simplest ### Personal Income Tax (PIT) - Findings: - PIT is levied on wages of both public and private sector employees, as well as professional income and income from business activity. - It has a progressive schedule with five rates: 0, 3, 5, 10 and 15 percent. - Where certain professions are suspected of underreporting taxable income, the authorities operate a presumptive system. - Total tax revenue from personal income in Iraq amounts to less than 0.5 percent of GDP (1 percent of non-oil GDP), compared to an average of 4 percent of GDP for a comparator set of countries with similar economic attributes. - Many deductions erode the tax base: pension contributions are fully deductible from taxable income, while retirement income is tax exempt. - Accumulated investment income and capital gains are not subject to taxation. - Multiple allowances and deductions (contingent on gender, marital status, and number of children) create a schedular PIT system with multiple effective tax rates, complicating tax administration and reducing collection. - Reform priorities: - Consider reducing the number of rates from 5 to 3, while preserving progressivity. - Address enforcement and compliance weaknesses: simplify the system by removing exemptions, rather than raising tax rates. - Introduce single basic income exemption (consolidate allowances). - Subject retirement income to personal income tax. - Analyze revenue and distributional implications of reducing rates and streamlining allowances. - Enhance ability to collect existing PIT before imposing new taxes or raising existing rates. ### Corporate Income Tax (CIT) - Findings: - The tax rate on corporate income (profits) is set at 15 percent. - The taxable base suffers from many exemptions, tax incentives, holidays, and exemptions, especially for investments. - Total tax revenue from CIT in Iraq amounts to less than 0.2 percent of GDP (0.4 percent of non-oil GDP), compared to 5–8 percent of GDP for comparators in recent years. - Reform priorities: - Preserve low rate (15 percent) for competitiveness. - Discontinue tax holidays (no need, given carry forward of losses are allowed for up to 5 years). - Remove tax exemptions for certain public sector enterprises to create a level playing field. - Consider levying a minimum tax on turnover (e.g. for large companies, whose turnover exceeds a certain threshold). - Enhance ability to collect existing CIT before imposing new taxes or raising existing rates. ### Indirect Taxes — Sales Taxes and Excises - Findings: - Indirect tax collection—from sales taxes, excises, and customs duties—is very low, with weak legal basis and coverage, various tax exemptions (in customs), and feeble enforcement capacity. - There is no sales tax law in Iraq. Several taxes and excises are levied as part of an administrative decree (Instruction no. 5, 2015). - Levies covered airline tickets (at a rate of 15 percent), cigarette products and alcoholic beverages (300 percent, on domestic production and on imports), automobile sales (15 percent on import value), mobile telephone services (20 percent on scratch cards and phone bills), subscriptions for internet usage (20 percent), and a sales tax on hotel and restaurant services (10 percent). - Most taxes were enacted through the annual budget law, with no separate legal basis, creating weaknesses in enforcement. - Some taxes have been repealed in the past; many underperformed except for the sales tax on telecommunications. - Reform priorities: - Implement selective sales taxes or excises on a few items that are relatively easy to tax: - Telecom and hotels, at a single rate (e.g. 10 to 15 percent tax a hotel’s “turnover”, not a hotel’s number of “stars”). - Automobiles, at a rate of 15 percent of value (or at a “specific” rate based on engine size, if valuation proves difficult). - Sugar-sweetened beverages, at a specific rate (e.g. $0.05 or $0.10 per liter). - Tobacco products, at 25 percent of value; and cigarettes, at a specific rate (e.g. $0.25–0.50 per pack). - Alcohol products, at 25 percent of value or at various specific rates (depending on the alcohol content). - Fuel products (at specific rates, per liter). - Advantages cited: - Simple to administer. - Revenue collection is easy; levy on “volumes” (excise per packet, per liter, etc.) avoids valuation issues. - Can be achieved with existing tax administration resources. ### Customs Duties - Findings: - Custom duty collections are minuscule compared to the size of imports. Iraq’s annual import bill was estimated at around $53 billion in 2016, equivalent to one-third of GDP. - Customs duties collected amounted to less than $600 million, entailing an effective tariff rate of just 1 percent. - Constraints include a complicated customs code with many exemptions, weak administration, and porous borders. - Up to 2015 the customs code applied a unified tariff rate of 5 percent on most imports. - The Customs Law of 2010 (introduced in 2016) replaced the simple code with a complex structure levying multiple rates (10 rates in total, ranging generally from 0–80 percent by tariff lines), increasing incentives for under-valuation, mis-classification, smuggling, trade diversion, and corruption. - Continued implementation of the pre-2010 Customs Law by the Kurdistan Regional Government (KRG) has complicated revenue collection by the Federal Government. - Key customs revenue figures (as presented): - $ 436 mn — 20 % of tax revenue — 0.3 % of non-oil GDP - $ 353 mn — 29 % of tax revenue — 0.3 % of non-oil GDP - $ 548 mn — 14 % of tax revenue — 0.5 % of non-oil GDP - Reform priorities: - Reduce the number of tariff rates to between 2–4, with a moderate top rate (e.g. capped at 30 percent for final goods) and a zero/low rate on capital goods. - Review the many exemptions in the customs law and limit ministerial power to change the rate structure or provide exemptions through decrees or other executive orders. - Unify the rates between the federal government and the KRG. ### Other Proposals to Raise Non-Oil Tax Revenue - Institutional and administrative reforms: - Improve management of the large taxpayer community by expanding the existing Large Taxpayer Unit into a fully functional Large Taxpayer Office (LTO) that would: - Ensure comprehensive responsibility over LTO affairs (e.g., administer all national-level taxes large taxpayers are due to pay or withhold). - Carry out all taxation functions in respect of its taxpayers, and provide all the services they require to comply with tax obligations. - Organize the LTO along functional lines (registration, tax assessment, compliance management) rather than based on tax type. - Implement computerized information systems both for taxes and customs to improve efficiency and effectiveness of revenue collection, enable better information gathering and analysis, proactively manage workloads, foster cooperative engagement and standardized treatment of taxpayers, facilitate uniform application of the tax law, and enable scenario analysis and quantification of potential reform impacts. - Stop introducing new, incremental, or ad hoc taxes through the annual budget process once proper tax laws are in place; proposals should be designed and costed centrally and clearly defined in tax laws following budget approval. - Develop analytical capacity for tax reform within the Ministry of Finance to research and study reform proposals adequately with appropriate legal and technical expert advice. - Sequence reforms carefully; combine difficult reforms with positive signals (e.g. implement new sales tax while simplifying the PIT). - Communicate clearly through a comprehensive media campaign about the need to increase non-oil tax revenue and the expected benefits of tax policy and administration reforms. - Assess reform efforts along the way and adjust policies in line with lessons learnt from implementation. *Source: INTERNATIONAL MONETARY FUND (Iraq tax policy and administration chapter).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17252.pdf_