## 1mozea2023014 ## Source details **Canonical URL:** [1mozea2023014](https://www.imf.org/-/media/files/publications/cr/2023/english/1mozea2023014.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1mozea2023014.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1mozea2023014.pdf.json) --- ### PREFACE - Technical assistance mission visited Maputo, Mozambique during November 15–29, 2016. - Mission composition: Artur Swistak (head), Liu Li (both FAD) and Ricardo Varsano (FAD external expert). - Final delivery: aide memoire presented to the Minister of Economy and Finance, Dr. Adriano Alfonso Maleiane, and the President of Mozambique’s Tax Authority, Ms. Amelia Nakhare, at the closing meeting on November 29, 2016. - Principal counterparts and interlocutors included AT, MEF, Investment Promotion Center, Ministry of Industry and Commerce, Institute for Promotion of Small and Medium Enterprises, National Institute of Statistics, and private sector representatives. - Mission contributed to an internal tax policy seminar at Mozambique’s Revenue Authority and acknowledged assistance by named local and IMF resident staff. ### MACRO-FISCAL CONTEXT AND OVERALL FINDINGS - Immediate fiscal situation: - Revised budget anticipates an overall deficit of 6.3 percent of GDP. - Projected fiscal deficit for 2017 is 5.5 percent of GDP. - Fiscal pressures: - Debt service cost is rising and access to financing is limited; fiscal consolidation appears inevitable. - Tax policy process: - No comprehensive tax reform in more than 10 years; tax policy formulation has been ad-hoc. - In 2011-2015 there were nearly 50 tax legislative efforts: "10 laws, 15 decrees, 7 decisions, 7 ministerial orders and 7 official notices." - MEF’s tax policy role has been limited; MEF is strengthening capacity (e.g., microsimulation model for VAT distributional effects). - Reform strategy summary: - Short-term: prioritize eliminating tax exemptions rather than raising statutory rates; broaden VAT base. - Medium-term: major tax reform to increase efficiency; reduce distortive rates as revenue permits. ### KEY STATISTICS AND OBSERVATIONS - Mozambique’s tax-to-GDP ratio in 2015: 23.8 percent. - Adjusted "true" tax-to-GDP ratio (excluding CGT windfall and gross-recorded VAT): around 20 percent in 2015. - Drivers of tax-to-GDP increase over 2006–2015: largely CIT and VAT (and to a lesser degree PIT). - VAT specifics: - VAT raised 7.8 percent of GDP in 2015, contributing 35 percent of all tax collections. - VAT revenue productivity grew from 5.2 percent of GDP in 2006 to 9 percent of GDP in 2014. - VAT C-efficiency: 0.54 in 2014; net-basis C-efficiency around 0.4 in 2015. - Mission estimate potential VAT base around MT 350 billion (63 percent of final consumption); potential VAT revenue at current rate around MT 60 billion (28 percent more than current level); VAT productivity could increase to 10 percent of GDP and C-efficiency to 62 percent. - VAT refunds and escrow: - Until 2015 around 50 percent of requested refunds were not paid. - 2014: MT 8.5 billion requested refunds; 56 percent (MT 4.8 billion) rejected; MT 4.4 billion paid. - 2015: requested refunds doubled to MT 15.3 billion; government securitized MT 8.2 billion (1.4 percent of GDP) to clear stock. - As of end-September 2016 outstanding refunds amounted to MT 9.6 billion (1.4 percent of GDP). - VAT losses from exemptions (selected): - Border exemptions (political parties; Mozambican miners from South Africa): MT 14.4 billion in 2015 (MT 2.1 billion; MT 13.2 billion). - Excise exemption on vehicles imported by miners: MT 17 billion foregone in 2015. - Zero-rating of a current basket of products/services: MT 12.2 billion loss (25 percent of total VAT collections in 2015). - Draft VAT amendment passenger transport zero-rating: around MT 1.8 billion loss. - Reduced rate on public work services: budget loss around MT 3 billion (additional figures noted elsewhere). - Reduction of tax base on fuels and electricity: MT 250 million loss. - Reduced rate on piped water since 2017: MT 19 million loss. ### VAT — REVENUE EFFICIENCY, STRUCTURE, AND RECOMMENDATIONS - Revenue potential and issues: - VAT’s apparent rising productivity is largely due to lack of refunds (gross accounting) and increasing exemptions on business inputs causing tax cascading. - VAT C-efficiency (net basis) around 0.4 in 2015 indicates scope to improve revenue productivity. - Registration and thresholds: - Current mandatory registration threshold: MT 750,000. - Simplified VAT: taxpayers above threshold but below MT 2.5 million may elect simplified VAT at 5 percent of turnover; simplified VAT invoices cannot be used as credits by standard VAT taxpayers. - Recommendations: - Increase VAT registration threshold to at least MT 4 million (equivalent of U$50,000 in current terms). - Taxpayers with turnover higher than MT 4 million account for 97.2 percent of all domestic VAT collections and 99 percent of total VAT collections. - Raising threshold to MT 4 million would remove more than half of VAT taxpayers while losing only 2.8 percent of current VAT collections. - Introduce a minimum registration threshold of MT 750,000 (except for exporters) and disallow registration below that level. - Apply standard VAT regime to all registered taxpayers, including voluntary registrants below MT 4 million. - Abolish the simplified VAT applied at 5 percent of turnover; consider sectoral simplified accounting or prescribed remittance rates. - Refunds and escrow: - Time limits and processing: - Excess credits currently carried forward for 12 months (draft amendment seeks 3 months). - AT has 30 days to review/pay refunds; may extend to 6 months for verification. - Suggestions: introduce a time limit to carrying excess credits (12 or 6 months common internationally); extend AT processing deadline to 90 days with "fast tracks" for known compliant taxpayers. - Escrow funding: - Current escrow funded at 16.4 percent of gross VAT collections. - Historical requested refunds accounted for around 20 percent of gross VAT receipts; funding may be insufficient and should be re-estimated. - Recommendation: ensure sufficient funds in VAT escrow account; avoid securitization where possible. - VAT grouping and place of supply: - Allow VAT grouping (single VAT registration for taxpayers within same capital group) to improve cash flow and eliminate intra-group refund/payment imbalances. - Carefully review and improve rules defining place of supply of services; include electronic services appropriately and clarify B2B/B2C distinctions and treatment of services performed in Mozambique for non-resident customers. - Input VAT credits: - Some non-deductibility rules are too strict (e.g., lack of credit on fuels other than diesel used in non-passenger vehicles; restrictions on mining sector diesel). - Some rules are too lenient (e.g., deduction of goods and services provided to employees). - Recommendation: review non-deductible input VAT list to allow deduction for non-diesel fuels and diesel for mining machinery and to disallow credits on goods and services provided to employees. - VAT base broadening: - Bring fee-based financial services, property and casualty insurance, immovable property (commercial and new residential supply by developers), and gambling (taxed on net margin) into VAT net. - Continue exempting residential property leases and exempt sales of used residential properties. - Tax lottery and gambling operators on net margin and apply normal VAT on non-gambling supplies. - Exemptions policy: - Immediate prohibition on adopting additional VAT reliefs in the draft VAT amendment (including passenger transport and inputs for agriculture). - Abolish VAT preferences on business inputs, remove all zero-ratings of domestic supplies, and remove exemptions except for education, health and social assistance services. - Do not provide VAT preferences for government, political parties, and members of parliament. - Improve enforcement to recover VAT not paid on goods imported by miners and sold domestically. ### VAT — ADMINISTRATION PRACTICES AND Securitization - Securitization of VAT refunds: - Government offered bonds to clear refund stock (MT 8.2 billion securitized). - Recommendation: pay VAT refunds in cash and avoid securitization; selling bonds in the market to obtain cash is preferred and any government paper should be taxpayer’s choice. - Administrative reforms: - Shorten refund delays, establish adequate funding, introduce fast tracks, and improve capacity for verification. ### EXCISES, BORDER CONTROLS, AND ENERGY TAXES - Border control imperative: - Improved border controls and reduction of informal trade are prerequisites for effective excise increases, especially for alcoholic beverages. - Bilateral trade discrepancies with South Africa (FOB comparisons) show large gaps in alcoholic beverages: - All alcoholic beverages: Reported by SARS = 431,558; Reported by MOZ = 148,863; SAR - MOZ = 282,695; SAR/MOZ = 2.9. - Beers: SAR = 165,250; MOZ = 64,999; SAR - MOZ = 100,250; SAR/MOZ = 2.5. - Wines/liqueurs/vermouths: SAR = 116,272; MOZ = 12,797; SAR - MOZ = 103,475; SAR/MOZ = 9.1. - Alcohol excise policy: - Global trend toward specific rates by alcohol content; specific rates are administratively easier, reduce evasion, and should be indexed to inflation. - Do not increase excises on alcoholic beverages until border control problems are resolved. - After border issues fixed, reform alcohol excises to adopt specific rates calibrated to match neighboring consumer prices, ideally coordinated regionally. - Fuel taxation (TSC) recommendations: - Current Mozambique prices (Meticais): Gasoline 50.02; Diesel 45.83. - South Africa prices (Meticais): Gasoline 70.09; Diesel 69.89. - Recommended increase in TSC: - Increase TSC on gasoline to MT 15.00. - Increase TSC on Diesel to MT 9.00. - Doubling TSC rates estimated to imply about 15 percent increase in gasoline price and 10 percent increase in diesel price. - Include TSC in tax base calculation for VAT purposes (additional revenue implication discussed). - Telecom excise: - Consider studies on introducing an excise on mobile phone usage; mobile usage has attractive tax base properties but positive externalities and penetration concerns warrant careful study. - Mozambique current indicators in Table 11 include Tax/TCMO = 17.5 and Handset tax / Handset Cost = 24.5 (with a footnote correcting the handset ratio to 25.8 percent). ### CORPORATE INCOME TAX (CIT) AND TAX INCENTIVES - Statutory and effective rates: - Statutory CIT rate: 32 percent. - Effective tax rate about half nominal due to widespread tax incentives; average tax rate across all companies is about 12 percent (many firms report negative pre-tax profits). - For companies with positive CIT liability average tax rate is about 22 percent. - Concentration of CIT payments: - Top 1 percent of taxpayers (positive liability) contributes about 56 percent of corporate tax; top 1 percent including all companies close to 70 percent; top 10 percent pay close to 96 percent of total corporate tax. - Code of Fiscal Benefits (CFB) incentives: - CFB offers full expensing, accelerated depreciation, investment tax credits, sector-specific rate reductions, exemptions for special economic zones, etc. - Many incentives overlap and apply to profitable investments; surveys indicate investors prioritize stability, infrastructure and regulatory environment over tax incentives. - METR findings: - Benchmark parameter assumptions preserved (e.g., real interest rate = 0.05; economic depreciation rates and Decree 72/2013 parameters). - METRs fall substantially with general investment incentives; sector-specific incentives can yield negative METRs in agriculture, indicating subsidy-like tax treatment. - Recommended CIT policy actions: - Do not extend tax benefits subject to the CFB sunset clause. - Undertake careful analysis of CFB impacts and prepare a detailed tax expenditure report estimating revenue forgone. - Eliminate most tax incentives after analysis. - Reduce statutory CIT to 30 percent in the short term and to 28 percent in the medium term (apply uniformly except possibly for extractive industries and telecommunication). - Increase depreciation period for residential buildings to that for commercial and industrial buildings to remove distortion (residential depreciation currently 10 years yields 12 percentage point lower METR vs commercial). - Strengthen transfer pricing rules, finalize transfer pricing regulation, improve thin-capitalization monitoring (current debt-to-equity disallowance ratio is 2:1), and require more detailed tax return reporting. ### PERSONAL INCOME TAX (IRPS) REFORMS - Structure and revenue composition: - IRPS categories: 1) Employment; 2) Business/self-employment; 3) Capital income/capital gains; 4) Property income; 5) Gambling/other increases in wealth. - IRPS pools income across categories but many capital incomes subject to final withholding (20 percent or 10 percent), making IRPS hybrid. - IRPS revenue by income type (MT): - Employment income: MT 18,410 million — 86.4 percent - Business/self-employment: MT 1,255 million — 5.9 percent - Capital income and capital gains: MT 486 million — 2.3 percent - Rental income: MT 870 million — 4.1 percent - Other income: MT 110 million — 0.1 percent - Non-specified: MT 279 million — 1.3 percent - Total: MT 21,311 million — 100.0 percent - Issues from 2013 amendment: - Withholding tax on employment income made final for wage earners, creating horizontal inequities and revenue loss for taxpayers with multiple income sources. - Non-taxable income allowance differs: MT 243,000 (annualized) for wages; MT 225,000 for other income. - Dependent allowance exists for wages but not other income. - Recommendations for IRPS: - Make withholding final only for employees with a single source of wage income and whose other incomes, if any, are only those subject to final withholding (article 57). - Excuse from filing annual returns only wage earners with a single wage source and no other income except final-withholding items. - Equalize non-taxable income allowances for general and employment income; consider reducing the non-taxable allowance and replacing deduction with a tax credit for better progressivity. - Do not extend expired agricultural tax reduction; tax time deposits at the same rate applied to other financial assets. ### SIMPLIFIED TAX REGIME (ISPC) AND TAXPAYER SEGMENTATION - ISPC features: - Introduced 2009: turnover-based presumptive tax replacing CIT, PIT and VAT for eligible taxpayers. - Eligibility: ABV below MT 2,500,000 may elect ISPC at 3 percent flat rate; exemption if ABV lower than 36 times minimum wage. - Taxpayer segmentation (recommended): - Micro: below MT 750,000 - Small: MT 750,000 - MT 4,000,000 - Medium: MT 4,000,000 - X - Large: above X - Align ISPC thresholds with VAT registration thresholds. - ISPC uptake and revenue: - Average growth rate in number of ISPC taxpayers ~34 percent between 2010 and 2015. - As of 2015 there are 9,046 ISPC taxpayers with positive tax payment. - ISPC tax revenue remained below 0.14 percent of total tax revenue at end-2015. - Policy recommendations on ISPC: - Extend ISPC eligibility threshold to MT 4 million and index it to inflation. - Raising eligibility to MT 4 million would cost approximately 0.06 percent of total tax revenue, or less than 0.03 percent of GDP. - Assumed VAT loss around MT 200 million compensated by additional MT 120 million in ISPC; additional CIT loss negligible. - Increase ISPC turnover rate to at least 5 percent (proposal to compensate threshold increase). - Net revenue consequence of raising rate to 5 percent and extending coverage: approximately MT 240 million additional tax revenue per year (net). - Exclude professional services and corporate taxpayers from ISPC; retain them under normal regime. - Develop ISPC into a comprehensive presumptive regime: turnover-based tax for small taxpayers and a lump-sum fee for micro taxpayers (below MT 750,000). - Eliminate obsolete simplified regimes superseded by ISPC and remove exemption threshold based on minimum salary. ### TIMING SUMMARY (selection of major recommendations) - Immediate (IM): - Avoid ad-hoc changes; do not adopt new VAT reliefs in draft amendment (including passenger transport and inputs for agriculture). - Abolish zero-ratings of domestic supplies. - Pay VAT refunds in cash; avoid securitization. - Do not extend expired PIT agricultural reduction. - Do not extend CFB benefits subject to the sunset clause. - Short-term (ST, 6 to 12 months): - Increase VAT registration threshold to MT 4 million and introduce minimum registration threshold of MT 750,000. - Improve border controls and address informal trade. - Analyze CFB and tax expenditures; prepare detailed tax expenditure report. - Adjust ISPC threshold to MT 4 million and consider raising ISPC rate to at least 5 percent. - Medium-term (MT, over next 2 years): - Reduce CIT to 30 percent (short term) and to 28 percent (medium run). - Eliminate most tax incentives following detailed analysis. - Broaden VAT base to include fee-based financial services, immovable property, and gambling on net margin. - Consider introducing an excise on mobile phone usage after careful study. ### OTHER HIGHLIGHTS AND ADMINISTRATIVE NOTES - Excise regime: - ICE excludes oil products; TSC applies to motor and aviation gasoline, diesel oil, jet fuel, fuel oil and LPG. - ICE rates mainly ad valorem with minimum specific rates; TSC rates are specific and should be adjusted quarterly for inflation though increases capped at 5 percent per TSC code. - Excise revenue trends (Total Excise Revenue MT million over 2006–2015): 2,382; 2,789; 3,353; 3,674; 4,591; 5,490; 6,186; 7,684; 9,447; 9,730. - Excise revenue as percent of GDP (2006–2015): 1.73; 1.79; 1.84; 2.01; 2.18; 2.33; 2.28; 2.47; 2.70; 2.50. - Administrative recommendations: - Strengthen MEF tax policy capacity so MEF can assume proactive tax policy role from AT over time. - Prepare and publish regular tax expenditure studies (particularly for CFB and VAT) to inform policy trade-offs and constrain new exemptions. - Improve customs and border controls before pursuing excise increases, especially for alcoholic beverages. *Source: 1mozea2023014 - PREFACE and EXECUTIVE SUMMARY (IMF staff report excerpt as provided).* ### PREFACE __________________________________________________________________________________________ 6 ### PREFACE AND EXECUTIVE SUMMARY ### PREFACE - Technical assistance mission visited Maputo, Mozambique during November 15–29, 2016. - Mission composition: Artur Swistak (head), Liu Li (both FAD) and Ricardo Varsano (FAD external expert). - Final delivery: aide memoire presented to the Minister of Economy and Finance, Dr. Adriano Alfonso Maleiane, and the President of Mozambique’s Tax Authority, Ms. Amelia Nakhare, at the closing meeting on November 29, 2016. - Principal counterparts and interlocutors included: - Mozambique’s Tax Authority: President Ms. Amelia Nakhare and staff. - Ministry of Economy and Finance: Director National Mr. Vasco Correia Nhabinde and staff. - Investment Promotion Center: Mr. Danubio Lado and Ms. Suzana Maferane. - Ministry of Industry and Commerce: Mr. Audre Clewaus and Mr. Oswalda Wilson. - Institute for Promotion of Small and Medium Enterprises: General Director Mr. Claire Mateus Zimba. - National Institute of Statistics: Mr. Furmino Guiliche, Ms. Monica Magaue and staff. - Private sector representatives including banking sector and alcoholic beverage industry. - Mission participation: contributed to internal tax policy seminar at Mozambique’s Revenue Authority. - Acknowledgements: assistance by Mr. Anibal Mbalango, Mr. Zefanias Tamele, Ms. Avaleria Amos, and IMF Resident Representative in Maputo Mr. Ari Aisen and his staff. ### MACRO FISCAL CONTEXT AND OVERALL FINDINGS - Mozambique faces significant fiscal challenges amid a deteriorating economic environment; fiscal consolidation is described as inevitable and requires thorough review of revenue potential. - Tax policy formulation has been ad-hoc; no comprehensive tax reform in more than 10 years and limited commitment to implement reforms. - Several specific tax proposals are under consideration, but a comprehensive modernization approach is recommended. ### KEY STATISTICS AND OBSERVATIONS - Mozambique’s tax-to-GDP ratio in 2015: 23.8 percent. - Drivers of tax-to-GDP increase over the last decade: largely CIT and VAT. - VAT increase driven by compromised efficiency rather than better enforcement. - CIT growth driven by payments from extractive sector (capital gains tax and withholding taxes). - Estimated potential VAT revenue: around MT 60 billion, which is 28 percent more than current level. - Implies VAT C-efficiency could increase from 0.4 to 0.6. - VAT revenue losses cited: - Draft VAT amendment if passed: around MT 1.8 billion lost via zero-rating of passenger transport. - Zero-rating certain food items: around MT 12 billion. - Reduced rate on public work services: budget loss around MT 3 billion. - Border exemptions (imports by political parties and Mozambican miners in South Africa): VAT loss MT 14.4 billion in 2015. - Excises on imports of vehicles by Mozambican miners: MT 17 billion lost in 2015. - Proposed excise levels (recommended): - Increase TSC on gasoline to MT 15.00 and on Diesel to MT 9.00. - Corporate income tax (CIT) headline rate: 32 percent (noted as high relative to regional standards). - Effective tax rate is about half the nominal rate due to widespread tax incentives. - Recommended statutory CIT adjustments: reduce to 30 percent short term and to 28 percent medium run. - ISPC (simplified tax) thresholds and rates recommended: - Increase ISPC eligibility threshold to MT 4 million and align with VAT threshold. - Increase ISPC turnover rate to at least 5 percent. - Personal Income Tax (PIT) issues: - 2013 changes created inequity and revenue loss by applying final withholding tax to employees even if they have other income or multiple wage sources. - Recommendations include making withholding final only for employees with a single source of wage income and aligning withholding schedule with annual schedule. - Consider reducing non-taxable income allowance and substituting tax credit for non-taxable income allowance. - VAT structural recommendations include: - Increase VAT registration threshold to MT 4 million. - Introduce minimum VAT registration threshold of MT 750,000 (except for exporters). - Apply standard VAT regime to all registered taxpayers, including voluntary registrants below MT 4 million. - Further improvements to VAT refund mechanism; pay VAT refunds in cash and avoid securitization. - Ensure sufficient funds in VAT escrow account; reevaluate the current allocation of 16.4 percent of gross receipts. - Abolish VAT preferences on business inputs given improved refund mechanism. - Tax fee-based financial services on a margin basis; tax property and casualty insurance under VAT; continue to exempt residential property leases but tax supply of residential property by developers (new buildings) and tax all sales and leases of commercial property. - Tax lottery and gambling operators on net margin under VAT; apply normal VAT on their non-gambling supplies. - Allow VAT grouping (single VAT registration for taxpayers within same capital group) and carefully review rules on place of supply of services. ### VAT STRATEGY AND RECOMMENDATIONS - Primary near-term revenue strategy: eliminate tax exemptions rather than increasing tax rates. - Shift toward greater reliance on indirect taxes by modernizing and broadening the VAT base (bring fee-based financial services, immovable property, and gambling into VAT net). - Immediate prohibition on adopting additional VAT reliefs contained in the draft VAT amendment (including passenger transport and inputs for agriculture). - Abolish VAT preferences aimed at progressivity that subsidize the rich; remove zero-ratings of domestic supplies. - Charge VAT on full tax basis for electricity, fuels, supply of public work services and aeronautical services; do not adopt proposed relief for piped water. - Remove all exemptions except education, health and social assistance services. - Do not provide VAT preferences for government, political parties and members of parliament. - Continue exempting residential property leases; tax sales and leases of commercial property and new residential supply by developers; exempt sales of used residential properties. ### EXCISES AND BORDER CONTROL - Border control weakness is a serious problem; better control is prerequisite for effective excise increases. - Excise policy guidance: - Align excise-driven retail prices of excisable goods with neighboring countries, especially South Africa. - Refrain from increasing excises on alcoholic beverages until satisfactory border control is established. - After resolving border issues, reform alcohol excises to adopt specific rates based on alcohol content and calibrate to match neighboring consumer prices. - Index specific rates on alcoholic beverages (and 2013 cigarette rates) to inflation. - Consider studies on introducing an excise on mobile phone usage; subject mobile phone services to excise tax as a possible revenue source. ### CORPORATE INCOME TAX AND TAX INCENTIVES - Most tax incentives in the Code of Fiscal Benefits (CFB) are overly generous and should be eliminated. - Short- and medium-term measures: - Do not extend tax benefits subject to the sunset clause in the CFB. - Undertake careful analysis of CFB impacts on investment and CIT revenue and prepare detailed tax expenditure report estimating revenue forgone. - Eliminate most tax incentives following the analysis. - Increase depreciation period for residential buildings to that for commercial and industrial buildings. - Reduce statutory corporate tax rate to 30 percent (short term) and to 28 percent (medium term). ### PERSONAL INCOME TAX REFORMS - Do not extend expired tax reduction for agricultural activities. - Tax time deposits at same rate applied to all other financial assets. - Correct non-taxable income allowance so the allowance for general income and employment income match. - Consider reducing the non-taxable income allowance and eliminate dependent allowance for wage earners. - Substitute tax credit for non-taxable income allowance. - Reform IRPS law so withholding is final only for employees with a single wage source. ### SIMPLIFIED TAX REGIME (ISPC) REFORM - Assure proper segmentation of taxpayers and align presumptive taxation thresholds with VAT. - Develop ISPC into a comprehensive presumptive regime: turnover-based tax for small taxpayers and lump-sum tax for micro taxpayers. - Extend ISPC eligibility threshold to MT 4 million and index it for inflation. - Exclude professional services and corporate taxpayers from ISPC; retain them under normal tax regime. - Eliminate obsolete simplified regimes superseded by ISPC. ### TIMING SUMMARY (selection of major recommendations) - Immediate (IM): - Avoid ad-hoc changes; do not adopt new VAT reliefs in draft amendment; abolish zero-ratings of domestic supplies; pay VAT refunds in cash; do not extend expired PIT agricultural reduction; do not extend CFB benefits under sunset clause. - Short-term (ST, 6 to 12 months): - Increase VAT registration threshold to MT 4 million and introduce minimum registration threshold of MT 750,000; improve border controls; analyze CFB and tax expenditures; adjust ISPC threshold to MT 4 million. - Medium-term (MT, over next 2 years): - Reduce CIT to 30 percent then to 28 percent; eliminate most tax incentives following analysis; broaden VAT base to include specified services and property; tax gambling on net margin; consider excise on mobile usage after studies. *Source: 1mozea2023014 - PREFACE and EXECUTIVE SUMMARY.* ### 1. With a deteriorating economic environment, Mozambique faces significant fiscal ### 1. With a deteriorating economic environment, Mozambique faces significant fiscal challenges. ### Fiscal context and immediate challenges - The recently revised budget anticipates an overall deficit of 6.3 percent of GDP. - The projected fiscal deficit for 2017 is 5.5 percent of GDP, continuing a trend that rapidly adds to the elevated stock of public debt. - Debt service cost is rising and access to financing is limited, leaving the government with few options to improve its fiscal stance; fiscal consolidation appears inevitable. ### Role and limitations of revenue measures - Embarking on fiscal consolidation requires a thorough analysis of revenue potential, but increasing revenue should not be seen as the only or sufficient measure; significant expenditure-side savings will likely be necessary (expenditure-side analysis is beyond this report). - Short-term revenue mobilization is an important goal in the context of possible fiscal consolidation and partly replacing grants, but the mission’s objective is a tax policy reform that spurs economic growth and sustainable revenue enhancement over the longer term. ### Tax policy formulation and institutional arrangements - Tax policy making is almost non-existent in a pro-active sense; changes are typically ad-hoc and responsive to pressing problems or short-term revenue needs. - In 2011-2015 there were nearly 50 tax legislative efforts: "10 laws, 15 decrees, 7 decisions, 7 ministerial orders and 7 official notices." - The Mozambique Tax Authority (AT) currently drives tax policy proposals; the Ministry of Economy and Finance (MEF) limits its role to formal approval and setting annual revenue targets for AT. - Due to a lack of capacity, MEF historically has not contributed constructively to tax policy development or initiated tax proposals; its contribution has been limited to setting annual revenue targets. - The MEF recognizes weak engagement and has started strengthening capacity (e.g., developing a microsimulation model to assess VAT changes on income distribution). ### Revenue structure and performance - Mozambique’s tax-to-GDP ratio in 2015 stood at 23.8 percent of GDP. - A First National Survey of Informal Sector (2004) reports the informal sector accounts for more than 40 percent of GDP and is not fully captured in official GDP estimates; the mission’s interlocutors confirmed informality remains large and growing. - After adjusting for CGT (a windfall or prepayment of CIT) and VAT recorded on a gross basis (without refunding excess tax credit), the adjusted "true" tax-to-GDP ratio is roughly 4 percentage points lower and amounts to around 20 percent in 2015. - The tax-to-GDP ratio nearly doubled over the decade 2006-2015. Growth was driven by VAT, CIT, and, to a lesser degree, PIT. - High PIT collections reflect real growth in the government wage bill and rapid expansion of a highly paid expatriate community. - Record high collections of capital gains tax (CGT) on transfer of interest in mining and petroleum concessions and withholding taxes on payments to non-resident service and finance providers in the extractive sector explain growth in CIT. - The unusually high performance of VAT is puzzling given no major VAT design changes since 1999; possible explanations include improved tax administration or ill-conceived tax enforcement (e.g., lack of paying refunds). - Composition of tax revenue in 2015: - Direct taxes (CIT and PIT), excluding CGT, accounted for 41 percent. - Indirect taxes contributed 59 percent, with VAT being 40 percent. - Over 2006–2015 the share of direct taxes rose from 28 percent to 41 percent; with CGT included direct taxes' share was even higher (in 2014 they contributed 47 percent). - Mozambique relies strongly on direct taxes relative to peers; over 10 percent of GDP is raised in income taxes, mostly CIT. - Receipts from category two income (tax on business income) fell from 10 percent of total PIT collections in 2009 to 6 percent in 2015. ### Specific tax proposals under consideration (as reported) - Amendments to the VAT Act aiming to: - expand VAT territory to the Mozambican Exclusive Economic Zone, - provide further exemptions and reliefs on public passenger transport, and inputs to pharmaceutical industry and agriculture sector, - improve certain administrative procedures. - Excise tax increases, including on alcoholic beverages. - Extension of expired income tax incentives to the agriculture sector beyond December 31, 2015. - Potentially new incentives for the poultry industry (discussion has just started; no concrete solutions tabled). ### Scope of the report - The report assesses VAT, excises, corporate income tax (CIT), and personal income tax (PIT), and provides recommendations for improvements. - Other taxes (stamp duties, local taxes, customs duties) and potential new taxes or removals are left for separate assessment. - Natural resource taxes (including production taxes/royalties) are not part of this discussion; they have been covered under a separate stream of TA. - The report focuses on fiscal incentives under various taxes but does not attempt to estimate revenue loss or overall efficiency of incentives under the Code of Fiscal Benefits (CFB); the mission encourages a careful analysis of tax expenditures and possible further TA. ### Reform strategy and policy recommendations - Short-term focus: - Explore avenues for tax revenue to contribute to fiscal consolidation, yet do not rely solely on tax increases. - Eliminate tax exemptions rather than increase tax rates, since CIT and VAT rates are already high by regional and international standards; eliminating exemptions reduces distortions and improves efficiency. - Priority reforms: eliminate costly and/or distortive tax expenditures (e.g., tax holidays), regressive VAT exemptions and reliefs, and incentives that benefit solely the government. - Broaden the VAT base wherever possible; VAT is generally the least distortive indirect tax and can better capture economic activity in the large informal sector. - Institutional reforms: - Enhance the tax policy formulation function of the MEF and frame tax policy adjustments within a broader macroeconomic policy context and objectives. - Avoid ad-hoc changes; develop a comprehensive approach to tax reforms. - Build MEF capacity so it can shift tax policy formulation function from AT to MEF over time. - Medium-term objectives: - Embark on a major tax reform to increase tax efficiency over the medium term. - Reduce the most distortive tax rates as revenue pressures permit: - The high nominal CIT rate of 32 percent deters investment; reducing it and applying it uniformly (except perhaps extractive industries and possibly telecommunication) would improve investor attractiveness. - The VAT rate should not be reduced for now; focus instead on broadening the base and addressing cross-border shopping through tightened border controls rather than rate reduction. - Improve PIT progressivity and coverage to mitigate regressive impacts of higher indirect taxes and to raise more revenue from high-income earners. - Rationalize the simplified income tax (ISPC) to improve taxation of individual businesses and reduce informality. ### Summary of concrete recommendations (from the report) - Explore avenues for tax revenue to contribute to fiscal consolidation effort, yet do not rely solely on tax increases; - Enhance the tax policy formulation function of the MEF and frame tax policy adjustments and reforms into a broader macroeconomic policy context and objectives; - Avoid ad-hoc changes to the tax regime and develop a comprehensive approach to tax reforms; - Embark on a major tax reform with a view to increase efficiency of taxes over a medium term. *Source: 1mozea2023014.* ### 22. Improved border controls and the associated reduction of informal trade is a ### 22. Improved border controls and the associated reduction of informal trade is a prerequisite for excise tax increases ### Excise Taxes and Border Controls - Without adequate border controls, there is limited room for higher taxation of excisable goods, especially alcoholic beverages. - Excisable goods exhibit low price elasticity and could be taxed at higher rates, but a sizeable and largely uncontrolled informal market means any further increase in tax rates would likely lead to revenue loss. - One efficiency improvement for excisable goods taxation: rely more on specific rather than ad valorem rates. - Expanding the excise tax base to mobile services usage is an option the authorities should carefully study and perhaps introduce in the medium term. ### Tax Expenditures Study - Mozambique should prepare a comprehensive study of tax expenditures and publish it regularly as part of the budget. - Purpose: allow policymakers to understand the “true” cost of tax reliefs granted to investors and/or the public and adjust them where benefits do not exceed revenue forgone. - Public tax expenditure estimates act as an important constraint by clarifying the revenue cost of offering tax benefits to particular groups. - It is especially important to undertake a tax expenditure study with regards to the Code of Fiscal Benefits and the VAT. - Any new proposed tax expenditure should be subject to a careful cost benefit analysis, including a tax expenditure estimate. ### Recommendations (as listed) - Undertake a comprehensive tax reform with a view to both increase revenue and enhance efficiency of taxation; - Anchor the tax reform on removing tax exemptions rather than increasing tax rates; - Shift towards more reliance on indirect taxes – modernize the VAT and expand its base to currently untapped base; - Address the issue of regressive indirect taxes through improvements to personal income tax and direct cash transfers; - Reduce the headline CIT rate and curtail investment tax incentives; - Prepare a detailed report on tax expenditure, evaluating effectiveness of various tax exemptions and reliefs and estimate revenue forgone from thereof; - Improve border controls and address informal trade before embarking on excise tax increase. ### III. VALUE ADDED TAX — A. Revenue Efficiency and Potential (Findings) - The VAT is by far the most important tax in Mozambique. - In 2015 it raised 7.8 percent of GDP in revenue, contributing 35 percent of all tax collections. - VAT revenue productivity grew from 5.2 percent of GDP in 2006 to 9 percent of GDP in 2014. - C-efficiency increased; at 0.54 in 2014 it belonged to one of the highest in the region. - The VAT’s growing revenue productivity is misleading; it reflects deterioration of the tax due to: - 1) lack of paying refunds (collecting VAT on gross rather than net basis); and - 2) a growing number of tax exemptions on business inputs that lead to tax cascading and artificially expand the VAT base. - Until 2015 around 50 percent of requested refunds were not paid. - 2014: out of MT 8.5 billion in requested refunds 56 percent (or MT 4.8 billion) were rejected on account of irregularities or illegitimate claims. - Only MT 4.4 billion was paid in refunds in 2014, with a large share being clearance of outstanding refunds. - Many taxpayers chose not to claim excess tax credits because of inefficiency of VAT refunding. - 2015: establishment of a VAT escrow account and timely refunds led to requested refunds doubling to MT 15.3 billion despite only 7 percent growth in gross VAT collections. - Government securitized MT 8.2 billion (or 1.4 percent of GDP) of refunds by issuing bonds to clear outstanding stock. - As of end of September 2016 outstanding refunds still amounted to MT 9.6 billion (or 1.4 percent of GDP). - Tax cascading from exemptions on business inputs artificially expands the tax base and increases VAT collections. - Article 15 of the VAT Act provides an extensive list of tax exemptions, many inputs in agriculture and food processing (e.g., sugar industry). - Draft VAT amendment submitted to parliament provides for additional tax exemptions and would further aggravate the problem. - VAT C-efficiency (net basis) amounted to around 0.4 in 2015, indicating scope to improve revenue productivity. - Improvements needed: tax administration enforcement, abolishment of widespread exemptions, and expansion of the VAT base to currently not taxed activities (certain financial, health and education sectors, immovable property and gambling). - Mission estimate using 2015 national accounts: - Potential VAT base around MT 350 billion, corresponding to 63 percent of final consumption (both private and public). - If financial, health and education consumption could be fully taxed, VAT at current rate should yield around MT 60 billion, 28 percent more than its current level. - With that collection level, VAT productivity would increase to 10 percent of GDP and C-efficiency would reach 62 percent. ### III. VALUE ADDED TAX — B. Modernization of the VAT Structure (Actions and Findings) - VAT design follows international standards (taxation of final consumption, goods and services, destination basis, refunds), but requires modernization: registration threshold, refund mechanism, place of supply, and taxation of business groups. - Registration threshold: - Businesses with turnover above MT 750,000 must register for VAT. - Those above the registration threshold but below MT 2.5 million may elect simplified VAT—paid at 5 percent of turnover; they issue special VAT invoices but the indicated amount of output VAT may not be used as a credit by businesses subject to standard VAT. - No minimum VAT registration threshold—voluntary registration allowed for all taxpayers. - Recommendation: increase current registration threshold to at least MT 4 million (equivalent of U$50,000 in current terms). - Such a move would remove more than half of VAT taxpayers from AT’s books while only 2.8 percent of current VAT collections would be lost. - Taxpayers with turnover higher than MT 4 million account for 97.2 percent of all domestic VAT collections, and 99 percent of total VAT collections. - Taxpayers with turnover below MT 750,000, unless exporters, should not be allowed to register at all. - Data: taxpayers with taxable sales below MT 750,000 reported MT 9.4 billion in input tax credit, out of which MT 4.7 billion was in excess of their output tax. - The input VAT claimed represented over 60 percent of their taxable sales whereas this ratio for larger taxpayers is around 20 percent. - Proposal: deregister those below MT 750,000 and move them mandatorily to simplified regime; those with sales between MT 750,000 and MT 4 million should be given a one-off option to remain registered or deregister. - Small taxpayers who choose to register should be subject to all standard accounting obligations, with possible administrative concessions (e.g., less frequent filing/payment). - Consider simplified VAT accounting methods used in some EU countries (taxpayers charge standard VAT on output but remit VAT based on a prescribed rate varied by sector). - VAT grouping: - Current law: single registration for a corporate entity; incorporated subsidiaries of the same business group are subject to individual registration. - VAT grouping would allow businesses in the same group to pool operations and register as a single VAT taxpayer, improving cash flow and eliminating refund/payment imbalances at group level. - Benefits for businesses with exempt operations (e.g., financial companies) and the extractive sector where upstream and downstream operations may have different VAT positions. - VAT Refunds: - Excess tax credits must be carried forward for 12 months before claim; draft amendment attempts to shorten to 3 months. - AT has 30 days to review and pay the requested refund; deadline may be extended up to 6 months for verification. - Since 20015 VAT refunds are paid out of an escrow account funded by a prescribed share of gross VAT collections—currently 16.4 percent; refunds are paid FIFO. - Improvements suggested: - Reconsider why taxpayers must wait 12 (or proposed 3) months for refunds; carrying forward credits strains cash flow. - Introduce a time limit to carrying excess credits (many countries limit refund claims to 12 or 6 months). - Extend AT processing deadline to 90 days given capacity constraints, while establishing “fast tracks” for known taxpayers in good standing. - Fund the VAT escrow account sufficiently: - After backlog clearance, re-estimate funding needs. - Data shows refunds requested in the past accounted for around 20 percent of gross VAT receipts, roughly 4 percentage points higher than current funding. - Refunds requested in the past were artificially downsized; actual ratio may be higher than 20 percent. - With the new refund mechanism, the argument for providing numerous import exemptions (e.g., to petroleum and mining companies, or investment projects subject to CFB) disappears; removal of domestic zero-ratings and reduced rates would make refunds to domestic suppliers disappear. - In 2011-2015 refunds requested by domestic suppliers amounted to 17 percent of total requested. *Source: IMF staff analysis as presented in the provided chapter content.* ### 41. Securitization of VAT refunds should be avoided to the extent possible. Taxpayers ### 41. Securitization of VAT refunds should be avoided to the extent possible. Taxpayers ### Securitization of VAT refunds - Taxpayers pay VAT in cash and are entitled to receive refunds in the same form. - Offering government paper instead of cash: - May be welcome compared to not being refunded or receiving refunds with significant delay. - Adversely affects taxpayer liquidity. - Reduces value of refunds if taxpayers are forced to trade the paper at a discount. - Authorities should explore raising funds by selling bonds in the open market and use proceeds to pay refunds in cash. - It should be a taxpayer’s choice to acquire government paper, not the authorities’ decision. - Explicit recommendation: Pay VAT refunds in cash and avoid securitization thereof. ### Place of Supply of goods and services - Current rules: - Services supplied by a non-resident entity are subject to Mozambican VAT through a reverse charge mechanism (list includes banking, financial and insurance services). - Draft VAT amendment attempts to expand the list by adding electronic services and “other similar services”. - No specific rules for triangular services or effective place of enjoyment. - Observations on principles: - VAT should be taxed where services are consumed in economic sense. - Current Mozambican solutions tend to rely on: - Principle that services are taxed where the supplier resides (default). - Art 6 par. 4: place of performance — services related to immovable property, carried out on movable property located abroad, entertainment and cultural services performed abroad, and transportation outside Mozambique are zero-rated. - Art 6 par. 8: principle of customer residence — listed services (e.g., advertising, professional, data processing, telecommunication services, leasing of movable property) provided to a customer established or living abroad are zero-rated. - Identified gaps and risks: - The list of services deemed exported is exhaustive and omits services (e.g., broadcasting, catering). - Relation between Art 6 par. 4 and par. 8 unclear (e.g., scientific services supplied to a London company but performed in Mozambique). - No clear distinction between B2B and B2C, or whether a customer is a taxable person or exempt; Art 6 par. 8 lacks this qualification while Art 6 par. 7 does. - All listed services provided to non-registered customers living abroad are zero-rated, which is asymmetrical and may cause revenue loss. - Recommendation: Carefully review and improve rules defining place of supply of services; inclusion of electronic services in Art. 6 par. 7 is a move in the right direction but more is needed. ### Denied input VAT credits - General context: - Many VAT systems deny certain input tax credits to prevent deduction of private/personal consumption as business inputs. - Issue acute for small, owner-operated businesses. - Best addressed by a relatively high VAT registration threshold and audits. - Too strict denial leads to tax cascading and compromises VAT neutrality and efficiency. - Mozambique-specific issues: - Some rules are too strict: - Lack of input tax credit on fuel other than diesel used in non-passenger vehicles. - No credit for fuel (including diesel) used in heavy duty trucks in the mining sector (allowed for vehicles and machinery used in agriculture). - Denial of expenses on telecommunication other than fixed land lines. - Some rules are too lenient: - No general rule excluding typical personal consumption items (personal care, clothing). - No general rule excluding goods and services provided to taxpayer’s employees (only transport and travel expenses explicitly excluded). - Computers, accommodation and mobile phone services provided to employees may be deducted — these are in-kind benefits and should not be deductible. - Recommendation: Consider reviewing the list of non-deductible input tax credits to allow for deduction of non-diesel fuels and diesel fuel for mining machinery, and disallow any credit paid on goods and services provided to taxpayer’s employees. ### Recommendations (explicit list from the source) - Increase the VAT registration threshold to at least MT 4 million; - Apply the standard VAT regime to all registered taxpayers, including those below MT 4 million who voluntarily register; - Abolish the simplified VAT applied at 5 percent of turnover; - Introduce a minimum registration threshold of MT 750,000, except for exporters; - Allow for single VAT registration of taxpayers within the same capital group; - Set 12-month time limit for claiming excess VAT credits; - Ensure sufficient funds in VAT escrow account; reevaluate the ratio of gross receipts funding, including after the VAT reform has been completed; - Pay VAT refunds in cash and avoid securitization thereof; - Carefully review and improve rules defining place of supply of services; - Consider reviewing the list of non-deductible input tax credits to allow for deduction of non-diesel fuels and diesel fuel for mining machinery, and disallow any credit paid on goods and services provided to taxpayer’s employees. ### VAT exemptions and reliefs — scope and critique - Mozambique provides an exceptionally wide range of VAT exemptions and special reliefs, listed in the VAT Act and additional legislation (notably the CFB). - Special reliefs include domestic zero-ratings and reductions in taxable value (reduced rates). - The list extends beyond conventional exemptions (health, education, diplomatic missions, personal belongings). - Trends: - In 2012, 10 new exemptions for agriculture, sugar producers and oil and soap industry and two zero-ratings of agricultural products were added. - Draft VAT amendment would add three new VAT exemptions, five zero-ratings and one reduced rate. - Six exemptions adopted in 2012 with sunset clause phasing out at end-2015 are planned to be extended by four years to end-2019. - No exemptions or reliefs abolished since at least 2010. - Policy position: VAT exemptions and reliefs are not needed and should be avoided. - Common reasons countries adopt exemptions: ease perceived regressivity, avoid complexity in some sectors, address non-functional refund mechanisms, alleviate tax cascading, lower government operating costs. - With improved refund mechanism, reasons related to refund dysfunction and cascading have disappeared. - Exemptions on inputs to incentivize investment are poor policy — refunds without delay permit recovery of input VAT through standard mechanisms, closing leakage avenues. - Recommendation: All exemptions provided on inputs, especially those in the CFB, should be immediately abolished. ### Equity and incidence of VAT preferences - VAT preferences often intended to address regressivity can instead undermine fairness. - Examples and distribution of benefits (Mozambique data): - Exemptions/reliefs on medicines, zero VAT rate on bread, reduced VAT rate on electricity: - In all three cases revenue forgone benefited mostly the top three deciles of Mozambican population — they received 52, 59 and 73 percent, respectively, of the total subsidy. - Hypothetical zero-rating of beans: - Would provide more benefits to the poor: 52 percent of the total subsidy goes to the bottom 3 deciles, whereas the top three deciles receive 7 percent of the overall gain. - Administrative practicality: Despite beans showing pro-poor incidence, providing VAT preferences on such goods is not recommended for administrative reasons. ### VAT preferences benefiting the government - Several VAT exemptions/reliefs benefit the public sector directly (e.g., supplies of equipment and uniforms to the military, firefighting vehicles; public works subject to a 60 percent reduction in taxable value — effectively a 6.8 percent VAT rate). - These are inefficient because: - No net gain to the government — government would increase spending but receive the same amount of VAT revenue without the preference. - VAT leakage risk (bogus sales, resale of superfluous goods procured by governmental agencies) could cause revenue loss. - Other preferences (imports by political parties and congressmen) are prone to abuse; direct subsidies would be a better channel. - Policy implication: Remove VAT preferences that benefit government or public officials to avoid negative examples and undue pressure from interest groups. ### VAT reliefs classification and revenue impact - Forms of relief have different consequences depending on application to final consumption, business inputs, domestic supplies and/or imports: - Zero-rating and tax base reductions (reduced rates) do not cause cascading but create outright revenue loss when applied to consumer goods and services. - For business inputs, zero-rating/reduced rates cause no direct revenue loss but raise leakage risk, especially on imports. - VAT exemptions on imports cause no efficiency loss; revenue is lost only when imported directly by final consumers. - VAT exemptions on domestic supplies: - On business inputs: cause tax cascading and affect production decisions; no direct revenue loss and may even expand base. - On consumer goods: produce partial revenue loss (remove VAT only from the last stage). - Quantified revenue impacts (2015 and subsequent measures): - Zero-rating of the current basket of products/services caused a loss of MT 12.2 billion or 25 percent of total VAT collections in 2015. - Introduction of zero tax rate on passenger transportation will cause additional MT 1.8 billion loss. - Reduction of tax base on fuels and electricity resulted in revenue loss of MT 250 million. - Since 2017 an additional MT 19 million will be lost due to a reduced rate on piped water. - Reduced rate on public works is another significant source of revenue loss (figure not completed in the provided excerpt). *Source: IMF staff analysis as presented in the provided PDF excerpt.* ### 3.6 billion. Revenue foregone resulting from various tax exemptions is also large. As shown in ### 1mozea2023014 - 3.6 billion. Revenue foregone resulting from various tax exemptions is also large. As shown in ### Revenue foregone from VAT exemptions (overview and magnitude) - Revenue foregone from various tax exemptions (select VAT exemptions) in 2015 amounts to more than MT 1.4 billion (or 3 percent of total VAT collections in 2015). - Only a portion of exemptions falling on final consumption was included; important exemptions (e.g., on banking services and new immovable property) are missing due to data limitations. - Table 3 reported totals: TOTAL16,157 and 18,013 (as presented in source table). - Table 4 reported totals for select VAT exemptions: TOTAL14,155 and 1,420 (as presented in source table). ### Border exemptions and import-related losses - Border exemptions do not necessarily translate into final revenue loss, because many apply to business inputs or are for imports traditionally exempt (diplomatic missions, personal allowances, temporary imports). - Some imports constitute final consumption and caused large VAT losses in 2015: - Two exemptions (political parties; miners returning to Mozambique from South Africa) resulted in MT 14.4 billion of VAT loss in 2015 — MT 2.1 billion and MT 13.2 billion respectively. - Excise exemption on vehicles imported by the miners resulted in MT 17 billion foregone. - Exempting imports, even of business inputs, risks leakage because it is difficult to ensure exempt goods are used as intended. ### Domestic VAT exemptions, tax cascading, and preference creep - Domestic VAT exemptions on business inputs are particularly problematic and numerous (agriculture, sugar, oil and soap, pharmaceuticals; also goods/services largely consumed by households like waste disposal, training, books, newspapers). - Domestic VAT exemptions lead to tax cascading and are not favored by businesses; exemptions intended for final consumers often adversely affect businesses because it is impossible to distinguish business inputs from consumer goods. - When exemptions fall on business inputs or are introduced for that purpose, output exemptions become necessary to avoid cascading, producing "preference creep". - Recent agriculture reliefs illustrate preference creep: - Agricultural output had been exempt, leading to 2012 exemptions for inputs (equipment, seeds, fodder, fertilizers) to address non-recoverable input VAT. - Similar patterns occurred in sugar, oil and soap industries (first outputs exempted, then inputs). - Exemptions can be counterproductive and inefficient; zero-rating across the value chain is the only way to fully remove VAT on inputs without creating cascading and distortions. - Example: Poultry sector — despite exemptions on maize, soybeans and other inputs, producers still complain about VAT because processed chicken is taxed; zero-rating of poultry raised using own resources (draft VAT amendment) will not apply to final sale of processed or frozen chicken. ### Numerical illustration and alternative: flat rate scheme for non-registered farmers - Exemptions increase consumer price via tax cascading (Table 5 provided a numerical example illustrating cascading). - If Mozambique removes exemptions and taxes a broader range of goods and services, it may consider a flat rate scheme for non-VAT-registered farmers: - Larger agricultural producers would be VAT taxpayers and recover VAT on inputs via credits/refunds. - Smaller non-registered farmers could voluntarily register; for those remaining exempt, a well-targeted direct compensation or an EU-like special flat rate scheme could allow recovery of input VAT without breaking the VAT value chain. - Under the flat rate scheme, businesses buying from exempt farmers calculate deemed output VAT using a prescribed rate and issue an invoice on reverse charge basis; the deemed VAT is paid to the farmer (kept by the farmer), and the buying business deducts it as input VAT, making the transaction neutral for the buyer. - Mozambique would need to establish an average share of taxable inputs in small-scale farming and set flat scheme rate(s) to avoid overcompensation. - Table 6 presented flat scheme rates used by select EU countries (2016) (rates and country examples presented in source table). ### Administrative benefits of removing VAT preferences - Removing VAT preferences increases simplicity and compliance: - Preferences complicate compliance and administration through additional effort to delineate scope of exemptions (e.g., whether bread includes breadcrumbs; distinction between “ordinary bicycles” and toy bicycles). - Taxpayers tend to interpret exemption scope expansively; tax authorities prefer narrow interpretation — leading to costly disputes and revenue loss. - Lack of exemptions helps address VAT leakage. ### Recommendations on VAT preferences and exemptions (text preserved) - Do not adopt additional VAT reliefs as currently proposed in the draft VAT amendment, including those on passenger transport and inputs for agriculture; - Do not extend VAT exemptions already expired at the end of 2015; - Remove all VAT preferences falling mostly on business inputs, including those for agriculture and other targeted industries (CFB); - Abolish all zero-ratings of domestic supplies; - Charge VAT on full tax basis for electricity, fuels, supply of public work services and aeronautical services; do not adopt the proposed relief for piped water; - Remove all exemptions that do not fall into the category of education, health and social assistance services; - Do not provide for any VAT preferences for government, political parties and members of parliament; - Improve enforcement, including through the recovery of VAT not paid on goods, especially vehicles, imported by miners working in South Africa upon sale of these goods into domestic market. ### Bringing new bases into the VAT net: financial services, immovable property, gambling - Consider bringing financial services, immovable property and gambling into the VAT net; currently exempt but sometimes taxed under other taxes (stamp duty, SISA, gambling tax). - Financial services: - Full taxation of financial services is difficult because taxing interest spread is administratively complex; an invoice-credit VAT cannot tax the spread transaction-by-transaction without over-taxation. - Fee-based financial services should be taxed under VAT; margin-based services (interest spread) may remain exempt. - Property and casualty insurance can be taxed under VAT by taxing premiums and indemnities and allowing credits for indemnities received by VAT-liable businesses; whole life insurance may remain exempt due to savings element. - Recommendation: Exempt only margin-based financial services and tax fee-based services under VAT; Tax property and casualty insurance under VAT. - Immovable property: - Under a pure VAT, transactions by VAT-registered taxpayers attract output tax, with input credits for business use; net VAT arises when purchaser/user is not a business or uses property for exempt supplies. - Recommendation: Continue to exempt residential property leases; tax supply of residential property by developers (new buildings) and exempt sales of used residential properties; tax all sales and leases of commercial property; do not charge stamp duty on transfer of a commercial property. - Gambling: - Casinos/lotteries should be taxed on net margin (difference between cash received for tokens/tickets and winnings paid out) and treat margin as VAT-inclusive; apply normal VAT rules to non-gambling supplies of casinos. - Recommendation: Tax lottery and gambling operators on their net margin under VAT but apply the normal VAT rules on their non-gambling supplies. ### Excises: overview (introductory findings) - Mozambique has an excise tax (ICE, imposto sobre consumos específicos) whose base does not comprise oil products, and a separate tax on oil products (TSC, taxa sobre combustíveis). - ICE base includes alcoholic beverages, tobacco products, vehicles, some perfumes, cosmetics and toiletries, firearms, jewels, and other luxury goods. TSC base comprises motor and aviation gasoline, diesel oil, jet fuel, fuel oil, and liquefied petroleum gas. - ICE rates are ad valorem; TSC rates are specific. Cigarette rates are specific. For other tobacco and alcoholic beverages, rates are ad valorem with minimum specific rates. Beer is subject only to ad valorem rates. - According to TSC code, specific rates should be adjusted quarterly for inflation though the rate increase cannot exceed 5 percent. - ICE and TSC revenues grew as a percentage of GDP in recent years but their share in total tax revenue has shrunk: - Excise Revenue as a Percentage of Total Tax Revenue* (by year): 10.15, 9.44, 9.78, 8.79, 8.10, 7.62, 6.99, 6.83, 6.71, 6.93 (for years 2006–2015 as presented in Table 7). - Total Excise Revenue (MT million) by year: 2,382; 2,789; 3,353; 3,674; 4,591; 5,490; 6,186; 7,684; 9,447; 9,730 (2006–2015 as in Table 7). - Total Excise Revenue as a Percentage of GDP (by year): 1.73, 1.79, 1.84, 2.01, 2.18, 2.33, 2.28, 2.47, 2.70, 2.50 (2006–2015 as in Table 7). - Domestic beer excise revenue peaked in 2012 and declined thereafter; other ICE components rose in 2013–2014 (likely from rate increases) but showed losses in 2015. *Source: INE HBS, IMF, IMF staff calculations* ### 73. Alcohol excises have the conflicting objectives of raising revenue while reducing ### Alcohol excises have the conflicting objectives of raising revenue while reducing consumption of these products to mitigate the associated negative externalities ### Alcohol excise design and trade-offs - Specific and ad valorem rates may be used—or a combination of both, like in Mozambique. - Specific rates: - Serve better the objective of reducing health problems since they stimulate the production of better quality beverages with lower alcohol content. - Make administration easier and evasion more difficult since no valuation is necessary and, for domestic production, flow metering is nowadays a simple practice. - Tend to be regressive as they burden cheaper brands, mostly consumed by the poorer individuals, heavier than more expensive ones. - Require indexing to inflation to avoid revenue deterioration; governments sometimes neglect this. - Global and regional practice: - The global trend is to apply exclusively specific rates related to the alcohol content. - All members of the OECD, except México, currently use specific rates. - In the SADC region (summary from Table 8): all countries use either an ad valorem rate or a specific rate by liter for wine. Five members tax both beer and spirits according to alcohol content; Mauritius taxes only spirits by their alcohol content. Eight out of the thirteen countries with available information use only specific rates. ### Cross-border context and smuggling vulnerability - Mozambique has very porous borders; examples: - The main Malawian road is, for a long stretch, the divide between Mozambique and Malawi; there is no natural obstacle separating the two countries. - Maputo is about one-hour drive from South Africa and Swaziland. - Implications: - Conditions are favorable for cross-border shopping and, unless customs administration is very efficient, for smuggling. - To avoid smuggling the only way is to have similar prices on the two sides of the border, which requires, among other measures, some degree of tax coordination. ### Bilateral trade statistics with South Africa (illustrative of border problems) - Comparison of FOB values of exports from South Africa to Mozambique reported by SARS with FOB values of imports from South Africa reported by the Mozambican AT indicates major discrepancies (Table 9 summary): - Beers: Reported by SARS = 165,250; Reported by MOZ = 64,999; SAR - MOZ = 100,250; SAR/MOZ = 2.5 - Wines, liqueurs, and vermouths: Reported by SARS = 116,272; Reported by MOZ = 12,797; SAR - MOZ = 103,475; SAR/MOZ = 9.1 - Spirits: Reported by SARS = 150,036; Reported by MOZ = 71,066; SAR - MOZ = 78,969; SAR/MOZ = 2.1 - All alcoholic beverages: Reported by SARS = 431,558; Reported by MOZ = 148,863; SAR - MOZ = 282,695; SAR/MOZ = 2.9 - Interpretation provided in the source: - Either exports from South Africa are massively entering Mozambique without paying taxes, or a massive carousel-type fraud is taking place in South Africa; more likely both types of fraud are happening. - No reform of the taxation of alcoholic beverages should take place before a thorough joint investigation of the border flows and until the problem is fixed. ### Policy recommendations on alcoholic beverages - Address immediately the problem revealed by the bilateral trade statistics. - After understanding and solving the border problem: - Reform the excises on alcoholic beverages to adopt specific rates on the alcohol content. - Calibrate rates so that consumer prices match those of neighboring countries, especially South Africa; whether the reform should be revenue neutral or revenue increasing depends on careful examination of prices of these goods in Mozambique and neighbor countries, especially South Africa. - Ideally set excise rates in concertation with neighbor countries so as to approximately equalize consumer prices of these goods in all countries involved. - Index the specific rates on alcoholic beverages (as well as the rates introduced in 2013 for cigarettes) to inflation. ### Gasoline and Diesel — prices, externalities, and recommendations - Rationale for taxing motor fuels: - Motor fuels are important sources of CO2 emissions and cause local negative externalities: air pollution, traffic congestion, traffic accidents, and road wear and tear. - Price comparisons (Table 10; prices in Meticais): - Angola: Gasoline 74.18; Diesel 62.59 - Botswana: Gasoline 55.81; Diesel 52.73 - Dem. Rep. of Congo: Gasoline 104.15; Diesel 103.45 - Lesotho: Gasoline 58.81; Diesel 56.53 - Madagascar: Gasoline 89.79; Diesel 75.75 - Malawi: Gasoline 87.15; Diesel 86.21 - Mauritius: Gasoline 80.50; Diesel 61.13 - Mozambique: Gasoline 50.02; Diesel 45.83 - Namibia: Gasoline 59.02; Diesel 58.70 - Seychelles: N/A - South Africa: Gasoline 70.09; Diesel 69.89 - Swaziland: Gasoline 62.81; Diesel 62.24 - Tanzania: Gasoline 64.52; Diesel 59.66 - Zambia: Gasoline 107.99; Diesel 89.86 - Zimbabwe: Gasoline 104.99; Diesel 99.33 - Key price differentials and implications: - South Africans may cross the border and save 29 percent on purchases of gasoline and 34 percent on those of diesel compared with South African prices. - Malawians may save 43 percent on gasoline and 47 percent on diesel. - There is room for smuggling fuel into neighboring countries or for increasing administered price and/or the TSC rates. - Doubling the TSC rates would imply increases of around 15 percent in the price of gasoline and 10 percent in the price of diesel. Diesel would still have the lowest price in SADC and gasoline the second lowest. - Without increasing the TSC rates on petroleum products Mozambique will continue to effectively subsidize foreign consumers. - Recommendation: - Increase the rate of TSC on gasoline to MT 15.00 and on Diesel to MT 9.00. - Additional revenue gain: - Include the TSC in tax base calculation for VAT purposes (discussed in Chapter III of the source). ### Telecom services — possible new excise base - Context: - Many countries have imposed taxes on mobile phone services; handsets are taxed practically everywhere by VAT or other sales taxes and sometimes by import duties. - Mobile usage (call, data, SMS) has good characteristics as a tax base: large base, fairly price-inelastic, simple to administer, easy to collect from few taxpayers, and difficult to evade. - Counterarguments and positive externalities: - Air time tax differs from taxing other excisable items: mobile services provide positive spillovers (communication, integration, mobile banking, health consultation services). - Opponents allege it reduces mobile penetration and economic growth. - Proponents allege telecom service is a natural monopoly; the tax could be borne by service providers, cutting economic rents without affecting marginal investment decisions. - Empirical note: - A recent study found that 37 countries out of a sample of 110 impose taxes on mobile usage; 14 countries have introduced or increased excises on usage since 2011 (four in Africa); four countries (including Uganda and Democratic Republic of Congo) have decreased excises. - Mozambique-specific data (Table 11; percentages preserved as in source): - Mozambique: Tax/TCMO = 17.5; Handset tax / Handset Cost = 24.5; Mobile specific tax / TCMO = 0 - Other SADC entries (examples): Angola 5.6 / 150; Botswana 12 / 20; South Africa 14 / 40; Tanzania 36 / 18.6 / 15.2; Zimbabwe 20.5 / 28.3 / 4.7 - Note in source: For Mozambique handset tax/handset cost data is incorrect in the table; the correct number for Mozambique would be 25.8 percent (footnote). - Recommendation: - Consider undertaking studies conducive to the introduction of an excise tax on mobile phone usage; mission did not have enough information to recommend in favor or against introduction but encourages the authorities to undertake a study on effectiveness and feasibility. ### Corporate Income Tax — tax incentives and revenue implications - Current incentive framework: - CIT tax incentives are offered through the Code of Fiscal Benefits to encourage investment. - Investment qualifying includes those under the Investment Law and investment in: (1) commercial and industrial activities in rural areas, (2) new infrastructures in retail and wholesale commerce, and (3) manufacturing and assembly industries. - General incentive: full expensing, accelerated depreciation, and investment tax credits. - Sector-specific incentives: reduction in statutory tax rate for investment in agriculture, hotel and tourism, and special economic zones. - Many incentives overlap and sometimes apply to very profitable investments (e.g., telecommunication companies in rapid development zones). - Result: unwarranted revenue loss by benefiting the most profitable sectors/economic activities. - Evidence on importance of incentives for investors: - Surveys summarized in Figure 8 show investment conditions (economic and political stability, quality of infrastructure) are far more important for multinational investors than availability of tax incentives. - Consultations with Mozambique business community corroborate that tax incentives are rarely mentioned and never a high priority; primary concerns were revenue administration, inefficient and costly regulation, poor infrastructure, currency limitations, and other business conditions. - Impact on effective tax burden: - Despite a 32 percent statutory corporate tax in Mozambique, the average tax rate for all companies is about 12 percent as more than 40 percent of companies report negative pre-tax profits and do not pay CIT. - For companies with positive CIT liability, their average tax rate is about 22 percent. - CIT is mostly paid by companies at the top of the profit distribution: - For companies with positive tax liability, the top 1 percent of taxpayers contributes about 56 percent of corporate tax. - Including all companies, the top 1 percent contributes close to 70 percent of corporate tax. - Overall the top 10 percent of all companies in Mozambique pay close to 96 percent of total corporate tax revenue. - Distributional and effective rate concerns: - The largest companies (mostly multinationals) face a much lower effective tax burden than the rest of CIT taxpayers. - Figures 9 and 10 show: - Strong concentration of tax payments among a small set of taxpayers. - The average tax rate for companies at the top 10 percent of the profit distribution is strikingly lower than for other corporate taxpayers. - Causes: generous investment tax incentives and profit-shifting opportunities undermine tax revenue. - Potential CIT base and revenue gap: - A methodology is proposed: derive company profits from gross value added (output minus intermediate consumption), deduct depreciation, compensation of employees, and taxes on production to obtain a rough measure of profit; compare potential CIT revenue at a 32 percent tax rate (assuming perfect compliance) with actual tax revenue at aggregate and sector levels. - Current data limitations: in a number of sectors cost of production exceeds business volume (commercial, real estate, other service activities), preventing a meaningful calculation of CIT tax base at the aggregate level. - The gap between potential and actual collections would indicate revenue foregone due to investment incentives and extent of tax avoidance. - Marginal Effective Tax Rate (METR) under different incentives (Table 12 summary; assumptions and exact METR observations preserved): - Benchmark assumptions: - real interest rate = 0.05; - economic depreciation rate for machinery and equipment = 0.175; - economic depreciation rate for commercial building = 0.031; - economic depreciation rate for intangible assets = 0.154; - Value of Key Tax Parameters according to Decree 72/2013 of 23 December 2013: marginal corporate tax rate = 0.32; - Depreciation in the Code: Machinery and Equipment = 10 percent; Commercial and Industrial Building = 2 percent; Residential Building = 10 percent; Intangible assets (patent) = 10 percent. - Table 12 findings: - Section A (No Incentives) METRs for asset types (examples): Machinery and Equipment = 0.3; Commercial and Industrial Building = 0.32; Residential Building = 0.2; Intangible: Patent = 0.29. - Section B (With General Investment Incentives) METRs fall substantially (examples): Machinery and Equipment = 0.24; Commercial and Industrial Building = n.a; Residential Building = n.a; Intangible = n.a. - Section C (With Additional Sector-Specific Investment Incentives) combining general and sector-specific incentives can yield negative METRs in agriculture (e.g., Agriculture and Fisheries column shows negative METR values like -0.02 and -0.04 for some asset/incentive combinations), indicating the tax code provides a subsidy to investment in those sectors. - Definition note: METR measures the extent to which taxation causes the pre-tax hurdle rate of return on investment to deviate from its normal (minimum) after-corporate tax rate of return; METRs reflect the “tax wedge” on investments that just break even and are useful to assess how taxes distort the level of investment (scale decisions). *Italic: Source: IMF staff report excerpt as provided in the supplied content.* ### 90. The tax code favors investment in residential building by prescribing a short ### 1mozea2023014 - 90. The tax code favors investment in residential building by prescribing a short ### Tax treatment of residential vs commercial/industrial building - The tax code prescribes a depreciation life of 10 years for residential building. - This depreciation life "appears to be too generous by international standard," causing the METR for investment in residential building to be 12 percentage point lower than for commercial and industrial building. - Differential depreciation treatment is likely to distort investment away from commercial and industrial building. ### Tax incentives and sunset clauses - Many benefits included in the CFB are subject to a sunset clause of 5 years, after which they no longer apply. - Example: "the 80 percent reduction in the IRPC or IRPS tax rate in agriculture was set to expire on December 31, 2015." - The government is advised to curtail tax exemption by restricting tax benefits within the effective period prescribed in the sunset clause rather than extending them. ### Corporate Income Tax Rate (CIT) - Mozambique’s statutory CIT rate: 32 percent. - Observation: Mozambique’s 32 percent CIT rate is "slightly above the average for low-income countries in the region." - Despite higher statutory rate, Mozambique’s CIT revenue yield is comparable with South Africa, even though South Africa’s statutory rate is 4 percentage point lower—suggesting numerous tax incentives undermine efficiency as measured by CIT revenue to (CIT rate × GDP). - Table 13 (regional data as presented): - Mozambique 2015: Standard CIT Rate 32; Revenue as percent of GDP 6.1; Efficiency Ratio 0.19 - Low-Income average: Standard CIT Rate 29.3; Revenue as percent of GDP 2.4; Efficiency Ratio 0.08 - Middle-Income average: Standard CIT Rate 27.0; Revenue as percent of GDP 3.9; Efficiency Ratio 0.15 - Individual examples from table (preserved): - Burudi 2013: Standard CIT Rate 30.0; Revenue as percent of GDP 2.4; Efficiency Ratio 0.08 - Ethiopia 2011: Standard CIT Rate 30.0; Revenue as percent of GDP 1.6; Efficiency Ratio 0.05 - Malawi 2014: Standard CIT Rate 30.0; Revenue as percent of GDP 3.2; Efficiency Ratio 0.11 - Tanzania 2013: Standard CIT Rate 30.0; Revenue as percent of GDP 3.0; Efficiency Ratio 0.10 - Uganda 2014: Standard CIT Rate 30.0; Revenue as percent of GDP 0.7; Efficiency Ratio 0.02 - Zimbabwe 2012: Standard CIT Rate 25.8; Revenue as percent of GDP 3.6; Efficiency Ratio 0.14 - Botswana 2014: Standard CIT Rate 22.0; Revenue as percent of GDP 5.3; Efficiency Ratio 0.24 - Kenya 2013: Standard CIT Rate 30.0; Revenue as percent of GDP 3.8; Efficiency Ratio 0.13 - Lesotho 2013: Standard CIT Rate 25.0; Revenue as percent of GDP 3.3; Efficiency Ratio 0.13 - South Africa 2014: Standard CIT Rate 28.0; Revenue as percent of GDP 5.4; Efficiency Ratio 0.19 - Swaziland 2012: Standard CIT Rate 30.0; Revenue as percent of GDP 1.8; Efficiency Ratio 0.06 - Policy recommendation on CIT rates: - Reduce the CIT rate for non-extractive and, perhaps, telecommunication sector to 30 percent in the immediate term. - If revenue pressures permit, reduce CIT rate to 28 percent over the medium term. - Rationale: align with South Africa, improve investment attractiveness, and reduce incentives for profit shifting. ### Anti-avoidance and transfer pricing - Current law: Article 49 establishes the arm’s length principle but does not specify detailed transfer-pricing rules in law or accompanying legislation. - Government acknowledges common practices of abuse: over-invoicing of services to related companies and mischarging of coal prices in cross-border transactions. - A transfer pricing regulation draft has been ongoing for more than three years and is yet to be finalized and published for public consultation. - Thin-capitalization rules: - Article 51 disallows interest deduction if intra-company debt is excessive; specific ratio stated: 2:1 debt to equity ratio. - No specific rule in Mozambique for the banking sector. - The current tax form does not include detailed information on interest, debt, or interest expense to assess compliance with the thin-capitalization rule or to allow meaningful analysis of company leverage. - International practice noted: most countries either exempt financial institutions from thin capitalization rules or specify a higher ratio aligned with regulatory requirements. ### Recommendations (tax policy and administration) - Do not extend the tax benefits subject to the sunset clause in the Code of Fiscal Benefits (CFB). - Undertake a careful analysis of the CFB on its impact on business investment and CIT revenue. - Conduct a detailed study of tax expenditure, identifying their size, type, their evolution, and the category of taxation to which they apply. - Eliminate most of the tax incentives in the CFB, following recommendations of the analyses above. - Reduce the statutory corporate tax rate to 30 percent and further to 28 percent in the medium term. - Increase the depreciation period for residential building to that for commercial and industrial buildings. - Strengthen transfer pricing rules; develop the capacity of the tax authority to administer transfer pricing, including on debt transactions. - Require reporting of more information in company tax returns to conduct meaningful analysis of risks. --- ### Personal Income Tax (IRPS) — overview and structure - IRPS = imposto sobre o rendimento das pessoas singulares (global personal income tax) substituted a set of partial taxes in 2002; fully reviewed in 2007 and amended in 2013. - The current progressive rates schedule was put in effect in 2008; the law of 2013 moved away from the global income tax by defining withholding tax on employment income as final. - IRPS classifies income into five categories: 1. Employment income, retirement pensions and alimonies. 2. Business and self-employment income. 3. Capital income and capital gains. 4. Property income. 5. Income from gambling, lotteries, similar, and increase in wealth not accounted by other categories. - Despite categories, the IRPS pools income across categories and applies the progressive schedule; however, many items of capital income are subject to a 20 percent final withholding (and some to a 10 percent tax), making IRPS a hybrid of a global and a dual income tax. ### IRPS developments and effects of 2013 amendment - Since 2014, employment income is subject to a final withholding; the IRPS became similar to the fragmented taxation it originally replaced. - IRPS is "essentially a tax on labor income." - Law 20/2013 provided two rate schedules: one for source withholding and one for annual return; they are "almost compatible." - Differences: dependent allowance exists for wages but not for other income; non-taxable income allowance is MT 243,000 (annualized) for wages and MT 225,000 for other income. - Recommendation: non-taxable income allowances should be equal and dependent allowance should either be eliminated or made available for all taxpayers; if extended, it should take the form of a tax credit rather than deduction. ### Revenue composition (IRPS revenue by income type) - Employment income: MT 18,410 million — 86.4 percent - Business and self-employment income: MT 1,255 million — 5.9 percent - Capital income and capital gains: MT 486 million — 2.3 percent - Rental income: MT 870 million — 4.1 percent - Other income: MT 110 million — 0.1 percent - Non-specified: MT 279 million — 1.3 percent - Total: MT 21,311 million — 100.0 percent - Source: AT ### Progressivity and non-taxable allowances - Two policy measures to improve progressivity and increase revenue: - Use of tax credit rather than income deduction for the non-taxable income allowance would improve progressivity of the average rate and increase revenue. - Reduce the amount of the non-taxable allowance, which currently excludes from taxation people up to the seventh decile of the income distribution. ### Final withholding tax on labor income — issues and examples - The 2013 change made withholding tax on wages final for all employees, including those with other types of income, generating horizontal inequities, revenue losses, and reduced progressivity. - Example: A taxpayer with annual rental income MT 1,500,000 and monthly wage MT 100,000: - Under old rule: annual tax = MT 650,460. - Under new rule: annual tax = MT 489,300 (about 25 percent less). - Example: Two wage earners each with yearly income MT 1,200,000: - One with a single job: annual tax = MT 206,250. - One with two part-time jobs (each MT 600,000): annual tax = MT 125,400. - Another employee with same annual income receiving wages quarterly: annual IRPS = MT 312,220. - Example illustrating behavioral response: An accountant with 10 clients paying MT 10,000 a month (MT 100,000 per year per client) as self-employed pays annual IRPS MT 208,050; employed by the 10 clients as an employee he could pay no tax. ### Administrative incompatibilities and corrective measures - Legal inconsistency: Article 65-A (withholding tax is final) and article 26.3 (employment income is not pooled) conflict with article 52 (who must file annual tax returns), which does not excuse wage earners from filing returns except those subject to final withholdings in article 57. - Recommended changes to avoid horizontal inequities and revenue loss: - Excuse from filing annual returns only wage earners who have no other type of income except those subject to final withholding (article 57). - Excuse only employees with a single source of wage income from filing; employees with more than one source of wage income should either file annual adjustment returns or have employers pool wage income for taxation (mission favors annual adjustment returns for AT). ### IRPS recommendations (summary) - If the dependent allowance is kept, provide it as a tax credit rather than as a deduction. - Amend the 2013 law to excuse employees from filing tax returns only if they have a single source of employment income and no other type of income except those subject to final withholding taxation. - Reform the IRPS law so withholding tax is final only for employees with a single source of wage income and whose other types of income are only those subject to final withholding taxation mentioned in article 57. ### Reduced rates and final withholding on passive income - Temporary reduced rate for agricultural business: 10 percent (created in 2007 for individuals and corporations); initially set to expire in 2010 and extended to the end of 2015. - Most passive income is subject to final withholding at 20 percent. - Exceptions taxed at 10 percent: interest on time deposits and income from financial papers transacted in the stock exchange (except government bonds). - Mission found no justification for privileged treatment of term deposits relative to other financial assets. - Recommendations: - Do not extend the expired tax reduction for agricultural activities. - Tax term deposits at the same rate applied to all other financial assets. ### Simplified Tax Regime (ISPC) - ISPC introduced in 2009 (Law 5/2009) as a simplified tax on gross business turnover, replacing CIT, PIT and VAT for eligible taxpayers. - Eligibility: taxpayers with annual business volume (ABV) below MT 2,500,000 in the previous calendar year may elect ISPC at a flat rate of 3 percent. - Taxpayers with ABV lower than 36 times minimum wage (MW) on December 31 of the preceding year are exempt from tax. - Note on minimum wage and exemption ceiling (as provided): - Minimum wage on December 31, 2015 was MT 8,750, or US$ 182.26 at exchange rate MT 45.5 = US$1. Thus exemption ceiling in 2015 is ABV of MT 10,500, or US$ 230.77. - Following rapid deprecation of Meticais in 2016, the exemption ceiling equals US $141.89 at time of drafting (MT 74 = US$1 on November 27, 2016). - ISPC should be part of a comprehensive approach to taxation of small and medium taxpayers, and when coupled with enhanced tax administration services and non-tax incentives (e.g., easier access to financing, streamlined registration and licensing, state grants and procurement) can support formalization, increase registrations and compliance, reduce inequalities between formalized and informal businesses, boost competitiveness and economic growth. - Proper design of ISPC requires segmentation of taxpayers; turnover is an appropriate yardstick to proxy taxpayer size for tax purposes. *Source: IMF chapter excerpt (1mozea2023014).* ### 113. The current tax code distinguishes micro and small taxpayers from the rest, while ### 1mozea2023014 - 113. The current tax code distinguishes micro and small taxpayers from the rest, while ### Taxpayer segmentation and thresholds - Current official categories of taxpayers: - Micro taxpayers: with annual turnover below MT 750,000 - Small taxpayers: with annual turnover between MT 750,000 and 2.5 million - Medium and large taxpayers: with annual turnover above 2.5 million - "There seems to be no clear distinction between the medium and large taxpayers" - Recommended segmentation (Table 15): - Micro: below 750,000 — Alignment: VAT voluntary registration threshold - Small: 750,000 - 4,000,000 — Alignment: VAT mandatory registration threshold - Medium: 4,000,000 - X — Alignment: LTU threshold or lower - Large: above X — Alignment: LTU threshold or higher - Note: X denotes a chosen LTU threshold ### ISPC regime alignment and rationale - Standard practice: align the ISPC regime with the VAT registration threshold. - Rationale: any business capable of accounting for VAT will be able to account for income taxation; important if simplified VAT regime is removed and replaced by a comprehensive ISPC regime. - Concession practice: businesses above VAT threshold may receive concessions (e.g., simplified book-keeping). ### ISPC uptake, coverage, and revenue contribution (2010–2015) - ISPC uptake: - Average growth rate in the number of ISPC taxpayers of around 34 percent between 2010 and 2015. - As of 2015 there are 9,046 taxpayers with positive tax payment under the ISPC regime, representing close to 20 percent of total taxpayers with positive VAT and corporate income tax payment, and with personal income taxation for income outside category 1 (i.e., employment income). - About 1.6 percent of ISPC taxpayers have graduated into the normal CIT regime in 2015. - Note on counting: "The number of taxpayers only include those with positive tax payment, based on tax data provided by AT." - ISPC revenue share: - ISPC tax revenue remained below 0.14 percent of total tax revenue at the end of 2015. - Despite steady increase in share between 2010 and 2015, the absolute amount is minor. - Policy view on ISPC use: - "Given the nature of ISPC as a presumptive tax, it should not be used as a primary tool to increase revenue." - ISPC should simplify the tax code for small taxpayers, lower administrative burden of auditing such taxpayers, and encourage proper account keeping and entries into the formal sector. ### Coexistence of multiple simplified regimes - Problem: Effectiveness of ISPC is compromised by several other simplified regimes targeting the same taxpayer group; these older regimes often implied a higher tax burden for small taxpayers than ISPC. - Recommendation in text: Abolish coexistence of alternative simplified tax regimes to streamline simplified taxation for small taxpayers. - Simplified Tax Regimes Available to Small Taxpayers (Table 16) — eligibility and implications: 1. ISPC - Eligibility: Exempt if ABV ≤ MT 315,000 - Rate/implication: A flat fee of tax rate of 3.0 percent of ABV up to MT 2,5000,000. In lieu of corporate income tax, personal income tax and VAT. 2. Simplified (or exemption) VAT regime - Eligibility: Exempt if ABV ≤ MT 750,000 - Rate/implication: A flat rate of 5 percent of ABV if ABV is above MT 750,000 and below MT 2,5000,000. Taxpayer can no longer claim VAT paid on input purchases. 3. Simplified IRPS regime - Eligibility/implication: Personal allowance of 315,000. Taxable income shall be 0.2 or 0.3 of ABV depending on the activity. The tax amount shall not exceed 2.1 percent of ABV (for activities subject to the coefficient of 0.2) or 4.2 percent of ABV (in case the coefficient is 0.3). 4. Simplified IRPC regime - Eligibility: ABV ≤ MT 2,500,000 - Taxable profits shall be: - 0.2 of ABV derived from sales of merchandise and products; - 0.2 of ABV derived from sales and provision of lodging, restaurant, and beverage services; - and 0.30 on the remaining earnings - Implication: This implies an effective tax rate on turnover of between 6.4 and 9.4 percent. ### Distributional effects, threshold bunching, and inflation indexing - Distributional observation: - A substantial number of taxpayers remain below the ISPC eligibility threshold; extent of bunching increased since ISPC introduction. - "During this period, the eligibility threshold remained at MT 2,500,000 despite of a relative high inflation rate in recent years (and 10 percent in 2015)." - Without indexing, setting threshold at nominal level restricts growth of small taxpayers facing significant compliance costs under the normal regime. - Footnotes: - Example: "the first dot shows that there are about 340 ISPC taxpayers with turnover between MT 1 and 1.1 million." - Registration timing note: "There is a small number of ISPC taxpayers above the threshold, possibly due to the registration requirement is applied to turnover in the previous year instead of current year." ### Revenue impact of raising ISPC eligibility and rate - Raising eligibility to MT 4 million: - Would cost approximately 0.06 percent of total tax revenue, or less than 0.03 percent of GDP in revenue. - Would extend coverage of ISPC to most taxpayers in Mozambique. - Revenue composition change: loss of around MT 200 million in VAT compensated with additional revenue of MT 120 million in ISPC. - "Additional revenue loss in corporate income tax is negligible." - Footnote assumption on VAT loss: "Assuming that all VAT taxpayers with turnover between MT 2.5 and 5.0 million will be removed from VAT register (i.e. they do not chose to voluntarily register for the VAT)." - Raising ISPC tax rate to 5 percent: - Proposed to compensate for revenue loss from threshold increase. - Net revenue consequence of increasing the rate and extending coverage: approximately MT 240 million additional tax revenue per year (net). ### Specific policy recommendations (as listed in the chapter) - Assure proper segmentation of taxpayers – align presumptive taxation thresholds with those of VAT; - As a part of coherent tax strategy, introduce a definition of large taxpayers based on turnover and possibly, on employment and asset size; - Develop the ISPC tax into a comprehensive presumptive regime – turnover based tax for small taxpayers and a simple lump sum tax for micro taxpayers; - Extend the coverage of ISPC by increasing the eligibility threshold to MT 4 million; index it to automatically adjust for inflation; - Remove the exemption threshold based on minimum salary; - Exclude professional services from the ISPC regime and keep them under the normal tax regime; - Charge a flat fee on a semi-annual or annual basis for micro taxpayers with turnover below MT 750,000; - Eliminate the other simplified taxation regimes that has become obsolete following the introduction of ISPC. ### Appendix (selected content on incentives) - The Code of Fiscal Benefits (Law 4/2009) — summary points: - Became effective in 2002; offers tax incentives lowering effective corporate income tax for investment under the Investment Law and in specified activities including commercial and industrial activities in rural areas, new infrastructures in retail and wholesale commerce, and manufacturing and assembly industries. - Box: Various types of major IRPC tax incentives in the Code of Fiscal Benefits — examples: - General incentives: - Direct deductions from taxable profits: 100 percent deduction; i.e. fully expensing in the first five tax year for investment in qualified equipment using new technology and cost of investment in professional training. - Accelerated depreciation: Increase in the depreciation rate of 50 percent for new immovable assets and machinery and equipment in industrial and agro-industrial operations. - Investment tax credit: - Investment in machinery and plant in the city of Maputo: 5 percent of investment to be deducted from IRPC for a period of five tax years. - Investment in machinery and plant outside the city of Maputo: 10 percent of investment to be deducted from IRPC for a period of five tax years. - Sector-specific incentives (selected): - Agriculture and Fisheries: 80 percent reduction in the IRPC tax rate by 2015 and by 50 percent between 2016 and 2025. - Hotel and tourism: Reduction by 3 percentage points of the investment tax credit and accelerated depreciation reduced from triple to double. - Rapid Development Zones: Investment tax credit of 20 percent for 5 years. - Industrial Free Zones: IRPC tax exemption for 10 years; IRPC 50 percent tax reduction from the 11th to 15th year and 25 percent for the rest of the project life. - Basic Infrastructure Creation: IRPC tax reduction of 80 percent in the first five years; 60 percent for 6 to 10 years; and 25 percent from the 11th to 15th year. - Science and Technology Parks: IRPC tax exemption in the first five years; 50 percent tax reduction from 6 to 10 years and 25 percent from the 11th to 15th year. - Special Economic Zones: IRPC tax exemption for 5 years (for operators responsible for creating infrastructure in the Zone) or three years (for companies establishing themselves in it); IRPC tax reduction of 50 percent in the next 5 years; and 25 percent IRPC tax reduction throughout the life of the project (for operators in the Zone) or for an additional 5 years (for companies). - Note: "*Exclusion restriction applies according to Article 15 para 6." *Source: 1mozea2023014 (PDF chapter/section).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mozea2023014.pdf_