## Executive Summary

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---

### Context and challenges
- Domestic revenue mobilization has been a longstanding challenge for countries in the Middle East and Central Asia (ME&CA), constraining priority social and infrastructure spending and the ability to reach the UN Sustainable Development Goals, improve growth prospects, and address climate-related challenges.
- Insufficient revenue has often been compensated by large and sustained debt accumulation, raising vulnerabilities and limiting fiscal space to address future shocks.
- The COVID-19 pandemic and the war in Ukraine compounded fiscal challenges:
  - Significant revenue losses during the pandemic, including from measures to ease the tax burden for businesses and households, and increased spending to support growth, weakened public finances.
  - Rising commodity prices because of the war in Ukraine and policy responses have added to fiscal pressures.
- The crises exacerbated societal inequalities, with the pandemic disproportionately affecting the poor and vulnerable and higher food and fuel prices hitting vulnerable households hardest.

### Scope for additional tax revenue
- Excluding hydrocarbon revenues, the region’s average tax intake lags those of other regions:
  - The average tax ratio, excluding hydrocarbon-related revenue, is about 12 percent—below that of emerging market and developing economies (EMDEs) in other regions.
- Fragile and conflict-affected states (FCSs) face particular challenges:
  - FCSs’ tax ratios averaged just 8 percent, well below those of FCSs in other regions and insufficient to cover critical social and development needs.
- Considerable scope exists to raise additional tax revenue:
  - Tax revenue gaps—the difference between potential and actual nonhydrocarbon tax collection—are estimated at more than 14 percent of nonhydrocarbon GDP on average for the region.
  - Some of the largest gaps are in low-income countries and fragile states; tax gaps are smallest in the Caucasus and Central Asia countries.

### Drivers of revenue shortfalls
- Tax policy design:
  - Low tax rates and pervasive tax exemptions are important factors driving shortfalls.
  - Hydrocarbon-exporting countries, especially in the Gulf Cooperation Council (GCC), have particularly low rates for corporate income tax, personal income tax (PIT) and consumption-based taxes, despite recent progress.
  - Exemptions are widespread and significant for both direct and indirect taxes; many state-owned enterprises benefit from privileges or concessions that erode the tax base.
- Tax structure and composition:
  - The region derives the bulk of tax revenue from consumption-based taxes and a variety of indirect taxes and fees, but revenue yields are relatively low.
  - Use of direct taxes—especially personal and corporate income taxes—has been relatively limited.
- Compliance and administrative shortcomings:
  - Weak tax compliance reflects structural features (large informal sectors, complex tax systems) and revenue administration shortcomings (lack of autonomy, inefficient organization, underdevelopment of digital taxpayer services).
  - These elements create opportunities for tax avoidance and evasion.
- Personal income tax (PIT) systems:
  - PIT systems vary in progressivity and redistributive capacity; some countries have relatively progressive PITs but too-small revenues to achieve meaningful redistribution, while others have larger PIT revenues but lower progressivity.
  - The most redistributive tax systems in the region are found among countries in the Middle East and North Africa.

### Policy priorities to raise revenue while supporting resilient and inclusive growth
- Improve tax policy design to broaden the tax base and increase progressivity and redistributive capacity:
  - Eliminate widespread exemptions and inefficient tax incentives to broaden bases and potentially improve progressivity.
  - Redesign personal income and value-added taxes—or accelerate their introduction where absent—to boost revenue collection and support inclusion.
  - Further develop property taxes, whose use is currently limited in the region.
- Strengthen revenue administration to improve compliance:
  - Modernize revenue administrations and enhance efficiency through restructuring on a functional basis and granting greater autonomy.
  - Develop taxpayer services to reduce the cost of compliance, reinforce control procedures, and leverage digital technologies and electronic taxpayer services for all main taxes.
  - Enhance international cooperation to facilitate information exchange across tax jurisdictions, improving transparency and fairness.
- Implement structural reforms to incentivize compliance, formalization, and diversification:
  - Promote financial inclusion and discourage the use of cash to improve access to financial services and lower the cost of digital payments, boosting compliance and formalization.
  - Implement reforms to fight corruption, improve governance, and enhance transparency and communication to build confidence in tax fairness.

### Implementation considerations and sequencing
- Reform success requires sustained efforts over relatively long periods; the experience of countries that achieved lasting improvements suggests persistence is essential.
- Careful timing, design, clear and transparent communication, and political commitment are necessary to generate buy-in and sustain reform momentum.

*Executive Summary, rmrirmecaea*

### Executive Summary ...............................................................................................ix

### Executive Summary ...............................................................................................ix

### Context and challenges
- Domestic revenue mobilization has been a longstanding challenge for countries in the Middle East and Central Asia (ME&CA), constraining priority social and infrastructure spending and the ability to reach the UN Sustainable Development Goals, improve growth prospects, and address climate-related challenges.
- Insufficient revenue has often been compensated by large and sustained debt accumulation, raising vulnerabilities and limiting fiscal space to address future shocks.
- The COVID-19 pandemic and the war in Ukraine compounded fiscal challenges:
  - Significant revenue losses during the pandemic, including from measures to ease the tax burden for businesses and households, and increased spending to support growth, weakened public finances.
  - Rising commodity prices because of the war in Ukraine and policy responses have added to fiscal pressures.
- The crises exacerbated societal inequalities, with the pandemic disproportionately affecting the poor and vulnerable and higher food and fuel prices hitting vulnerable households hardest.

### Scope for additional tax revenue
- Excluding hydrocarbon revenues, the region’s average tax intake lags those of other regions:
  - The average tax ratio, excluding hydrocarbon-related revenue, is about 12 percent—below that of emerging market and developing economies (EMDEs) in other regions.
- Fragile and conflict-affected states (FCSs) face particular challenges:
  - FCSs’ tax ratios averaged just 8 percent, well below those of FCSs in other regions and insufficient to cover critical social and development needs.
- Considerable scope exists to raise additional tax revenue:
  - Tax revenue gaps—the difference between potential and actual nonhydrocarbon tax collection—are estimated at more than 14 percent of nonhydrocarbon GDP on average for the region.
  - Some of the largest gaps are in low-income countries and fragile states; tax gaps are smallest in the Caucasus and Central Asia countries.

### Drivers of revenue shortfalls
- Tax policy design:
  - Low tax rates and pervasive tax exemptions are important factors driving shortfalls.
  - Hydrocarbon-exporting countries, especially in the Gulf Cooperation Council (GCC), have particularly low rates for corporate income tax, personal income tax (PIT) and consumption-based taxes, despite recent progress.
  - Exemptions are widespread and significant for both direct and indirect taxes; many state-owned enterprises benefit from privileges or concessions that erode the tax base.
- Tax structure and composition:
  - The region derives the bulk of tax revenue from consumption-based taxes and a variety of indirect taxes and fees, but revenue yields are relatively low.
  - Use of direct taxes—especially personal and corporate income taxes—has been relatively limited.
- Compliance and administrative shortcomings:
  - Weak tax compliance reflects structural features (large informal sectors, complex tax systems) and revenue administration shortcomings (lack of autonomy, inefficient organization, underdevelopment of digital taxpayer services).
  - These elements create opportunities for tax avoidance and evasion.
- Personal income tax (PIT) systems:
  - PIT systems vary in progressivity and redistributive capacity; some countries have relatively progressive PITs but too-small revenues to achieve meaningful redistribution, while others have larger PIT revenues but lower progressivity.
  - The most redistributive tax systems in the region are found among countries in the Middle East and North Africa.

### Policy priorities to raise revenue while supporting resilient and inclusive growth
- Improve tax policy design to broaden the tax base and increase progressivity and redistributive capacity:
  - Eliminate widespread exemptions and inefficient tax incentives to broaden bases and potentially improve progressivity.
  - Redesign personal income and value-added taxes—or accelerate their introduction where absent—to boost revenue collection and support inclusion.
  - Further develop property taxes, whose use is currently limited in the region.
- Strengthen revenue administration to improve compliance:
  - Modernize revenue administrations and enhance efficiency through restructuring on a functional basis and granting greater autonomy.
  - Develop taxpayer services to reduce the cost of compliance, reinforce control procedures, and leverage digital technologies and electronic taxpayer services for all main taxes.
  - Enhance international cooperation to facilitate information exchange across tax jurisdictions, improving transparency and fairness.
- Implement structural reforms to incentivize compliance, formalization, and diversification:
  - Promote financial inclusion and discourage the use of cash to improve access to financial services and lower the cost of digital payments, boosting compliance and formalization.
  - Implement reforms to fight corruption, improve governance, and enhance transparency and communication to build confidence in tax fairness.

### Implementation considerations and sequencing
- Reform success requires sustained efforts over relatively long periods; the experience of countries that achieved lasting improvements suggests persistence is essential.
- Careful timing, design, clear and transparent communication, and political commitment are necessary to generate buy-in and sustain reform momentum.

*Executive Summary, rmrirmecaea*

### 1. A Longstanding Challenge

### 1. A Longstanding Challenge

### Overview
- Domestic revenue mobilization has been a longstanding challenge for countries in the Middle East and Central Asia (ME&CA).
- For the last two decades, domestic tax revenues have generally fallen short of those in other regions, limiting the region’s ability to support resilient and inclusive growth.
- Some progress has been made in recent years, especially by countries in the Caucasus and Central Asia (CCA), reflecting reform efforts on both tax policy and revenue administration.
- The COVID-19 pandemic and the war in Ukraine compounded existing challenges, producing significant revenue losses as policymakers implemented tax policy and revenue administration measures to mitigate economic impacts.

### A. The Case for Efficient and Equitable Revenue Mobilization
- Key objectives: supporting resilient growth, reducing poverty, and reducing inequality.
- Evidence and context:
  - Resilient growth and inclusion are mutually reinforcing objectives.
  - For ME&CA, lackluster and volatile growth translated into lower average real income per capita in 2018 than in 2008.
  - Youth unemployment remains high and access to high-quality affordable public services is uneven, hampering progress toward the UN Sustainable Development Goals (SDGs).
  - From 1990 to 2016, the share of income accruing to the top decile averaged 64 percent in the region, compared to 47 percent in the United States and 55 percent in Brazil (Piketty, Alvaredo, and Assouad 2017).
- Estimated spending needs:
  - Additional spending to achieve five critical SDGs covering human, social, and physical capital was estimated at 5.3 percent of GDP per year by 2030 on average for the region (Mathai and others 2020).
  - Adaptation to climate change is estimated to generate additional public spending needs of up to 3.3 percent of GDP per year over the next 10 years (IMF 2020, Duenwald and others 2022).
- Fiscal constraints and risks:
  - Fiscal space has shrunk while spending needs are projected to increase to support the post-COVID recovery and address high commodity prices, inequality, youth unemployment, and refugee movements.
  - Elevated debt levels and financing needs increased vulnerabilities and susceptibility to tightening global financial conditions; reducing debt even to pre-COVID levels would require much stronger and sustained fiscal adjustment for more than a decade (IMF 2021b).
  - Managing hydrocarbon revenue volatility and long-term diversification away from hydrocarbons requires development of the nonhydrocarbon tax base.
- Efficiency-equity trade-offs in tax design:
  - Consumption taxes tend to be relatively efficient and supportive of economic growth; income taxes tend to be more equitable (IMF 2013a).
  - Broadening the base for consumption taxes is found to be more supportive of growth than raising consumption tax rates.
  - Income taxes can be designed to minimize distortions to growth.
  - The equity-efficiency trade-off must be assessed in terms of net taxes, including benefits from financing growth-friendly and equity-enhancing spending.

### B. Pre-Pandemic Revenue Stagnation
- Regional revenue patterns:
  - Between 2000 and 2019, total government revenue in ME&CA countries averaged 29.9 percent of GDP, reflecting hydrocarbon-related revenue.
  - From 2012, the average revenue ratio in ME&CA declined due to lower oil prices; by 2019 the average revenue ratio (26.5 percent of GDP) had fallen below the 2008 level.
- Tax-to-GDP comparisons (2019):
  - ME&CA average tax-to-GDP ratio: 12.7 percent of GDP.
  - Emerging and developing Asia: 15.3 percent.
  - Sub-Saharan Africa: 15.6 percent.
  - Latin America and the Caribbean: 16.9 percent.
  - The region’s average tax revenue intake in 2019 had fallen below its 2008 level (13.4 percent), the most significant decrease compared to other regions.
- Tax structure and composition:
  - ME&CA countries derive most tax revenue from consumption-based taxes: taxes on goods and services and taxes on international trade and transactions.
  - Increases in goods and services tax revenue were offset by declines in trade taxes due to generalized tariff reductions in the context of trade liberalization.
  - Direct tax revenues (personal and corporate taxes) are lower in many economies, notably GCC members.
  - Property tax revenues were limited—ranging between zero and 2 percent of GDP in 2019.
- Fragile and conflict-affected states (FCSs):
  - Average tax ratio for FCSs in ME&CA averaged 8.4 percent during 2015–19.
  - This was lower than FCS averages in other regions (13 percent) and below the estimated minimum tax ratio (12¾ percent) associated with a significant acceleration of growth (Gaspar, Jaramillo, and Wingender 2016).
  - Resource-rich FCSs in the region raised only 2.8 percent of GDP in tax revenue, had no VAT, and limited income tax revenue.
  - Hydrocarbon-importing FCSs in the region (Afghanistan, Tajikistan, Djibouti, Lebanon, Somalia, Sudan) raised around 10 percent of GDP in tax revenue.
- Success stories and reform experience:
  - Nonhydrocarbon tax revenue to nonhydrocarbon GDP was higher in 2019 relative to 2000 in 15 countries, with largest increases in hydrocarbon-importing economies, particularly in the CCA (Armenia, Georgia, the Kyrgyz Republic, Tajikistan).
  - Notable reforms combined tax policy and revenue administration changes sustained over a relatively long period.
    - Georgia and Tajikistan simplified the tax system by reducing the number of taxes as part of anti-corruption strategies.
    - Armenia modernized revenue administration by upgrading IT infrastructure for electronic tax filing, streamlining business processes, and training tax officials.
- Remaining structural constraints:
  - Narrow tax bases and weak compliance stem from concentration of economic activity in few sectors, large informal and hard-to-tax sectors, and extensive tax expenditures.
  - Informality (measured by estimates of the shadow economy and the share of self-employment) is high and has risen in several ME&CA countries as growth slowed; informality tends to be negatively correlated with tax performance.
  - Widespread tax exemptions and loopholes narrow tax bases and complicate tax administration.
- Redistribution and progressivity:
  - The redistributive capacity of regional tax systems is generally weak due to heavy reliance on consumption-based taxes and fees and fines, which tend to be more regressive.
  - GCC members do not have a PIT; in hydrocarbon-exporting countries with a PIT, its level and progressivity tend to be low.
  - Progressivity is necessary but not sufficient for redistribution—the amount of revenue raised also matters.

### C. COVID-19 Compounded Revenue Challenges
- Pandemic impacts and policy responses:
  - Economic activity was hit by health effects, containment measures, reduced mobility, and reduced tourism.
  - Governments implemented health, fiscal, monetary, and financial measures; most governments provided temporary tax relief to support households and businesses.
  - Several countries implemented revenue administration measures to support staff health, service provision, and revenue collections; a few introduced temporary taxes or raised existing rates.
- Government revenue losses:
  - MENA hydrocarbon-exporting economies experienced the largest revenue loss: 5.2 percentage points on average (decline in general government revenue ratios between 2019 and 2020).
  - Most of the shortfall in these economies was driven by non-tax hydrocarbon revenue, indicating the oil price shock had a greater immediate impact on revenue than fiscal policy measures.
  - CCA hydrocarbon-exporting economies experienced a smaller magnitude of overall revenue loss.
  - Hydrocarbon-importing economies’ losses were driven by shortfalls in tax revenue.
  - Revenue losses between 2019 and 2020 were comparable to—although slightly lower than—those from the 2014 oil price slump for MENA hydrocarbon-exporting economies; significantly smaller for CCA hydrocarbon-exporting economies.
  - Among hydrocarbon-importing economies, the pandemic was broadly revenue neutral for MENAP Afghanistan and Pakistan, but had a more marked impact in the CCA region than during previous crises.
- Post-pandemic implications and recent tax measures:
  - The need to raise revenues is more pressing to support inclusive growth, address scarring, and meet health and preparedness needs.
  - Recent country measures reflecting efficiency-equity considerations:
    - Saudi Arabia increased the VAT rate from 5 to 15 percent and raised customs duties; revenue from these tax increases was in part used to strengthen the social safety net.
    - Egypt reformed its PIT schedule in 2020 to make it more progressive.
    - Algeria announced tax reforms in 2022 to improve taxation of the informal sector and distribute the tax burden more equitably.
  - Mobilizing tax revenues presents an opportunity to improve tax systems and better balance efficiency and equity.

*IMF DEPARTMENTAL PAPERS •    Revenue Mobilization for a Resilient and Inclusive Recovery in the ME&CA*

### 1. ME&CA  Subregions

### 1. ME&CA  Subregions

### Recent fiscal impact and comparisons
- Chart summary (change 2019–20): subregional changes in percent of GDP shown for MENA hydrocarbon exporters, MENAP hydrocarbon importers, CCA hydrocarbon exporters, and CCA hydrocarbon importers (scale from −6 to 2 percent).
- Comparison of crises (change in total government revenue, percent of GDP): post-Arab Spring (2010–11), oil price slump (2014–15), and pandemic (2019–20) shown on scale from −6 to 6 percent.
- Note: In panel 1, taxes include hydrocarbon tax revenue and GDP includes hydrocarbon GDP. In panel 2, revenue includes hydrocarbon-related revenues, and GDP includes hydrocarbon GDP.

*Sources: IMF Regional Economic Outlook Middle East and Central Asia, April 2021; IMF World Economic Outlook, October 2021; and IMF staff calculations.*

### Box 1 — Revenue administration and tax policy responses to COVID-19
- Administrative and policy measures implemented recognizing taxpayers’ liquidity constraints:
  - Payment postponement (incl. extension or tax filing and utility bills): Afghanistan, Algeria, Bahrain, Georgia, Iran, Lebanon, Morocco, Oman, Saudi Arabia, Uzbekistan.
  - Reductions (incl. exemptions, refunds, and delayed introduction of new taxes/fees): Afghanistan, Azerbaijan, Bahrain, Georgia, Kazakhstan, Kuwait, Mauritania, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Somalia, Tajikistan, United Arab Emirates, Uzbekistan.
  - By type of tax measures:
    - Property tax: Azerbaijan, Egypt, Georgia, Kazakhstan, United Arab Emirates, Uzbekistan.
    - Customs duty: Afghanistan, Jordan, Mauritania, Pakistan, Qatar, Tunisia, United Arab Emirates.
    - Income tax: Azerbaijan, Georgia, Morocco, Oman, Tunisia, Uzbekistan.
    - VAT: Georgia, Kazakhstan, Mauritania, Tajikistan, Tunisia, United Arab Emirates.
    - Sales (consumption) tax: Jordan, Somalia.
    - Capital income tax: Egypt.
    - Sector-targeted tax relief: Azerbaijan, Bahrain, Egypt, Georgia, Jordan, Kazakhstan, Kyrgyz Republic, Morocco, Tajikistan, United Arab Emirates.
- Additional revenue administration measures across the region included:
  - Work from home arrangements.
  - Extended filing and payment deadlines and adjusted enforcement programs (suspension of audit and arrears collection activities in Algeria, Iraq, Lebanon, Tunisia, Uzbekistan).
  - Relaxed conditions and terms for paying tax arrears in installments (Algeria, Morocco, Uzbekistan).
  - Accelerated tax refund payments (Tunisia).
  - Provision of taxpayer incentives to regularize disrupted tax liabilities (Egypt).
  - Enhanced taxpayer service and communication (Jordan, Uzbekistan).
  - Streamlined clearance processes for essential goods and medical supplies.
  - Suspension of penalties for minor customs law breaches (Tunisia).
- Tax policy measures included:
  - Exonerations from VAT and customs duties for essential commodities (Somalia), pharmaceutical products, and medical equipment (Algeria).
  - Exemptions for services and sales of hotels and restaurants (Jordan).
  - Tax holidays to boost consumption and support SMEs (Algeria, Somalia, Tajikistan).
  - Revenue-raising measures in a few countries: coronavirus taxes on public and private sector salaries and state pensions (Djibouti, Egypt); temporary solidarity funds financed by voluntary contributions (Tunisia).

### Scope for additional tax revenues (tax potential, tax gap, and tax effort)
- Methodology:
  - New estimates for tax potential and tax effort for ME&CA countries using stochastic frontier analysis (SFA) applied to a panel of 146 countries covering the period 2000–19.
  - Tax potential interpreted as the tax frontier; tax gap interpreted as “technical inefficiency.”
- Key aggregate findings:
  - Average tax gaps: nonhydrocarbon tax gaps are on average 14.2 percent of GDP for nonhydrocarbon taxes.
  - Determinants of tax potential with statistically significant positive impact: higher net foreign direct investment, trade openness, and better control of corruption.
  - Determinants with statistically significant negative impact: lower levels of economic diversification and high dependency on hydrocarbon revenues.
- Hydrocarbon-exporting countries:
  - Excluding Bahrain, tax potential in hydrocarbon economies ranges from 14 to 25 percent of nonhydrocarbon GDP.
  - Comparators: advanced economies average 48 percent of nonhydrocarbon GDP; emerging market economies average 30 percent.
  - Estimated tax gaps in hydrocarbon exporters range from 0.4 to 15 percent of nonhydrocarbon GDP, with the lowest gaps in the CCA subregion.
  - Explanations: narrow nonhydrocarbon economic base; extensive tax exemptions and low tax rates—particularly in GCC countries.
- Hydrocarbon-importing countries:
  - Estimated tax potential ranges from 20 to 41 percent of GDP, with an average of 33 percent.
  - Comparator: EMDEs average 30 percent of GDP.
  - Corresponding tax gaps vary between 12 and 30 percent of GDP, with lowest gaps in more developed middle-income countries and highest gaps in low-income countries.
- Country-specific note:
  - Bahrain: highest tax capacity among hydrocarbon-exporting countries at 34 percent of nonhydrocarbon GDP and tax gap at 31 percent of nonhydrocarbon GDP; high FDI inflows and large imports of goods and services relative to GDP explain high estimated tax capacity.
- Tax effort dynamics:
  - Many countries have improved tax effort; tax effort increased most in non-GCC MENA countries, followed by GCC countries.
  - Four hydrocarbon-exporting countries have made efforts to improve nonhydrocarbon tax collection: Algeria, Azerbaijan, Kazakhstan, and Saudi Arabia.
  - In Saudi Arabia, reforms were introduced to enhance compliance and improve tax efficiency under the Saudi Vision 2030 strategy.
  - For hydrocarbon-importing countries, tax effort has been increasing slowly—except in low-income countries where tax effort started declining in 2011.
- Policy implication:
  - Differentiated policy approach warranted: all countries would benefit from higher tax effort; less diversified hydrocarbon-exporting economies could additionally benefit from reforms to promote diversification to raise tax potential.

### Identifying sources of additional revenue and reform priorities
- Nature of shortfalls:
  - Tax revenue shortfalls may reflect policy design (low tax rates, inefficient exemptions) and/or weak compliance (revenue administration capacity, informality).
  - Policy design and compliance challenges are interrelated: high tax rates could encourage non-compliance; reducing exemptions can facilitate tax administration and curtail tax optimization opportunities.
- Tax policy challenges in the region:
  - Personal and corporate income tax rates are generally low.
  - Direct and indirect tax systems feature prevalent exemptions, narrowing bases and reducing progressivity.
  - Corporate income tax regimes provide various tax incentives.
  - VAT systems often use multiple rates, reducing efficiency.
- Summary of tax rate statistics and ranges (preserved as in source):
  - Average standard corporate tax rate and top-tier PIT rate in the region: 20 and 23 percent, compared to 24 and 25 percent in other EMDEs (Figure 14).
  - Standard corporate tax rates range from 0 to 35 percent.
  - Top marginal PIT rates range from 0 to 40 percent.
  - Standard sales tax rates range from 0 to 20 percent.
  - A few countries (Iraq, Kuwait, Libya, and Qatar) are yet to introduce a broad-based consumption tax system (VAT).
  - Note: Some countries charge higher tax rates on certain sectors (extractive and financial), which are excluded from the calculation of standard corporate tax rates.
- Reform directions to increase tax revenues while supporting resilient and inclusive growth:
  - Improve progressivity of tax systems and reduce exemptions.
  - Accelerate reforms to develop personal income taxes and indirect taxes where needed.
  - Improve tax compliance by reducing tax complexity and strengthening administrative capacity through:
    - Organizational reforms.
    - Enhanced international cooperation on tax issues.
    - Reforms to reduce corruption risks and bolster institutions.

_Italic: IMF DEPARTMENTAL PAPERS • Revenue Mobilization for a Resilient and Inclusive Recovery in the ME&CA (excerpts)._

### 1. Personal Income Tax

### 1. Personal Income Tax

### Top-tier and Indirect Tax Context (2021)
- Figures presented for "Top tier, 2021" and "Standard rate, 2021" across ME&CA countries (visual charts in source).
- Source data: Country authorities; KPMG International Limited; and IMF staff calculations.

### Progressive and Redistributive Capacities of the PIT
- Definitions and measurement:
  - A tax system is progressive if the average tax rate increases with income.
  - Redistributive capacity is measured by the difference in the Gini coefficients of pre-tax and post-tax income.
  - Progressive capacity of the PIT is measured by the difference between the distribution of pre-tax income and tax liabilities, as measured by Gini coefficients.
  - The average tax rate is defined as the ratio of total tax liabilities over total pre-tax income.
  - The analysis follows Benítez and Vellutini (2021) using simulated microdata based on Gini coefficients of pre-tax income (Annex 1 notes imprecision due to hypothetical distribution).
- Regional patterns and key comparative statistics:
  - Redistributive and progressive capacities are below those of peers but vary across countries.
  - Examples of specific country patterns:
    - Iran, Lebanon, and Pakistan: PIT is rather progressive but too small to achieve meaningful redistributive capacity.
    - Georgia, the Kyrgyz Republic, Turkmenistan, and Uzbekistan: larger PIT but low progressivity due to flat PIT rates.
    - Most redistributive tax systems found among MENA countries: Algeria, Djibouti, Egypt, Tunisia, Mauritania, and Morocco.
  - Hydrocarbon exporters vs. importers:
    - For hydrocarbon exporters with a PIT:
      - Median PIT revenue of 1 percent of GDP.
      - Median progressive capacity of the PIT is 8.4.
      - Algeria, Iran, and Iraq have somewhat higher PIT redistributive capacities with values above 2.
      - Algeria’s relatively strong progressivity is in part driven by a 35 percent top rate.
    - For hydrocarbon importers:
      - Median progressive capacity is 16.0.
      - Median progressive capacity in other EMDEs is 33.9.
      - Median redistributive capacity of the PIT is 1.1, closer to EMDEs and low-income developing countries but significantly lower than advanced economies’ median value of 4.9.
- Visual metrics reported in Box Figure 2.1 (panels):
  - 1. PIT Revenue (Percent of GDP)
  - 2. Progressive Capacity (Gini tax minus Gini pre-tax income)
  - 3. Average Tax Rate (Percent of pre-tax income)
  - 4. Redistributive Capacity (Gini pre-tax income minus Gini post-tax income)

### Rates, Revenues, and the Weak Rate–Revenue Relationship
- Cross-country correlations and country experiences:
  - Cross-country correlation between income tax rates and revenues was 0.3 for PIT in 2019.
  - Cross-country correlation for corporate income tax was –0.15 in 2019.
  - Example: Jordan increased top-tier PIT rates from 14 to 30 percent between 2017 and 2019, but PIT revenues remained below 1 percent of GDP.
- VAT observations:
  - Countries with higher VAT rates tend to have higher VAT revenues (cross-country correlation of 0.8 in 2019).
  - Egypt: VAT revenue increased after the standard VAT rate was raised in 2016 and in 2017.
  - Algeria: VAT revenue declined as a share of GDP following the increase in the standard VAT rate from 17 to 19 percent in 2017.
- Explanations for weak relationship:
  - Significant exemptions and poor tax administration narrow tax bases and undermine effectiveness of rate hikes.
  - Common exemptions:
    - Capital gains and financial incomes often not taxed or taxed at low rates; most CCA and GCC countries exempt capital gains and other financial income from income tax altogether.
    - Corporate income tax exemptions—special economic zones and incentives that can exempt companies from corporate income tax for years; domestic companies owned by GCC nationals often at least partially exempt from corporate income tax (footnote notes Zakat as alternative in some cases).
    - VAT exemptions common on basic food-stuffs, financial services and insurance, real property and construction, extractive sectors, healthcare and education.
  - Policy design notes:
    - Capital income exemptions reduce progressivity and narrow the tax base.
    - In some countries the top-tier PIT bracket is set very high at hundreds of times per capita income, reducing the effectiveness of a high marginal tax rate.
  - VAT registration thresholds:
    - Several countries have high VAT registration thresholds, reaching multiples of the OECD average in some CCA and GCC countries. A too-high threshold can exclude a large part of economic activity from the VAT base.
  - VAT efficiency:
    - VAT C-efficiency ratios compare actual VAT revenues to the product of the standard rate and final consumption; 100 indicates perfect compliance and no exemptions.
    - Relatively low VAT C-efficiency rates in the region reflect prevalence of exemptions and weak compliance.
    - Three GCC countries that recently introduced a VAT rate (Bahrain, Saudi Arabia, United Arab Emirates) have high VAT C-efficiency ratios despite numerous exemptions, likely reflecting high compliance given low VAT rates.

### Taxation of Extractive Industries (EIs)
- Macro fiscal significance:
  - In 2020–21 hydrocarbon revenue accounted for about half of government revenue on average in ME&CA resource-rich countries.
  - Mining revenue averaged about 6.6 percent.
- Examples of higher corporate tax rates applied to extractive sectors:
  - Bahrain (46 percent), Egypt (41 percent), Iraq (35 percent), Qatar (35 percent), Saudi Arabia (50–85 percent), Turkmenistan (20 percent), United Arab Emirates (55 percent), Yemen (35 percent).
- Design considerations and trade-offs:
  - EIs characterized by uncertainty, asymmetric information, high sunk costs, involvement of multinationals and SOEs, and exhaustibility of resource.
  - Revenue objectives must be balanced with need to attract foreign investment in some countries.
  - Examples:
    - Armenia and Mauritania: mining sectors accounted for half or more of merchandise exports, but less than 10 percent of export proceeds were collected by the government.
    - Oil exporters in the region typically collect 80 percent or more from crude oil export proceeds where sectors are well established and less reliant on foreign investment.
  - Policy instruments:
    - Regimes combining a royalty and a rent-targeted tax (along with standard corporate income tax) can yield immediate revenue and rising government share as rents increase.
    - Production sharing frameworks common in petroleum countries are an alternative.
  - Administrative requirements:
    - Transparent rules and contracts improve stability and credibility.
    - Poorly designed international tax arrangements can undermine revenue potential.
    - Robust revenue administration capacity is needed due to capital intensity, long lead times, and shared responsibilities across regulatory agencies.
    - Prioritizing short-term revenue measures and ignoring pre-production costs can lead to substantial revenue losses.
- International corporate tax developments:
  - In October 2021, 136 countries and jurisdictions—including 14 from the region—agreed to establish a minimum effective corporate tax rate of 15 percent, with implementation in 2023.
  - The 14 countries from the region listed in the source: Armenia, Bahrain, Djibouti, Egypt, Georgia, Jordan, Kazakhstan, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, and United Arab Emirates.
  - Adoption of the minimum corporate tax rate presents an opportunity to revisit corporate tax incentives and design; lower tax competition could strengthen political support for removing redundant incentives and improving corporate tax design.

### Compliance Challenges—Administrative and Structural Shortcomings
- Nature of compliance challenges:
  - Countries face compliance challenges at all stages: registration, filing, and payment.
  - Efficient collection, monitoring, and enforcement require adequate administrative resources and modern digital technologies.
  - Excessive policy complexity can overburden tax administrations and taxpayers; simpler frameworks reduce administrative and compliance costs.
  - International cooperation is increasingly important amid globalization and digitalization.
- Structural bottlenecks hindering compliance:
  - Large informal sectors, low financial inclusion, and governance challenges.
- Heterogeneity in tax administration capacity in the region:
  - Effective tax administrations reduce collection costs for the state and compliance costs for taxpayers, encouraging voluntary registration and payment.
  - Some countries appear to have particularly high tax collection costs (for example, the Kyrgyz Republic, Tajikistan, and Tunisia), though available estimates may not reflect recent reforms.
- Definition note:
  - The cost of tax collection is defined by USAID as "the ratio of the cost of administering the tax system to total tax revenues."

*Source: IMF Departmental Papers — Revenue Mobilization for a Resilient and Inclusive Recovery in the ME&CA (selected excerpts).*

### Box 3. Taxation of Extractive Industries in the Middle East and Central Asia

### Box 3. Taxation of Extractive Industries in the Middle East and Central Asia

### Administrative capacity and organization of revenue administrations
- Revenue authorities need to accelerate development of sector expertise and implement robust compliance risk management capabilities to enable effective risk identification and mitigation from the onset of EI activities.
- Best practice: establish and build EI expertise within an integrated EI unit typically within the Large Taxpayers Office to perform non-routine functions such as audit and targeted client assistance.
- TADAT assessments (11 assessments in the ME&CA region between 2015 and 2019) indicate gaps in:
  - adequacy and accuracy of taxpayers register;
  - on-time filing of core taxes;
  - collectible core tax debt/revenue collections.
- In lower- and middle-income countries, about 90 percent of tax revenue is collected from the largest 10 percent of taxpayers, and half of revenues come from the largest 1 percent (Junquera-Varela and others 2017).
- Some countries (for example, Bahrain, Kazakhstan, Kuwait, and Oman) lack functional large taxpayer units with full responsibility for all functions related to this segment; some have dedicated units that undertake only part of LTU responsibilities.
- Organizational deficiencies noted:
  - Weak autonomy of revenue administrations and separate customs administrations reduce coordination and information exchange.
  - Functional (task-based) organizational structures generally facilitate efficiency; ME&CA administrations tend to be function-based except for some hydrocarbon exporters (for example, Bahrain, Iraq, and Kuwait).
  - Lack of integration between tax and customs administrations undermines detection of non-compliance and undervaluation.

### Digital taxpayer services and digital transformation
- Use of digital platforms reduces opportunities for corruption, extortion, and fraud; minimizes compliance costs; enhances taxpayer services; and facilitates monitoring.
- Examples of digitalization outcomes:
  - Tajikistan: introduction of e-filing and payment system for a number of taxes increased tax compliance among high-risk firms (Okunogbe and Pouliquen 2018).
  - Georgia: e-filing helped reduce compliance costs, which fell by two-thirds between 2009 and 2011 (OECD 2015).
  - Recent rollouts: corporate tax filing platforms in Egypt (2018), Saudi Arabia (2020), and Algeria (2021).
- Gaps remain: many countries’ electronic taxation services do not cover all stages of tax compliance (registration, filing, payment) or all core taxes.
- Telecommunication and skills readiness:
  - A number of countries (for example, Bahrain, Kazakhstan, Kuwait, Oman, United Arab Emirates, Uzbekistan) score highly on the UN Online Service Index and could leverage this to advance electronic tax services.
  - Nearly half of the 30 ME&CA countries included in the UN Online Service Index lag peers on quality of telecommunication infrastructure or skills.
- Box 4 key digitalization lessons:
  - Successful digitalization involves comprehensive transformation (redesigning core functions and organizational structure), taxpayer education, clear taxpayer-oriented vision, medium-term planning, and proper sequencing.
  - Digitalization introduces fraud, privacy, and cybersecurity risks; revenue administrations should implement cyber security and data protection measures and governance arrangements to reduce reputation, privacy, and revenue risks.
- COVID-19 experience:
  - “Digitalized” administrations such as Morocco and the United Arab Emirates maintained service delivery, collected taxes, and taxed e-commerce while respecting social distance; enabled telework and business continuity.

### Tax complexity, informality, and structural constraints
- Complex tax systems overstretch thin administrative resources, create discretion (raising risks of rent-seeking and extortion), and generate opportunities for tax avoidance.
- Complexity particularly harms compliance of micro, small, and medium enterprises (MSMEs) which have limited resources for bookkeeping and reporting.
- Reform examples reducing complexity:
  - Georgia (2004–09) and Tajikistan (2013) significantly reduced the number of taxes.
  - Egypt adopted a Unified Tax Procedures Law in 2020 to create a single system of tax procedures for all core taxes.
  - Morocco adopted a framework law in 2021 to simplify local taxation.
- Survey-based indicators point to persistent tax complexity in a number of countries (Figure 22).

### International cooperation, tax abuse, and revenue losses
- Internationalization of global value chains and financial services, and rapid digitalization, create opportunities for profit shifting and concealment of assets and revenue.
- Based on Tax Justice Network (2021), estimated regional revenue losses:
  - US$10.4 billion per year as a result of tax abuse and evasion by wealthy individuals.
  - On average, the loss is estimated to be 0.2–0.3 percent of GDP per country but rises to 0.8–1 percent of GDP in some countries (for example, Morocco, Tunisia, and the United Arab Emirates).
- Participation in global tax platforms is limited:
  - More than half of CCA countries, most FCSs, and hydrocarbon exporting countries do not participate in at least one of: the Convention on Mutual Administrative Assistance in Tax Matters, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, or the OECD/G20 Inclusive Framework on BEPS.
  - 11 countries do not participate in any of the three platforms (Annex 4).

### Financial inclusion, cash use, and enforcement
- Large informal sectors and low financial inclusion hinder tax compliance and create disproportionate tax burdens on the formal sector.
- Tax coverage of the self-employed is low in the region; wage earners in the formal sector shoulder most of income taxation (Jewell and others 2015).
- Perception of unfair competition from informal sector is higher in Lebanon, Mauritania, Sudan, Tunisia, and the West Bank and Gaza relative to peers (Figure 23).
- Widespread use of cash weakens traceability of transactions and facilitates underreporting, especially in business-to-consumer transactions.
- Electronic payments and electronic invoicing create a “digital trail” supporting monitoring, cross-checking, and enforcement.
- Most countries in the region lag peers in incidence of digital payment and credit supply to enterprises; share of currency in circulation outside the banking sector in broad money is high in most CCA countries and several MENA countries, indicating high evasion risks and enforcement challenges.
- GCC countries tend to have low shares of currency in circulation and relatively high incidence of digital payments.
- Cooperation with financial sector for enforcement is uneven; examples:
  - Court of Audit in Algeria (2021) highlights lack of exchange of information between revenue administration and banks as a main driver of weaknesses.
  - Bank secrecy laws in Jordan and Lebanon could hinder access to financial information.
- Some countries have introduced legislative reforms to promote electronic invoicing (for example, Egypt, Saudi Arabia, Tunisia, the United Arab Emirates) but implementation progress is mixed.

### Corruption risks and integrity safeguards
- Perceived weaknesses in control of corruption create challenges for tax compliance and open opportunities for taxpayers to evade obligations or obtain undue advantages.
- IMF (2019) finding: an improvement in the Control of Corruption Index by one-third of a standard deviation is associated with 1.2 percentage point increase in tax revenue-to-GDP.
- Country-level safeguards to address corruption risks include:
  - Internal investigation units (Armenia, Georgia).
  - Universal electronic payment of taxes (Armenia, the Kyrgyz Republic).
  - External oversight by anticorruption unit or institutionalized ombudsman (Georgia, Pakistan, Tajikistan).
  - Codes of ethics (Algeria, Jordan, Tajikistan, the United Arab Emirates).
  - Reward-based schemes for tax collectors experimented in Pakistan to reduce bribery incentives.
  - Surveys on public perception of integrity and service quality (Armenia, Georgia, Jordan, the Kyrgyz Republic, Tajikistan, Tunisia).
- Enhancing tax compliance would benefit from further efforts to reduce corruption risks across the region.

*IMF DEPARTMENTAL PAPERS •    Revenue Mobilization for a Resilient and Inclusive Recovery in the ME&CA*

### 1. Incidence of Digital Payments

### 1. Incidence of Digital Payments

### Measurement of incidence
- Incidence of digital payments is measured by the percentage of respondents aged 15+, who are in the labor force and who report using a mobile money or financial institution account, a debit or credit card, a mobile phone or the internet to make or receive a transfer or payments over the last 12 months.

### Related financial access indicators shown
- Outstanding Bank Credit to SMEs (Percent of GDP, regional averages over 2018–20) — figure presented with country listings including: Saudi Arabia; Iraq; Azerbaijan; Kuwait; Libya; Bahrain; Algeria; Mauritania; Afghanistan; Jordan; Morocco; Lebanon; West Bank and Gaza; Egypt, Arab Rep.; Pakistan; Turkmenistan; United Arab Emirates; Uzbekistan; Tunisia; Kyrgyz Republic; Georgia; Kazakhstan; Armenia; Tajikistan; Iran, Islamic Rep.; Sub-Saharan Africa; Latin America and the Caribbean; Middle East and Central Asia; World; Europe; Asia and Pacific.
- Share of Currency in Circulation in Broad Money (2017–19) — figure presented with country listings including: World average; Qatar; Kuwait; United Arab Emirates; Oman; Djibouti; Kazakhstan; Egypt, Arab Rep.; Jordan; Tunisia; Georgia; Morocco; Armenia; Pakistan; Mauritania; Uzbekistan; Algeria; Sudan; Azerbaijan; Kyrgyz Republic; Iraq; Afghanistan; Tajikistan.
- Firms Expected to Give Gifts to Tax Officials (Percent of respondents, latest available data) — figure presented with country listings including: Tajikistan; Georgia; Uzbekistan; Djibouti; Afghanistan; Armenia; Azerbaijan; Egypt, Arab Rep.; Kazakhstan; Yemen, Rep.; Pakistan; Morocco; Kyrgyz Republic; Jordan; Iraq; Tunisia; Lebanon; West Bank and Gaza; Mauritania; Sudan.

### Sources and notes
- Sources: WB Global Financial Inclusion Database; IMF Financial Access Survey; and IMF staff calculations.
- Note: Use of these indicators should be considered carefully, as they are derived from perception based data.

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### Governance, Trust, and Tax Compliance

### Empirical relationships
- Governance and Tax Revenue: figure reports a correlation r = 0.46*** between a Composite Governance Indicator (average Z–scores across all pillars (2021)) and Tax revenue in percent of GDP (2016–18).
- Tax Morale and Trust in Government: figure reports a correlation r = 0.46*** between the share of respondents who find tax cheating to be sometimes or always justifiable and the share of respondents who have no trust in government (2017–20).

### Observations from the region
- Comparative weaknesses in regulatory quality, voice and accountability, government effectiveness, and rule of law could be detrimental to tax revenue mobilization.
- Stronger governance is correlated with better tax performance because sound legal institutions and adequate dispute resolution mechanisms enhance fairness, tax certainty, and the credibility of enforcement, thereby promoting compliance.
- Negative correlation between indicators of trust in government and social tolerance toward tax cheating is illustrated in the figures.
- Domestic tax dispute resolution mechanisms are well developed in several countries in the region (for example, Armenia, Jordan, and Pakistan) but are weak in others (for example, Tajikistan, according the 2020 TADAT assessment report).
- Where dispute resolution mechanisms are well developed, efficiency is sometimes undermined by lengthy delays in responding to taxpayer requests or where outcomes are not acted upon to reform legislation or administrative procedures.

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### 4. Policies to Mobilize Revenues for Resilient and Inclusive Growth

### Strategic priorities (overview)
- Post-COVID tax reforms should strengthen tax systems to support resilient growth and inclusion by: broadening the tax base, improving tax progressivity, strengthening revenue administration to boost tax compliance, and undertaking structural reforms to reduce informality.
- Policy action is needed in three key areas: tax policy design; revenue administration modernization; and structural reforms supporting compliance, formalization, and diversification.
- A medium-term revenue strategy (MTRS) is recommended, comprising four components: estimating spending needs; elaborating a tax system reform roadmap; committing to sustained medium-term government reform; and coordinating external support to government-led tax system reform.

### Tax policy design — priorities and examples
- Reduce widespread tax exemptions on personal and corporate income to broaden the tax base, improve allocative efficiency, simplify administration, and reduce non-compliance opportunities. Example: Egypt is working on reforming its income tax law to simplify the legal framework and streamline exemptions.
- Remove inefficient corporate tax incentives and improve corporate tax design. The recent global corporate tax agreement can help mitigate international corporate tax competition (IMF 2022b). Example: the United Arab Emirates recently announced plans to introduce a 9 percent federal corporate income tax rate in 2023.
  - Note from source: In 2022, the United Arab Emirates announced the introduction of a federal corporate income tax (CIT) effective for financial years starting on or after June 1, 2023. CIT will apply to all businesses and commercial activities alike, except for those in the extractive sectors. The standard statutory CIT rate of 9 percent will apply only to firms with income exceeding AED 375,000. Multinationals will be subject to a 15 percent CIT rate, which constitutes the United Arab Emirates’ implementation of the global minimum corporate tax.
- Increase low PIT rates and accelerate introduction of PIT and VAT in some countries. Some countries without a PIT should consider introducing one to increase tax revenue and reduce income inequality.
- Improve VAT design by replacing broad exemptions on basic goods and services with better-targeted cash transfers financed by consumption tax revenues where appropriate; use additional VAT revenues to finance social programs, education, health, and infrastructure. Example: Armenia has plans to gradually remove inefficient VAT exemptions.
- Develop taxation of wealth: most countries have property taxes but revenue collection ranged between zero and 2 percent of GDP in 2019. Scope exists to raise property tax rates, align property values with market prices, improve cadasters, and scale up administrative capacity. Consider effectiveness of inheritance taxes and the introduction of net wealth taxes where applicable.

### Strengthening revenue administrations — actions
- Implement organizational reforms: structure tax administrations on a functional basis, grant autonomy with effective governance and accountability, segment taxpayers through dedicated units (starting with large taxpayers and high-net-worth individuals), and enhance cooperation between tax and customs administrations. Example: efforts to expand capacity of the Large Taxpayer Department in Iraq.
- Develop taxpayer services through a collaborative approach: streamline administrative processes, provide assistance on tax and accounting matters (particularly to small firms), ensure timely repayment of tax refunds, and run public awareness campaigns (examples: VAT campaigns in Bahrain, Saudi Arabia, and United Arab Emirates).
- Implement adequate controls and enforcement: widen coverage and increase frequency of audits and field visits, pursue legislative reforms to enhance sanctions against major offenses, and implement comprehensive compliance risk management (CRM) approaches to focus resources on highest risks to the tax base.
- Enhance domestic cooperation: share information with financial intelligence units, business and property registries, and financial institutions to aid pursuit of tax evasion cases and related money laundering activities.
- Leverage digital technologies and expand electronic taxpayer services: automate routine tasks, computerized data processing and exchange, cross-checking of information for risk profiling, and electronic filing/payment platforms to reduce compliance costs and opportunities for corruption. Examples of countries using electronic tax filing include Algeria, Azerbaijan, Iran, and Pakistan.
- Strengthen international cooperation: participate in global initiatives on taxation to access information on taxable income, support policy design and enforcement, and technical assistance. The global minimum corporate tax agreement is cited as a positive step (IMF 2022b).
- Ensure tax legislation is clear, well-organized, and integrated into the wider legal framework to make laws understandable and consistently administered.

### Structural reforms — incentives for compliance and formalization
- Broadening financial inclusion and limiting the use of cash: consider regulatory measures and stronger competition in the financial sector to reduce costs of digital payments; tax measures (for example, limits on the deductibility of expenses settled in cash) to incentivize bank-based instruments; caps on payments in cash and mandatory electronic fiscal devices at points of sale; and tax administration strategies targeting cash-based sectors.
- Fight corruption, improve governance, and enhance transparency and communication: implement payroll management measures, competitive salaries, professional career systems, codes of ethics, internal investigation units, external oversight, asset declaration mechanisms, and publicize high-profile prosecutions to enhance deterrence. Promote transparency on public expenditures and exemptions and regular reporting on tax spending as part of the budget information process to enhance trust and taxpayer awareness.
- Factor interplay between taxation and informality into tax reform design: avoid adding complexity that discourages formalization; make benefits conditional on proof of tax compliance to leverage formalization efforts for better compliance. Complement tax reforms with labor and product market and institutional reforms.

### Implementation considerations
- Sustained efforts over relatively long time periods are necessary to achieve lasting improvements in tax ratios.
- Political feasibility and distributional impacts are major obstacles; careful timing, design, and transparent communication are essential.
- For fragile and conflict-affected states (FCSs), sequencing matters and political commitment is critical to coordinate agencies and implement reforms.
- A Medium-Term Revenue Strategy (MTRS) with the four related components can guide reform implementation over several years.

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*Source: IMF DEPARTMENTAL PAPERS • Revenue Mobilization for a Resilient and Inclusive Recovery in the ME&CA (content unit: rmrirmecaea - 1. Incidence of Digital Payments).*

### Box 5. Revenue Mobilization Challenges in Fragile and Conflict-Affected States

### Box 5. Revenue Mobilization Challenges in Fragile and Conflict-Affected States

### Revenue mobilization priorities and tax-design guidance for FCSs
- Revenue mobilization often takes precedence over short-term behavioral tax considerations in fragile and conflict-affected states (FCSs).
- Ease of administration is critical; reforms should emphasize:
  - A small number of taxes, easy-to-access tax bases, a focus on large taxpayers and easy collection points.
  - Wide recourse to presumptive taxation and as few exemptions as possible.
  - For FCSs with abundant hydrocarbon resources: focus on taxing those resources, including reforms to better tax rents in the extractive sector.
  - For large enterprises in sectors with high returns to capital (e.g., banking and telecoms): focus on these firms, including turnover-based presumptive taxation when profit-based taxation and/or VAT are not feasible.
  - In non-resource FCSs (which tend to have more developed tax systems): simplification, cutting harmful exemptions in the VAT, CIT, and PIT; consolidating multiple rates; eliminating small taxes.
  - Institution building is equally important.

### Administrative reform sequencing by stage of fragility
- For FCSs coming out of conflict, administrative reforms could include:
  - Reestablishment of basic tax-administration infrastructure.
  - Modernization of a few selected offices collecting the bulk of revenue.
  - Identification and appointment of key staff; identification and registration of taxpayers.
  - Establishment of basic administrative procedures for registration, filing, and payment in tax and customs administrations.
- For more stable but still vulnerable FCSs, reforms should focus on:
  - Establishment of effective headquarters functions and human resource capacity development.
  - Establishment of a large and medium taxpayer unit, collection of arrears.
  - Development of IT support systems and establishment of basic compliance improvement strategies.

### Equity considerations and the role of the PIT in FCSs
- Equity is especially relevant in FCSs where effective progressive taxation based on the PIT or wealth taxes may not be easily implementable.
- An easy-to-tax, clear and legitimate tax base is perceived as more equitable than one plagued by exemptions and difficult-to-tax items.
- Nine FCSs out of 10 in the region have a PIT, although often with limited redistributive capacity.
- Medium-term objectives as administration strengthens:
  - Improve PIT progressivity, including by raising top PIT rates.
  - Where a cadaster exists, property taxes can be relatively easy to administer and are progressive.
  - Excise taxes on luxury goods are effective for raising revenue and contributing to progressivity.

### Findings from the PIT progressivity and redistributive-capacity analysis (Annex 1)
- Redistributive capacity measure: difference between Gini coefficients of pre- and post-tax income, made comparable across countries by controlling for differences in pre-tax income distributions.
- Decomposition: redistributive capacity is decomposed into a progressivity component (Kakwani-style) and the size of the PIT (average tax rate = ratio of total tax liabilities over total pre-tax income).
- Key illustrative country findings:
  - In Iran, Lebanon, and Pakistan: redistributive capacity can be improved by increasing the size of PIT revenue rather than its progressivity.
  - In Georgia, the Kyrgyz Republic, Uzbekistan, and Turkmenistan (all with a flat PIT rate): improving progressivity rather than size would increase redistributive capacity.
- Tax treatment of capital income is key:
  - Tax rates applying to dividends, interest income and capital gains are consistently lower in the region than in other country groups.
  - Non-taxation of capital gains (for example, in Armenia and the GCC countries) significantly limits redistributive ability.
- Policy implications:
  - GCC countries with some of the highest income inequality in the region should consider implementing a PIT.
  - In other countries, strengthen PIT redistributive capacity by increasing progressivity (e.g., raising the top PIT rate), and reviewing exemptions and specific deductions that typically benefit top earners, and by taxing capital income more effectively.

### Caveats and methodological limitations noted for the PIT analysis
- Exemptions and deductions are imperfectly captured; specific exemptions and deductions (e.g., deductions of educational expenses) are not fully reflected and their omission tends to overestimate progressivity.
- Simulated microdata are used rather than actual microdata, implying some degree of imprecision.
- Capital income often not treated as ordinary income; since capital income is typically concentrated among higher-income households, progressivity and redistribution indices will be biased upward in countries where capital income is taxed at lower rates.
- The analysis does not account for compliance levels of the PIT; it measures policy intentions/capacities of PIT regimes, not actual effective collection.

### Stochastic Frontier Analysis (SFA) approach to estimating tax capacity and revenue gaps (Annex 2)
- Econometric model (panel, 146 countries, 2000–19):
  - y_it = a + b' X_it + v_it − u_it
  - y_it = ln(tax revenue) for country i at period t.
  - X_it = [ln(real GDP per capita), ln(real GDP per capita)^2, Inflation, Agriculture, Trade openness, net FDI inflows, Oil, Control of Corruption, LIC, non-LIC EMDE].
  - v_it = statistical error (standard normal).
  - u_it > 0 = time-variant inefficiency (truncated-normal).
- Tax Effort (TE_it) definition and expression:
  - TE_it = exp(−u_it)
  - Alternatively shown as TE_it = exp(a + b'X_it + v_it − u_it) / exp(a + b'X_it + v_it) = exp(−u_it).
- Variable definitions and expected signs:
  - Ln(Tax revenue): sum of all direct and indirect taxes collected by the central government as percent of GDP; for hydrocarbon-exporting countries, only taxes on nonhydrocarbon activities are considered.
  - Ln(Real GDP per capita) (PPP, constant 2017): proxy for development, expected positive correlation with tax collection.
  - Ln(Real GDP per capita)^2: captures non-linear elasticity.
  - Inflation: expected negative coefficient.
  - Agriculture (share of value added in GDP): expected negative coefficient.
  - Trade openness (exports + imports as percent of GDP, minus hydrocarbon exports where applicable): expected positive coefficient.
  - Net FDI inflows (percent of GDP): expected positive coefficient.
  - Control of Corruption index: expected positive coefficient.
  - Oil, LIC, non-LIC EMDE dummies: control for economic diversification and income level; expected negative coefficients for oil abundance and lower income groups.
- Descriptive statistics (Annex Table 2.1):
  - All Countries:
    - Tax Revenue as percent of GDP: 17 7. 50.6 48.4
    - GDP per capita (PPP, 2017): 19, 3 0 821, 276630162,915
    - Inflation: 5.5 13. 5 −18 .15 13.9
    - Agriculture as percent of GDP: 12.1 11.7 0.0 179.1
    - Trade Openness: 90.0 59. 8 0 .15 457
    - FDI as percent of GDP: 5.9 17. 5 −58.24 49.1
    - Control of Corruption Index: 0.003 0.9 −1.92.5
  - Middle East and Central Asia Countries (ME&CA):
    - Tax Revenue as percent of GDP: 11. 5 6.8 0.72 26.8
    - GDP per capita (PPP, 2017): 19, 85623,9091,189102,494
    - Inflation: 6.3 7. 8 −10 .163.3
    - Agriculture as percent of GDP: 11. 2 9. 50 .14 1. 2
    - Trade Openness: 72.33 4 .10 .15 194. 2
    - FDI as percent of GDP: 4.3 5.6 −11. 655 .1
    - Control of Corruption Index: −0.5 0.7 −1. 81.5
  - (Source line in table: Authors’ calculations.)
- Estimation results summary:
  - Regression results are robust across specifications and have the expected signs.
  - Three specifications considered: baseline adds governance indicator and income-group dummies progressively.
  - All coefficients for the three specifications are statistically significant at the 99 percent confidence level, except net FDI inflows (significant at the 90 to 95 percent level).

*Source: Box 5 and Annexes 1–2 of the IMF Departmental Paper: Revenue Mobilization for a Resilient and Inclusive Recovery in the ME&CA (excerpts provided in the content unit).*

### Annex Table 2.2. Stochastic Frontier Analysis: Determinants of Tax Revenue

### Annex Table 2.2. Stochastic Frontier Analysis: Determinants of Tax Revenue

### Model and dependent variable
- Dependent variable: Tax Revenue as Percent of GDP.
- Three model specifications reported: (1), (2), (3).
- Estimation method: Stochastic frontier analysis (authors’ estimations).

### Estimated coefficients and t statistics (by specification)
- Ln (GDP per capita)
  - (1): 2.006*** (13.98)
  - (2): 2.005*** (13. 57)
  - (3): 2.257*** (14.62)
- Ln (GDP per capita)2
  - (1): −0.110*** (−14 . 3 4)
  - (2): −0.112*** (−14 . 2 2)
  - (3): −0.127*** (−15 .18)
- Inflation
  - (1): −0.003*** (-17.17)
  - (2): −0.004*** (−17. 37 )
  - (3): −0.004*** (−17. 5 6)
- Agriculture
  - (1): −0.007*** (−7. 0 9)
  - (2): −0.007*** (−6 . 66)
  - (3): −0.007*** (−6 .4 4)
- Trade Openness
  - (1): 0.001*** (8.93)
  - (2): 0.002*** (9. 25)
  - (3): 0.001*** (9.11)
- Net FDI Inflows
  - (1): 0.0003** (2.10)
  - (2): 0.0003* (1.93)
  - (3): 0.0003* (1.79)
- Oil
  - (1): −1.014*** (−11.94)
  - (2): −0.842*** (−12 . 5 0 )
  - (3): −0.562*** (−5.73)
- Control of Corruption
  - (1): 0.077*** (5.29)
  - (2): 0.063*** (4.38)

### Country group indicators and intercept
- LIC (Low-Income Countries) indicator
  - (2): −0.454*** (−4.96)
- Non-LIC EMDEs indicator
  - (3): −0.444*** (−5.70)
- Intercept
  - (1): −5.136*** (−7. 6 0 )
  - (2): −5.103*** (−7. 3 0 )
  - (3): −5.951*** (−8 . 26)

### Inefficiency and time-variation parameters
- μ (u) — mean of truncated normal distribution for uit
  - (1): 1.026*** (18. 24)
  - (2): 0.908*** (15. 40)
  - (3): 0.667*** ( 7.14)
- η — parameter for time varying inefficiency
  - (1): 0.008*** (14.53)
  - (2): 0.010*** (13 .18)
  - (3): 0.013*** (12.27)

### Model diagnostics and sample
- Number of observations
  - (1): 2397
  - (2): 2297
  - (3): 2,297
- Number of countries
  - (1): 146
  - (2): 146
  - (3): 6
- σ2
  - (1): 0 .18 40
  - (2): 0 .175
  - (3): 0 .16 8
- γ
  - (1): 0.923
  - (2): 0.921
  - (3): 0.918

### Notes and statistical significance
- Note: t statistics in parentheses; *p<0.05; **p<0.01; ***p<0.001.
- η is the parameter for time varying inefficiency; μ is the mean of the truncated normal distribution for uit.

*Source: Authors’ estimations.*

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_Source: https://www.imf.org/-/media/files/publications/dp/2022/english/rmrirmecaea.pdf_