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### Preface (assignment overview)
- At the request of the Libyan Tax Authority (LTA), a capacity development (CD) assignment was conducted through remote assistance during the period April 22 to May 2, 2024, by Mr. Thomas Story, External Advisor, IMF Fiscal Affairs Department (FAD).
- Mrs. Sabine Corm, Regional Tax Administration Advisor for fragile and conflict-affected states (FCS) at the Middle East Regional Technical Assistance Center (METAC) also participated in the remote assistance.
- Purpose: support LTA in the identification of data and reporting requirements for the administration of income taxes, and in developing initial high-level proposals for the re-design of tax forms.
- Between April 22 and 25, 2024, virtual workshops using the Zoom platform were attended by senior LTA staff to clarify current approaches for income tax administration, including processes for registration, declaration, payment, and verification of liabilities.
- The report presents suggestions from the workshops for improvements to income tax registration and annual tax declaration reporting.

### Executive Summary — key observations and proposed forms
- LTA initiated a wide-ranging transformation program for tax administration with central focus on digitalization of paper-based systems. METAC provided a road map for implementation of an integrated tax administration system (ITAS) and advice on digitization preparedness.
- Key observation: LTA tax forms were poorly defined and unable to support data capture and processing.
- Without sufficient information on registered taxpayers and their tax filings, there is very limited risk assessment. Tax forms for registration and annual declaration filing contain no structured data fields; information is in free text.
- The amount of information requested in annual declarations is too little; for CIT there is total reliance on annexures in unspecified formats.
- Officials acknowledge that analytical capacity for monitoring and management of tax compliance is most difficult.

- Proposed taxpayer registration application form:
  - Will allow LTA to compile and maintain a complete database of businesses and individuals required by law to register.
  - Retains existing approach for a single application form across all forms of entity, both incorporated and unincorporated.
  - Expands the application form to include additional data fields consistent with international standards for taxpayer registration, particularly for companies.
  - Provides advance information on expected numbers of employees and projected annual gross income.

- Proposed annual tax declaration for unincorporated entities (merged Forms 4 and 5):
  - Merges reporting of trade, industry, craft, and liberal professionals.
  - Provides a large amount of additional data; is more data demanding than current approaches.
  - Suggested for taxpayers who are over a total income threshold and who can be reasonably expected to have some books and records.
  - Maintains separation of net income from industry and handicraft (reflecting reduced tax rate for this cohort).
  - Fully itemizes gross profit calculation for each class of taxpayer to facilitate comparative ratio analyses for risk assessment.
  - Suggests a very small number of end-of-year balance sheet items: cash at bank, total assets, and total debts.
  - Because the declaration is comprehensive, need for a formal profit and loss statement as an annexure may be re-considered; medium-term approach: remove need for separate profit and loss statement.

- Revised CIT declaration (Form 9):
  - Proposed preliminary set of data to expand considerably the information within the existing form 9.
  - Requirement for a profit and loss and balance sheet would be retained for company taxpayers.

- Implementation considerations:
  - Examine legislative impact and short-term technical feasibility of proposals.
  - Interim but limited computer system for income taxes anticipated for a mid-year commencement.
  - Ideal approach: incorporate these forms within scope of new computer platform.
  - Program of consultation with business groups and taxpayer representatives on new forms is suggested.

### Recommendations (summary)
- Taxpayer Registration
  1. Adopt the revised format for a taxpayer registration application form.
  2. Conduct consultations with the business community on the changes to tax forms.

- Data Items for Income Tax Declarations
  3. Review the preliminary data items proposed for a single annual income tax declaration for unincorporated entities (merged forms 4 and 5) and a revised form 9 for companies.
  4. As a medium-term measure, (e.g., after two years of implementation of the revised form), remove a requirement for a profit and loss account to accompany the revised forms 4 and 5.
  5. Examine the legislative impacts arising from the new tax forms.
  6. Confirm the technical feasibility of all new forms for short term implementation in the interim LTA computer platform.
  7. Maintain the requirement for a profit and loss statement and balance sheet to accompany annual tax declarations for all CIT payers.
  8. Maintain the availability of the existing Forms 4 and 5 for use by the smallest taxpayers where there are very limited books and records and who are below a pre-determined total income threshold.
  9. Adopt a standardized approach for industry classification based upon the United Nations ISIC.

### I. Key Findings — background and operational status
- Background
  - In 2021, the Libyan Tax Authority (LTA) proposed a strategy for the transformation of income tax administration, envisioning digitalization and reforms in legislation, organization, infrastructure, and human resources.
  - As a near-term measure, the report focuses on re-design of tax declarations.

- Status of LTA Income Tax Operations
  - Libya’s administration of income taxes remains within a traditional paper-based environment.
  - Organization and IT
    - Income tax administration is decentralized across a network of 39 executive administrations (regional offices) and 60 smaller offices, with administrative support from a small headquarters.
    - There are no enterprise-level computer systems to support core functions of tax administration.
    - Office automation tools (word processing, scanning, and printing) are available; work stations were being replaced at LTA’s five largest offices as a precursor for digitalization.
    - Local IT and spreadsheet applications may exist for some functions, but no systems for central and standardized data capture of income tax information.
    - Taxpayer registration, filing, assessment, and their recording are reduced to very restricted and manual processes.
  - Planned IT developments
    - LTA is progressing an in-house small IT system development for roll-out from mid-2024.
    - A total tax administration IT solution covering PIT, CIT, and the Defense (“Jehad”) tax is at a very early stage of technical specification.
    - The small system development is an interim measure to be piloted in a few offices; details of functions to be supported were not confirmed.
  - Tax forms and data
    - Tax forms are very outdated and cannot support data capture: registration and annual declaration forms contain no structured data fields; information is in free text.
    - Annual declarations request too little information; CIT relies on annexures in unspecified formats.
    - Without a data resource on registered taxpayers and tax filings, there are few internal controls and limited analytical capacity for monitoring and management of an income tax system.

### II. Taxpayer Registration — current practice and gaps
- Current practice
  - A single registration application (“Form 1”) applies to all income tax entities including companies.
  - Individuals register with LTA upon commencing business in trade (retail and wholesale), industry (manufacturing), or as a liberal professional (e.g., lawyers, doctors, accountants, architects).
  - Before registering with LTA, every entity must obtain a business license from the Ministry of Economy.
  - Legal persons (companies) register with LTA following their entry into the Commercial Register.

- Gaps in Form 1 (selected omissions)
  - For individuals: Date of Birth; Contact information (e.g., cell and other telephone contact); Taxpayer segment; Economic / industry sectors by code; Contact information for tax agents or intermediaries; Nature on filing and payment obligations.
  - For companies: Identity of associated entities; Identity information for company office holders (directors); Contact information (cell and other telephone contacts) for company office holders; Identity of related parties, e.g. shareholders and subsidiary companies; Other taxpayer roles within the tax system (e.g., as an employer).
  - Form 1 does not provide additional information to support the application, such as: An estimate of annual gross income; The number of paid employees; The accounting period to be applied.
  - Employees are not required to register with LTA; employees of non-profit entities may be obliged to file a declaration and pay taxes on annual assessment.
  - No coding system for classification of business activity: single line in Form 1 for description of main purpose of business; absence of activity coding system severely limits analysis of tax compliance.
    - Recommendation: adopt industry classification based upon the United Nations International Standard Industrial Classification (ISIC).
  - An individual may have multiple tax numbers when having more than one class of income; a tax number is six digits and is sequential.
  - The number of taxpayers cannot be accurately determined; officials advise that there are 45,000 income taxpayers, but this includes unknown numbers of ceased businesses, bankrupts, and liquidated entities.

### III. Annual Income Tax Declarations — current limits and risks
- Current forms and limitations
  - Separate forms for partnerships and individuals engaged in trade, industry, and handicraft (Form 4) and for liberal professionals (Form 5); both specify some expense items but lists are not extensive and there are significant omissions.
  - Where available, a profit and loss statement is to be annexed together with certification from a registered accountant and legal auditor.
  - Tax forms for companies (Form 9) are restricted to identification and address information, including branches; high-level tables provide reconciliation between accounting and taxable profit and a CIT calculation against taxable income; certification by a registered accountant completes the declaration.
  - No prescribed data fields within Form 9 relating to determination of net income, taxable income, tax credits, or balance sheet items.
  - Full reliance on external accounting reports for determination of income tax assessment; administrative assessments are based upon information provided by the taxpayer; no authority for adjustment to primary assessment information without conducting a tax audit.

- Risk assessment limitations
  - Risk assessment for audit selection is largely based upon formal accounting reports; absence of stored key taxpayer data (e.g., gross and net income, assets, liabilities) prevents automated benchmarks and comparator analyses by industry sectors.
  - Officials advise that risk assessment is attempted to guide audit selection despite limitations.

- Box 2 — omitted and limited information in annual declarations (selected items omitted)
  - Opening stock, closing stock, purchases and cost of goods sold for trade (retail and wholesale).
  - Opening and closing inventories of raw materials, finished goods and cost of goods manufactured and sold for industry (manufacturer).
  - Common expense items: e.g., depreciation, repairs and maintenance, leasing expenses.
  - Credits and income tax offsets – e.g., for income tax withheld on payments.
  - Identification of exempt income (for Jehad tax).
  - Summary balance sheet items (e.g., cash at bank, total assets, total debt).
  - Provision of bank account information for payment of taxes and refund of overpayments.

- Box 2 — partial coverage (limited information)
  - Dissection of total income from all sources – e.g., commissions, rents.
  - Calculation of gross profit.
  - Schedule of common expense items.
  - Calculation of a tax liability.

- Box 2 — inability to support financial ratio analysis and cross-matching
  - Unable to support calculation of common financial ratios including: Profitability: Gross Profit/Gross Business Income; Profitability: Sales/Purchases; Working capital: Current Assets/Current liabilities; Financial stability: Debt/Total Assets; Efficiency: Total Business Income/Total Assets; Debtors/Total Business Income; Creditors/Cost of Goods Sold; Business Income/Fixed Assets.
  - Unable to support cross-matching of income and expense items between contracted parties (e.g., sales to purchases, rents paid to rents received, legal expenses paid, and professional fees received).

### IV. Technical Assistance Provided — illustrative annex features
- Annex 1 (illustrative revised registration form) — features:
  - Separates a trading name from any other business name.
  - Separates a business address from a mailing address.
  - Provides full contact information.
  - Separates trading location information that is from other than the main business.
  - Separates a description of the type of operation (e.g., trade, industry craft, and professional services) from the nature of the business ownership.
  - Seeks an indication of annual gross income as well as the number of paid employees.
  - Seeks information on associated persons, directors, shareholders and subsidiaries.
  - Requests information on the accounting period.
  - The form includes rental information to permit a crossmatch with information provided under current Form 2.
  - “Office Use Only” fields indicate: any existing local office references; a business activity code should a coding system be established; the separate tax accounts for which the taxpayer will have a liability.

### V. Annual Tax Declaration Forms 4 and 5 — consolidation proposal and features
- Because of considerable overlap between Forms 4 and 5, these forms could be merged into a single annual tax declaration for unincorporated taxpayers carrying on a business.
- LTA indicated in principle support for Forms 4 and 5 to be merged but noted that a legislative change will be needed.
- Annex 2 presents an example of the data fields for a revised personal income tax declaration:
  - The form provides for a large amount of additional data and is more complex than the current forms 4 and 5.
  - LTA should retain the existing declarations for the smallest taxpayers.
  - A test based upon level of turnover is the usual approach for defining eligibility for a simplified declaration.
  - Proposed turnover test example: total revenue that is greater than (say) Dinar 50,000, though determination of the turnover threshold will need analysis by the authorities on impact of the change.
  - Annex 2 data collection should be considered a preliminary compilation subject to authorities’ review, testing against existing laws and subsequent modification.

- Key features of the merged declaration for unincorporated taxpayers (Box 3)
  - The declaration would annually update taxpayers’ identity information and expand identity information and contact details consistent with proposals for an expanded revised registration form at Annex 1; the declaration also includes details of the bank account.
  - Financial components are in five sections with item codes within each section; references use section number with the alpha item code (e.g., item 2A is Sales for a trade and commerce entity).
  - The income tax declaration distinguishes domestic purchases and sales from imported sales and exports for crossmatching with Customs as a future compliance measure.
  - The form requires separation of net income from industry and handicraft to allow calculation of tax payable at the ten percent rate.
  - Industry net income data fields include a cost of goods manufactured and goods sold to fully itemize gross profit and allow comparative ratio analyses.
  - Net income from trade and commerce incorporates data for itemization to calculate cost of goods sold.
  - Income from E Commerce is included (section 2, item 2K) for taxpayers with trade and commerce income or income from professional services.
  - Minor expansion of expense items: adds categories for legal and accounting and other professional fees, travel, motor vehicle and transport, and telecommunications costs.
  - An extract of items from the balance sheet is shown as a minimum set for unincorporated entities: cash at bank, total assets and total debts.
    - If a taxpayer has elected an accruals basis for revenue recognition, the taxpayer should also provide information on accounts receivable and payable.

### VI. Profit and loss statement considerations
- Because the declaration is reasonably comprehensive, the need for a formal profit and loss statement as an annexure to the declaration will diminish.
- In the first two years of implementation, accounting reports should be retained as the declaration will need to be evaluated and modified.
- As a medium-term approach, the requirement for a separate profit and loss statement would be removed to reduce costs to businesses.

### VII. Annual Corporate Income Tax (CIT) Declaration Form 9 — proposed expansion
- Annex 3 suggests a tax declaration for companies (Form 9) with proposed data items shown as a preliminary set for consideration, evaluation and testing against existing law.
- The current Form 9 (Annex 4) does not request any financial data; the proposed declaration is significantly expanded.
- The revised CIT declaration collects financial data in four sections.

- Key features of the declaration for incorporated taxpayers (Box 4)
  - One section is dedicated to net income of industry taxpayers because of distinct information items to calculate a cost of goods manufactured within cost of sales.
  - Gross income from all other sources is within section 2, including trade and commercial taxpayers, E commerce income, professional fees, income from rents, leasing, commissions, interest and capital gains.
  - CIT payers are subject to a standard tax rate for all income sources, allowing some simplifications and less requirement to separate expense items for a particular class of income (except industrial companies).
  - It may be desired to separate expense items by nature of activity for broader purposes (e.g., statistical or policy development).
  - In contrast to unincorporated entities, the revised Form 9 would retain an ongoing requirement for accounting reports: a profit and loss statement as well as a balance sheet to accompany the CIT declaration.
  - The revised Form 9 should include exempt income categories (see item 2W) because the Jehad tax is levied on profits or income exempt from taxation, excepting income from agricultural activities.

### VIII. Consultation, legislative impacts, and IT feasibility
- A wider consultation with business and industry groups on changes to tax forms would be appropriate.
- Officials confirm proposals for all form changes will require legislative changes.
- Because the annual income tax declarations are complex and represent a significant departure from existing approaches, the proposals need to be tested against existing law and evaluated for their impact on taxpayers and intermediaries (tax agents and accountants) and the business community.
- All proposed forms are considered draft forms for further evaluation by LTA.
- LTA should quickly consider whether the proposals are technically feasible for incorporation within the small system platform proposed for introduction from mid-2024.

### IX. Recommendations (numbered, final listing)
- 30. Adopt the revised format for a taxpayer registration application form.
- 31. Review the preliminary data items proposed for a single annual income tax declaration for unincorporated entities (merged forms 4 and 5) and a revised form 9 for companies.
- 32. Maintain the availability of the existing Forms 4 and 5 for use by the smallest taxpayers where there are very limited books and records and who are below a pre-determined total income threshold.
- 33. Confirm the technical feasibility of all new forms for short term implementation in the interim LTA computer platform proposed for introduction from mid-2024.
- 34. Examine the legislative impacts arising from the new tax forms.
- 35. Conduct consultations with the business community on the changes to all tax forms.
- 36. As a medium term measure, (e.g., after two years of implementation of the revised form), remove a requirement for a profit and loss account to accompany the revised forms 4 and 5.
- 37. Maintain the requirement for a profit and loss statement and balance sheet to accompany annual tax declarations for all CIT payers.
- 38. Adopt a standardized approach for industry classification based upon the United Nations ISIC.

*IMF | METAC Technical Assistance Report | Preface and Executive Summary (selected sections); pages 15–21.*

### Preface ___________________________________________________________________________  6

### Preface

### Preface (assignment overview)
- At the request of the Libyan Tax Authority (LTA), a capacity development (CD) assignment was conducted through remote assistance during the period April 22 to May 2, 2024, by Mr. Thomas Story, External Advisor, IMF Fiscal Affairs Department (FAD).
- Mrs. Sabine Corm, Regional Tax Administration Advisor for fragile and conflict-affected states (FCS) at the Middle East Regional Technical Assistance Center (METAC) also participated in the remote assistance.
- Purpose: support LTA in the identification of data and reporting requirements for the administration of income taxes, and in developing initial high-level proposals for the re-design of tax forms.
- Between April 22 and 25, 2024, virtual workshops using the Zoom platform were attended by senior LTA staff to clarify current approaches for income tax administration, including processes for registration, declaration, payment, and verification of liabilities.
- The report presents suggestions from the workshops for improvements to income tax registration and annual tax declaration reporting.

### Executive Summary
- LTA initiated a wide-ranging transformation program for tax administration with central focus on digitalization of paper-based systems. METAC provided a road map for implementation of an integrated tax administration system (ITAS) and advice on digitization preparedness.
- Key observation: LTA tax forms were poorly defined and unable to support data capture and processing.
- Without sufficient information on registered taxpayers and their tax filings, there is very limited risk assessment. Tax forms for registration and annual declaration filing contain no structured data fields; information is in free text.
- The amount of information requested in annual declarations is too little; for CIT there is total reliance on annexures in unspecified formats.
- Officials acknowledge that analytical capacity for monitoring and management of tax compliance is most difficult.
- Proposed taxpayer registration application form:
  - Will allow LTA to compile and maintain a complete database of businesses and individuals required by law to register.
  - Retains existing approach for a single application form across all forms of entity, both incorporated and unincorporated.
  - Expands the application form to include additional data fields consistent with international standards for taxpayer registration, particularly for companies.
  - Provides advance information on expected numbers of employees and projected annual gross income.
- Proposed annual tax declaration for unincorporated entities (merged Forms 4 and 5):
  - Merges reporting of trade, industry, craft, and liberal professionals.
  - Provides a large amount of additional data; is more data demanding than current approaches.
  - Suggested for taxpayers who are over a total income threshold and who can be reasonably expected to have some books and records.
  - Maintains separation of net income from industry and handicraft (reflecting reduced tax rate for this cohort).
  - Fully itemizes gross profit calculation for each class of taxpayer to facilitate comparative ratio analyses for risk assessment.
  - Suggests a very small number of end-of-year balance sheet items: cash at bank, total assets, and total debts.
  - Because the declaration is comprehensive, need for a formal profit and loss statement as an annexure may be re-considered; medium-term approach: remove need for separate profit and loss statement.
- Revised CIT declaration (Form 9):
  - Proposed preliminary set of data to expand considerably the information within the existing form 9.
  - Requirement for a profit and loss and balance sheet would be retained for company taxpayers.
- Implementation considerations:
  - Examine legislative impact and short-term technical feasibility of proposals.
  - Interim but limited computer system for income taxes anticipated for a mid-year commencement.
  - Ideal approach: incorporate these forms within scope of new computer platform.
  - Program of consultation with business groups and taxpayer representatives on new forms is suggested.

### Recommendations (numbered)
- Taxpayer Registration
  1. Adopt the revised format for a taxpayer registration application form.
  2. Conduct consultations with the business community on the changes to tax forms.
- Data Items for Income Tax Declarations
  3. Review the preliminary data items proposed for a single annual income tax declaration for unincorporated entities (merged forms 4 and 5) and a revised form 9 for companies.
  4. As a medium-term measure, (e.g., after two years of implementation of the revised form), remove a requirement for a profit and loss account to accompany the revised forms 4 and 5.
  5. Examine the legislative impacts arising from the new tax forms.
  6. Confirm the technical feasibility of all new forms for short term implementation in the interim LTA computer platform.
  7. Maintain the requirement for a profit and loss statement and balance sheet to accompany annual tax declarations for all CIT payers.
  8. Maintain the availability of the existing Forms 4 and 5 for use by the smallest taxpayers where there are very limited books and records and who are below a pre-determined total income threshold.
  9. Adopt a standardized approach for industry classification based upon the United Nations ISIC.

### I. Key Findings
- Background
  - In 2021, the Libyan Tax Authority (LTA) proposed a strategy for the transformation of income tax administration, envisioning digitalization and reforms in legislation, organization, infrastructure, and human resources.
  - As a near-term measure, the report focuses on re-design of tax declarations.

A. Status of LTA Income Tax Operations
- Libya’s administration of income taxes remains within a traditional paper-based environment.
- Organization and IT
  - Income tax administration is decentralized across a network of 39 executive administrations (regional offices) and 60 smaller offices, with administrative support from a small headquarters.
  - There are no enterprise-level computer systems to support core functions of tax administration.
  - Office automation tools (word processing, scanning, and printing) are available; work stations were being replaced at LTA’s five largest offices as a precursor for digitalization.
  - Local IT and spreadsheet applications may exist for some functions, but no systems for central and standardized data capture of income tax information.
  - Taxpayer registration, filing, assessment, and their recording are reduced to very restricted and manual processes.
- Planned IT developments
  - LTA is progressing an in-house small IT system development for roll-out from mid-2024.
  - A total tax administration IT solution covering PIT, CIT, and the Defense (“Jehad”) tax is at a very early stage of technical specification.
  - The small system development is an interim measure to be piloted in a few offices; details of functions to be supported were not confirmed.
- Tax forms and data
  - Tax forms are very outdated and cannot support data capture: registration and annual declaration forms contain no structured data fields; information is in free text.
  - Annual declarations request too little information; CIT relies on annexures in unspecified formats.
  - Without a data resource on registered taxpayers and tax filings, there are few internal controls and limited analytical capacity for monitoring and management of an income tax system.

B. Taxpayer Registration
- Current practice
  - A single registration application (“Form 1”) applies to all income tax entities including companies.
  - Individuals register with LTA upon commencing business in trade (retail and wholesale), industry (manufacturing), or as a liberal professional (e.g., lawyers, doctors, accountants, architects).
  - Before registering with LTA, every entity must obtain a business license from the Ministry of Economy.
  - Legal persons (companies) register with LTA following their entry into the Commercial Register.
- Gaps in Form 1 (see Box 1 summary)
  - Registration information in Form 1 is narrowly prescribed; proof of identity requirements exist.
  - Form 1 omits or only indirectly references several items considered standard for modern registration:
    - For individuals: Date of Birth; Contact information (e.g., cell and other telephone contact); Taxpayer segment; Economic / industry sectors by code; Contact information for tax agents or intermediaries; Nature on filing and payment obligations.
    - For companies: Identity of associated entities; Identity information for company office holders (directors); Contact information (cell and other telephone contacts) for company office holders; Identity of related parties, e.g. shareholders and subsidiary companies; Other taxpayer roles within the tax system (e.g., as an employer).
    - Form 1 does not provide additional information to support the application, such as: An estimate of annual gross income; The number of paid employees; The accounting period to be applied.
  - Employees are not required to register with LTA; employees of non-profit entities may be obliged to file a declaration and pay taxes on annual assessment.
  - No coding system for classification of business activity: single line in Form 1 for description of main purpose of business; absence of activity coding system severely limits analysis of tax compliance.
  - Recommendation: adopt industry classification based upon the United Nations International Standard Industrial Classification (ISIC).
  - An individual may have multiple tax numbers when having more than one class of income; a tax number is six digits and is sequential.
  - The number of taxpayers cannot be accurately determined; officials advise that there are 45,000 income taxpayers, but this includes unknown numbers of ceased businesses, bankrupts, and liquidated entities.

C. Annual Income Tax Declarations
- Current forms and limitations
  - Separate forms for partnerships and individuals engaged in trade, industry, and handicraft (Form 4) and for liberal professionals (Form 5); both specify some expense items but lists are not extensive and there are significant omissions.
  - Where available, a profit and loss statement is to be annexed together with certification from a registered accountant and legal auditor.
  - Tax forms for companies (Form 9) are restricted to identification and address information, including branches; high-level tables provide reconciliation between accounting and taxable profit and a CIT calculation against taxable income; certification by a registered accountant completes the declaration.
  - No prescribed data fields within Form 9 relating to determination of net income, taxable income, tax credits, or balance sheet items.
  - Full reliance on external accounting reports for determination of income tax assessment; administrative assessments are based upon information provided by the taxpayer; no authority for adjustment to primary assessment information without conducting a tax audit.
- Risk assessment limitations
  - Risk assessment for audit selection is largely based upon formal accounting reports; absence of stored key taxpayer data (e.g., gross and net income, assets, liabilities) prevents automated benchmarks and comparator analyses by industry sectors.
  - Officials advise that risk assessment is attempted to guide audit selection despite limitations.
- Box 2 summary: omitted and limited information in annual declarations
  - Income tax declarations omit information on:
    - Opening stock, closing stock, purchases and cost of goods sold for trade (retail and wholesale).
    - Opening and closing inventories of raw materials, finished goods and cost of goods manufactured and sold for industry (manufacturer).
    - Common expense items: e.g., depreciation, repairs and maintenance, leasing expenses.
    - Credits and income tax offsets – e.g., for income tax withheld on payments.
    - Identification of exempt income (for Jehad tax).
    - Summary balance sheet items (e.g., cash at bank, total assets, total debt).
    - Provision of bank account information for payment of taxes and refund of overpayments.
  - Income tax declarations provide limited information for partial coverage of:
    - A dissection of total income from all sources – e.g., commissions, rents.
    - A calculation of gross profit.
    - A schedule of common expense items.
    - A calculation of a tax liability.
  - Income tax declarations are unable to support calculation of common financial ratios for comparison to prior years and like taxpayers, including but not limited to:
    - Profitability: Gross Profit/Gross Business Income
    - Profitability: Sales/Purchases
    - Working capital: Current Assets/Current liabilities
    - Financial stability: Debt/Total Assets
    - Efficiency: Total Business Income/Total Assets
    - Other comparator ratios for potential understatement of income: Debtors/Total Business Income, Creditors/Cost of Goods Sold, Business Income/Fixed Assets
  - Unable to support cross-matching of income and expense items between contracted parties (e.g., sales to purchases, rents paid to rents received, legal expenses paid, and professional fees received).

### II. Technical Assistance Provided
A. Taxpayer Registration
- Annex 1 presents an example of a revised taxpayer registration application (illustrative) with features addressing shortcomings of Form 1:
  - Separates a trading name from any other business name.
  - Separates a business address from a mailing address.
  - Provides full contact information.
  - Separates trading location information that is from other than the main business.
  - Separates a description of the type of operation (e.g., trade, industry craft, and professional services) from the nature of the business ownership.
  - Seeks an indication of annual gross income as well as the number of paid employees.
  - Seeks information on associated persons, directors, shareholders and subsidiaries.
  - Requests information on the accounting period.

*IMF | METAC Technical Assistance Report | Preface and Executive Summary (selected sections).*

### 19.        The form also includes rental information.  Although optional, the purpose is to permit a

### 19.        The form also includes rental information.  Although optional, the purpose is to permit a

### Registration form and office-use fields
- The form includes rental information to permit a crossmatch with information provided under current Form 2.
- Under the heading for “Office Use Only”, information fields indicate:
  - any existing local office references,
  - a business activity code should a coding system be established,
  - the separate tax accounts for which the taxpayer will have a liability.

### Annual Tax Declaration Forms 4 and 5 — consolidation proposal
- Because of considerable overlap between Forms 4 and 5, these forms could be merged into a single annual tax declaration for unincorporated taxpayers carrying on a business.
- LTA indicated in principle support for Forms 4 and 5 to be merged but noted that a legislative change will be needed.
- Annex 2 presents an example of the data fields for a revised personal income tax declaration:
  - The form provides for a large amount of additional data and is more complex than the current forms 4 and 5.
  - LTA should retain the existing declarations for the smallest taxpayers.
  - A test based upon level of turnover is the usual approach for defining eligibility for a simplified declaration.
- Proposed turnover test example: total revenue that is greater than (say) Dinar 50,000, though determination of the turnover threshold will need analysis by the authorities on impact of the change.
- Annex 2 data collection should be considered a preliminary compilation subject to authorities’ review, testing against existing laws and subsequent modification.

### Key features of the merged declaration for unincorporated taxpayers (Box 3)
- The declaration would annually update taxpayers’ identity information and expand identity information and contact details consistent with proposals for an expanded revised registration form at Annex 1; the declaration also includes details of the bank account.
- Financial components are in five sections with item codes within each section; references use section number with the alpha item code (e.g., item 2A is Sales for a trade and commerce entity).
- The income tax declaration distinguishes domestic purchases and sales from imported sales and exports for crossmatching with Customs as a future compliance measure.
- The form requires separation of net income from industry and handicraft to allow calculation of tax payable at the ten percent rate.
- Industry net income data fields include a cost of goods manufactured and goods sold to fully itemize gross profit and allow comparative ratio analyses.
- Net income from trade and commerce incorporates data for itemization to calculate cost of goods sold.
- Income from E Commerce is included (section 2, item 2K) for taxpayers with trade and commerce income or income from professional services.
- Minor expansion of expense items: adds categories for legal and accounting and other professional fees, travel, motor vehicle and transport, and telecommunications costs.
- An extract of items from the balance sheet is shown as a minimum set for unincorporated entities: cash at bank, total assets and total debts.
  - If a taxpayer has elected an accruals basis for revenue recognition, the taxpayer should also provide information on accounts receivable and payable.

### Profit and loss statement considerations
- Because the declaration is reasonably comprehensive, the need for a formal profit and loss statement as an annexure to the declaration will diminish.
- In the first two years of implementation, accounting reports should be retained as the declaration will need to be evaluated and modified.
- As a medium-term approach, the requirement for a separate profit and loss statement would be removed to reduce costs to businesses.

### Annual Corporate Income Tax (CIT) Declaration Form 9
- Annex 3 suggests a tax declaration for companies (Form 9) with proposed data items shown as a preliminary set for consideration, evaluation and testing against existing law.
- The current Form 9 (Annex 4) does not request any financial data; the proposed declaration is significantly expanded.
- The revised CIT declaration collects financial data in four sections.

### Key features of the declaration for incorporated taxpayers (Box 4)
- One section is dedicated to net income of industry taxpayers because of distinct information items to calculate a cost of goods manufactured within cost of sales.
- Gross income from all other sources is within section 2, including trade and commercial taxpayers, E commerce income, professional fees, income from rents, leasing, commissions, interest and capital gains.
- CIT payers are subject to a standard tax rate for all income sources, allowing some simplifications and less requirement to separate expense items for a particular class of income (except industrial companies).
- It may be desired to separate expense items by nature of activity for broader purposes (e.g., statistical or policy development).
- In contrast to unincorporated entities, the revised Form 9 would retain an ongoing requirement for accounting reports: a profit and loss statement as well as a balance sheet to accompany the CIT declaration.
- The revised Form 9 should include exempt income categories (see item 2W) because the Jehad tax is levied on profits or income exempt from taxation, excepting income from agricultural activities.

### Consultation, legislative impacts, and IT feasibility
- A wider consultation with business and industry groups on changes to tax forms would be appropriate.
- Officials confirm proposals for all form changes will require legislative changes.
- Because the annual income tax declarations are complex and represent a significant departure from existing approaches, the proposals need to be tested against existing law and evaluated for their impact on taxpayers and intermediaries (tax agents and accountants) and the business community.
- All proposed forms are considered draft forms for further evaluation by LTA.
- LTA should quickly consider whether the proposals are technically feasible for incorporation within the small system platform proposed for introduction in mid-2024.

### Recommendations (numbered)
- 30. Adopt the revised format for a taxpayer registration application form.
- 31. Review the preliminary data items proposed for a single annual income tax declaration for unincorporated entities (merged forms 4 and 5) and a revised form 9 for companies.
- 32. Maintain the availability of the existing Forms 4 and 5 for use by the smallest taxpayers where there are very limited books and records and who are below a pre-determined total income threshold.
- 33. Confirm the technical feasibility of all new forms for short term implementation in the interim LTA computer platform proposed for introduction from mid-2024.
- 34. Examine the legislative impacts arising from the new tax forms.
- 35. Conduct consultations with the business community on the changes to all tax forms.
- 36. As a medium term measure, (e.g., after two years of implementation of the revised form), remove a requirement for a profit and loss account to accompany the revised forms 4 and 5.
- 37. Maintain the requirement for a profit and loss statement and balance sheet to accompany annual tax declarations for all CIT payers.
- 38. Adopt a standardized approach for industry classification based upon the United Nations ISIC.

*IMF | METAC Technical Assistance Report | 15–21*

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_Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024100-print-pdf.pdf_