## _sdn1516

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---

### EXECUTIVE SUMMARY — overview and purpose
- Greater equality and fairness—and what governments can do to achieve them—are at the forefront of the economic and social debate across MENA.
- Fiscal policy is indispensable: revenues (taxes or natural resources) can support growth and improve distribution via spending on infrastructure, healthcare, and education.
- Two country groups analyzed and tailored recommendations provided:
  - Countries with well-established non-hydrocarbon-based tax systems (mostly oil importers).
  - Countries with primarily hydrocarbon-based revenue systems (mostly oil exporters).

### CURRENT STATE OF TAX SYSTEMS — key findings
- Well-established non-hydrocarbon tax systems:
  - Diversified sources of tax revenues, but lower levels of tax revenues compared to other EMDCs.
  - Tax revenues stable for the past two decades while EMDC tax revenues have risen.
- Significant room to improve fairness:
  - Personal income taxes often lack progressivity: low top tier rates apply at relatively high income levels and non-wage earnings are frequently excluded.
  - Corporate income taxes have competitive rates but suffer from widespread exemptions provided in non-transparent ways.
  - Value-added taxes are hampered by multiple rates and exemptions, reducing revenue efficiency and poor targeting.
  - Excise taxes are often poorly designed and yield limited revenues.
  - Tax administration is inefficient and exercises significant discretion, producing unfair treatment.
- Hydrocarbon-dependent (oil-exporting) countries:
  - Dominance of hydrocarbon revenues stifled alternative tax instruments.
  - Personal income taxes are rare and, where present, often apply only to foreigners.
  - Value-added taxes largely do not exist.
  - Corporate income taxes generally applied to foreign companies and trade taxes account for the bulk of tax revenues.
  - Opportunity exists to design fair, simple tax systems while developing administrative capacity.

### HOW TO MAKE MENA TAXATION FAIRER — summary of recommended reforms
- For well-established non-hydrocarbon systems:
  - Broaden the tax base, eliminate privileged corporate income tax regimes, increase progressivity (particularly in personal income taxes), and strengthen administration.
  - Eliminate exemptions to improve fairness, facilitate compliance and administration, and bring informal activities into the open.
  - Specific reform options:
    - Consolidate multiple VAT rates and rationalize exemptions.
    - Eliminate corporate income tax exemptions and simplify the rate structure.
    - Raise the top marginal personal income tax rate (with lower income thresholds), set three to four rates, and include non-wage earnings in taxable income.
    - Introduce property taxes and other wealth taxes (for example, taxes on inheritances and gifts) in the long term; excises on certain luxury goods where PIT is ineffective.
    - Improve tax and customs administration: introduce “customer service,” simplify codes and regulations, and upgrade human and IT resources.
- For hydrocarbon-based revenue systems:
  - Leverage hydrocarbon revenues to design simple, fair tax systems and build administrative capacity scalable over time.
  - Recognize oil revenues can be an efficient form of taxation; develop a healthy non-oil tax system for resilience and accountability.
  - Priorities include:
    - Introduce a low-rate VAT and CIT, preferably applied to all companies.
    - Set up or improve property taxes and excises.
    - Formulate plans for introducing personal income taxes.

### ADDRESSING RESISTANCE TO REFORM
- Sources of resistance:
  - Vested interests, lack of broad-based support, and entrenched tax administrations with limited appetite for change.
- Ways to advance reforms:
  - Involve stakeholders in design.
  - Show that revenues will be used effectively.
  - Set an appropriate pace for reform.
  - Use effective communication—based on evidence—about the benefits of reform.

### THE NEED FOR FAIR TAXATION — context and social dimensions
- Lack of fairness is a root cause of discontent in MENA.
- Fair taxation can help satisfy demands for socioeconomic equity and opportunity; tax systems are a critical interface between state and citizens.
- Socioeconomic issues highlighted:
  - Persistently high unemployment (especially youth).
  - High risk of falling into absolute poverty concentrated just above the poverty line (those living on US$2.00–2.50 per day).
  - Inadequate access to education and healthcare, lack of business opportunities, low domestic competition.
  - Perceptions about taxation of natural resource income when accruing to foreigners vs nationals.
- Pre-tax energy subsidies on petroleum, natural gas, and electricity were 0.7 percent of global GDP in 2011 and 2013; recommended gradual reform: first raise consumer prices to cover supply costs and then incorporate an efficient tax level.

### CORRUPTION AND (UN)FAIR TAXATION — mechanisms and effects
- Corruption in revenue administration can be initiated by taxpayers (under-reporting, bribes, avoidance) or tax collectors (over-assessing, extortion); companies can pay senior officials to obtain exempt status.
- Corruption undermines respect for the tax system, weakens compliance, and lowers revenue collection.
- Corruption contributes to perceptions of unfairness because:
  - Discretionary application of rules cannot be fair across taxpayers.
  - Corruption may be regressive: upper-income segments can understate or evade taxes and are less exposed to extortion, while the poorest have fewer evasion opportunities and may be exposed to extortion via over-reported incomes.
- Burdensome revenue administration correlates with perceptions of corruption; increased transparency and simplification can address perceptions and boost compliance and revenues.

### CURRENT STATE OF TAX SYSTEMS — selected statistics and indicators
- For MENA countries with well-established non-hydrocarbon tax systems:
  - Region’s tax revenues are about 13 percent of non-oil GDP, lower than the average of 17 percent in other EMDCs.
  - Domestic taxes on goods and services (VAT and excises) account for about a third of tax revenues, in line with the EMDC average.
  - VAT revenues range from 1.8 percent of non-oil GDP in Iran to 11.1 percent in Jordan.
  - Taxes on personal and corporate income account for about a third of tax revenues in most of the region.
- Income taxes — personal and corporate:
  - Personal income taxes (PIT) yield less than in EMDCs and are often not very progressive.
  - Examples of top-tier tax table fragment (presented in source as "Non-Oil Corporate Personal Difference"):
    - Yemen 50 15 35
    - Jordan 35 20 15
    - Egypt 25 25 0
    - Tunisia 35 35 0
    - Morocco 37 38 -1
    - Djibouti 25 30 -5
    - Lebanon 15 20 -5
    - Mauritania 25 33 -8
    - Iran 25 35 -10
    - Algeria 23 35 -12
  - PIT base often excludes non-wage income; examples of reforms: Morocco included certain non-wage income; Tunisia reintroduced dividend taxation in 2014.
  - Compliance is low due to large informal economy, cash salary payments, capacity constraints, and complex deductions.
  - CIT rates have declined and are comparable to EMDCs but exemptions and multiple rates persist; off-shore regimes and free-trade zones offer tax holidays.
- VAT and excise design issues:
  - Multiple rates, tax exemptions, and low registration thresholds (Egypt, Morocco, Tunisia) produce large variations in effective tax rates.
  - Tax expenditures can disproportionately benefit the rich: Morocco—Poor Q1 Q2 Q3 Q4 Q5 Total = 5.2 9.3 12.0 15.0 19.7 38.8 100.0; Tunisia row: N/A 7.9 12.7 17.0 23.2 39.2 100.0.
  - VAT collection efficiency (C-efficiency) in most MENA countries is below the EMDC average.
  - Tax effort is under 50 percent for Algeria and Iran.
  - Excises generate lower revenues than in EMDCs and do not particularly target goods consumed by high-income households.
- Trade and property taxes:
  - Tariff structures are often uneven with multiple tariffs, exemptions, and preferences.
  - Property taxes play a small role and exist in only a handful of countries, with revenues far below EMDC averages.
- Hydrocarbon-based systems:
  - Non-resource tax revenues in most oil-exporting countries often represent less than 5 percent of non-oil GDP.
  - PIT is rare and mainly applied to foreigners; Saudi Arabia applies PIT exclusively to expatriate workers.
  - Libya, Iraq, and Sudan have PIT top rates of Libya 10 percent; Iraq 15 percent; Sudan 15 percent.
  - CIT generally represents two-thirds of non-hydrocarbon tax revenues (except Sudan where it is negligible).
  - Indirect taxes such as VAT do not exist in the GCC and Libya; VAT present in Sudan but tax effort is less than 50 percent.
  - Iraq introduced sales tax on internet services, mobile phones, and imported vehicles in the 2015 budget.
  - Zakat is collected in some countries (for example Saudi Arabia) at the rate specified in national practice for charitable/religious purposes; in other countries zakat is regulated by the state but (source fragment continues).

### RECOMMENDATIONS — operational priorities and sequencing
- General priorities:
  - Simplify tax systems via fewer indirect taxes and tariff rates.
  - Broaden tax bases by reducing exemptions.
  - Enhance progressive features of PIT and introduce/improve property taxes (design and administration).
- Well-established non-hydrocarbon systems — concrete actions:
  - Base broadening preferred over across-the-board rate increases.
  - VAT: aim for one or two rates, raise registration thresholds, rationalize exemptions.
  - Trade tariffs: flatten structures and reduce number of rates.
  - CIT: remove exemptions/deductions (notably for off-shore and special zones), consider lower uniform rates, limit number of rates to two, and eventually align corporate and top personal income tax rates.
  - Strengthen administration: reduce discretion, improve transparency, implement customer-service orientation, and upgrade IT/human resources.
- Hydrocarbon-based systems — concrete actions:
  - Introduce a low-rate VAT and CIT applied broadly.
  - Establish or improve property taxes and excises.
  - Formulate gradual plans for PIT introduction and scale up administrative capacity.

### COUNTRY CASE EXAMPLES — Tunisia and Morocco
- Box 2 — Tunisia: On-Shore Off-Shore Dual Development Model
  - Off-shore firms received 10 years profit tax exemptions, 50 percent reduction for another 10 years, full tax deduction for reinvested profits, duty-free inputs, and streamlined customs.
  - On-shore profits taxed at 35 percent (now 25 percent).
  - World Bank estimate: fiscal incentives for offshore sector cost about 2 percent of GDP in 2012.
  - Effects: regional disparities in poverty and unemployment; off-shore firms larger and more productive; predominance of low value-added assembly jobs; limited technology transfer.
  - Reforms: reduced corporate tax wedge on shore vs off-shore from 30 to 15 percent; standard on-shore rate reduced from 35 to 25 percent (except banks and telecoms); export activities subject to 10 percent; timetable for full convergence expected; proposed convergence to a single corporate tax rate of 15–20 percent; re-introduction of dividend taxation in 2014 to aid revenue neutrality.
- Box 3 — Morocco: Tax Reform
  - National conference April 2013 set strategic areas: widen tax base, reduce tax expenditures, cultivate tax administration–taxpayer relationship.
  - Tax revenues averaged almost 25 percent of GDP over the past three years.
  - Concentration: about 80 percent of corporate taxes paid by 2 percent of enterprises; more than 70 percent of income tax receipts paid by wage earners; self-employed and liberal professions pay disproportionately low taxes.
  - Tax expenditures in 2013–14 were 4 percent of GDP.
  - VAT issues: accumulation of refund credits created cash-flow problems for small firms.
  - Recommended actions: reduce tax expenditures, widen PIT base, progressively tax agriculture, improve tax administration, clear VAT credit stock, reduce number of VAT rates, and eliminate inappropriate VAT exemptions.
  - Implementation: 2014 budget taxed large agriculture firms, better enforced taxation of self-employed and liberal professions, and began VAT reform; 2015 budget reduced number of VAT rates and further improved compliance; measures include VAT credit reimbursement procedures and elimination of the one-month lag for VAT deduction.

_italic_ Source — EXECUTIVE SUMMARY from _sdn1516

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### _sdn1516 - EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY
- Greater equality and fairness—and what governments can do to achieve them—are at the forefront of the economic and social debate all over the world. In the Middle East and North Africa (MENA), these themes assume particular significance in light of the strong demands for more equitable access to socioeconomic opportunities, which has been at the core of recent political transitions, but has not yet been fully addressed.
- A well-designed fiscal policy is indispensable. Revenues, whether from taxes or natural resources, can be used to support growth and improve the distribution of wealth and well-being through spending on infrastructure, healthcare, and education. Taxes are a critical interface between the state and its citizens and can play an important role, including in countries that rely primarily on commodity revenues.
- The paper tailors analyses and recommendations to two distinct groups of countries:
  - Countries with well-established non-hydrocarbon-based tax systems (mostly oil importers).
  - Countries with primarily hydrocarbon-based revenue systems (mostly oil exporters).

### CURRENT STATE OF TAX SYSTEMS — key findings
- MENA countries with well-established tax systems:
  - Have diversified sources of tax revenues, but lower levels of tax revenues compared to other emerging market and developing economies (EMDCs).
  - Have shown tax revenues stable for the past two decades, whereas EMDC tax revenues have been on a strong rising trend.
- Significant room exists to improve fairness:
  - Personal income taxes in MENA often lack progressivity due to low top tier rates that often apply at relatively high income levels and exclusion of non-wage earnings.
  - Corporate income taxes have relatively competitive rates but suffer from widespread exemptions, often provided in non-transparent ways and with a high degree of discretion.
  - Value-added taxes are hampered by multiple rates and exemptions, which reduce revenue efficiency and are generally poorly targeted.
  - Excise taxes are often poorly designed and yield limited revenues.
  - Tax administration is inefficient and exercises significant discretion in many countries, leading to unfair treatment of citizens and businesses.
- MENA oil-exporting countries that depend primarily on hydrocarbon revenues:
  - Dominance of hydrocarbon revenues has stifled the emergence of alternative tax instruments.
  - Personal income taxes are rare and, where present, are applied only to foreigners.
  - Value-added taxes do not exist for the most part.
  - Corporate income taxes—generally only applied to foreign companies—and trade taxes account for the bulk of tax revenues.
  - The need to develop tax systems to support diversification provides an opportunity to design them emphasizing fairness, simplicity, and efficiency.

### HOW TO MAKE MENA TAXATION FAIRER — recommendations for well-established non-hydrocarbon systems
- Broaden the tax base, eliminate privileged corporate income tax regimes, increase progressivity (particularly personal income taxes), and strengthen administration.
- Elimination of exemptions is key to improving fairness and facilitating compliance and administration, bringing many informal activities into the open.
- Specific reform options:
  - Consolidate multiple VAT rates and rationalize exemptions to improve targeting and reduce their cost to budgets.
  - Eliminate corporate income tax exemptions and simplify the rate structure to level the playing field for businesses and reduce collection costs.
  - Raise the top marginal personal income tax rate (with lower income thresholds), set three to four rates, and include non-wage earnings (for example, professional and capital income) in taxable income to improve progressivity.
  - Introduce property taxes, other wealth taxes (for example, taxes on inheritances and gifts) in the long term, and excises on certain luxury goods, especially in the absence of an effective personal income tax to improve progressivity.
  - Improve tax and customs administration with the introduction of “customer service,” simplified codes and regulations, and improved human and IT resources to simplify compliance for taxpayers and reduce arbitrary treatment.

### HOW TO MAKE MENA TAXATION FAIRER — recommendations for hydrocarbon-based revenue systems
- Leverage hydrocarbon revenues to design simple, fair tax systems and build administrative capacity that can be scaled up over time.
- Recognize that revenues from oil production can be an efficient and politically acceptable form of taxation; a healthy non-oil tax system remains critical for resilience and accountability.
- Priorities include:
  - Introduce a low-rate VAT and CIT, preferably to be applied to all companies.
  - Set up property taxes and excises, or improve existing ones.
  - Formulate plans for the introduction of personal income taxes.

### ADDRESSING RESISTANCE TO REFORM
- Resistance stems from vested interests, lack of broad-based support, and entrenched tax administrations with limited appetite for change.
- To advance tax fairness, governments can:
  - Involve stakeholders in the design of reforms.
  - Show that revenues will be used effectively.
  - Set an appropriate pace for the reform process.
  - Use effective communication—based on evidence—about the benefits of reform to gather support.

### THE NEED FOR FAIR TAXATION — context and social dimensions
- Lack of fairness has been a root cause of discontent across the MENA region.
- “Fair taxation” can help satisfy demands for greater socioeconomic equity and opportunity, as tax systems represent a critical interface between the state and its citizens.
- The paper reviews current tax systems across MENA and proposes measures to make them fairer while tackling resistance to reform.
- Inequality is central to the policy debate; extreme inequality is argued to be bad for the pace and quality of growth (references to IMF 2014a; Cingano 2014; Ostry and others 2014 are noted in the source).
- A broader concept of fairness is particularly relevant in MENA:
  - MENA countries are not particularly unequal in terms of income distribution compared to other regions, but perceptions of exclusion and unfair access to opportunities are significant.
  - Socio-economic aspects include persistently high unemployment (especially youth), a high risk of falling into absolute poverty concentrated just above the poverty line (those living on US$2.00–2.50 per day), inadequate access to education and healthcare, lack of business opportunities and low competition in domestic markets, and views on taxation of natural resource income when it accrues to foreigners as opposed to nationals.
- Role of taxation in fairness:
  - Policy has focused more on spending reforms (for example, subsidy reform coupled with strengthening social safety nets) which provided fiscal savings and improved support to poor households.
  - Taxation contributes to the relation between citizen and state in terms of equal treatment, burden-sharing, and economic opportunities.
  - Key unresolved questions include:
    - Is the burden of taxation distributed evenly? MENA typically don’t tax returns on various forms of individual savings, focusing only on labor income. Employees in the formal economy often bear the brunt of direct taxation. Tax exemptions are a typical vehicle of discrimination.
    - Are most citizens paying taxes? Data are scarce, but withheld income taxes on wages occupy a very high share of total personal income taxes collected in well-developed tax systems, suggesting taxes paid by self-employed and on non-wage income are very low.
    - Is implementation fair? Even well-designed systems can be implemented unfairly; for example, Egyptian firms with political connections have about a 15 percent probability of receiving exclusive benefits such as exemptions from corporate taxes or customs duties.
- Pre-tax energy subsidies (including on petroleum, natural gas, and electricity) were 0.7 percent of global GDP in 2011 and 2013; a gradual reform strategy involves first raising consumer prices to cover supply costs and then incorporating an efficient tax level.

*Italic line: Source — EXECUTIVE SUMMARY from _sdn1516*

### Box 1. Corruption and (Un)fair Taxation

### Box 1. Corruption and (Un)fair Taxation

### Corruption, perceptions of unfairness, and revenue administration
- Corruption in revenue administration can be initiated by either taxpayers or tax collectors: taxpayers may under-report income, offer bribes, or avoid registration; tax collectors may over-assess to extort; companies can pay off senior officials to obtain exempt status.2
- Corruption undermines respect for the tax system, weakens compliance, and lowers revenue collection.
- Corruption contributes to perceptions of unfairness for two main reasons:
  - A system that allows discretionary (and therefore uneven) application of the rules cannot, by definition, be fair across taxpayers.
  - Corruption in tax collection may well be regressive in its effect: the upper-income segments have most to gain from understating or evading taxes and are least exposed to extortion; the poorest segments have fewer opportunities to evade taxes and their incomes can be more easily over-reported, exposing them to possible extortion by tax collectors.1
- Burdensome revenue administration appears strongly correlated with perceptions of corruption, including in MENA countries; increased transparency and simplification of procedures may help address perceptions of corruption and contribute to a fairer tax system and stronger compliance (and thus boost revenue collection).
- Footnotes in source: 1 Hindriks, Keen, and Muthoo (1999). 2 The World Bank (2009) finds officials often perceived as partial in changing or applying the law for the benefit of a few firms, families, and institutions.

### Fair taxation: rationale and opportunities
- Many systems in MENA have only limited progressivity even abstracting from distortionary effects of widespread exemptions.
- In many MENA countries tax revenues rely largely on indirect taxation3 and property taxes are often absent.
- MENA tax revenues do not fare well compared to other EMDCs, pointing to potential for increase: higher revenues would create fiscal space for spending on well-targeted social protection for the poor and infrastructure, healthcare, and education; the alternative—continuing deficit financing—imposes burdens on future generations and typically benefits holders of government debt.
- Timing for reform:
  - For oil importers: impact of the global financial crisis and political transitions is triggering rethinking of tax systems to ensure fiscal adjustment.
  - For oil exporters: the oil price decline may create pressures and political demands to mobilize non-hydrocarbon revenues.
  - The likelihood of successful tax reforms increases during crisis periods (historical analogy: Latin America in the 1990s for inflation episodes).
- Challenges to reform: political economy obstacles—distrust of the state (leading to tax evasion), vested interests, poor administrative capacity, weak/fragmented political systems, and where present, political tensions and conflict.

3 footnote: The regressivity of indirect taxes can be overstated given reduced VAT rates on necessities; however, reduced rates are a very expensive way of protecting the poorest (Ebrill and others 2001).

### Current state of tax systems — overview and key statistics
- For MENA countries with well-established non-hydrocarbon-based tax systems:
  - The region’s tax revenues, at about 13 percent of non-oil GDP, are lower than the average of 17 percent in other EMDCs.
  - Domestic taxes on goods and services (VAT and excises) account for about a third of tax revenues, in line with the EMDC average.
  - VAT revenues range from as low as 1.8 percent of non-oil GDP in Iran to as much as 11.1 percent in Jordan (largest yield in the region).
  - Taxes on personal and corporate income account for about a third of tax revenues in most of the region.
  - The remainder of tax revenues mostly comes from trade taxes.5

5 footnote: In some cases revenues essentially taxes are classified as non-tax revenues such as recurrent property fees.

### Income taxes — personal and corporate
- Personal income taxes (PIT):
  - PIT yield less than those in EMDCs and are often not very progressive.
  - The top PIT rate in Djibouti, Egypt, Jordan, Lebanon, and Yemen is below the EMDC average top rate.
  - Excessively high income thresholds for the highest brackets exclude many well-off households:
    - Egypt’s highest income tax bracket with a rate of 25 percent is only paid by those earning at least 10 times the per capita income.
    - Jordan’s newly adopted income tax law added a third bracket at 20 percent that targets those who make seven times the per capita income.
  - The tax base frequently excludes non-wage income, such as capital earnings, which disproportionately benefit the rich. Morocco’s recent reform included certain types of non-wage income in the PIT base; Tunisia reintroduced dividend taxation in 2014.
  - Compliance is low due to a large informal economy, widespread cash salary payments, capacity constraints in income verification, and pervasive/complex deductions facilitating avoidance. Presumptive and minimum tax regimes can facilitate evasion if not rigorously applied.
- Corporate income taxes (CIT):
  - Standard CIT rates have declined across the region over the past two decades and are now comparable to CIT rates in EMDCs.
  - Industries are taxed at varying rates and benefit from many exemptions. Example: in Tunisia, CIT rates on telecommunications are 35 percent, instead of the standard 25 percent.
  - Exemptions and multiple rates make taxes difficult to administer, create avoidance opportunities, and can damage the business environment; off-shore regimes and free-trade zones often offer tax holidays and exemptions favoring insiders and over-burdening on-shore taxpayers.
  - Large gaps between the highest rates for CIT and PIT distort the choice of incorporation.

- Selected numeric table fragments reported in source (Top-Tier Income Tax Rates):
  - Yemen 50 15 35
  - Jordan 35 20 15
  - Egypt 25 25 0
  - Tunisia 35 35 0
  - Morocco 37 38 -1
  - Djibouti 25 30 -5
  - Lebanon 15 20 -5
  - Mauritania 25 33 -8
  - Iran 25 35 -10
  - Algeria 23 35 -12
  (Table header context preserved as presented in source: "Non-Oil Corporate Personal Difference")

### Domestic taxes on goods and services (VAT, excises)
- Most countries with well-established tax systems have introduced VAT, which accounts for a large share of tax revenue, but design and implementation suffer from shortcomings:
  - Tax expenditures (exemptions, special rates, thresholds) worsen VAT progressivity and hamper efficiency/administration.
  - Multiple rates, tax exemptions, and low registration thresholds (noted in Egypt, Morocco, Tunisia) produce large variations in effective tax rates.
  - Tax expenditures intended to help the poor often benefit the rich: Morocco—top quintile reaps nearly 38.8 percent of VAT tax expenditures while bottom quintile gets 5.2 percent (Morocco row: Poor Q1 Q2 Q3 Q4 Q5 Total = 5.2 9.3 12.0 15.0 19.7 38.8 100.0). Tunisia row: N/A 7.9 12.7 17.0 23.2 39.2 100.0.
  - VAT collection efficiency (C-efficiency) in most MENA countries is below the EMDC average (C-efficiency compares actual VAT yields to potential yields from a perfectly administered uniform-rate VAT).
  - Tax effort (actual collection as percent of potential revenues) is under 50 percent for Algeria and Iran (Fenochietto and Pessino, 2013; IMF 2014d; IMF 2013).
  - Excises generate lower tax revenues than in EMDCs and do not particularly target goods consumed by high-income households; design shortcomings reduce their equity and revenue potential.

### Other taxes: trade and property
- International trade taxes:
  - Tariff structures are often uneven with multiple tariffs, exemptions, and tariff preferences that create an uneven playing field, erode effectiveness of trade agreements, and constrain yields (mostly derived from imports).
- Property taxes:
  - Property taxes play a small role and exist in only a handful of countries, yielding revenues typically far below the EMDC average.
  - Property taxes offer potential given concentrated real estate wealth and the immobility of the tax base, but require significant investment in cadastres and administrative infrastructure.
- Example statistics (from charts and text):
  - Non-resource tax revenues in most oil-exporting countries often represent less than 5 percent of non-oil GDP.
  - Taxes on trade and property tax revenue values are generally lower than EMDC averages in the countries shown.

### Hydrocarbon-based revenue systems (GCC, Iraq, Libya, Sudan)
- Non-resource tax revenues in most oil-exporting countries in the region are very low—representing less than 5 percent of non-oil GDP, significantly below the EMDC average and average in rest of MENA.
- Reasons for limited use of tax systems in these countries:
  - Historically large natural resource revenues reduced pressure to develop alternative revenues and weakened political case for them.
  - Natural resources are seen as property of citizens, focusing fiscal policy debate on expenditures rather than revenues.
  - The "GCC model": government provides employment for nationals and heavily subsidized energy—introducing income taxes or indirect taxes on fuels would be politically and socially sensitive.
- Tax structures in hydrocarbon-based countries:
  - PIT is rare and mainly applied to foreigners. Saudi Arabia is the only GCC country with PIT, applied exclusively to expatriate workers.
  - Libya, Iraq, and Sudan have PIT structures but top rates are low: Libya 10 percent; Iraq 15 percent; Sudan 15 percent (Appendix 3 referenced).
  - CIT and trade taxes are the main non-hydrocarbon tax revenues; CIT generally represents two-thirds of these revenues (except in Sudan where it is negligible).
  - In Iraq, Kuwait, and Qatar CIT rates are well below those in other EMDCs; CIT base is narrow and often applied only to foreign companies (United Arab Emirates: CIT paid exclusively by foreign banks; Oman: extensive exemptions).
  - Indirect taxes such as VAT do not exist in the GCC and Libya; VAT is present in Sudan but tax effort is less than 50 percent. Iraq introduced sales tax on internet services, mobile phones, and imported vehicles in the 2015 budget.
  - Wealth is generally not taxed; some countries (for example Saudi Arabia) collect zakat (obligatory payment under Islamic law) at the rate specified in national practice for charitable/religious purposes.

_Italic source attribution: International Monetary Fund, Box 1. Corruption and (Un)fair Taxation, extracted from the source content provided._

### 2.5 percent (in other countries, including oil importers, zakat is regulated by the state but

### _sdn1516 - 2.5 percent (in other countries, including oil importers, zakat is regulated by the state but

### RECOMMENDATIONS FOR FAIRER TAXATION
- Tax policies and tax and customs administration reforms can rapidly alter public perceptions.
- In countries with well-established non-hydrocarbon-based systems:
  - Simplify through a reduction in the number of indirect taxes and tariff rates.
  - Broaden bases through a reduction of exemptions.
  - Increase the progressive features of PIT and introduce or improve taxes on property (both in design and administrative capabilities).
- In countries with hydrocarbon-based systems:
  - Gradually design fair, simple, and effective tax systems, focusing initially on VAT and CIT.
  - Develop tax revenue administrations that can later be leveraged to introduce more direct taxation of personal incomes.

### A. Well-Established Non-Hydrocarbon-Based Tax Systems — Simplifying tax systems, broadening the tax base
- General approach:
  - Broaden bases and simplify the rate structures of VAT and international trade taxes.
  - For both efficiency and equity reasons, base-broadening is generally preferred over across-the-board rate increases.
  - The VAT should serve as a uniform tax on all consumption; reduced rates on items important in the budgets of the poor can mainly benefit the better-off because they consume absolutely more of these items.
  - Recent evidence confirms that base broadening is also better for growth.14

- Key policies:
  - Reducing or eliminating tax exemptions and deductions (except those specifically targeted to the poor) to simplify administration and reduce opportunities for tax avoidance and corruption.
  - Consolidating multiple rates:
    - For the VAT, ideally one or two rates should be applied, while raising registration thresholds.
    - For international trade tariffs, flatten structures and reduce the number of rates (including maximum rates).
    - These changes support more equitable treatment across taxpayers and reduce distortions in production and consumption choices.
  - Setting VAT registration thresholds sufficiently high to simplify administration, provide some price advantage to small businesses, and reduce their compliance costs (notably in rural areas).
    - Example: an increase in the VAT threshold in the Dominican Republic has been found to have strong pro-poor effects (Jenkins, Jenkins, and Kuo 2006).

### Corporate Income Tax (CIT) — Simplify and reduce related exemptions
- Rationale:
  - Simplifying the CIT and reducing related exemptions, notably for export (off-shore) sectors and free-trade and other special economic zones, helps level the playing field for businesses.
  - Eliminating privileged regimes improves governance and promotes creation of new businesses, especially if streamlined regulatory environments for off-shore sectors are extended more broadly.

- Specific recommendations:
  - Remove exemptions and certain deductions, possibly paving the way for lower rates while preserving revenue yields.
    - Phase out privileged regimes in off-shore sectors and special tax privileges in free-trade zones gradually.
    - Inclusion of off-shore companies (often the most profitable and dynamic) would allow a reduction in the overall rate structure while maintaining or increasing revenues.
  - Introduce a simple rate structure, generally limited to two rates (a standard rate and, if needed, a second rate for specific sectors earning extraordinary profits).
  - Eventually align corporate and top personal income tax rates to reduce profit-shifting incentives (notably through incorporation).

*Source: IMF staff content from the provided PDF excerpt.*

### Box 2. Tunisia: On-Shore Off-Shore Dual Development Model

### Box 2. Tunisia: On-Shore Off-Shore Dual Development Model

### Background: incentives for off-shore firms
- Off-shore firms benefited from:
  - Tax exemptions on profits during the first 10 years of activity.
  - A 50 percent reduction for another 10 years.
  - A full tax deduction for reinvested profits.
  - Duty-free access for all inputs and equipment.
  - Streamlined customs procedures relative to the on-shore sector.
- Profits in the on-shore sector were taxed at 35 percent (now at 25 percent).
- According to recent World Bank estimates, the total cost of fiscal incentives for the offshore sector amounted to about 2 percent of GDP in 2012.

### Effects of the on-shore / off-shore duality
- Unequal access to opportunities:
  - Average poverty rates remained four times as high in the interior of the country as in richer coastal “off-shore” areas.
  - At 25 percent, unemployment rates in the interior regions are double those of coastal areas.
  - Only 13 percent of foreign firms were created in the interior regions.
  - Off-shore firms often turned out to be larger, more productive, and more likely to be foreign-owned.
- Creation of jobs in low value-added activities:
  - The generous tax regime for off-shore companies attracted mostly assembly-type investments generating mostly low-skill jobs.
  - Resulted in low value-added manufacturing and exports, exacerbating the mismatch between high demand for unskilled labor and the large supply of an educated workforce.
- No transfer of technology and know-how from the off-shore sector to the rest of the economy:
  - Heavy regulatory burden in the on-shore sector kept it isolated and subject to cronyism, privileges, and rent extraction.

### Reform efforts and policy priorities undertaken by Tunisian authorities
- Key priorities in revising the investment code (dating back to 1994):
  - Increasing market access.
  - Streamlining the institutional framework governing investment to limit discretion.
  - Simplifying and reducing fiscal and financial incentives for investors.
- Corporate tax and related measures enacted or proposed:
  - Reduced the corporate tax wedge between the on-shore and off-shore sectors from 30 to 15 percent.
  - The standard rate for on-shore activities was reduced from 35 to 25 percent, except for banks and telecoms.
  - Export activities are now subject to a 10 percent rate.
  - A timetable for the full convergence of the offshore and onshore corporate taxes is expected to be part of the global tax reform to be unveiled later this year.
  - Convergence to a single corporate tax rate of 15–20 percent is proposed, which would still keep the rate below regional peers.
  - The re-introduction of dividend taxation in 2014 would help keep the CIT tax rate convergence revenue neutral.

### Analytical implications and objectives
- Goals of convergence and reform:
  - Ensure a more equitable and efficient tax system.
  - Keep Tunisia competitive relative to regional peers while reducing distortions created by dual regimes.
  - Reduce privileged treatment that favored low value-added, assembly-type offshore investment.
- Anticipated outcomes:
  - A single corporate tax rate in the 15–20 percent range aimed at balancing competitiveness with equity.
  - Revenue neutrality of CIT convergence facilitated by restoring dividend taxation.

*International Monetary Fund — Box 2 text as provided in the source content.*

### Box 3. Tax Reform in Morocco

### Box 3. Tax Reform in Morocco

### Background and reform objectives
- A national conference held in April 2013 initiated a broad social dialogue to revamp the tax system to enhance its fairness; participants included public and private sector representatives, members of Parliament, labor and trade unions, academia, and external participants.
- The conference identified three strategic reform areas:
  - widening the tax base,
  - reducing tax expenditures,
  - cultivating the relationship between the tax administration and taxpayers.

### Key characteristics and challenges of the Moroccan tax system
- Tax revenues averaged almost 25 percent of GDP over the past three years, comparable to levels in other EMDCs.
- The tax base is very narrow and embedded tax incentives create relatively high tax expenditures.
- Concentration of tax payments and exemptions/evasion:
  - About 80 percent of corporate taxes are paid by 2 percent of all enterprises operating in the country.
  - More than 70 percent of income tax receipts are paid by wage earners while self-employed and liberal occupations (for example, doctors and lawyers) pay disproportionally low taxes.
  - Sectors such as agriculture were, until 2014, exempted.
- In 2013–14, tax expenditures were 4 percent of GDP.
- The VAT has resulted in a large accumulation of refund credits, creating cash-flow problems for smaller enterprises with limited liquidity.

### National conference recommendations
- Reduce tax expenditures by:
  - evaluating current tax incentives relative to government priorities,
  - widening the income tax base,
  - progressively taxing the agriculture sector.
- Improve the business environment through better tax administration (including streamlining red tape).
- Clear the stock of VAT tax credits and reform the VAT system to:
  - prevent the buildup of credits,
  - simplify the VAT by reducing the number of rates,
  - reduce inappropriate VAT exemptions.

### Implementation in 2014 and 2015 budgets
- The 2014 budget measures:
  - introduced measures to tax large agriculture firms as a first step toward the full taxation of the sector;
  - better enforce the taxation of the self-employed and liberal professions;
  - start reforming the VAT regime.
- The 2015 budget continued in the same direction by introducing new steps to:
  - reduce the number of VAT rates,
  - further improve tax compliance.
- Other measures (noted in the source) include the establishment of a procedure for reimbursement of VAT credits and the elimination of the one-month lag for deduction of the VAT.

*Source: Box 3. Tax Reform in Morocco, FAIR TAXATION (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1516.pdf_