## _wp09157 ## Source details **Canonical URL:** [_wp09157](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09157.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09157.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09157.pdf.json) --- ### Context and key trends (1980–2005) - Trade in goods (exports plus imports) increased from 49 to 62 percent of regional GDP between 1980–02 and 2003–05. - FDI inflows increased from 1 to about 3.3 percent of GDP over the same interval. - The share of SSA in global trade fell from around 4 to 2 percent. - Dataset and analysis cover 1980–2005 and predate the late-2008 crisis and commodity-price fall; the crisis is noted as likely to intensify pressures on corporate tax revenues and tariff revenues. ### Findings on tax revenues and the role of resources - Simple-average tax ratio (total taxes as a share of GDP) increased since the late 1990s largely because of resource revenues. - Resource-country experience: - Average increase in revenue from natural resources of around 7.7 points of GDP over the period. - On a weighted-average basis (excluding South Africa), resource revenue contribution rose from 11.7 percent of GDP in 1980 to 24 percent in 2005. - Examples cited include increases to 36.6 percent in one case, Gabon from 11 to 20 percent, and Nigeria from 16.8 to 36.8 percent. - Nonresource-related revenues across the full sample: - Almost no change: around 13 percent of GDP at the start of the period to closer to 14 percent 25 years later. - In resource countries: - Nonresource-related revenue essentially stagnant; declined from a peak of 14.7 percent of GDP in 1990 to 12.8 percent in 2005. ### Dataset description and classifications - Revenue data source: IMF Staff reports; sample of 40 SSA countries over 1980–2005 (excludes Democratic Republic of Congo, Liberia, Angola, Eritrea for data constraints). - Key dataset features: - Distinguishes tariffs vs. domestic commodity taxes (VAT and excises on imports classified as domestic sales and excise revenues). - Distinguishes upstream natural resource revenues (royalties and CIT paid by oil and gas and mining companies) from other corporate tax receipts. - Country classifications: - Income groups: low (LIC), lower-middle (LMIC), upper-middle (UMIC) per 2005 World Bank classification. - Resource status: 13 ‘resource’ countries (Botswana, Cameroon, Cape Verde, Chad, Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Guinea, Namibia, Nigeria, South Africa, Togo) and 27 ‘nonresource’ countries. ### Tax revenue composition and category trends - Trade taxes declined from 6 to about 4 percent of GDP (simple averages, 1980–2005). - Indirect taxes increased by broadly the same magnitude as the decline in trade taxes. - Income taxes (mainly personal and nonresource corporate) remained at around 4 percent of GDP. - Social security contributions excluded from income tax revenues due to data issues; other payroll taxes are included in individual income tax revenues. ### Corporate income tax (CIT) — role, incidence, and empirical magnitudes - Theoretical point: small open economies with fixed required after-tax return ideally have a zero source-based tax on marginal return to capital; practical reasons for taxing corporate income in SSA include residence-country taxation, location-specific rents, CIT as back-up to weak personal/capital gains taxation, and administrative practicality (large taxpayer units). - Empirical magnitudes: - CIT accounts for an average of around 17 percent of tax revenue in developing countries (Norregaard and Khan, 2007) versus around 10 percent in OECD countries. - In the paper’s SSA dataset, CIT revenues (excluding resource revenues) account for 8 percent of total revenues and 10 percent of nonresource revenues. - Evidence indicates much of the real burden of the CIT is borne by labor. ### Nature and instruments of corporate tax competition - Two main forms: - Economy-wide low statutory CIT rate (available to all firms): lowers average effective tax rate and reduces incentives for profit shifting. - Selective preferential treatment: tax holidays, investment tax credits, reduced sectoral rates. - Which rate matters: - Statutory tax rate: visible and comparable. - Marginal effective tax rate: affects investment intensity. - Average effective tax rate: influences location decisions; can be expressed as a weighted average of statutory and marginal effective rates. - Preferential investment-related instruments likely more effective than tax holidays: investment allowances, investment tax credits, accelerated depreciation. ### The dangers of tax holidays and evidence on incentives - Tax holidays: time-limited CIT exemptions, often renewable; regarded as ill-designed and prone to abuse. - Principal dangers: - Attract footloose firms with limited wider benefit. - Open to transfer-pricing and financing abuse shifting taxable income. - Interaction with foreign tax credit systems can shift revenues to investor residence countries unless tax sparing applies. - May discourage timely investment if depreciation allowances cannot be carried forward. - Signal administrative weaknesses and potentially encourage corruption or avoidance of tax-administration reform. - OECD experience: CIT statutory rates fell (mid-1980s onward) while CIT revenue generally held up due to base broadening, rising profit share, asymmetric loss treatment, and other factors. - Developing-country evidence: Keen and Simone (2004) find statutory CIT rates and revenues declined in LICs in the 1990s with increased use of incentives. ### SSA-specific CIT trends and statistics (simple averages, 1980, 1990, 2000, 2005) - Low income: - Corporate tax rate (%) 45.3 46.0 37.2 33.8 - Non-resource CIT revenue / GDP (%) 1.3 1.6 1.5 1.4 - Implicit tax base (% of GDP) 3.1 3.7 3.9 4.1 - Lower-middle-income: - Corporate tax rate (%) 39.0 39.2 36.2 31.7 - Non-resource CIT revenue / GDP (%) 1.4 2.8 1.9 2.3 - Implicit tax base (% of GDP) 3.8 4.9 4.6 6.5 - Upper-middle-income: - Corporate tax rate (%) 37.3 39.2 30.0 31.5 - Non-resource CIT revenue / GDP (%) 1.9 2.0 1.0 1.7 - Implicit tax base (% of GDP) 6.0 9.2 8.1 14.8 - Resource countries: - Corporate tax rate (%) 40.0 41.9 35.7 35.4 - Non-resource CIT revenue / GDP (%) 1.6 2.3 1.7 1.7 - Implicit tax base (% of GDP) 4.5 7.0 5.5 9.0 - All SSA countries: - Corporate tax rate (%) 40.4 44.0 36.0 33.2 - Non-resource CIT revenue / GDP (%) 1.4 1.8 1.5 1.5 - Implicit tax base (% of GDP) 4.3 6.0 5.2 8.6 - Aggregate observation (1980–2005): - Average statutory CIT rate fell since 1990 (about 44 to 33 percent), while nonresource CIT revenue remained broadly unchanged due to an increase in the implicit tax base (from 5.1 percent of GDP in 2000 to 8.6 percent in 2005). ### Tax incentives — scope, prevalence, and data limitations - Definition used: preferential treatment; investment allowances included. - Data limitations: systematic, comparable information on CIT breaks in SSA is not readily available; Table 2 (not reproduced here) snapshots incentive types for 1980 and 2005. - Key observations: - Tax incentives more widely provided in 2005 than in 1980 (caveat: ad hoc early-1980s incentives hard to document). - Over two-thirds of countries provide tax holidays in 2005 versus <50 percent in 1980. - Free zone (FZ) laws expanded from 1 country in 1980 to 17 in 2005. - Investment codes (ICs) expanded from 31 percent of countries in 1980 to 74 percent in 2005. - LICs use incentives more extensively and favor tax holidays; MICs favor reduced CIT rates and investment allowances. - Export-related CIT incentives increased, mainly in LICs and resource countries (noting WTO subsidy concerns). ### Trade taxation trends and revenue replacement - Average collected tariff rate in SSA declined from over 20 percent in the early 1980s to less than 13 percent in 2005. - Trade tax revenues fell relative to GDP and as a share of total tax revenue; export taxes have virtually disappeared. - Still significant revenue at stake: over 4 percent of GDP on average for SSA countries—equivalent to about 1/3 of nonresource tax revenues. - Country-group findings (1980–82 to 2003–05): - All middle income countries lost trade revenues except Cape Verde: LMICs lost 2.7 percentage points of GDP; UMICs lost 5.7 points. - LICs: about 1/3 gained trade tax revenue and 2/3 lost; many LICs that lost trade tax revenue still increased total tax ratio. - VAT adoption: - Of 31 sample countries with a VAT in 2005, 27 introduced it after 1990. - VAT accounts on average for over 25 percent of nonresource taxes in SSA; in Benin and Senegal more than 40 percent. - On average the increase in indirect taxes was twice the loss in trade tax revenue; in MICs the gain in indirect tax roughly offset the loss in trade tax revenue. - Caveats: - Tariff-to-VAT replacement logic complicated by imports of intermediate goods, imperfect competition, and large informal sectors. - VAT may favor formality and has distributional considerations; VAT design (number of rates, registration threshold) strongly affects collection costs and compliance. ### Trading blocs, customs unions, and revenue implications - SSA integration and CETs: - CEMAC and WAEMU apply CETs; EAC became a customs union in January 2005; COMESA, SADC and others moving toward CETs or customs unions with varying timelines. - EPAs with EU: short-term revenue impact modest due to backloaded reductions; long-run phasing-in (12–15 years) could be substantial. - In 2005, around 32 percent of SSA imports came from the EU—implying long-term loss of about 1/3 of current tariff revenues (≈10 percent of nonresource revenues) under full liberalization with the EU. - Empirical finding: trade tax revenue declined by 20–30 percent in most groups; in CEMAC declined by more than 70 percent. Reliance on tariff revenue remains strong in COMESA, SADC, WAEMU. ### Policy implications, recommendations, and scenarios - Key policy messages: - Globalization has reduced trade tax receipts and placed pressure on corporate taxation; statutory CIT rates have fallen and incentives proliferated while CIT revenues have broadly held up to date. - Heterogeneous country experiences: resource countries saw strong revenue performance (with resource revenue volatility risk); some nonresource MICs mobilized domestic revenue; LIC experiences mixed. - Institutional imperative: integrate trade-policy decisions with fiscal plans and revenue-replacement strategies; avoid fragmented tax policymaking (e.g., Free Zone administrations acting without rigorous cost-benefit tests). - Revenue administration improvements and strengthened tax design are priorities. - Specific policy options and recommendations: - Scale back proliferation of tax incentives, especially tax holidays and export incentives, while reasonably grandfathering existing commitments. - Base broadening of CIT as a significant unilateral revenue source; could allow statutory rates to be set in the upper 20s without jeopardizing revenue. - Consider modest minimum statutory corporate tax rate (possibly limited to nonresource activities) to limit downward pressure from profit-shifting, though rollback of harmful incentives may be more important than the minimum rate itself. - Prioritize action on tax bases as the core of cooperation (rates alone are insufficient). - Terminate tax holidays and remove direct tax advantages in free zones as natural elements of cooperation. - For trade liberalization revenue replacement, emphasize indirect taxation (VAT) but recognize limits: many VAT rates near practical maxima, VAT design and enforcement constraints, and the need to tax the informal sector and broaden bases. - Use tax-expenditure budgets to disclose revenue foregone from tax incentives and inform public debate. - Cooperation dimensions and institutional issues: - Coordination most effective among countries in direct competition for mobile capital (not necessarily all countries). - Forms of cooperation range from a loose code of conduct to binding treaty commitments; EU experience suggests binding rules may be more effective. - Implementation requires monitoring frameworks and information exchange—difficult but feasible examples exist (CEMAC, WAEMU VAT and excise coordination). - Monitoring and enforcement (proposed features): - Establish a committee to monitor compliance, identify nonconforming tax measures, allow countries to lodge complaints, permit the implicated country to respond, and issue a nonbinding opinion. - Guiding principles for a code/treaty include Freedom to Invest, National Treatment, Nondiscrimination, Repatriation, Expropriation protections, Transparency, rules on investment incentives, commitment on Standard Tax Rate, restrictions on new incentives, rollback of inconsistent incentives with grandfathering, and publication of tax-expenditure budgets. - Scenario considerations: - Remaining potential tariff revenue losses exceed those already realized and will become progressively harder to replace. - VAT rates in many countries already at maxima prescribed by WAEMU and CEMAC directives; further VAT increases may harm compliance and widen informality. - Base broadening and taxation of the informal sector are difficult but likely more suitable long-run revenue sources. ### Data notes and variable definitions (selected) - Revenue data: IMF staff reports; indirect taxes shown by nature rather than point of collection. - Adjustments made for incomplete series: shares of corporate and individual tax revenues held constant at last-available-year levels for specific country-year gaps (listed in source). - Key variable definitions: - Tax revenue: taxes paid to the budget, including natural resource revenues (excludes revenue from non-oil public enterprises). - Resource revenues: upstream oil and mining activities (production sharing, royalties, corporate income tax on resource companies); excludes revenue not paid to the budget. - Corporate tax revenue: income taxes paid by nonresource companies. - Indirect taxes: turnover and other sales taxes, VAT, excises, stamp duties. - Trade tax revenue: import and export taxes and other levies on international trade (e.g., statistical fees). *Source: _wp09157 (IMF staff compilation and analysis based on IMF Staff reports and related materials; sample covers 40 Sub‑Saharan African countries over 1980–2005).* ### 1. CIT Rates and Nonresource CIT Revenues in SSA, by Income Level and Resource ### 1. CIT Rates and Nonresource CIT Revenues in SSA, by Income Level and Resource ### Summary of context and key trends - Between 1980–02 and 2003–05: - trade in goods (exports plus imports) increased from 49 to 62 percent of regional GDP. - inflows of foreign direct investment (FDI) increased from 1 to about 3.3 percent of GDP. - the share of SSA in global trade fell from around 4 to 2 percent over the same period. - Globalization increases international mobility of goods, services, and capital, raising mobility of tax bases and creating downward pressure on tax rates and revenues. - The dataset and much of the analysis cover 1980–2005 and predate the crisis and fall in commodity prices that intensified in late 2008; the crisis is noted as likely to intensify pressures on corporate tax revenues (including from the financial and resource sectors) and on tariff revenues (from reduced trade flows). ### Findings on tax revenues and the role of resources - Simple-average tax ratio (total taxes as a share of GDP) increased since the late 1990s, but this rise is largely attributable to resource revenues. - Resource countries experienced an average increase in revenue from natural resources of around 7.7 points of GDP over the period. - For nonresource-related revenues across the sample: - there has been almost no change over the sample period: from an average of around 13 percent of GDP at the start of the period to closer to 14 percent 25 years later. - In resource countries specifically: - nonresource-related revenue has been essentially stagnant over the full period, and has declined from a peak of 14.7 percent of GDP in 1990 to 12.8 percent in 2005. - On a weighted-average basis (excluding South Africa), the contribution of resource revenue to the budgets of SSA resource countries increased from 11.7 percent of GDP in 1980 to 24 percent in 2005. (Noted country examples with large increases are provided in the source.) ### Dataset description (Box 1: A New Revenue Dataset for Sub‑Saharan Africa) - Source and coverage: - Revenue data taken from IMF Staff reports; sample of 40 SSA countries over the period 1980–2005. - Countries covered correspond to those in the IMF’s SSA Regional Economic Outlook (April 2007), excluding Democratic Republic of Congo, Liberia, Angola, and Eritrea due to data constraints. - Key dataset features relevant to the analysis: - Distinction between tariffs and domestic commodity taxes (ensuring VAT and excises collected on imports are classified as domestic sales and excise revenues rather than international trade tax revenue). - Distinction between revenues from upstream activities in natural resources (mainly royalties and CIT paid by oil and gas, and mining companies) and other corporate tax receipts. - Country classifications used in analysis: - Division into low, lower-middle and upper-middle-income (LIC, LMIC, UMIC) based on 2005 World Bank country classification. - Division into (13) ‘resource’ and (27) ‘nonresource’ countries. The 13 resource countries listed in the source are: Botswana, Cameroon, Cape Verde, Chad, Congo, Côte d’Ivoire, Equatorial Guinea, Gabon, Guinea, Namibia, Nigeria, South Africa, and Togo. ### Fiscal challenges highlighted - Two immediately pressing revenue challenges from globalization are emphasized: 1. Corporate income tax (CIT) pressures: - Whether CIT revenue has, or will, come under significantly increased pressure as countries compete more aggressively to attract investment. - The risk of mutually harmful tax competition—each country cutting taxes to attract investment while ignoring cross-border fiscal externalities. - The potential mutual benefit from limiting such tax competition is raised as a policy question. 2. Trade tax revenue pressures: - Coping with likely reductions in revenue from taxes on trade due to trade liberalization, formation of free trade areas and customs unions, and Economic Partnership Agreements (EPAs) with the EU. - Trade diversion (e.g., imports from countries with relatively low tariffs displacing those from countries with higher tariffs, such as shifts from China to EU members) will reinforce pressures on tariff revenues. - Interaction between the two challenges: - Trade liberalization makes it easier to serve national markets from locations abroad, increasing the likelihood that investment location decisions will be affected by tax considerations—linking trade and corporate tax pressures. - Lessons from other regions (notably the EU and CAFTA) are suggested as potentially instructive for SSA. ### Analysis agenda and policy questions set out by the source - The paper aims to: - Assess the significance of the corporate tax and trade-tax challenges for SSA. - Outline possible responses to these challenges. - Specific policy questions identified (as posed in the source): - Is there a case for some degree of cooperation to avoid mutually damaging tax competition? - How can reductions in trade tax revenue be replaced from other sources? - The paper notes that the first step is describing and understanding current trends using the new dataset; subsequent sections (not included in this excerpt) examine corporate taxation and trade reform, identify trends, discuss issues, and consider policy responses. *Source: IMF staff compilation and analysis based on IMF Staff reports and related materials (sample covers 40 SSA countries over 1980–2005).* ### 36.6 percent), Gabon (from 11 to 20 percent), and Nigeria (from 16.8 to 36.8 percent). ### _wp09157 - 36.6 percent), Gabon (from 11 to 20 percent), and Nigeria (from 16.8 to 36.8 percent). ### Tax revenue trends in SSA (1980–2005) - Data period: 1980–2005. - Averages plotted both as weighted averages (weighted by contemporaneous GDP; 40 countries, of which 13 are resource countries) and simple averages by income group. - Weighted-average effect: - Resource-rich Nigeria: tax ratio increased from about 30 percent in the early 1990s to over 42 percent at the end of the period. - Overall weighted average tax ratio increased more markedly than the simple average, reflecting the greater weight attached to resource-rich Nigeria. - Simple-average trends by income level: - Tax ratios have tended to increase in middle income countries (LMICs and UMICs), consistent with their disproportionate resource richness (half of middle income countries being ‘resource’ countries versus 20 percent of low income countries). - Nonresource-related revenues: - Essentially flat in LICs. - Increased in LMICs. - Noticeably lower in UMICs than they were in the 1980s. ### Composition of tax/GDP and category-specific trends - Figure 4 composition (simple averages, 1980–2005) highlights: - Marked increase in resource revenues. - Trade taxes declined from 6 to about 4 percent of GDP. - Indirect taxes increased by broadly the same magnitude as the decline in trade taxes. - Income taxes (mainly personal and nonresource corporate) remained at around 4 percent of GDP. - Data treatment note: - Social security contributions are excluded from income tax revenues due to incompleteness and unreliability of data. - Other payroll taxes not earmarked, which tend to be insignificant in SSA, are included in individual income tax revenues. ### Policy-relevant challenges identified - For SSA countries without natural resources: - Enhancing revenue mobilization has proved a considerable challenge. - Globalization pressures are likely to intensify these challenges. - For resource-rich SSA countries: - Recent revenue performance has been strong. - Potential fiscal challenges include managing commodity price volatility and the downturn that began in the latter part of 2008. ### Corporate taxation in developing countries and SSA-specific context - Role of the corporate income tax (CIT): - Theoretical result: small open economies facing a fixed required after-tax return should have a zero source-based tax on the marginal return to capital (taxing capital leads to capital flight and the tax burden being borne by less mobile factors, notably labor). - Reasons SSA countries may still tax corporate income: - Residence-country taxation: when residence countries tax worldwide income with foreign tax credits, lowering source-country CIT may merely shift revenue to the investor’s residence country. - Location-specific rents (e.g., natural resources, access to internal markets) can, in principle, be taxed more heavily without driving away investment. - CIT provides a back-up to the personal income tax where capital gains taxation is weak and undistributed corporate earnings might otherwise escape taxation. - Administrative practicality: large corporations concentrate investment, making CIT collection relatively easy; large taxpayer units facilitate collection. - Empirical magnitudes in the paper’s dataset: - CIT revenue accounts for an average of around 17 percent of tax revenue in developing countries (Norregaard and Khan, 2007) compared to around 10 percent in OECD countries. - For the dataset used in this paper, CIT revenues in SSA (excluding resource revenues) account for 8 percent of total revenues, and 10 percent of nonresource revenues. - Evidence on incidence: - There is evidence that much of the real burden of the CIT is borne by labor. ### Nature and instruments of corporate tax competition - Two main forms of tax competition: - Economy-wide low statutory CIT rate available to all firms: - Lowers average effective tax rate. - Reduces incentives for profit shifting via transfer pricing and financial arrangements. - Reduces distortions across types of investment and financing methods. - Selective preferential tax treatment targeted at specific investments or taxpayers: - Tax holidays (including Free Zone laws). - Investment tax credits for particular activities or regions. - Reduced tax rates for particular sectors. - Effects on investment and FDI: - Taxation can influence investment location decisions; evidence is stronger for OECD countries. - Other factors often matter more than taxation: infrastructure, labor quality and cost, governance. - Surveys and business-opinion analyses (e.g., McKinsey (2003), IFC Doing Business indicators) emphasize non-tax factors such as registering and protecting property, trading across borders, enforcing contracts, and accessing labor. - Dharmapala and Hines (2007) highlight that without good governance tax advantages may have little impact on FDI. ### Which tax rate matters (Box 2 summary) - Three tax-rate measures used in assessing tax impact on investment: - The statutory tax rate: - Visible and comparable across countries. - Most relevant for tax planning and profit-shifting incentives. - The marginal effective tax rate: - Combines statutory rate and key features of the CIT base. - Indicates how much the corporate tax increases the pre-tax return an investment must earn to meet the required after-tax return; important for investment intensity decisions. - The average effective tax rate: - Measures present value of taxes on a project relative to present value of pre-tax revenue stream. - Shapes location decisions: projects locate where the average effective rate is lowest. - Can be shown to be a weighted average of the statutory and marginal effective rates (Devereux and Griffith, 2003). ### Observations on preferential tax measures - Investment-related incentives that directly reduce the cost of investing are likely more effective than tax holidays. - Examples of investment-related incentives: - Investment allowances: deductions for investment in addition to depreciation allowances (allowing more than 100 percent of an asset’s value to be written off for tax purposes over its lifetime). - Investment tax credits: a percentage of the cost of the investment that directly reduces CIT liability. - Accelerated depreciation: faster deduction from the CIT base relative to economic depreciation, reducing the after-tax cost of investment. *Source: Author's compilation based on IMF staff reports and other documents (content from _wp09157 PDF).* ### Box 3. The Dangers of Tax Holidays ### Box 3. The Dangers of Tax Holidays ### Nature and mechanisms of tax holidays - Definition: Tax holidays are time-limited exemptions from the CIT, which may or may not be renewable. - They are widely regarded as a particularly ill-designed form of investment incentive, posing considerable dangers to the wider tax system. ### Principal dangers and mechanisms of abuse - Attract the most footloose firms: - Unless offered for periods so long that investors are likely to doubt their credibility, they are most attractive to the most footloose firms, which are those likely to bring the least benefit to the wider economy (such as textile and assembly of light manufacturing goods). - Open to transfer-pricing and financing abuse: - They are open to abuse, undermining tax revenue by providing entrepreneurs with an incentive to use transfer pricing and financial arrangements—by arranging, for example, for taxpaying companies (able to deduct the interest payments) to borrow from holiday companies (not taxable on interest received)—that shift taxable income to where it is not taxed. - Such devices can operate across national borders, and also between domestic firms. - Experience suggests that companies will prove adept in finding ways to avoid even clever legal provisions; even the most developed tax administrations have great difficulty dealing with such abuse. - Weaker tax administrations are likely to do better allocating their scarce capacity to strengthening the basic tax system. - Interaction with foreign tax credit systems: - For foreign investors resident in countries operating a foreign tax credit system, the benefits of the holiday will be undone when profits are repatriated. - All the holiday then achieves (unless a double tax agreement with the residence country provides for tax sparing—which is now rarely the case) is a transfer of tax revenues to the residence country. - Multinationals may have ways of deferring repatriation so this may not be a major consideration in practice. - Timing and depreciation allowance effects: - Unless depreciation allowances can be carried forward out of the holiday period, the incentive to invest towards the end of a holiday may actually be lower than it would be under the regular corporate tax system, as investors defer investment in order to take full advantage of such allowances. - Signaling untrustworthiness and administrative weaknesses: - By offering tax holidays, a government is in effect, to some degree, signaling its own untrustworthiness in tax matters: otherwise a firm that intends to stay beyond the holiday period would find even more attractive the promise of a low, constant rate of tax implying a present value of payments below that implied by the holiday. - Many companies apparently find holidays attractive because they spare them the necessity of dealing with corrupt or inefficient tax administrations. Thus offering a holiday can itself signal a corrupt or inefficient tax administration, and distract from the need to address such underlying problems. ### Evidence on tax competition and CIT revenues (developed vs developing) - OECD experience: - In the OECD, CIT revenue has generally held up despite significant reductions in the statutory rate of CIT since the mid-1980s (Stewart and Webb, 2006, Norregaard and Khan, 2007, and Devereux and Sørensen, 2006). - Explanations cited: - CIT bases have been broadened (example: decrease in depreciation allowances in the EU over the past two decades). - The share of corporate profits in GDP has increased (Ellis and Smith (2007) document a significant increase in profits in most OECD countries since the mid-1980s). - Corporate profits have become more volatile; asymmetric treatment of losses has increased average tax rates and CIT revenues (Auerbach (2007) for the U.S.). - Reduced CIT rates may have had Laffer-type effects, though marginal effective tax rates have generally not fallen greatly (Devereux, Griffith and Klemm, 2002). - Other factors: increase in incorporation as a form of doing business, increases in profitability of certain sectors (financial intermediation and telecommunications). - The relative force of these explanations remains unclear; buoyancy of CIT revenues has not eliminated concerns that they could ultimately decline. - Developing countries: - These issues have attracted almost no attention for developing countries. - Keen and Simone (2004) find that both statutory CIT rates and revenues declined in LICs during the 1990s, with evidence that increased use of tax incentives may have contributed. ### Trends in SSA: CIT rates and nonresource CIT revenues (1980–2005) - Aggregate trends (1980–2005): - Two subperiods: - 1980s: average statutory CIT rate increased slightly; ratio of nonresource CIT to GDP and implicit tax base fluctuated modestly. - Since 1990: average statutory CIT rate has fallen markedly (from about 44 to 33 percent), yet revenue has remained broadly unchanged, reflecting an increase in the implicit tax base (from 5.1 percent of GDP in 2000 to 8.6 percent in 2005). - Interpretation: - Revenue performance of nonresource CIT in SSA over 1980–2005 is less pessimistic than some earlier work focused on the early 1990s to 2000. - Over the full period from 1980 to 2005, nonresource revenues have been constant or increased in all but UMICs, though they are in all cases lower than in 1990. - The revenue impact of reductions in the statutory rate has been substantially cushioned, or even offset, by a broadening of the nonresource CIT base. - Deliberate base-broadening measures in SSA seem modest; the apparent broadening likely reflects an increase in the share of corporate profits in GDP, reasons for which remain unexplored. ### Key statistics by country group (Table 1: simple averages, 1980, 1990, 2000, 2005) - Low income - Corporate tax rate (%) 45.3 46.0 37.2 33.8 - Non-resource CIT revenue / GDP (%) 1.3 1.6 1.5 1.4 - Implicit tax base (% of GDP) 3.1 3.7 3.9 4.1 - Lower-middle-income - Corporate tax rate (%) 39.0 39.2 36.2 31.7 - Non-resource CIT revenue / GDP (%) 1.4 2.8 1.9 2.3 - Implicit tax base (% of GDP) 3.8 4.9 4.6 6.5 - Upper-middle-income - Corporate tax rate (%) 37.3 39.2 30.0 31.5 - Non-resource CIT revenue / GDP (%) 1.9 2.0 1.0 1.7 - Implicit tax base (% of GDP) 6.0 9.2 8.1 14.8 - Resource countries - Corporate tax rate (%) 40.0 41.9 35.7 35.4 - Non-resource CIT revenue / GDP (%) 1.6 2.3 1.7 1.7 - Implicit tax base (% of GDP) 4.5 7.0 5.5 9.0 - All SSA countries - Corporate tax rate (%) 40.4 44.0 36.0 33.2 - Non-resource CIT revenue / GDP (%) 1.4 1.8 1.5 1.5 - Implicit tax base (% of GDP) 4.3 6.0 5.2 8.6 *Source: Box 3, "The Dangers of Tax Holidays", IMF staff compilation based on IMF staff reports and other documents; and International Bureau for Fiscal Documentation.* ### Appendix 2). ### _wp09157 - Appendix 2) ### C. Tax Incentives — scope, definitions, and data limitations - "Tax incentive" usage varies: some define it as any departure from a notional benchmark base; others as departure from a country's established normal practice. - Authors' preference: definition in terms of preferential treatment; for completeness, investment allowances are included in the analysis. - Systematic and comparable information on the extent and nature of CIT breaks in SSA is not readily available. - Table 2 (author's compilation from IMF staff reports and tax guides) provides a snapshot for 1980 and 2005 by income level, listing four incentive types (tax holidays, reduced CIT rates, investment allowances, and CIT breaks for exports) and two laws (investment code (IC) and free zone (FZ)) that provide incentives. ### Key empirical observations from the table and narrative - Tax incentives are much more widely provided in SSA in 2005 than in the early 1980s. Caveat: ad hoc negotiated incentives in the early 1980s (hard to document) are excluded from the table and may mean the increase is overstated. - Over two-third of countries provide tax holidays in 2005; less than 50 percent did so in 1980. - Dramatic increase in free zone (FZ) laws offering special corporate tax treatment: one country in 1980 versus 17 in 2005. - Risks associated with FZs noted: - Potential revenue leakage to CIT, personal income tax, social security contributions, VAT and excise via trade between FZ companies and the taxed economy. - Evidence of FZ companies declaring noticeably higher profit rates than firms outside the zone, consistent with transfer pricing and tax planning concerns. - Political pressure to extend similar tax advantages outside zones through the general tax code or investment codes. - Potential benefits of FZs: - Provide high quality infrastructure and services for export companies and foreign investment. - May ease remission of import duties and refund of VAT for exporters. - Problems occur when FZ status is granted without location in a secured area (example given: Madagascar). - Investment codes (ICs) expanded: 74 percent of SSA countries had an IC in 2005 versus 31 percent in 1980. - IC tax incentives typically include tax holidays, tariff and VAT exemptions. - IC incentives are often conditional on size, location, industry classification, employment and value added creation — conditions easy to meet ex-ante but difficult to monitor ex-post. - Low-income countries use tax incentives more extensively than middle-income countries, and favor tax holidays (example: Senegal introduced Free Zone provisions including a 50-year tax holiday). - Middle-income countries tend to favor reduced CIT rates and investment allowances. - Marked increase in tax incentives for exporters (CIT rate reduction or exemption), mainly in LICs and resource countries. - Such incentives constitute prohibited export subsidies under WTO rules, except for the very poorest countries designated in "Annex VII". - Relationship between CIT rates and FDI (Figure 6): - Overall, there is a clear positive correlation between CIT rate reductions and FDI, but correlation is not causation. - Increase in FDI most noticeable in resource and upper-middle-income countries (including Equatorial Guinea and Gabon). - Decline in average CIT rate in low-income countries (excluding natural resource countries) from about 45 percent in 1980 to 34 percent in 2005. - FDI in those low-income countries increased from less than 1 percent of GDP to about 2.5 percent of GDP — broadly the same as for all nonresource countries. - Summary judgment: tax competition in SSA has largely taken the form of tax holidays. Statutory CIT rates have trended down since 1990 but "are not low by international standards, and remain particularly high in LICs." The paper notes difficulty in detecting net gains from targeted tax holidays aimed at mobile investment while keeping higher rates on immobile investments. ### D. Policy Implications — central challenge and options - Core challenge: stem and reverse proliferation of tax incentives whose effectiveness is unclear — important to avoid distortions and protect revenue amid global trends to lower statutory rates. - Scaling back incentives unilaterally is daunting given ongoing offers elsewhere; however, many countries have successfully scaled back or are in the process of doing so (Box 4). - Coordinated response has appeal to avoid mutually harmful uncoordinated corporate tax design; achieving cooperation raises institutional and substantive issues: - Which countries to include: cooperation most effective when all participate; incomplete participation reduces but does not necessarily eliminate benefits. - Priority: cooperation among countries in the most direct competition for mobile capital — likely those joined in free trade area arrangements. - Form of coordination: loose code of conduct versus binding international treaty commitment. EU experience suggests legally binding rules (e.g., state aid rules) may accomplish more than nonbinding codes. Central America experience also indicates treaty commitments may be needed. - Institutional timing: cooperation in CIT matters may be best established early in the integration process rather than later (lesson from the EU). ### Box 4 — Scaling Back Tax Incentives: selected examples - Egypt: - Mid-2005 new income tax law reduced top marginal tax rates on income and profits from 32 to 20 percent for individuals and from 40 to 20 percent for corporations and partnerships (rates for petroleum, the Suez Canal authority, and the central bank were left at 40 percent). - Reforms increased the exemption threshold, liberalized normal depreciation (equipment and machinery eligible for a 30 percent deduction in the first year of use; normal depreciation rates apply afterwards to the remaining balance), and provided for phasing out tax holidays while grandfathering current beneficiaries. - Reforms accompanied by extensive tax administration reforms, introduction of self-assessment, and reform of tax treatment of small- and medium-size enterprises. - Between 2005 and 2006, FDI into Egypt doubled. - Mauritius: - In the 2006 budget, Mauritius normalized taxation of EPZ (export processing zone companies and others) with non-EPZ sectors, and removed all provisions relating to tax credits and tax holidays (except for a four-year income tax holiday for small business). - At the same time, the corporate tax rate was reduced from 25 to *Source: Author's compilation based on IMF staff reports and other documents; and International Bureau for Fiscal Documentation.* ### 22.5 percent, effective July 1, 2007, and a further reduction to 15 percent, effective July 1, 2008, was introduced ### _wp09157 - 22.5 percent, effective July 1, 2007, and a further reduction to 15 percent, effective July 1, 2008, was introduced ### Tax rate changes and depreciation rules - Corporate income tax changes introduced in 2007: - A rate of 22.5 percent, effective July 1, 2007. - A further reduction to 15 percent, effective July 1, 2008. - The personal income tax rate structure was changed to a single rate of 15 percent. - Depreciation and expensing changes: - Depreciation shifted from straight line to declining balance for all assets, except for non-hotel buildings. - The ceiling for equipment or machinery to be fully expensed in the first year was raised from Rs 10,000 to Rs 30,000. ### International corporate tax reforms noted - China (December 2007 announcement): - Reform of foreign income tax regime to end a five-year break (two years at zero percent, then three at half the standard rate of 33 percent), in favor of a single rate of 25 percent. - Reduced CIT rates (of 15 percent and 24 percent) are to be eliminated in favor of the single 25 percent rate. - Footnote: Under the proposed policy change, current holidays are grandfathered, and the low CIT rates are phased out gradually over 2008–12. - Slovak Republic (adopted in 2004): - Single rate of 19 percent applied to both corporate and personal income. - Reduction from previous corporation tax rate of 25 percent. - Accompanied by more rapid depreciation, more generous carry forward rules, elimination of tax holidays for new enterprises, and tighter rules on provisioning and reserves. ### Coordination of CIT: rates and bases — analysis and options - Key considerations: - Two elements for cooperation: the rate of the CIT and its base. - Minimum statutory rate alone may not prevent harmful competition because effective tax rates depend on both rate and base. - Countries could compete by narrowing their CIT bases to lower average effective tax rates. - Suggested first steps: - Focus on limiting the most damaging CIT incentives, notably tax holidays and export incentives. - Countries might commit to eliminating, prospectively, all CIT incentives to exports and tax holidays available, including in FZ laws and ICs—while grandfathering, so far as is reasonable, tax benefits already granted. - Base broadening would allow statutory rates to be brought closer to international levels (say in upper 20s) without jeopardizing revenues. - Sectoral differentiation and mobility: - Restricting the ability to offer differentially low CIT rates for particular sectors is discussed; potential rationale exists for taxing resource (immobile) activities at a higher rate than nonresource activities. - Practical issues: delineating mobile vs. nonmobile portions of the corporate tax base could be problematic and impose administration and compliance costs; preferential treatment raises profit-shifting risks and political economy concerns. - Offering moderate tax treatment for all, rather than preferential treatment for some, is recommended as a surer guide to policy. - Minimum rate role: - A minimum rate of CIT (perhaps limited to nonresource activities) may limit downward rate pressures from profit-shifting and attempts to reduce effective tax rates on domestic investment. - As a minimum, it would preserve national autonomy to set higher rates. - Ultimately, agreement to scale back questionable forms of incentive may be more important than the minimum rate itself. - Implementation challenges: - Negotiating and implementing such an agreement would be demanding politically and technically. - Requires a monitoring framework and system for exchange of information (on tax rules and changes), which have proven difficult to accomplish effectively in SSA (for instance, in enforcing the common external tariffs and excise directives in WAEMU and CEMAC). ### Guiding principles for a code of conduct or treaty agreement (Box 5) - Freedom to Invest: - All investors, domestic and foreign, can invest in all sectors, subject to investment registration, and with the following exceptions: [A short negative list]. - National Treatment: - Domestic and foreign investors entitled to make investments in participating countries on the same terms. - Nondiscrimination: - No discrimination between foreign investors relative to domestic. - Repatriation: - Each country will permit prompt transfer of funds related to foreign investment—such as profits, dividends, royalties, loan payments and from liquidations—in freely convertible currency. - Expropriation: - Investments will not be expropriated except for a public purpose and on a nondiscriminatory basis; if expropriated, prompt payment of adequate compensation. - Transparency: - Investment incentive systems (laws, regulations, guidelines, administrative procedures) should be transparent and readily available. - Investment incentives (detailed): - Any incentives must be in the law and available to all investors on the same terms and not subject to administrative discretion. - Countries agree not to compete by offering tax holidays or profit tax rates below the standard rate in each country. - Any investment tax incentives provided must be directly related to the amount of investment (such accelerated depreciation, investment allowances, or tax credits) and cannot favor particular economic sectors or activities. - Standard Tax Rate: - Each country commits not to reduce the standard corporate tax rate below [rate]. - New Investment Tax Incentives: - Countries agree not to introduce new investment tax incentives or extend the scope of or increase existing incentives that are inconsistent with the guidelines on investment incentives (paragraph 7). - Rollback of Existing Investment Tax Incentives: - Countries commit to amend existing laws and established practices to eliminate investment tax incentives inconsistent with paragraph 7 by [date]. - Companies that, prior to [date], have been awarded incentives counter to paragraph 7 should be “grandfathered” and continue to enjoy the incentives during the period promised, assuming they continue to meet the conditions. - Tax Expenditure Budget: - Each country will develop and publish a tax expenditure budget that will cover, at a minimum, all tax incentives inconsistent with paragraph 7. *Source: _wp09157* ### 12. Monitoring and Enforcement: A committee will be established to monitor compliance, including ### 12. Monitoring and Enforcement: A committee will be established to monitor compliance, including ### Monitoring and Enforcement - A committee will be established to monitor compliance, including identifying tax measures in each country that are not in accordance with paragraph 7. - Each country would be allowed to lodge a complaint against the practice of another country. - The implicated country should be given a chance to respond. - The committee would issue a nonbinding opinion at the end of the process. ### Trade Liberalization and Revenue Replacement — Principles for Revenue Replacement - Not all measures of trade liberalization necessarily reduce trade tax revenue; for example, tariffication of quotas can reduce trade distortions while at the same time increasing rather than reducing revenue. - Free trade implies zero trade taxes; beyond some point further liberalization will reduce trade tax receipts and raises the question of recovery from domestic taxes. - Conventional wisdom emphasizes consumption taxation for revenue recovery: - For a small economy, cutting a tariff by $1 and increasing the consumption tax by $1 has no effect on consumer prices, eliminates the protective effect of the tariff, and increases government revenue because the consumption tax applies to domestic production as well as imports. - Alternatively, increasing the consumption tax by less than $1 can allow consumers to share in the reform gains. - Important caveats and complications: - Imports of intermediate goods and imperfect competition in product markets complicate the simple result. - A large informal sector in many developing countries undermines the simple replacement argument because not all consumption can be taxed. - The VAT (as opposed to a tax on final retail sales) is fully charged on imports and provides credits/refunds to registered formal sector businesses; for informal operators not registered for VAT the tax is unrecovered and acts like a tariff. - The VAT’s net effect may favor informality because it taxes imported inputs of informal operators while formal sector operators can claim credits; this could increase the size of the informal sector and generate welfare loss if informal operators are relatively inefficient. - Instruments that differentially affect informal operators (such as withholding taxes on imports, creditable by formal operators against income tax liability) can supplement the VAT but raise practical difficulties. - Administrative and compliance cost considerations: - It is widely supposed that tariffs are easier to administer and comply with than a VAT, but there is almost no hard evidence on comparative costs. - VAT collection costs are strongly affected by design features, particularly the number of rates and the registration threshold. - Strengthening VAT administration can benefit wider tax administration through self-assessment methods and information useful for business and personal income tax. - Distributional considerations: - A shift towards the VAT that does not preserve consumer prices unchanged may have distributional consequences. - These consequences may be best handled on the spending side of the budget (infrastructure, education, training) rather than by VAT rate differentiation. - Muñoz and Cho (2004) show distributional effects of introducing the VAT in Ethiopia could be largely neutralized by broad spending measures. ### Trends in Trade Taxation — Key Findings and Statistics - Average collected tariff rate in SSA declined from over 20 percent in the early 1980s to less than 13 percent in 2005. - Trade tax revenues have fallen both relative to GDP and as a share of total tax revenue (with a recent increase reflecting increased share of imports in GDP). - Export taxes have virtually disappeared over this period. - Despite reductions, significant revenue remains at stake: over 4 percent of GDP on average for SSA countries—equivalent to about 1/3 of nonresource tax revenues. - Grouping by income level (averages of trade tax revenues relative to GDP for countries which lost trade revenues between 1980–82 and 2003–05 vs. those who gained): - All middle income countries lost trade revenues except Cape Verde. - Losses: 2.7 percentage points of GDP for LMICs and 5.7 points for UMICs. - Both middle income groups increased their total tax ratio: LMICs relying mainly on indirect taxes, UMICs on natural resource revenue. - LICs: roughly 1/3 gained trade tax revenue and 2/3 lost; even LICs that lost trade tax revenue managed on average to increase their total tax ratio. - Broad empirical consistency with Baunsgaard and Keen (2005) and IMF (2005): revenue recovery has been stronger in SSA than in other regions. ### Trading Blocs: Past and Future — Institutional and Revenue Issues - Forms of trade liberalization in SSA since early 1980s: free trade areas and customs unions. - CEMAC and WAEMU have applied a common external tariff (CET) for some time. - EAC became a customs union in January 2005; Burundi and Rwanda expect to apply the CET in the near future. - COMESA planned to introduce a two-band CET at end of 2008. - SADC formed a free trade area at end of 2008 and intends to form a customs union by 2018. - COMESA and EAC planned similar three-rate CETs; neutrality and trade facilitation hinge on classification of goods, including a long list of “social goods” and whether key imports (such as sugar) are intermediate or final-consumption goods. - EPAs with the EU are a key issue; short-term revenue impact likely modest because rate reductions on high-revenue items are backloaded; longer-run effects with phasing-in over 12–15 years will be substantial as revenues from EU dwindle and displaced imports from outside the EU increase. - In 2005, around 32 percent of SSA imports came from the EU, suggesting that in the long term about 1/3 of current tariff revenues (or about 10 percent of nonresource revenues) would be lost from full trade liberalization with the EU. - Table 4 (Tariff Structure of Existing and Prospective Customs Unions in SSA) reports CET rates by category for COMESA, EAC, CEMAC, WAEMU (as in the source). - Table 5 (Trade Taxes and Collected Tariff Rates by Trading Bloc in SSA) reports: - Trade tax revenue declined by 20–30 percent in all groups; in CEMAC they declined by more than 70 percent. - Reliance on tariff revenue remains strong in COMESA, SADC, and WAEMU. ### Replacing Tariffs by Domestic Indirect Taxes — Evidence and Country Experiences - Standard advice emphasizes indirect taxation (particularly VAT) for recovering revenue losses from trade reform. - Indirect taxes played a significant role in mobilizing revenues in SSA over past 25 years. - Evidence suggests efficiency gains expected of the VAT have not been realized as clearly in SSA as elsewhere (Keen and Lockwood (2009)). - On average, increase in indirect taxes in SSA broadly matched the decline in trade revenues in the 1980s. - Of 31 countries in sample with a VAT in 2005, 27 introduced it after 1990. - The VAT accounts on average for over 25 percent of nonresource taxes in SSA; in some countries (Benin and Senegal) more than 40 percent. - Country-level findings (from Figure 8 analysis): - Indirect tax revenue increased in most countries (exceptions: Côte d’Ivoire, Central African Republic, Tanzania), regardless of whether they lost or gained trade tax revenue. - On average, the increase in indirect taxes was twice the loss in trade tax revenue. - In MICs the gain in indirect tax revenue roughly offset the loss in trade tax revenue (exceptions: Botswana and Equatorial Guinea—both resource countries with substantial increases in other revenues). - For some LICs, loss in trade tax revenue accompanied by reduction in total tax revenue; often these reductions reflected losses from other sources too (e.g., loss in trade tax revenue accounted for 32 percent of the decline in total tax ratio in Togo, 70 percent in Côte d’Ivoire, and 84 percent in Central African Republic). - Most countries that lost trade tax revenue were able to recover the loss and many increased total tax revenue. - For LICs that increased their tax ratio, indirect taxes (VAT and excises) accounted on average for 66 percent of the increase in total tax effort (32 percent for resource LICs, and 92 percent for nonresource LICs). ### Conclusions — Key Findings, Policy Recommendations, and Scenarios - Key findings: - Globalization has had marked effects on tax revenues and tax policy in SSA: significant reductions in receipts from trade taxation; CIT revenue broadly held up but statutory CIT rates reduced and incentives proliferated. - Trade taxes and corporate tax rates remain high by global standards, implying further pressures ahead. - Substantial country heterogeneity: resource countries often responded passively; some nonresource MICs mobilized additional domestic revenue; LIC experiences are mixed. - Number of countries with tax revenue/GDP ratios less than 15 percent fell from 16 to 12 since early 1980s. - Institutional imperatives: - Avoid fragmented decision making; trade policy decisions must consider fiscal implications and be combined with a plan to address them. - Early planning is needed because responses involve significant tax policy changes and strengthening of domestic tax administration. - Free Zone administrations often can propose tax policy changes directly to parliament without rigorous cost-benefit tests; this creates another pole for tax policy-making that needs oversight. - Tax expenditure analysis can inform public debate by setting out revenue foregone from tax incentives. - Policy recommendations and guidelines: - Address revenue consequences of globalization within a medium-term tax policy strategy (including scaling back incentives consistent with macro-fiscal priorities). - Base broadening in CIT is a significant potential revenue source, particularly for LICs; experience shows benefits may be secured unilaterally. - Cross-country cooperation may help prevent proliferation of mutually damaging tax incentives and ideally work toward their progressive elimination while honoring existing commitments. - Consider modest minimum statutory corporate tax rate—statutory corporate tax rates remain relatively high; only five SSA countries had a rate lower than 30 percent in 2005. - Cooperation models exist in SSA (CEMAC and WAEMU coordination of VAT and excise directives that set minimum rates, define broad tax base, list permissible exemptions). - Guidelines for CIT cooperation: - The larger the number of participating countries and the greater capital mobility among them, the larger potential gains from cooperation. - Coordination on rates alone likely achieves little; action on tax bases is core. - Natural elements of cooperation could include termination of tax holidays (with reasonable grandfathering) and removal of direct tax advantages in free zones. - Cooperation is less urgent for upstream natural resource activities because location-specific rents reduce sensitivity to competition. - On trade liberalization and VAT strategy limitations: - Remaining potential revenue losses are generally larger than those already realized and will become progressively harder to recover from other sources. - VAT rates in many countries have reached levels where significant further increases may be problematic for compliance, enforceability and informality; in several countries standard rate is already at the maximum prescribed under WAEMU and CEMAC directives. - Base broadening and taxation of the informal sector—both difficult—are potentially more appropriate revenue generators. - Overall policy priorities: - Continued improvement in revenue administration remains a priority. - Strengthened tax design, potentially supported by enhanced regional cooperation, will be needed to address continuing fiscal challenges from globalization. *Italicized: Source: _wp09157 - 12. Monitoring and Enforcement: A committee will be established to monitor compliance, including (PDF chapter/section).* ### Appendix I. Data Notes and Definitions ### Appendix I. Data Notes and Definitions ### Data notes - Revenue data used in this paper are taken from IMF staff reports. These have the advantage of showing indirect taxes by the nature of the tax rather than by the point of collection. For example, taxes collected at customs administrations are separated between sales taxes (often VAT), excises, import and export taxes, and other levies on trade such as statistical taxes. This level of detail is crucial for the analysis of indirect tax reforms. - Despite their quality, one problem with these data is the consistency of revenue classification over time. Although IMF staff follow closely GFS classification of revenues, it is sometimes difficult to keep consistency over time, particularly where tax systems are reformed and revenue classification changes in the accounting systems of treasury departments. For these and other reasons, some simplifying assumptions had to be made in order to have complete series for most variables used in this paper. The following adjustments, which are not expected to substantially affect the main conclusions, were made: - The shares of corporate and individual tax revenues were not available for the whole period for all countries. It was assumed that these shares remained constant at the level of the last year for which data were available; no adjustments were made for earlier years. Data for the following countries were adjusted in this way: Republic of Congo (1996–2005), Equatorial Guinea (2002), Guinea (2002–05), Mozambique (2005), Nigeria (2005), Rwanda (2004–05), Tanzania (2005), Zambia (2005), and South Africa for resource revenue (2001–05). - Côte d’Ivoire: oil revenues were assumed to be constant, as a percent of total revenue, over 2002–05. - Car registration fees, which are often included in indirect taxes in IMF staff reports, were excluded if reported separately. This should not have any significant impact on results as they tend to be a small share of indirect tax revenue. ### Definition of variables - Tax revenue - Taxes paid to the budget, including natural resource revenues. Tax revenue excludes revenue from non-oil public enterprises. - Resource revenues - Revenues from upstream oil and mining activities. These include income from production sharing, royalties and corporate income tax on resource companies, but exclude revenue not paid to the budget. - Income taxes - Individual and company taxes (excluding resource companies), income taxes on self-employed and other taxes on income that are not allocated to individuals or companies (such as withholding taxes on payments to nonresidents and taxes on capital gains). This category also includes payroll taxes paid to the budget, except social security contributions, which in SSA are generally paid to the agency in charge of managing the spending programs to which such revenues are earmarked (pension and health funds, for instance). - Corporate tax revenue - Income taxes paid by nonresource companies. - Individual tax revenue - Income taxes paid by individuals to the budget. Social security contributions earmarked for specific use are excluded, due to data quality and availability. Other general payroll taxes, which tend to be insignificant in SSA, are included. - Indirect taxes - Turnover and other sales taxes, VAT, excises taxes, and stamp duties. - Trade tax revenue - Import and export taxes and other levies on international trade (such as “statistical fees”, which are prevalent in SSA). ### Appendix II. Countries by Income Level and Resource Status - Low-income countriesLower-middle-countriesUpper-middle-income countries - Beni - nCameroonBotswana - Burkina FasoCape VerdeEquatorial Guinea - BurundiLesothoGabo - n - Central African RepublicNamibiaMauritius - ChadSwazilandSeychelles - ComorosSouth Africa - Congo, Republic o - f - Côte d'Ivoire - Ethiopia - Gambia - Ghana - Guinea - Guinea-Bissau - Kenya - Madagascar - Malawi - Mali - Mozambique - Nige - r - Nigeria - Rwanda - Sâo Tomé and Principe - Senegal - Sierra Leone - Tanzania - Togo - Uganda - Zambia - Zimbabwe - 29 countries5 countries6 countries - Notes: - Countries in shaded grey are classified as resource countries. - Income classification follows the World Bank 2006 country classification according to 2005 incomes (see Data and Research at www.worldbank.org). ### Appendix III. Membership of Trade Groups - All SSA countries Included in the Sample CEMAC WAEMU SADC COMESA EAC ECOWASSACU - Angola No X - Benin Yes X X - Botswana Yes X X - Burkina Faso Yes X X - Burundi Yes X X - Cameroon Yes X - Cape Verde Yes X - Central African Republic Yes X - Chad Yes X - Comoros Yes X - Congo, Democratic Republic of No X X - Congo, Republic of Yes X - Côte d'Ivoire Yes X X - Equatorial Guinea Yes X - Eritrea No X - Ethiopia Yes X - Gabon Yes X - Gambia Yes X - Ghana Yes X - Guinea Yes X - Guinea-Bissau Yes X X - Kenya Yes X X - Lesotho Yes X X - Liberia No X - Madagascar Yes X X - Malawi Yes X X - Mali Yes X X - Mauritius Yes X X - Mozambique Yes X - Namibia Yes X X - Niger Yes X X - Nigeria Yes X - Rwanda Yes X X - Sâo Tomé and Principe Yes - Senegal Yes X X - Seychelles Yes X X - Sierra Leone Yes X - South Africa Yes X - Swaziland Yes X X X - Tanzania Yes X X - Togo Yes X X - Uganda Yes X X - Zambia Yes X X - Zimbabwe Yes X X X *Source: _wp09157 - Appendix I. 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