## _wp09215 - conclusion that whether São Tomé and Príncipe becomes an oil producer or not, it is more sustainable for it to rely on non-oil domestic revenue—to finance current expenditures.

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### Fiscal sustainability and the role of non-oil domestic revenue
- Conclusion:
  - Whether São Tomé and Príncipe becomes an oil producer or not, it is more sustainable for it to rely on non-oil domestic revenue—a less volatile and less exhaustible resource—to finance current expenditures.
- Rationale and fiscal outlook:
  - Since 2005 the country received oil bonuses of about $78 million, of which only $12 million are remaining.
  - Oil exploration to date did not confirm commercially extractable reserves; additional drilling expected in late 2009, pushing any prospects for oil production to 2015.
  - If commercially extractable oil reserves are not found, and if additional oil bonuses are not received, the existing balance of the National Oil Account (NOA) may run out by 2014 given annual withdrawals to finance the central government budget.
  - Other sources of revenue—mainly external donor support—are not sufficient to meet increasing spending pressures.
  - For meeting PRSP and MDG social objectives, mobilizing domestic revenues (direct and indirect taxes) is essential to create fiscal space for increased social spending.
- Fiscal management guideline:
  - Aim to finance current expenditures from domestic revenues (adhering to a “Golden Rule” perspective) to preserve oil-related receipts for intergenerational equity and non-recurrent uses.

### Recent domestic revenue performance: key statistics and vulnerabilities
- Domestic revenue and tax composition:
  - Domestic revenue increased from 13.2 percent of GDP in 2001 to 17.7 percent of GDP in 2008.
  - Over 2001–2008, total tax revenue made up on average about 84.8 percent of total domestic revenue.
  - Indirect taxes made up on average about 69.7 percent of total tax revenue (2001–2008).
- Excises, import taxes, and concentration:
  - Excise duties averaged 35.5 percent of total tax revenue and about 5.2 percent of GDP over 2001–2008.
  - In 2008, excise duties on imported petroleum products alone made up almost half of total excise duties, and alone averaged about 11.7 percent of total tax revenue; reaching about 3 percent of GDP.
  - Customs collection increased by about 39.3 percent per year over 2001–08 (mainly reflecting large increases in imports).
  - Collected customs amounted to 25.6 percent of total tax revenue over 2001–2008, reaching 3.7 percent of GDP.
  - Together, excise duties, import duties, and other small indirect taxes make up about 69.7 percent of tax revenue, reaching about 10 percent of GDP.
- Direct and non-tax revenue:
  - Direct taxes (corporate, personal, and other smaller taxes) constituted about 30.3 percent of tax revenue, averaging 4.3 percent of GDP during 2001–08.
  - Recent tax law changes (January 2009): personal income tax changed from a flat rate of 13 percent to a progressive rate of 10–20 percent; corporate income tax changed from a progressive range of 25–45 percent to a single rate of 25 percent.
  - Non-tax revenue averaged about 2.5 percent of GDP over 2001–08; main sources include fishing royalties (from the European Union) and an in-kind oil payment from Nigeria.
- Fiscal gap and expenditure pressures:
  - Over 2001–2008, current expenditures consistently outpaced total domestic revenues by an average of 40 percent, implying an average domestic resource gap on the order of 6.7 percent of GDP.
  - The central government budget is burdened by a large public sector wage bill and rising spending on goods and services (mostly utilities), which together used up about 86.1 percent of total domestic revenue in 2008.
- Revenue responsiveness and administrative capacity:
  - Tax buoyancies have recently been below unity (inelastic), indicating tax revenues respond slowly to changes in income.
  - Tax performance is highly dependent on import taxes and excise duties—particularly on imported petroleum products—adding significant volatility.
  - Tax administration remains very weak, resulting in weak tax enforcement and low tax morale; the taxpayer base is reduced by lack of registration and weak voluntary compliance.
- Comparative perspective:
  - In 2006 São Tomé and Príncipe’s tax revenue (17.2 percent of GDP) is close to the average for Sub-Saharan Africa (17.8 percent of GDP) but lower than the average for island economies (22.2 percent of GDP).
  - Total expenditure in percent of GDP is the second highest in São Tomé and Príncipe compared with a selected group of African countries, while domestic revenue is comparably small.

### Tax potential and empirical findings
- Empirical main findings (cross-section models):
  - São Tomé and Príncipe’s 2007 tax-revenue-to-GDP ratio: 16.3 percent.
  - Model-implied tax potential for São Tomé and Príncipe in 2007: 28.3 percent.
  - Estimated tax-potential range from full model results: 20.4 to 36.4 percent.
  - Interpretation: there is room to improve São Tomé and Príncipe’s tax system; the study is indicative rather than a benchmark because the model does not take into account tax incentives, tariff rates, and tax administration issues.
- Drivers identified by regressions (selected coefficients preserved exactly as reported):
  - Original 38-country model (Table 4): Imports coefficient 0.39981 (Std. Error 0.080654, t-Statistic 4.95729, Prob. 0.0000*); Agriculture coefficient -0.18122 (Std. Error 0.04431, t-Statistic -4.09018, Prob. 0.0002*); PPP per capita growth coefficient 0.01144 (Std. Error 0.01226, t-Statistic 0.93337, Prob. 0.3572). R-squared: 0.56138; Adjusted R-squared: 0.52268.
  - Robustness with dummies (38 observations): Imports coefficient 0.534095 (Std. Error 0.089497, t-Statistic 5.967764, Prob. 0.0000*); Agriculture coefficient -0.141616 (Std. Error 0.045709, t-Statistic -3.098219, Prob. 0.0040*); Dummy - Oil-producing economies coefficient 0.265687 (Std. Error 0.103706, t-Statistic 2.561925, Prob. 0.0153*). R-squared 0.648156.
  - Larger sample (56 observations): Imports coefficient 0.451666 (Std. Error 0.078396, t-Statistic 5.761341, Prob. 0.00000*); Agriculture coefficient -0.218150 (Std. Error 0.041517, t-Statistic -5.254507, Prob. 0.00000*); PPP per capita, change coefficient -0.017840 (Std. Error 0.008279, t-Statistic -2.154844, Prob. 0.03600*); Dummy - Island economy coefficient -0.176782 (Std. Error 0.079950, t-Statistic -2.211148, Prob. 0.03160*). R-squared 0.692997.
  - Replacing GDP per capita with GNP (56 observations): Imports coefficient 0.442170 (Std. Error 0.083505, t-Statistic 5.295099, Prob. 0.000000*); Agriculture coefficient -0.163297 (Std. Error 0.037101, t-Statistic -4.401366, Prob. 0.000100*); GNP, change coefficient -0.007676 (Std. Error 0.003287, t-Statistic -2.335682, Prob. 0.023600*); Dummy - Oil-producing economies coefficient 0.197492 (Std. Error 0.084179, t-Statistic 2.346097, Prob. 0.023000*). R-squared 0.662974.
- Interpretation:
  - Imports are the most important positive driver of tax revenue in the sample, while larger agriculture shares reduce tax revenue; change in per capita income is not robustly significant across specifications.
  - Being an oil-producing economy was positive and significant in some specifications; being an island economy was negative and significant in some specifications.
  - São Tomé and Príncipe’s tax potential varies across model specifications from 20.4 to 36.4 percent of GDP.

### Tax system structure, rates, and administrative constraints (selected exact rates and facts)
- Doing Business (2009) indicators and rankings:
  - Ease of Paying Taxes ranking (2009 Doing Business): 151 out of 181.
  - Payments (number): 42; Time (hours): 424; Profit tax (%): 35.5; Labor tax and contributions (%): 6.8; Other taxes (%): 4.9; Total tax rate (% profit): 47.2.
  - Tax Payments ranking: 134; Time to Comply ranking: 152; Total Tax Rate ranking: 114.
- Major statutory tax rates and features (selected exact items preserved):
  - Personal Income Tax (IRS): Old Law flat rate of 13%; New Law personal income tax rates to range between zero (threshold of exemption) and 20 percent; specified deductions (percentages and amounts) preserved in law text.
  - Corporate Tax (IRC): New Law general rate of 25%; rate of 20% for income withheld at source for specified categories; Old Law flat rate of 30% plus additional 15% surtax above thresholds.
  - Excise Tax selected rates: Petroleum products = 15% (Gasoline), 60% (Gas oil and diesel oil), 130% (petroleum). Services = 5%. Alcoholic drinks = 25–130% (domestic beer = 60%, imported beer = 120%, champagne = 100%, whisky = 120%). Tobacco = 55 - 250%. All domestically produced goods = 20%.
  - Import Duties: Basic import duty rates: 5% on basic goods; 20% on luxury goods; 10% on all other goods.
  - Surtaxes for petroleum and other goods preserved exactly as reported (e.g., Gasoline 144% surtax; Jet fuel 317% surtax; Diesel 57.9% surtax).
  - Motor vehicle tax renewal rates and specified dobra amounts preserved exactly (e.g., 50–500 cc = 500 dobra if less than 6 years old, and 1,000 dobra if more; etc.).
  - Other fees and taxes preserved (e.g., Lighthouse User Fee: 150 to 650 dobra per ship; Harbor Tax: 1% of c.i.f. value plus additional tax of 30%; Inheritance and Gift Tax exemptions and rates; Real estate transfer tax = 10%; Stamp tax examples and amounts preserved).
- Administrative capacity constraints:
  - Tax directorate operations largely manual; limited audit capacity (average of 15–20 cases audited per year historically).
  - Stock of tax arrears by September 2008: about 132 billion dobra (equivalent to 35 percent of tax revenue in 2008 and 5.1 percent of GDP).
  - MCC-assisted enforced collection plan has begun collection of at least 50 cases (none large taxpayers).
  - Customs inspection and clearance hampered by lack of equipment, transport, imaging; ports access limitations; obsolete ASYCUDA (1994) software in use; MCC initial procurement for a new ASYCUDA system underway.

### Policy recommendations and sequencing (priority measures)
- Immediate and priority actions:
  - Strengthen the tax administration to improve enforcement and expand the taxpayer register.
  - Fully implement the new direct tax reforms (personal and corporate income tax changes enacted January 2009).
  - Reduce exemptions and streamline existing indirect taxes.
- Medium-term tax policy actions:
  - Reform the tax system to broaden the domestic tax base (including direct and indirect taxes) while simplifying compliance.
  - Improve tax administration capacity before introducing new indirect taxes; once administration is more effective, the introduction of new indirect taxes could help mobilize additional domestic revenues.
  - Pursue measures that make domestic revenue sources less volatile and less dependent on exhaustible resources (i.e., shift reliance away from oil bonuses and oil-related excises toward sustainable domestic revenue).
  - Confine excise taxes to traditional goods (tobacco, alcohol, petroleum products, and a limited number of luxury goods); link excise design to externalities; unify tax rates for domestic and imported goods; increase excise tax on services from 5 percent to 10 percent phased over three years; consider replacing some excises with a sales tax and, eventually, a GST or VAT as administration improves.
- Fiscal and structural strategy:
  - Tax reforms should be part of a comprehensive policy to achieve fiscal consolidation, preserve macroeconomic stability, and develop the productive base.
  - Combine revenue and expenditure measures, including tax administration improvements and public expenditure management, and expenditure restraint to ensure sustainable use of domestic resources.
  - Structural reforms: improve infrastructure (roads, ports, utilities), legislative reforms to reduce administrative burden, labor market reforms, and diversify productive base (develop tourism).
- Design of arrears and amnesty policies:
  - Avoid broad full tax amnesty; favor measures aligned with international best practices such as limited deferrals and conditional arrangements tied to administrative reforms.
- External support and technical assistance:
  - Continue and deepen cooperation with IMF, World Bank, MCC, Portugal, European Union, and regional/international agreements (EU Economic Partnership Agreement, WTO) for technical assistance, automation, and capacity building.

### Summary of implications and priorities
- São Tomé and Príncipe faces a large realized gap between actual tax revenue (16.3 percent of GDP in 2007) and model-implied potential (20.4 to 36.4 percent of GDP), indicating scope to increase domestic revenue mobilization.
- Key constraints to close the gap: narrow production and export base, heavy reliance on volatile import-related taxes (notably petroleum product excises), limited administrative capacity, numerous exemptions and tax incentives, and outdated tax laws and procedures.
- Priority sequence: modernize and implement new tax laws, strengthen and automate tax/customs administration, reduce exemptions, rationalize excises, eliminate low-yield taxes, pursue expenditure restraint, and implement structural reforms to expand the tax base.
- Maintaining reform momentum is critical for achieving meaningful and sustainable increases in domestic revenues and for financing current expenditures without relying on volatile or exhaustible oil receipts.

*Italic source: _wp09215 - conclusion that whether São Tomé and Príncipe becomes an oil producer or not, it is more sustainable for it to rely on non-oil domestic revenue—to finance current expenditures (IMF staff paper, content provided).*

### conclusion that whether São Tomé and Príncipe becomes an oil producer or not, it is more sustainable

### _wp09215 - conclusion that whether São Tomé and Príncipe becomes an oil producer or not, it is more sustainable for it to rely on non-oil domestic revenue—a less volatile and less exhaustible resource—to finance current expenditures.

### Fiscal sustainability and the role of non-oil domestic revenue
- Conclusion: Whether São Tomé and Príncipe becomes an oil producer or not, it is more sustainable for it to rely on non-oil domestic revenue—a less volatile and less exhaustible resource—to finance current expenditures.
- Rationale:
  - Since 2005 the country received oil bonuses of about $78 million, of which only $12 million are remaining.
  - Oil exploration to date did not confirm commercially extractable reserves; additional drilling expected in late 2009, pushing any prospects for oil production to 2015.
  - If commercially extractable oil reserves are not found, and if additional oil bonuses are not received, the existing balance of the National Oil Account (NOA) may run out by 2014 given annual withdrawals to finance the central government budget.
  - Other sources of revenue—mainly external donor support—are not sufficient to meet increasing spending pressures.
  - For meeting PRSP and MDG social objectives, mobilizing domestic revenues (direct and indirect taxes) is essential to create fiscal space for increased social spending.

### Recent domestic revenue performance: key statistics and vulnerabilities
- Domestic revenue trends:
  - Domestic revenue increased from 13.2 percent of GDP in 2001 to 17.7 percent of GDP in 2008.
  - Over 2001–2008, total tax revenue made up on average about 84.8 percent of total domestic revenue.
  - Indirect taxes made up on average about 69.7 percent of total tax revenue (2001–2008).
- Excises and import taxes:
  - Excise duties averaged 35.5 percent of total tax revenue and about 5.2 percent of GDP over 2001–2008.
  - In 2008, excise duties on imported petroleum products alone made up almost half of total excise duties, and alone averaged about 11.7 percent of total tax revenue; reaching about 3 percent of GDP.
  - Customs collection increased by about 39.3 percent per year over 2001–08 (mainly reflecting large increases in imports).
  - Collected customs amounted to 25.6 percent of total tax revenue over 2001–2008, reaching 3.7 percent of GDP.
  - Together, excise duties, import duties, and other small indirect taxes make up about 69.7 percent of tax revenue, reaching about 10 percent of GDP.
- Direct taxes:
  - Direct taxes (corporate, personal, and other smaller taxes) constituted about 30.3 percent of tax revenue, averaging 4.3 percent of GDP during 2001–08.
  - Recent tax law changes (January 2009): personal income tax changed from a flat rate of 13 percent to a progressive rate of 10–20 percent; corporate income tax changed from a progressive range of 25–45 percent to a single rate of 25 percent.
- Non-tax revenue:
  - Non-tax revenue averaged about 2.5 percent of GDP over 2001–08; main sources include fishing royalties (from the European Union) and an in-kind oil payment from Nigeria.
- Fiscal gap and expenditure pressures:
  - Over 2001–2008, current expenditures consistently outpaced total domestic revenues by an average of 40 percent, implying an average domestic resource gap on the order of 6.7 percent of GDP.
  - The central government budget is burdened by a large public sector wage bill and rising spending on goods and services (mostly utilities), which together used up about 86.1 percent of total domestic revenue in 2008.
- Revenue responsiveness and administrative capacity:
  - Tax buoyancies have recently been below unity (inelastic), indicating tax revenues respond slowly to changes in income.
  - Tax performance is highly dependent on import taxes and excise duties—particularly on imported petroleum products—adding significant volatility.
  - Tax administration remains very weak, resulting in weak tax enforcement and low tax morale; the taxpayer base is reduced by lack of registration and weak voluntary compliance.
- Comparative perspective:
  - In 2006 São Tomé and Príncipe’s tax revenue (17.2 percent of GDP) is close to the average for Sub-Saharan Africa (17.8 percent of GDP) but lower than the average for island economies (22.2 percent of GDP).
  - Total expenditure in percent of GDP is the second highest in São Tomé and Príncipe compared with a selected group of African countries, while domestic revenue is comparably small.

### Tax potential and empirical findings
- The paper finds São Tomé and Príncipe’s domestic tax performance remains below potential because of:
  - Narrow production and export base.
  - Heavy reliance on volatile import-related taxes (notably petroleum product excises).
  - Limited administrative capacity to collect taxes and enforce compliance.
- When tax administration becomes more effective, additional tax policy measures could mobilize more domestic revenue.

### Policy recommendations to mobilize domestic resources
- Immediate and priority actions:
  - Strengthen the tax administration to improve enforcement and expand the taxpayer register.
  - Fully implement the new direct tax reforms (personal and corporate income tax changes enacted January 2009).
  - Reduce exemptions and streamline existing indirect taxes.
- Medium-term tax policy actions:
  - Reform the tax system to broaden the domestic tax base (including direct and indirect taxes) while simplifying compliance.
  - Improve tax administration capacity before introducing new indirect taxes; once administration is more effective, the introduction of new indirect taxes could help mobilize additional domestic revenues.
  - Pursue measures that make domestic revenue sources less volatile and less dependent on exhaustible resources (i.e., shift reliance away from oil bonuses and oil-related excises toward sustainable domestic revenue).
- Fiscal management guideline:
  - Aim to finance current expenditures from domestic revenues (adhering to a “Golden Rule” perspective) to preserve oil-related receipts for intergenerational equity and non-recurrent uses.

*Italic source: _wp09215 - conclusion that whether São Tomé and Príncipe becomes an oil producer or not, it is more sustainable for it to rely on non-oil domestic revenue—to finance current expenditures (IMF staff paper, content provided).*

### 15. In looking at the performance of revenue, several economic characteristics

### _wp09215 - 15. In looking at the performance of revenue, several economic characteristics

### Economic characteristics and tax potential
- Key characteristics affecting tax potential: (i) per capita income; (ii) structure of output (sectoral composition); (iii) integration into the world economy (openness).
- São Tomé and Príncipe’s 2007 tax-revenue-to-GDP ratio: 16.3 percent.
- Model-implied tax potential for São Tomé and Príncipe in 2007: 28.3 percent.
- Estimated tax-potential range from full model results: 20.4 to 36.4 percent.
- Factors contributing to higher potential: larger services sector, higher imports, smaller agriculture sector.
- Factors constraining realized revenue: narrow productive base, weak tax compliance, exemptions, weak tax administration, tax incentives and holidays for large enterprises.

### Comparative findings (selected highlights)
- São Tomé and Príncipe collects less tax revenue than peers despite characteristics that should increase tax revenue.
- Trade liberalization and tariffs:
  - Simple average customs tariff in São Tomé and Príncipe: 11.6 percent.
  - SSA average tariff cited: 12.7 percent.
  - Tariff bands were simplified (three bands down from more than 100); average tariff lowered from 20 percent to 11.7 percent.
- Tax administration and compliance indicators:
  - Ease of Paying Taxes ranking (2009 Doing Business): 151 out of 181.
  - Estimated share of businesses tax registered: only 35–40 percent.
  - Stock of tax arrears by September 2008: about 132 billion dobra (equivalent to 35 percent of tax revenue in 2008 and 5.1 percent of GDP).
- Comparative gap: São Tomé and Príncipe’s gap between actual and potential revenue in 2007 is among the largest in the sample (a shortfall of 12.0 percentage points in Table 5).

### Empirical cross-section model and results (38 countries, 2007)
- Model specification (dependent variable: tax revenue as percent of GDP) uses regressors: PPP per capita growth, agriculture output (% of GDP), imports of goods & services (% of GDP), and services (% of GDP).
- Reported estimated coefficients and statistics (Table 4, included observations: 38):
  - Imports of goods and services (% of GDP): coefficient 0.39981, Std. Error 0.080654, t-Statistic 4.95729, Prob. 0.0000*.
  - Agriculture output (% of GDP): coefficient -0.18122, Std. Error 0.04431, t-Statistic -4.09018, Prob. 0.0002*.
  - PPP per capita, growth: coefficient 0.01144, Std. Error 0.01226, t-Statistic 0.93337, Prob. 0.3572.
  - Constant: 1.77687, Std. Error 0.36185, t-Statistic 4.91049, Prob. 0.0000.
  - R-squared: 0.56138.
  - Adjusted R-squared: 0.52268.
  - S.E. of regression: 0.25560.
  - Prob(F-statistic): 0.00000.
- Interpretation: imports are the most important positive driver of tax revenue in the sample, while larger agriculture shares reduce tax revenue; PPP per capita growth is not statistically significant in this specification.

### Policy reforms enacted and administrative developments
- New tax laws approved late 2008, in force from April 2009:
  - Personal income tax rates to range between zero (threshold of exemption) and 20 percent.
  - Corporate tax rate unified at 25 percent (replacing prior corporate tax rate of 45 percent).
- Legislative and administrative context:
  - Prior tax laws dated from 1898, 1954, 1976, 1993 in various areas; many laws characterized as outdated with cumbersome rules, special exemptions, and limited taxpayer protection.
  - Tax directorate operations largely manual; limited audit capacity (average of 15–20 cases audited per year historically).
  - Code of Tax Processes and Procedures (enacted December 2006, effective August 2007) created a Tax Tribunal; Tribunal not yet established (requires an Organic Law).
- Measures with external support:
  - Millennium Challenge Corporation (MCC) Threshold Program cooperation to improve revenue administration processes and automation: tax registration, returns processing, audit, taxpayer accounting, revenue accounting.
  - Portugal provides extensive technical assistance to improve revenue administration.
  - MCC initial procurement for a new ASYCUDA system; current customs system uses 1994 UNCTAD ASYCUDA with obsolete software.
- Enforcement and arrears management:
  - MCC-assisted enforced collection plan has begun collection of at least 50 cases (none large taxpayers).
  - National Assembly considering a tax pardon law for tax years through 2006; concerns noted that broad amnesty is not good international practice and may produce unfair treatment and negative revenue effects.
- Customs administration constraints:
  - Inspection and enforcement limited by lack of basic equipment and transportation; inability to access some entry points beyond airport and seaport.
  - At the seaport, customs inspectors must wait for a ship to send a boat ashore or use local boats; lack of imaging equipment forces full unpacking of containers.
  - Delay in customs clearance due to weak internal communication and lack of transport/inspection equipment.

### Implications and recommendations going forward (policy priorities drawn from analysis)
- Strengthen tax administration capacity and enforcement:
  - Enhance authority and capacity of the Directorate of Taxes, including increased monitoring of large taxpayers.
  - Establish the Tax Tribunal (implement Organic Law) to operationalize taxpayer appeal and enforced collection mechanisms.
  - Develop and implement a comprehensive fiscal procedures code to create consistent tax administration procedures.
- Improve registration, filing, and audit processes through automation and process reforms:
  - Complete modernization and automation projects supported by MCC and technical partners (tax registration, returns processing, audit, taxpayer accounting, revenue accounting).
  - Replace outdated ASYCUDA system and procure necessary customs inspection and transport equipment to reduce clearance delays and smuggling controls.
- Design amnesty and arrears policies carefully:
  - Avoid broad full tax amnesty that may undermine compliance and produce unfair treatment; favor measures aligned with international best practices such as limited deferrals and conditional arrangements tied to administrative reforms.
- Address narrow productive base and tax incentives:
  - Review and rationalize tax incentives and holidays for large enterprises to broaden the tax base.
  - Consider policies to diversify the productive base to increase domestic tax capacity over time.
- Monitor tariff policy trade-offs:
  - Recognize that trade liberalization (simple average tariff 11.6 percent / 11.7 percent) contributes to openness but can reduce import-tax-derived revenues; balance tariff policy with domestic revenue needs and broader trade objectives.

*Source: IMF and World Bank databases; content from the provided IMF chapter excerpt.*

### 27.  Given the challenges facing São Tomé and Príncipe, including uncertain oil

### _wp09215 - 27.  Given the challenges facing São Tomé and Príncipe, including uncertain oil

### Background and context
- New drilling for oil expected in late 2009, pushing prospects for possible oil production, if commercially viable amounts are found, beyond 2014.
- Public expenditures (particularly current spending) have been increasing since 2004 by an average of 30 percent per year, in anticipation of oil revenues.
- Developmental needs are large in infrastructure, health, education, and poverty reduction.
- The PRSP objective: boost government revenue and improve the environment for private enterprise to help achieve “fiscal discipline and reduce the threat of inflation resulting from the scarcity of financial resources”. Authorities committed in the PRSP to increasing revenue by simplifying the tax system and limiting exemptions.

### Tax structure, constraints, and risks
- Building a solid non-oil revenue base is essential whether or not São Tomé and Príncipe becomes an oil producer.
- Domestic revenue base remains thin relative to increasing expenditure needs and revenue potential.
- High dependence on trade taxes: custom tariffs and excise duties, including on imported petroleum products.
- Dependence on trade taxes increases vulnerability due to high volatility and uncertainty in international oil prices.
- Current indirect tax system has not realized its potential because:
  - More sophisticated taxes (e.g., VAT) require a more sophisticated and efficient tax administration, which the country still does not have.
  - Indirect taxes are generally regressive and can increase inequity given the higher marginal propensity to consume of low income groups.
- Direct taxes tend to grow with income, enhance revenue buoyancy, and can be more dependable.

### Recommended tax reforms and sequencing (priority measures)
- Swift implementation of the new tax laws aimed at modernizing the tax system, broadening the tax base, and reducing distortions to increase tax revenue over time, mostly through efficiency gains.
- Strengthened tax and customs administration:
  - Initial focus on increasing administrative capacity, including enforcement of tax collection.
  - Over time, move toward voluntary compliance, self assessment, and audits.
- Reduction of tax exemptions:
  - Reduce direct and indirect tax exemptions to special sectors to expand the tax net, raise tax revenue, improve neutrality, and increase economic efficiency.
- Change the structure of excise taxes:
  - Confine excise taxes to traditional goods: tobacco, alcohol, petroleum products, and a limited number of luxury goods.
  - Link excise design to associated externalities (social and environmental costs) — higher taxes on products with more inelastic demand and higher negative externalities.
  - Unify tax rate for domestically produced and imported goods to remove implicit tariff protection.
  - Increase excise tax on services from its current rate of 5 percent to a rate of 10 percent (on the low-side for cost recovery). This reform can be implemented gradually over the next three years and can pave the way for future introduction of additional indirect taxes, such as a sales tax.
- Over time, introduce a sales tax to replace excise tax on a number of products (e.g., mineral water, soft drinks, olive oil, small cars) and consider introducing a GST or VAT as tax administration improves.
- Eliminate a number of other small taxes (cumbersome and universal stamp duties and other small taxes) that yield little revenue, are expensive to administer, cause inconvenience, and encourage evasion.

### Fiscal strategy and structural measures
- Tax reforms should be part of a comprehensive policy to achieve fiscal consolidation, preserve macroeconomic stability, and develop the productive base.
- A comprehensive fiscal strategy should combine revenue and expenditure measures, including tax administration improvements and public expenditure management, and expenditure restraint to ensure sustainable use of domestic resources.
- Structural reforms to support revenue efforts:
  - Improve infrastructure and lay the basis for private sector development to expand the revenue base sustainably over the long run.
  - Legislative reforms to reduce administrative burden on businesses and labor market reforms to increase flexibility.
  - Significantly improve basic infrastructure: roads, ports, utility provision.
  - Develop the tourism sector as promising for growth and revenue.

### External support and integration
- Development partners providing support:
  - IMF and World Bank: technical assistance and policy advice.
  - Millennium Challenge Corporation: threshold program support.
  - European Union: project support and technical advice.
  - Cooperation through the EU’s Economic Partnership Agreement and WTO membership can support development through improved governance, social development, capacity building, integration, and market access.

### Empirical analysis and tax potential
- Cross-country empirical model (38 countries, 2007) used to estimate tax potential:
  - Equation form: Tax_it = α + β pcGDP_it + δ agri_it + γ imp_it + ν_it
  - Estimated regression (coefficients exactly as reported):
    - Tax_it = 1.77687 + 0.011444 pcGDP_it - 0.181222 agri_it + 0.399805 imp_it
    - Standard errors (in parentheses in source): (0.36185), (0.012261), (0.044307), (0.080654)
  - Regression statistics:
    - R-squared 0.561381
    - Adjusted R-squared 0.522679
    - S.E. of regression 0.255601
    - Prob(F-statistic) 0.000003
  - Statistical significance at the 5 percent level for:
    - Imports of goods and services (% of GDP): coefficient 0.399805, t-statistic 4.957292, Prob. 0.0000 *
    - Agriculture output (% of GDP): coefficient -0.181222, t-statistic -4.090180, Prob. 0.0002 *
    - PPP per capita change not statistically significant: coefficient 0.011444, t-statistic 0.933365, Prob. 0.3572
- Key empirical finding for São Tomé and Príncipe (2007):
  - Actual tax-revenue-to-GDP ratio: 16.3 percent
  - Tax revenue potential implied by model: 28.3 percent
  - Gap (Actual Tax minus Potential): -12.0 (percent of GDP)
- Cross-section results indicate openness (imports) and economic structure (agriculture share) significantly affect tax potential at the 5 percent confidence interval; change in per capita income does not significantly contribute.

### Summary of substantive findings and priorities
- São Tomé and Príncipe is highly open and depends on imports, resulting in high but volatile indirect tax revenue and a narrow production and export base.
- Tax performance compares unfavorably with neighboring countries and other island economies due to capacity constraints and narrow tax base.
- Revenue collection is inefficient: tax efficiency relatively low; tax arrears significant; tax system outdated and complex, harming tax morale.
- There is room to improve tax revenue substantially—empirical analysis suggests potential to raise tax revenue from 16.3 percent to 28.3 percent of GDP if average collection effort is achieved.
- Priority actions: implement tax law reforms, strengthen tax/customs administration, reduce exemptions, rationalize excises, phase in sales tax/VAT as capacity improves, eliminate low-yield small taxes, pursue expenditure restraint, and implement structural reforms to expand the productive base.
- Maintaining reform momentum is critical for achieving meaningful and sustainable results.

*Source: IMF working paper section provided in the supplied content.*

### 4. The model was also tested for robustness as follows:

### _wp09215 - 4. The model was also tested for robustness as follows:

### Adding dummies (island economies and oil-producing countries)
- Key finding summary:
  - Imports and agriculture value added remain significant determinants of tax revenues.
  - Imports have a larger impact on tax revenue potential.
  - Change in GDP per capita does not have a significant effect on tax revenues.
  - Being an oil-producing economy positively affects potential tax revenue.
  - Being an island economy does not have a significant effect on tax potential.
  - São Tomé and Príncipe’s tax potential rises to 36.4 percent from 28.3 percent, mostly due to the increasing importance of imports.

- Estimation details (Dependent Variable: Tax revenue in percent of GDP; Included observations: 38):
  - Imports of goods and services (% of GDP): Coefficient 0.534095, Std. Error 0.089497, t-Statistic 5.967764, Prob. 0.0000 *
  - Agriculture output (% of GDP): Coefficient -0.141616, Std. Error 0.045709, t-Statistic -3.098219, Prob. 0.0040 *
  - PPP per capita, change: Coefficient 0.003911, Std. Error 0.011719, t-Statistic 0.333700, Prob. 0.7408
  - Dummy - Island economy: Coefficient -0.111720, Std. Error 0.091860, t-Statistic -1.216202, Prob. 0.2328
  - Dummy - Oil-producing economies: Coefficient 0.265687, Std. Error 0.103706, t-Statistic 2.561925, Prob. 0.0153 *
  - Constant: Coefficient 1.191580, Std. Error 0.395252, t-Statistic 3.014736, Prob. 0.0050
  - R-squared 0.648156
  - Adjusted R-squared 0.593180
  - S.E. of regression 0.235971
  - Prob(F-statistic) 0.000002
  - * denotes statistical significance at the 5 percent level.

### Using a larger sample set (38 → 56 countries)
- Key finding summary:
  - Imports and agriculture value added remain significant determinants of tax revenues.
  - Change in GDP per capita becomes a significant determinant of tax potential and changes sign to negative (an increase in income results in lower taxes).
  - Role of dummy variables changes: being an island economy significantly and negatively affects tax potential, while being an oil economy does not.
  - São Tomé and Príncipe’s tax potential falls to 20.4 percent, mostly due to the negative impact of per capita income.

- Estimation details (Dependent Variable: Tax revenue in percent of GDP; Method: Least Squares; Included observations: 56):
  - Imports of goods and services (% of GDP): Coefficient 0.451666, Std. Error 0.078396, t-Statistic 5.761341, Prob. 0.00000 *
  - Agriculture output (% of GDP): Coefficient -0.218150, Std. Error 0.041517, t-Statistic -5.254507, Prob. 0.00000 *
  - PPP per capita, change: Coefficient -0.017840, Std. Error 0.008279, t-Statistic -2.154844, Prob. 0.03600 *
  - Dummy - Island economy: Coefficient -0.176782, Std. Error 0.079950, t-Statistic -2.211148, Prob. 0.03160 *
  - Dummy - Oil-producing economies: Coefficient 0.073523, Std. Error 0.091622, t-Statistic 0.802458, Prob. 0.42610
  - Constant (C): Coefficient 1.909136, Std. Error 0.381087, t-Statistic 5.009706, Prob. 0.00000
  - R-squared 0.692997
  - Adjusted R-squared 0.662297
  - S.E. of regression 0.220880
  - Prob (F-statistic) 0.000000
  - * denotes statistical significance at the 5 percent level.

### Replacing GDP per capita with GNP (wider income concept)
- Key finding summary:
  - Results do not change significantly when using GNP instead of per capita GDP.
  - Imports and agriculture value added remain significant determinants of tax revenues.
  - Change in income (GNP, change) is a significant determinant of tax potential with a negative sign (an increase in income results in lower taxes).
  - Both dummy variables become significant (island economy at 10 percent level; oil-producing economy at 5 percent level).
  - São Tomé and Príncipe’s tax potential increases to 26.6 percent, due to smaller negative effects of agriculture.

- Estimation details (Dependent Variable: Tax revenue in percent of GDP; Method: Least Squares; Included observations: 56):
  - Imports of goods and services (% of GDP): Coefficient 0.442170, Std. Error 0.083505, t-Statistic 5.295099, Prob. 0.000000 *
  - Agriculture output (% of GDP): Coefficient -0.163297, Std. Error 0.037101, t-Statistic -4.401366, Prob. 0.000100 *
  - GNP, change: Coefficient -0.007676, Std. Error 0.003287, t-Statistic -2.335682, Prob. 0.023600 *
  - Dummy - Island economy: Coefficient -0.148345, Std. Error 0.083664, t-Statistic -1.773106, Prob. 0.082300 **
  - Dummy - Oil-producing economies: Coefficient 0.197492, Std. Error 0.084179, t-Statistic 2.346097, Prob. 0.023000 *
  - Constant (C): Coefficient 1.797949, Std. Error 0.367158, t-Statistic 4.896940, Prob. 0.000000
  - R-squared 0.662974
  - Adjusted R-squared 0.629271
  - S.E. of regression 0.233967
  - Prob (F-statistic) 0.000000
  - * denotes statistical significance at the 5 percent level.
  - ** denotes statistical significance at the 10 percent level.

*Source: _wp09215 - 4. The model was also tested for robustness as follows:*

### 5. Overall, empirical results from all the models used above support the view that

### 5. Overall, empirical results from all the models used above support the view that

### Main empirical finding on tax potential
- Actual Tax Revenue, 2007: 16.3 percent of GDP.
- Estimated tax-revenue potential: lies in the range of 20.4 to 36.4 percent of GDP (Table I.5).
- Interpretation: there is room for improving São Tomé and Príncipe’s tax system; the study is indicative rather than a benchmark because the model does not take into account tax incentives, tariff rates, and tax administration issues.

### Key fiscal and tax-system statistics reported
- Actual Tax Revenue, 2007: 16.3 percent of GDP.
- Tax-potential range: 20.4 to 36.4 percent of GDP.
- (Table I.5 note: results derive from the Original Model + Dummy Variables across country samples of 38 countries and 56 countries using GNP.)

### Ease of paying taxes indicators (World Bank/IFC Doing Business, 2009)
- Indicator comparisons (São Tomé and Principe vs Sub-Saharan Africa averages):
  - Payments (number): 42 vs 37.8
  - Time (hours): 424 vs 311.7
  - Profit tax (%): 35.5 vs 21.5
  - Labor tax and contributions (%): 6.8 vs 13.2
  - Other taxes (%): 4.9 vs 32
  - Total tax rate (% profit): 47.2 vs 66.7
- Ease of Paying Taxes, 2009 country rankings (selected row for São Tomé and Príncipe):
  - Overall ranking: 151
  - Tax Payments ranking: 134
  - Time to Comply ranking: 152
  - Total Tax Rate ranking: 114

### Major features of the tax system (selected substantive elements and rates preserved exactly as reported)
- Personal Income Tax (IRS)
  - New Law: Levied on all income for residents and nonresidents from A. employment and pensions, B. business and professional income, C. capital income, and D. asset increases. Deductions: Personal and family deductions: 20% of annual minimum wage for each taxpayer; 25% of annual minimum wage for each taxpayer with one (non-tax liable) dependent, 30% with two, and 35% with three or more. Deductions increase to 50% for persons/families with disabilities. Health expenses: 30% of all health-related expenses; Education expenses: 30% of all education/training-related expenses. 30% of real property-related expenses not exceeding 15 million dobra. Employee social security contributions, 50% of aggregate pension income, union dues, and international double taxation. Payment and filing timing described.
  - Old Law: Levied on all resident and non-resident domestically earned income. Deductions and exemptions include earned annual income up to 480,000 dobra after 5,000 dobra monthly deductible; salary supplements up to 10% of fixed monthly salary; exemptions for clergy, diplomatic personnel, etc. Rates (old law): Flat rate of 13%. Other rates detailed for brackets and withholding (e.g., 15 million dobra = 0 %; 15 – 60 million dobra = 10% with 1.17 million deductible; 60 – 180 million dobra = 13% with 2.5 million deductible; 180 – 300 million dobra = 18% with 7.5 million deductible; Above 300 million dobra = 20% with 12 million deductible; withholding rates for income A: 15 – 60 million = 8%; 60 – 180 million = 11%; 180 – 300 million = 16%. 15% flat tax on other gross income not specified.)
- Corporate Tax (IRC)
  - New Law (Law 16/08): Levied on commercial companies or noncommercial partnerships. Self assessments due by August 31. Advanced payments of 25% made in June, September, and December.
  - Rates (new law): A general rate of 25%. A rate of 20% for income withheld at source for specified categories (intellectual property rights, certain capital investments, remuneration from statutory bodies, lottery/betting/gaming prizes, income from work/services for a client in the territory).
  - Old Law: For commercial, industrial, service, and agricultural businesses: A flat rate of 30% on taxable profits, plus an additional 15% on taxable profits in excess of 12 million dobra. For independent professionals: five-bracket schedule from 5 to 30% applies to taxable profits of 60,000 to 3 million dobra; A flat rate of 30% on taxable profits above 3 million dobra, plus a 15% surcharge on the portion of taxable profits in excess of 3 million dobra.
  - Exemptions and deductions: 50% of earnings of exclusive agricultural activity after loss deductions; special exemptions under the investment code; specified deductions for travel grants, vehicle use, representation expenses, international double taxation.
- Excise Tax
  - Nature: Payable by producer and levied on provision of services and value of domestically produced goods; payable by importers on c.i.f. value of imports. Monthly filing by the 10th day; payment by last business day of the month.
  - Exemptions: Locally produced goods exported directly; raw materials for processing; imported/domestic packaging for export; certain alcohol uses; goods imported by international organizations and embassies (reciprocity); crafts; duty-free imports.
  - Rates (selected): Petroleum products = 15% (Gasoline), 60% (Gas oil and diesel oil), 130% (petroleum). Motor vehicles = 15–50% based on value. Alcoholic drinks = 25–130% (e.g. domestic beer = 60%, imported beer = 120%, champagne = 100%, whisky = 120%, etc.). Tobacco = 55 - 250%. All domestically produced goods = 20%. Services = 5%.
- Import Duties and Surtaxes
  - Basic import duty rates: 5% on basic goods (including raw materials or inputs); 20% on luxury goods; 10% on all other goods.
  - Surtaxes in addition to import duty: Petroleum products — Gasoline 144% surtax; Kerosene 4.4% surtax; Jet fuel 317% surtax; Diesel 57.9% surtax. Alcoholic beverages — Beer 41% surtax; Wine 25% surtax; Spirits 55% surtax. Cigarettes = 55% surtax, in addition to 20% import duty. Vehicles = 0 to 20% surtax depending on age, in addition to 10 to 20% import duty.
- Motor vehicle tax (annual renewal rates by engine size and age)
  - 50–500 cc = 500 dobra if less than 6 years old, and 1,000 dobra if more;
  - 501–1,300 cc = 2,500 dobra if less than 6 years old and 4,000 dobra if more;
  - 1,301–1,900 cc = 4,000 dobra if less than 6 years old and 6,000 dobra if more;
  - over 1,900 cc = 6,000 dobra if less than 6 years old;
  - recreational boats up to 25 hp = 500 dobra if up to 6 years old, 1,000 dobra between 6-10 years; and 10,000 dobra if more than 10 years;
  - over 25 hp, for each 10 hp or fraction = additional tariffs of 500 dobra for boats up to 6 years old and 1,000 dobra if more.
- Other notable taxes, fees, and rates
  - Lighthouse User Fee: 150 to 650 dobra per ship.
  - Harbor Tax: for materiel procured from ENAPORT, tax of 1% of the c.i.f. value applies, plus an additional tax of 30%.
  - Inheritance and Gift Tax: exemptions for inheritances/gifts of less than 5,000 dobra; rates 7 to 25% based on value and kinship.
  - Real estate transfer tax: Rural and urban property = 10%. Barter deeds = 5%.
  - Stamp tax examples: Stamped forms = 500 dobra; Revenue stamps = 1,500 dobra; Check stamps = 3 dobra for local payments and 15 dobra for payments abroad.
  - Service Stamp Tax (customs clearance and receipts): 2 to 10 dobra for values below 10,000 dobra; an ad valorem rate of 0.15% for values above 10,000 dobra. Certificates = 100,000 dobra. Licenses for 25 identified activities = 100,000 to 500,000 dobra.
  - Special tax (Law 22/93) surtax: 20% on total amount of specified taxes/fees.
  - Military tax: 750 dobra or 1,000 dobra depending on income level.
  - Justice tax: 10%.

### Analytical caveats and implications for policy
- Caveat: The estimated tax-potential range does not account for tax incentives, tariff rates, and tax administration shortcomings; therefore estimates should be considered indicative of the room to increase domestic resources rather than an optimal benchmark.
- Implication: The gap between actual tax revenue (16.3 percent of GDP) and estimated potential (20.4 to 36.4 percent of GDP) suggests scope for reforms to increase domestic revenue mobilization, including:
  - improving tax administration and compliance (implicit in model caveat and Doing Business indicators showing high number of payments and long compliance time);
  - reassessing tax incentives and tariff structures that were not captured in the model;
  - simplifying payment and filing processes (Doing Business indicators: Payments number = 42; Time = 424 hours);
  - evaluating specific tax rates and exemptions for revenue and equity trade-offs (numerous rates and exemptions documented across IRS, IRC, excises, import duties, and other levies).

*Source: São Tomé and Príncipe authorities; World Bank Doing Business Report 2009 (data presented in the source document).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09215.pdf_