## _wp9605 ## Source details **Canonical URL:** [_wp9605](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/_wp9605.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/_wp9605.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/_wp9605.pdf.json) --- ### Second-best solution: social planner problem and optimal inflation - Social planner internalises effects of policy actions on inflation expectations; solution termed "second-best" in presence of distortionary taxation. - Objective: - The social planner minimizes the social loss function (equation (1)) through choice of taxation and inflation, subject to the government budget constraint. - Footnotes preserved: - "2/ The social planner minimizes the social loss function (equation (1)) through its choice of taxation and inflation, subject to the government budget constraint." - "2/ See Beetsma and Bovenberg (1995) for more discussion." - Optimal inflation (verbatim): - * sgsx flopt’ sxsx +sgsn +sxsg 1 then Tc > Tp and marginal excess income is untaxed under presumptive regime. - Qualifications: - Efficiency gains fail if the presumptive tax is not lump-sum. - Frequent adjustments of presumed levies erode the zero marginal tax advantage. - Design stability and lump-sum character are crucial to preserve incentive benefits. ### Equity considerations (Section 3) - Horizontal equity: - Presumptive taxation can improve horizontal equity by taxing self-employed and informal small-scale operators who often escape taxation; formal wage earners are better taxed via withholding. - Risk: wage earners "tend to be overtaxed in relation to their self-employed equals (Bird and Oldham 1990)." - Vertical equity: - Targeting self-employed professionals and asset owners via presumptive methods can enhance vertical equity where incomes are underreported. - Methods: presumptive taxation by years of experience, asset ownership (e.g., land), or imputed income taxation. - Administrative expediency: - Weak administrative capacity (insufficient skilled staff, scarce financial resources, lack of equipment) motivates presumptive methods as pragmatic, cost-effective alternatives. - Empirical note: in countries with strong presumptive traditions, "the number of presumptive taxpayers may be ten to twenty times higher than the number of those subject to self-assessment on recorded transactions (Bulutoglu 1995)." ### Presumptive taxation variants and country experiences - Standard assessments (lump-sum by occupation): - Examples: Ghana Standard Assessment Act 1963; Ethiopia applied to "about 150 different businesses and professions since the 1960s"; Burkina Faso "Informal Sector Contribution." - Ghana examples of annual payments (Cedi per annum): doctor q500; moneylenders $400; lawyers &200; carpenters &72; tailors &48. "Thirty-three different occupations and business groupings were covered." - Advantages: simple administration, incentive effects, minimizes corruption opportunities, aids taxpayer identification. - Disadvantages: poor revenue performance when incomes within groups diverge; levies rarely updated; regressivity; Ethiopia example: lump-sum levy on small-scale farmers "generates only 1 percent of total government revenue" despite group constituting "about 85 percent of the population" and agriculture "approximately 50 percent of GDP." - Policy summary: "Standard assessments are administratively attractive but offer 'limited revenue gains and tend to violate a number of economic principles.'" - Estimated assessments (indicator-based or best-judgment): - Two approaches: estimate income then apply regular tax rate; or specify tax liability directly (forfait). - Rajaraman (1995) criteria for indicators: observability/recordability; susceptibility to concealment/falsification; correlation to income and stability. - Common indicators: size of premises, number of employees, machinery, inventory, seating capacity, passenger/cargo capacity; third-party info like electricity or water bills. - Country examples: - Angola: statutory example with turnover threshold Nkz 3.5 million and limits on employees/vehicles. - Niger: forfait if turnover less than CFAF 5 million; forfait fixed for two years; review by commission of three tax officials and three business representatives. - Burkina Faso: forfait threshold CFAF 15 million; mid-1980s: 78 percent of businesses in Ouagadougou assessed under presumptive scheme; outside capital 91 percent (Syracuse University 1986). - Advantages: more refined than standard assessments; can adjust for shocks; can be substantial revenue sources (Israel). - Disadvantages: risk of shifting incidence to inputs; administrative burden and need for sectoral studies; discretion invites corruption. - Presumptive minimum taxes (five forms and examples): - Forms: lump-sum levy; percent on gross receipts; lump-sum plus percent of receipts; greater of lump-sum and percent; highest liability across bases. - Country examples and rates: - Benin minimum tax CFAF 200,000; C6te d'Ivoire CFAF 1 million. - Percent-of-turnover examples: Niger 1 percent; Ghana 5 percent; Central African Republic, Chad, Guinea, Sierra Leone, Togo. - Madagascar: MF 200,000 plus 5 percent of turnover; MF 600,000 plus 5 percent for other sectors. - Nigeria: minimum tax liability is 0.5 percent of gross profits, 0.5 percent of net assets, 0.25 percent of paid-up capital, or 0.25 percent of turnover, whichever is highest. - Risks: can freeze companies at minimum liabilities. - Lesotho introduced "minimum chargeable income" tax in 1993 based on assets and consumption; "recently introduced so no conclusive revenue evidence yet." - Presumptive taxes on imports: - Objective: capture incomes of registered/unregistered importers; for unregistered importers treated as final profit tax; for registered as down payment. - Rates: - Senegal: 1 percent on import value. - Niger: 2 percent on import value. - Benin: 3 percent on import value. - Cote d'Ivoire: 5 percent on import value. - Differentiated-rate example: Comoros 5 percent for unregistered importers; 1 percent for registered importers as advance. - Withholding schemes: - Purpose: capture incomes of unregistered businesses; withholding can be final tax if payer unregistered or creditable if registered. - Examples: - Côte d'Ivoire: 5 percent advance on various taxes withheld by manufacturers/wholesalers; creditable if registered, final if not. - Benin and Senegal: withholding on purchases from wholesalers at 3 percent. - Graduated business license fees: - Indicators: floor space, rental value, number of employees, machinery. - Advantages: cost-effective, administratively simple at local level, can improve vertical equity, leverage licensing contacts for tax compliance. - Examples: - Benin: TPU based on rental value; donor-supported computerization of urban property register. - Comoros: 10 percent of rental value plus flat fee CF 5,000-300,000. - Lesotho compliance gap: 350 of 6,244 licensed traders/service providers (4 percent) had filed returns (Malik 1979). ### Box 2: Asset-based presumptive taxation and related experiences - Latin American asset-based minimum taxes: - Purpose: address underreporting and transfer pricing by multinationals. - Mexico: 2 percent minimum presumptive tax on all corporations introduced in 1988; reported "unqualified revenue success." - Other countries: Argentina, Bolivia, Costa Rica, Ecuador, Panama, Peru, Uruguay, Venezuela. - Typical rate range: "l-3 percent." - Taxes creditable against final tax liability. - Bases: gross assets, gross fixed assets, net assets; timing varies (year-end, year-average). - Applicability to Africa: - Constraints: inadequate records on physical assets; limited financial assets due to underbanking. - Conditional recommendation: "in African countries where tax administration capacity is relatively well advanced, asset-based presumptive taxation ... may be considered as a tax policy option." - Ethiopian import-related presumptive tax: - Implemented at airport customs office in Addis Ababa: registered importers exempt; unregistered importers taxed using customs-estimated business profits. - "revenue from this tax increased threefold over three years." - Country-wide introduction envisaged; appears "comparatively easily collected" source of revenue. ### Coverage, registration, and practical implementation guidance - Coverage example: - "2.2 million self-employed businessmen were covered by the presumptive levy (Malik 1979)." - Registration campaigns: - Identifying and registering small business operators via field censuses and taxpayer identification numbers is crucial but expensive. - Countries with campaigns: Benin, Cote d'Ivoire, Kenya, Senegal, Uganda. - Recommendations and preconditions: - Standard assessments: if used, introduce graduation via sector/occupation matrix tables; update or index for inflation (Ethiopia example: many assessments could be increased by at least 300 percent given changed conditions). - Estimated assessments: restrict to limited high-priority sectors; require detailed, regularly updated sectoral studies; rely on third-party information and inter-agency cross-checking. - Avoid excessive reliance on labor/capital indicators that distort input use or create perverse incentives. - Newer promising methods: presumptive import taxes, withholding schemes, business license fees — they: - Require limited additional administration, - Use existing institutions (customs, registration bureaus), - Target informal sector transaction points, - Prepay liabilities to reduce arrears (CFA countries: arrears estimated > 30 percent of total annual tax receipts). - Prioritize taxpayer registration campaigns where feasible because registration underpins improved tax coverage. ### Presumptive taxation schedules, notable numeric thresholds, and country examples - Selected country-specific figures preserved from source: - Benin: Presumptive minimum tax CFAF 200,000; import presumptive tax 1 percent (imports prepayment for registered firms; final for unregistered). - Burkina Faso: CFAF 100,000 or 0.5 percent of turnover, whichever is greater. - Burundi: 1 percent of turnover, CFAF 600,000 or 1 percent of turnover. - Cameroon: CFAF 300,000 or 1.2 percent of turnover (agriculture); CFAF 1.5 million or 1.2 percent (other companies); 2 percent of turnover for coffee exporters and gold mining. - Cote d'Ivoire: CFAF 1 million minimum tax; 5 percent presumptive tax on imports; 5 percent withholding (Accompte sur Divers Impots). - Equatorial Guinea: CFAF 300,000 (< CFAF 50 million turnover); CFAF 600,000 (CFAF 50-100 million); CFAF 1 million (CFAF 100-500 million); CFAF 2 million (> CFAF 500 million). - Gabon: CFAF 600,000 or 1.1 percent of turnover, or 40 percent of profits, whichever is highest. - Gambia: 2 percent of turnover, or 50 percent of profits. - Ghana: 5 percent of turnover (except companies in first five years); sample standard assessments (Cedi per annum): Carpenter 72; Tailor 48; Doctor 200; Lawyer groups: 500, 1,500, 2,500 (by practice length); Accountant groups: 200, 600, 1,000, 2,000 (by practice length); Fisherman groups: 500, 1,000, 2,000; vessel fees up to 32 feet 60; up to 59 feet 1,000; up to 100 feet 1,200; over 100 feet 2,000. - Guinea: 3 percent of turnover for enterprises > GF 20 million sales. - Madagascar: MF 200,000 plus 5 percent of turnover for agriculture, industry, mining, tourism, transportation; MF 600,000 plus 5 percent for other sectors. - Malawi: K 500-10,000 depending on turnover. - Niger: Special import levy 2 percent on value of imports; estimated assessment threshold CFAF 5 million. - Rwanda: Presumptive tax on highway carriers equal to 3 percent of the value of new vehicle; 3 percent of invested capital (other entry). - Senegal: CFAF 500,000 for turnover below 500 CFAF million; CFAF 1 million for turnover above CFAF 500 million; import tax 1 percent. - Sierra Leone: 10 percent of turnover; 15 percent if accounts not kept. - Togo: 1.5 percent of turnover. - Uganda: Minimum graduated tax by local governments ranging from USh 6000 to USh 60,000. - Kenya: presumptive tax on 5 percent of gross sales of agricultural farms (abolished January 1994). - Nigeria: minimum tax rules including 0.5 percent of gross profits or net assets, or 0.25 percent of paid-up capital or turnover, whichever is highest. - Other source statement: "0.5 percent of turnover for other businesses in other sectors." ### Overall conclusions and policy assessment (summary) - Primary objective: increase government revenue by broadening tax base consistent with efficiency, equity, and administrative expediency. - Context: informal sector estimated at about 30 percent of recorded GDP in many sub-Saharan African countries. - Three major conclusions: 1. Presumptive taxation has not received adequate attention in tax policy reforms in sub-Saharan Africa. 2. Presumptive taxation could help increase government revenue and support more efficient and fairer tax systems, but not all methods are equally effective given tradeoffs across efficiency, equity, and administrative feasibility. 3. Intensifying presumptive taxation must be accompanied by strengthening tax administration capacity. - Policy recommendation highlights: - Favor judicious application of simplified, cost-effective presumptive methods (presumptive import taxes, withholding schemes, business license fees) where administrative capacity is limited. - Give low priority to standard assessments unless they are carefully graduated, regularly updated, and supported by adequate administrative resources. - Use estimated assessments selectively with robust sector studies and third-party information. - Pursue taxpayer registration campaigns despite costs as foundational to improved coverage. *Source: _wp9605* ### 1. Second-best solutioq ### 1. Second-best solutioq ### Social planner problem and objective - The section analyzes the solution when a social planner internalises the effects of policy actions on inflation expectations — described as the second-best solution in the presence of distortionary taxation. - The social planner minimizes the social loss function (equation (1)) through choice of taxation and inflation, subject to the government budget constraint. - Footnote references preserved exactly: - "2/ The social planner minimizes the social loss function (equation (1)) through its choice of taxation and inflation, subject to the government budget constraint." - "2/ See Beetsma and Bovenberg (1995) for more discussion." ### Optimal inflation solution (equation and interpretation) - The resulting solution for inflation is given verbatim as in the source: - * sgsx flopt’ sxsx +sgsn +sxsg 0 and (dU/dY) < 0; individual maximizes utility subject to after-tax income X. - Under conventional taxation: Tc = T(Z). - Under presumptive taxation: Tp = T(N) = Tnormal. - If Y > 1 (effort above normal), Z > N and T(Z) > T(N); therefore Tc > Tp and presumptive taxation leaves the marginal excess income untaxed, encouraging effort. - Qualifications and limits to efficiency gains: - If the presumptive tax is not lump-sum, efficiency gains do not hold. - If lump-sum presumptive levies are adjusted frequently in response to presumed increases in taxpayer income, the marginal rate on additional effort is no longer zero; frequent adjustments can erode incentive advantages. - Thus, efficiency gains depend on the design (lump-sum nature and stability) of the presumptive levy. *Source: _wp9605 - Section III then reviews pertinent* ### 3. Eauitv ### 3. Eauitv ### Horizontal equity: presumptive taxation and the self-employed - Presumptive taxation can enhance horizontal equity by facilitating the taxation of the self-employed and informal small-scale business operators, who "often escape paying taxes entirely or pay unduly low amounts." - Recipients of wages and salaries in the formal sector are "much more effectively taxed than the self-employed or the informal sector, thanks mainly to withholding schemes." - Consequence identified: "wage earners tend to be overtaxed in relation to their self-employed equals (Bird and Oldham 1990)." - Adoption of presumptive taxation that at least levies a modest tax on the self-employed "can thus lead to greater horizontal equity." ### Vertical equity: taxing professionals and asset owners - Presumptive taxation may enhance vertical equity by targeting self-employed professionals "whose incomes are often several times the national average but often pay only low taxes because of underreporting of incomes." - Example method: taxes levied on the basis of a professional's years of experience (presumed incomes) are "likely to collect more revenues than tax regimes that rely on honest reporting from professionals or those that use a low flat-rate levy." - Presumptive minimum taxation based on ownership of particular assets (e.g., land) can enhance vertical equity where owners are "members of groups judged to have a higher ability to pay and have been avoiding taxes on their personal incomes." - Presumptive taxes on assets or holdings of wealth "may also serve as a tax on the imputed income of particular assets" and "the imputed income of assets may be captured when presumptive taxation methods are applied." - Net effect: where such assets are largely owned by higher-ability-to-pay groups who escape personal income taxation, presumptive regimes "may improve vertical equity." ### Administrative expediency: rationale for presumptive taxation - Many African countries face administrative weaknesses: "insufficient staff with the appropriate accounting, auditing, and technical skills"; "financial resources are scarce"; "up-to-date equipment and facilities are lacking (Burgess and Stern 1993)." - Consequences for tax administration: - Difficulties in taxpayer identification and assessment. - Weak enforcement and collection, sometimes due to "inadequate legal structures," lack of incentives, and inadequate follow-up procedures. - Administrative capacity constraints can bias tax structure choices, leading to "an excessive reliance on a certain set of taxes simply because of the ease with which those particular taxes can be assessed and collected" (e.g., strong reliance on trade taxes). - From the tax administrator's view, key motivation for presumptive taxation is to overcome these endemic administrative weaknesses. - Practical considerations: - With accurate measures of recorded income unavailable, conventional assessments require detailed auditing and investigation which may not be cost-effective. - Presumptive taxation provides "administrative convenience" and a "pragmatic approach to increasing tax revenues." - If used judiciously, presumptive taxation may be "a comparatively cost-effective means to increase the number of taxpayers and thus broaden the tax base." - Empirical note: in countries with a solid presumptive taxation tradition, "the number of presumptive taxpayers may be ten to twenty times higher than the number of those subject to self-assessment on recorded transactions (Bulutoglu 1995)." ### IV. Presumptive Taxation: African Country Experiences — 1. Standard assessments - Definition and scope: - Standard assessments prescribe a fixed, lump-sum tax payment by persons or enterprises engaged in specific trades and professions. - Ghana enacted the Standard Assessment Act in 1963 to tax small businesses and the self-employed; several other African countries adopted similar systems in the 1960s and 1970s (federal states in Nieeria, Mozambiaue, Lesotho, Sierra Leone, Ethiopia). - Ethiopia has applied standard assessments for "about 150 different businesses and professions since the 1960s." - Burkina Faso introduced an "Informal Sector Contribution" collecting occupation-specific fixed amounts from all business activities with turnover less than a specified threshold. - Gabon used lump-sum standard assessments (i&t forfaitaire sur le,revenue) to tax small businesses, traders, and individual transport operators. - Ghana specifics: - The Standard Assessment Act required registration with the Commissioner of Income Tax and established lump-sum payments by occupational groupings; examples in the text: - doctors had to pay q500 per year; - moneylenders $400; - lawyers &200; - carpenters &72; - tailors and shoemakers &48 (Boateng 1971). - "Thirty-three different occupations and business groupings were covered," with annual tax clearance certificates required to be displayed on premises. - In practice, standard assessments "increasingly represented final tax liabilities" though intended as minimums. - Calibration and variations: - Some systems differentiate levies within occupations (graduation by years of practice or by vessel length; Ghana: medical doctors and dentists paid varying lump-sum taxes according to years in practice). - Calibration methods include locality (Burkina Faso), construction of business premises (Rwanda), freight and seating capacity (Ethiopia), and agricultural indicators (Cameroon, Mozambique, Ethiopia, Eritrea). - Agricultural lump-sum levies in Cameroon based on "the crop planted, area covered, average yield, and number of livestock" (French forfait tradition); Mozambique depends on tractor use, number of farm employees, and type of agricultural activity; Ethiopia and Eritrea use low fixed lump-sum levies not calibrated. - Advantages cited: - Comparatively simple to administer — relieve tax authorities of ascertaining individual incomes by presuming an "average" income for an occupation. - Positive incentive effects: "any additional earnings above the 'average' presumed income level are effectively taxed at a zero rate." - Attractive for horizontal equity to the extent they capture previously untaxed small businesses and self-employed. - Minimize opportunities for corruption and collusion because lump-sum taxes are pre-determined and not at the discretion of tax officials. - Effective for taxpayer identification and creating lists of small businesses and professionals. - Disadvantages and limitations: - Poor performance in revenue mobilization: when members of an occupational group have highly divergent incomes, levies tend to be set "based on the incomes of the poor performers" rather than true averages. - Levies are "rarely indexed to inflation or updated regularly," explaining limited revenue yield. - Example: Ethiopia's lump-sum levy on small-scale farmers "generates only 1 percent of total government revenue," despite the group constituting "about 85 percent of the population" and agriculture accounting for "approximately 50 percent of GDP." - Violations of economic principles: - Cannot account for taxpayer-specific conditions (family size, exceptional losses). - Regressivity: imposing the same tax on high-income and low-income members of an occupation violates vertical equity. - Calibration improves equity but increases administrative complexity and resource requirements (e.g., land surveys for agriculture). - Given the demands of calibration, many administrations resort to fixed, non-calibrated levies. - Summary of overall assessment: - Standard assessments are administratively attractive but offer "limited revenue gains and tend to violate a number of economic principles." - In Ghana, the role of standard assessment has been gradually minimized: businesses and individuals under standard assessment "are now required to maintain basic records," and the standard assessment serves only as a down payment against final income tax (referred to as the Quarterly Advance Tax Payment) (Coopers and Lybrand 1991). - Conclusion in the text: "Although several African countries continue to utilize standard assessments, they would not appear to be the most effective means of capturing the incomes of small businesses and the self-employed." *Source: _wp9605 - 3. Eauitv* ### 2. Estimated assessments ### _wp9605 - 2. Estimated assessments ### Overview of estimated assessments - Estimated assessments: tax liability is generally estimated for each taxpayer based on certain indicators (indicator-based assessment) or on the basis of whatever detailed information the tax assessor deems relevant (best judgment assessment). - Two broad approaches: - Estimate a taxpayer's income or profits and then apply the regular personal or business income tax rate to that estimated income. - Presume a tax liability directly without first estimating income. - Estimated assessments are viewed as a more refined presumptive taxation technique than standard assessments because they rely on multiple indicators of business activity rather than merely occupational or business grouping. - Estimated assessments can generally be adjusted to take account of sudden or severe income shocks faced by a business or an individual. - Drawback: they can involve considerable discretion by tax assessors, unlike standard assessments. ### Indicators and selection criteria - Theoretical options: many indicators could be used to estimate the income of an enterprise or a self-employed professional. - Rajaraman (1995) criteria for a "good" indicator: - (i) the level of observability and recordability of that indicator; - (ii) the level of concealment, falsification, or substitution of the indicator; - (iii) the correlation of the indicator to income and the stability of that correlation over time. - A good indicator: easily observable and recordable, difficult to conceal/falsify/substitute, identifiable and stable correlation to income. - Common indicators used by developing countries: - size of business premises; - number of employees; - skill level of employees; - amount of installed machinery; - level of inventory; - indicators of "service capacity" (e.g., seating capacity of a restaurant, number of rooms in a hotel); - transport indicators (e.g., passenger capacity, cargo space). - Third-party information examples: electricity or water bills (Israel, Pakistan), data from wholesale suppliers. ### Determination, calibration, and administrative considerations - Determination of presumed income from indicators ranges from crude to highly nuanced. - Indicators must be developed on an industry- or trade-specific basis. - Within a given activity, adjustments and calibrations can include location, size, capital base, labor use, and years of operation. - Applies both where estimated income is taxed at regular rates and where a tax liability is directly specified. ### Variants and country examples - Estimating income then applying regular tax rate: examples include Angola, Chad, Malawi, Madagascar, and Malawi (Madagascar and Malawi referenced twice in source; preserved as given). - Angola statutory example: regular tax rate applies to presumptive profits of taxpayers who cumulatively: (i) engage as a self-employed person in commercial or industrial activity; (ii) work alone or with no more than three others; (iii) do not keep reliable books; (iv) use no more than two vehicles; and (v) have an annual turnover of less than Nkz 3.5 million. - Second form (directly specifying tax liability) common in francophone African countries, analogous to the French forfait system. - Typical procedure: tax authority specifies a tax amount using available information (gross receipts, number of employees, machinery), taxpayer accepts or challenges, if challenged taxpayer must provide verification. - Niger example: - Estimated assessment if no proper records and turnover less than CFAF 5 million. - Taxpayers with bookkeeping may still choose estimated assessment. - Review of contested assessments by a special commission of three tax officials and three business representatives. - Once forfait assessment is settled, remains unchanged for two years. - Burkina Faso example: - Threshold for forfait method: CFAF 15 million. - Mid-1980s data: 78 percent of businesses in Ouagadougou were assessed under presumptive scheme; comparable figure outside the capital was 91 percent (Syracuse University 1986). - Agricultural-sector uses in eastern and southern Africa: Lesotho, Swaziland, Tanzania, Uganda, Zambia. - Uganda: graduated personal tax by reference to crop planted and acreage cultivated. - Livestock incomes estimated on basis of head count. ### Box 1: The French Forfait System and Israel's Tachsiv (high-level findings) - France's forfait system targets four groups: farmers; unincorporated business enterprises; professionals with turnover below a designated threshold; small enterprises. - Farmers: "collective estimates" differentiated by type, location, size. - Professionals: based on "normal" income (average expected income, without exceptional losses/gains). - Unincorporated businesses and small enterprises: "individual-specific estimates" using basic records and business indicators. - Process example: (i) taxpayer declares annual sales via compulsory form; (ii) tax authority corrects/accepts turnover; (iii) tax authority uses monographs and profit margin information to determine taxable income. If acceptable, liability fixed for two years. - Israel's tachsiv system: - Tax assessment guide used since the 1950s for more than one hundred business and occupational groupings. - Prepared over several years after extensive research; specifies appropriate indicators and guidelines for tax inspectors. - Sample indicators include number of employees, location, seating capacity, skill of workers, nature of equipment, water consumption. - Features: elaborate preparation and continual updating; entrenched as conventional taxation system; substantial revenue-earner. - A suspension in 1975 to push taxpayers toward filed returns was followed by reintroduction due to immediate revenue shortfalls. - Contribution: income taxes account for 46 percent of total tax revenues in Israel (source text). ### Advantages and disadvantages of estimated assessments - Advantages / pragmatic uses: - More refined than standard assessments; can adjust for shocks. - Useful where many enterprises cannot or will not keep proper accounting records. - Can be substantial revenue sources when well-designed (Israel example). - Disadvantages: - Crude/excessive reliance on indicators like labor or capital can shift incidence of tax onto inputs rather than income, potentially discouraging employment or capital use. - Administrative burden: selecting indicators, studying sectoral profitability, establishing correlations is difficult, time-consuming, and costly. - Many tax administrations may lack external data or capacity to compile it. - Discretion by tax assessors invites corruption, especially given low civil service salaries and weak management; discretion leads to inconsistencies and may worsen horizontal equity. ### Presumptive minimum taxes (key forms and country examples) - Presumptive minimum taxes: assume a taxpayer can be assigned some minimum income in a given year. - Five forms used in Africa: - Lump-sum levy (may or may not be graduated): Benin minimum tax of CFAF 200,000 for all companies; C6te d'Ivoire set at CFAF 1 million. - Percent rate on gross receipts: Central African Republic, Chad, Ghana, Guinea, Niger, Sierra Leone, Togo; rates range from 1 percent of turnover (Niger) to 5 percent of turnover (Ghana). - Lump-sum minimum plus a percentage of gross receipts: Madagascar example MF 200,000 plus 5 percent of turnover for many manufacturing and service activities. - Greater of lump-sum levy and specified percentage of gross receipts: Burkina Faso example at least CFAF 100,000 or 0.5 percent of turnover, whichever is greater. - Based on the highest liability across different tax bases: Nigeria example—minimum tax liability is 0.5 percent of gross profits, 0.5 percent of net assets, 0.25 percent of paid-up capital, or 0.25 percent of turnover, whichever is highest. - Minimum taxes on individuals and professionals: - Lump-sum personal levies or minimum personal taxes exist in Burkina Faso, Burundi, Cameroon, Equatorial Guinea. - Minimum taxes on self-employed professionals: lump-sum in Burkina Faso, Central African Republic, Congo, Equatorial Guinea, Ghana, Madagascar, Malawi; percentage of turnover in Cameroon, Chad, Gabon, The Gambia, Niger, Nigeria, Zambia. - Motivations: - Capture incomes of enterprises declaring little or no income despite lucrative activities. - Safeguard against complete tax evasion and underreporting due to creative accounting or loss claims. - Risks: - Minimum taxes can freeze companies' tax liabilities at minimum levels. - Notable implementations: - Lesotho introduced a tax on "minimum chargeable income" in 1993 based largely on assets owned and some consumption expenditures; recently introduced so no conclusive revenue evidence yet. ### Presumptive taxes on imports - Objective: capture incomes of registered and unregistered importers. - For unregistered importers: treated as final profit tax on presumed income. - For registered importers: functions as a down payment on final tax liability; helps ensure speedier and assured payment. - Implementation in Africa (examples and rates): - Senegal: 1 percent on import value. - Niger: 2 percent on import value. - Benin: 3 percent on import value. - Cote d'Ivoire: 5 percent on import value. - Differentiated rates to encourage registration: - Comoros example: 5 percent presumptive tax on value of goods by unregistered importers; 1 percent levy for registered importers as an advance tax payment. - Rationale: differentiation is intended to push importers toward registering with tax authority; even without differential rates, the presumptive import tax may pressure registration if the payment exceeds normal tax liability. *Source: _wp9605 - 2. Estimated assessments — PDF chapter content as provided.* ### Box 2. ### Box 2. Successful Asset-Based Presumptive Taxation in Latin America: Replicable in Africa? ### Asset-based presumptive minimum taxes — description and Latin American experience - Presumptive minimum taxes are levied on gross assets rather than on gross receipts or in lump-sum form. - These taxes depend on the value of a taxpayer's assets and not on the income actually derived from those assets. - Purpose in Latin America: primarily to deal with underreporting of profits by corporations and transfer pricing practices by multinational enterprises (Rajaraman 1995). - Mexico introduced a 2 percent minimum presumptive tax on all corporations in 1988. - Other countries instituting similar taxes: Argentina, Bolivia, Costa Rica, Ecuador, Panama, Peru, Uruguay and Venezuela. - Typical rate range reported: "l-3 percent." - Taxes are creditable against final tax liability computed by declarative norms. - Bases used for computation: - gross assets (Argentina), - gross fixed assets (Costa Rica), - net assets (Colombia). - Timing for asset base calculation: - year-end basis (Venezuela), - year-average basis (Mexico). - Reported outcome: the introduction in Mexico described as an "unqualified revenue success," and its revenue contribution is believed to have spurred adoption elsewhere (Rajaraman 1995). ### Applicability and constraints for African countries - Major practical constraints to replication in many African countries: - inadequate records on companies' physical assets, - limited base of financial assets because many African countries are "among the most underbanked in the developing world." - Conditional recommendation: in African countries where tax administration capacity is relatively well advanced, asset-based presumptive taxation as applied in Latin America "may be considered as a tax policy option." ### Ethiopian import-related presumptive tax experience - To date applied solely at the customs office at the airport in Addis Ababa: - registered importers are exempt; - unregistered importers have their business profits estimated by the customs office and are taxed according to the rate schedule applicable to the general business profits tax schedules for individuals. - Country-wide introduction is envisaged in the near future. - Reported revenue outcome: "revenue from this tax increased threefold over three years." - Implication: the tax appears to become an important, and comparatively easily collected, source of revenue. - Rationale for broader applicability: many importers may not be registered and trading/retailing volumes may be large, so potential for revenue generation from import levies appears substantial in many other African countries. ### Withholding schemes (as a form of presumptive taxation) - Purpose: capture incomes of unregistered businesses and individuals; withholding is essentially a down payment but can be characterized as presumptive where the withheld amount constitutes a final tax on presumed income of unregistered businesses. - Possible implementations: - government departments renting space could withhold from landlords and remit to tax authorities; - incomes of building contractors, professionals, or others transacting with government could be subject to withholding; - any domestic payment by government institutions to private suppliers could be subjected to withholding; - large public and private manufacturers and wholesale suppliers could be required to collect a fixed percentage of sales prices with each sale. - Country examples and rates: - Côte d'Ivoire: has applied a 5 percent advance on various taxes (Accompte sur Divers Impots), withheld by manufacturers, wholesalers, and merchants on sales of many consumer and industrial goods; payments creditable toward final income tax if registered, otherwise represent a final tax. - Benin and Senegal: introduced similar withholding taxes on purchases from wholesalers, "with rates in both countries set at 3 percent." ### Graduated business license fees — design, examples, and benefits - Many African countries charge license fees across a large number of business sectors; some use graduated fees as a partial means of taxing business incomes. - Graduation indicators commonly used: firm's floor space, rental value of premises, number of employees, amount and power of machinery. - Advantages: - comparatively cost-effective means of capturing taxable incomes, - comparatively easy administration at local government levels, - potential to improve vertical equity by bringing informal sector businesses into the tax net, - routine, often annual, contacts between licensing authorities and taxpayers can be exploited for tax collection (e.g., make license renewal contingent on proof of tax payment). - Country examples: - Benin: business license tax (taxe professionnelle unique) targeting small enterprises is based on rental value of premises; implementation assisted by donor-supported computerization of urban property register; taxpayers included relieved of obligation to file returns; property register continuously updated (Bodin 1994). - Comoros: business license tax based on 10 percent of rental value of premises and levied in addition to a flat fee ranging from CF 5,000-300,000 depending on type of business activity. - Guinea: license duty tax comprises a fixed charge plus an ad valorem charge based on rental value of premises used for commercial purposes. - Côte d'Ivoire: indicators include amount and power of the firm's machinery. - Administrative enforcement notes: - linking licensing and tax collection, sharing information, and co-location of services can improve compliance. - Example of compliance gap: Lesotho comparison found only 350 of a total of 6,244, or just 4 percent, of licensed traders and service providers had filed returns with the tax authority (Malik 1979). ### Conclusions and policy assessment (summary of key findings) - Primary objective: increase government revenue by broadening tax base consistent with efficiency, equity, and administrative expediency. - Context: many sub-Saharan African countries face a large informal sector and underreporting by formal businesses and self-employed individuals; untaxed second economy "is estimated at about 30 percent of recorded GDP." - Three major conclusions drawn from the survey of presumptive taxation experiences: 1. Presumptive taxation has not received adequate attention in tax policy reforms in sub-Saharan Africa. 2. Presumptive taxation could help increase government revenue and ensure more efficient and fairer tax systems, but not all presumptive methods yield similar revenue contributions or are worth pursuing when considering efficiency, equity, and administrative expediency. 3. Intensifying use of presumptive taxation must be accompanied by strengthening tax administration capacity. - Recommendation: intensified use of presumptive taxation schemes is recommendable in many sub-Saharan African countries given persistent hard-to-tax groups, substantial scope for tax evasion, and weak tax administrations. - Additional observations: - Judicious application of simplified and cost-effective presumptive methods is generally more practical than attempting to tax hard-to-tax groups under regular income tax schemes. - Presumptive methods can facilitate movement of informal small-scale enterprises into the formal sector (Bulutoglu 1995). - Assessment of standard assessments: - Standard assessments generally deserve lowest priority in tax policy reforms for sub-Saharan Africa. - Reasons: - Often not very effective in generating more revenue because they are rarely updated and usually levied at low levels. - When calibrated equivalently across members of an occupation or business grouping, they "grossly violate principles of vertical equity." - Introducing graduation can be self-defeating if it requires extensive administrative resources or remain flawed if done with minimal studies. - Offer little or no incentive for businesses and individuals to move into the declarative tax regime; recipients may prefer continued assessment under simpler, more generous regimes (example: Israeli experience). - Concern about targeting very small-scale, low-income activities: e.g., Ghana's standard assessment has targeted small-scale craftsmen and others likely at or just above subsistence; modest presumptive levies could create disincentives for these activities, which often employ a large portion of the labor force and serve as poverty-alleviating safety nets (Goode 1987). - Administrative risk: excessive widening of tax net through standard assessments can aggravate shortages of staff and resources and increase visibility of tax administration weaknesses; effective standard assessments would require extensive national registration campaigns. *Source: Box 2 from the provided IMF PDF content unit.* ### 2.2 million self-employed businessmen were covered by the presumptive levy ### _wp9605 - 2.2 million self-employed businessmen were covered by the presumptive levy ### Coverage and taxpayer registration - 2.2 million self-employed businessmen were covered by the presumptive levy (Malik 1979). - Identifying and registering small business operators—generally through extensive field censuses and the use of taxpayer identification numbers—is at least as important as the utilization of presumptive taxes. - To date, only few African countries have launched extensive taxpayer registration campaigns; these campaigns are very useful but also very expensive. - Countries where taxpayer registration campaigns have been launched include Benin, Cote d'Ivoire, Kenya, Senegal, and Uganda. ### Standard assessments: constraints and graduation - The case against an ambitious tightening of the tax net through standard assessments is strong. - If applied at all, graduation should be applied extensively to enhance vertical equity and expand revenue contribution of standard assessments. - Graduation is best introduced using adequately prepared matrix tables arranged for each sector or occupation grouping. - Information requirements for matrix-based graduation may be much less stringent than for estimated assessments, but still require careful study and attention. - Standard assessment tables must be updated frequently or indexed to take inflationary developments into account. - Example: In Ethiopia, considerable revenue is forgone because standard assessments have not been updated for more than a decade; there are indications that for many areas of activity, standard assessments could be increased by at least 300 percent in light of changed economic conditions during the 1980s and 1990s. ### Estimated assessments: preconditions and limitations - Estimated assessment schemes should only be used if certain preconditions are met: - Require detailed and regularly updated sectoral studies; without these, schemes will be flawed. - To keep the task feasible, estimated assessments should primarily focus on a limited number of groups or sectors—not across all sectors. - Priority sectors for estimated assessments may be those that: - (i) cover a large number of businesses; - (ii) offer more than one indicator to calculate incomes; - (iii) offer a reasonable number of sources of information; - (iv) are noticeably prosperous; and - (iv) whose indicators involve measures of quantity rather than quality (Musgrave 1990). - Any effort to employ estimated assessments should be carried out over several years, for a few sectors at a time, from a list ranked in descending order by evasion (Rajaraman 1995). - Additional cautions: - Avoid excessive reliance on labor and capital indicators because of potentially adverse effects on input use and business decisions. - Avoid deliberately high estimated burdens intended to encourage bookkeeping; they risk driving businesses away from tax authorities. - Estimated assessments work best when using third-party information and documentation, requiring intensive collaboration and cross-checking between tax authorities and other government institutions. - Experience in many African countries shows inadequate attention to these considerations has often produced poor results; in francophone Africa the forfait system has sometimes become a source of corruption or an arbitrary method of calculating tax liabilities (Baldet 1990). ### Taxation of land and presumptive minimum taxes - Taxation of land through standard and estimated assessment methods has achieved rather modest revenue increases in practice. - Presumptive minimum taxes, compared with standard and estimated assessments, appear to be more effective in many Sub-Saharan African countries. - Presumptive minimum taxes have reportedly had a considerable positive impact on revenue where introduced. - However, these taxes mostly target large and registered enterprises, leaving many informal sector businesses and self-employed individuals outside the tax net and potentially harming horizontal equity. - The application of presumptive minimum taxes is primarily geared toward reducing under-reporting of large-scale formal sector businesses. ### Newer presumptive taxation methods: potential and advantages - Three relatively new methods with greatest potential where standard/estimated assessments cannot be met: - Presumptive import taxes - Withholding schemes - Business license fees - Arguments supporting expanded use: - First, they require only limited additional administrative duties relative to other presumptive methods. - Second, they use existing institutions/administrations (customs, business registration bureaus) which are often comparatively strong. - Collecting presumptive import levies can be undertaken by customs offices. - Business license levies can be collected alongside existing licensing and registration agencies. - Withholding tax schemes (domestic manufacturers withholding tax from bulk purchasers) are extensions of payroll withholding already in practice. - Third, they target activities with heavy informal sector involvement (importing, bulk purchasing), effectively capturing unregistered operators who earn significant incomes. - Fourth, they address collection and arrears problems by imposing prepayment of tax liabilities even on registered taxpayers, reducing long collection lags and cutting tax administration costs; speedier payments in high inflation preserve real value of liabilities. - Example: In the CFA countries, the stock of arrears is estimated to be more than 30 percent of total annual tax receipts (Baldet 1990). - Fifth, they tend to push evaders into registering with tax authorities, making presumptive tax a bridge to the conventional tax system. - Finally, these methods promise substantial revenue-earning potential by capturing transactions of unregistered importers and traders and sharply reducing delinquency opportunities. ### Country-level practices and notable numeric thresholds or rates (selected examples from August 1995 material) - Benin: Business tax (Taxe Professionnelle Unique, TPU) based on rental value of firm’s premises; 1 percent tax levied on imports serving as pre-payment for registered firms and final payment for unregistered importers/enterprises. - Cote d'Ivoire: 5 percent presumptive tax collected by customs on imports and by wholesalers on their sales; final payment for unregistered importers and buyers; prepayment for registered ones. - Ethiopia: Presumptive tax levies for all "Category B" and "Category C" businesses; "Category B and C" includes taxpayers with gross sales less than Br 250,000 a year; presumptive taxes on imports with reference to Standard Assessment Guide. - Ghana (Appendix U sample standard assessments): examples of annual standard tax (Cedi per annum) for occupations—Carpenter 72; Tailor 48; Doctor 200; Lawyer groups: 500, 1,500, 2,500 (by practice length); Accountant groups: 200, 600, 1,000, 2,000 (by practice length); Fisherman groups: 500, 1,000, 2,000; vessel fees: up to 32 feet 60; up to 59 feet 1,000; up to 100 feet 1,200; over 100 feet 2,000. - Examples of presumptive minimum tax characteristics (Appendix III excerpts): - Benin: CFAF 200,000. - Burkina Faso: CFAF 100,000 or 0.5 percent of turnover, whichever is greater. - Burundi: 1 percent of turnover, CFAF 600,000 or 1 percent of turnover. - Cameroon: CFAF 300,000 or 1.2 percent of turnover, whichever is highest, for agricultural companies; CFAF 1.5 million or 1.2 percent of turnover, whichever is highest, for all other companies; 2 percent of turnover for coffee exporters and gold mining enterprises. - Kenya: Presumptive tax on 5 percent of gross sales of agricultural farms (abolished in January 1994). - Niger: Special import levy 2 percent on value of imports; creditable against profit tax for registered firms; final tax payment for those not registered. - Rwanda: Presumptive tax on highway carriers equal to 3 percent of the value of new vehicle. - Uganda: Minimum graduated tax levied by local governments, ranging from USh 6000 to USh 60,000. - Various other country-specific lump-sum levies, turnover thresholds, and percentage rates are listed in the country tables (August 1995). ### Practical recommendations and implementation guidance (implied by text) - Prioritize taxpayer registration campaigns despite their expense where feasible, because registration is foundational to improving tax coverage. - Use graduation via sector/occupation matrix tables if applying or expanding standard assessments; ensure tables are updated or indexed for inflation. - Restrict estimated assessments to a limited number of high-priority sectors, build detailed and regularly updated sector studies, and rely on third-party documentation and inter-agency cross-checking. - Avoid policies that create perverse incentives (e.g., reliance on labor/capital indicators that distort input use; high punitive estimated burdens that induce noncompliance). - Expand use of presumptive import taxes, withholding schemes, and business license fees where administrative capacity is limited, leveraging existing institutions (customs, registration bureaus) and targeting transaction points that capture informal sector activity. *Italic source: IMF country material and chapter content from the provided PDF excerpt.* ### 0.5 percent of turnover for ### _wp9605 - 0.5 percent of turnover for ### Presumptive taxation schedules and rates by country - General note: entries list presumptive tax bases, fixed amounts, or shares of turnover/profits as presented in the source. - Equatorial Guinea: - CFAF 300,000 for turnover below CFAF 50 million; - CFAF 600.000 for turnover of CFAF 50-100 million; - CFAF 1 million for turnover of CFAF lOO-500 million; - CFAF 2 million for turnover above CFAF 500 million. - Gabon: - CFAF 600,000 or 1.1 percent of turnover, or 40 percent of profits, whichever is highest. - Gambia (The): - 2 percent of turnover, or 50 percent of profits. - Ghana: - 5 percent of turnover, except for companies in first five years. - Guinea: - 3 percent of turnover for enterprises more than GF 20 million of sales. - Madagascar: - MF 200,000 plus 5 percent of turnover for agriculture, industry, mining, tourism, and transportation; - MF 600,000 plus 5 percent of turnover for all other sectors. - Malawi: - K 500-10,000 depending on turnover. - Rwanda: - 3 percent of invested capital. - Senegal: - CFAF 500,000 for turnover below 500 CFAF million; - CFAF 1 million for turnover above CFAF 500 million. - Sierra Leone: - 10 percent of turnover. - 15 percent of turnover if accounts are not kept. - Togo: - 1.5 percent of turnover. - Other specification in the source: - "0.5 percent of turnover for other businesses in other sectors." - Source statement: IMF country data. ### Analysis on central bank independence, inflation, and welfare tradeoffs - Key mechanism: - Increasing central bank independence reduces the time-consistency problem but decreases the willingness to respond to output shocks, reflecting a tradeoff between flexibility and commitment. - Effects on objectives and loss: - Increasing independence reduces the level and variance of inflation. - Increasing independence also decreases output and government spending. - The expected period loss is composed of terms that move in opposite directions with respect to central bank independence: one term increases in p and another decreases in p. - Welfare implications: - Full commitment to zero inflation (setting L=0) yields zero inflation but may cause output and government spending to fall short of their optimal levels. - Whether society is better off depends on the relative weights placed on inflation, output, and government spending objectives. - Imposing a distortion (e.g., strict anti-inflation commitment) in a second-best world does not necessarily improve welfare (Beetsma and Bovenberg (1995) referenced in source). - Model limitations and caveats: - The model does not include direct distortionary effects of inflation; taxes are the only distortion modeled. - If inflation has negative productivity effects, the conclusion that a decline in inflation may increase the loss function could be overstated. Examples noted include productivity shocks being a function of inflation (Howitt in Lipsey (1990), and Selody (1990) as cited). *Source: IMF country data.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/_wp9605.pdf_