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Agenda

Agenda. Background Doing Business Indicators for Tax METRs Agriculture Mining Manufacturing Tourism Financial Services Small Business Customs Licensing. Background. FIAS series of studies across Africa (Mozambique = # 8)

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Agenda

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  1. Agenda • Background • Doing Business Indicators for Tax • METRs • Agriculture • Mining • Manufacturing • Tourism • Financial Services • Small Business • Customs • Licensing

  2. Background • FIAS series of studies across Africa (Mozambique = # 8) • Previous FIAS Admin Barriers work in Mozambique, in 1996 and 2001 • Rise of tax as an IC issue, partly due to rise of independent RAs in Africa • Mozambique has strong P-P engagement (e.g. CTA Bolnick Report 2004) • FIAS work: more ‘grist to the mill’; sector analysis; additional role of licenses, fines etc.

  3. Mozambique: Doing Business (Tax) Indicators

  4. Marginal Effective Tax Rates (METR) • Summary measure of the impact of the tax system on the incentive to invest in capital • Captures the impact of the statutory tax rate, investment allowance, depreciation, and various other taxes imposed on the return to capital • Can be amended to incorporate local taxes etc.

  5. What is the METR? • NOT the AVERAGE Effective Tax Rate (AETR)! • AETR is the share of total income required to pay taxes • AETR = Taxes/Income • METR is the share of the before-tax rate of return on a marginal investment required to pay taxes

  6. Example • Say shareholders demand an after-tax rate of return of at least 10% on an investment • In order to earn this after-tax rate of return the investment must earn a before-tax rate of return of 12% METR = (12%-10%)/12% = 16.7%

  7. What does this mean? • 16.7% of the before-tax rate of return on a marginal investment is required to cover its taxes • The higher the METR the more the tax system discourages investment

  8. Aggregate METRs for Mozambique CPI Regime

  9. Mozambique vs Peer Economies

  10. Agriculture • Tax not the investment issue. • Yet still (as is common) receive significant tax benefits. • Biggest tax burden remains fuel. • Crop specific tax issues (cashews, sugar). • Large exporters face many common problems (VAT refunds, customs, etc). • METR of 16% (no CPI) 6% (with CPI)

  11. Mining • Mining METR of 51% for non-CPI, 5% CPI. • Issues: • Many incentives such as accelerated depreciation can’t be used because of 5-year limit on loss carry-forward. • Almost all companies can negotiate own tax rate and royalty payments. System is untransparent and uncertain • Proposed new mining fiscal regime corrects most of these problems: 10-year loss carry-forward, standardized royalties and taxation, reduced disparities in taxation of mining compared to other sectors, liberalized ring-fencing provisions, reduced withholding tax. Reduces disparities with taxation of other sectors.

  12. Manufacturing • Overall sectoral METR of 40% (non-CPI) or 11% (with CPI) • Issues are common to general regime: • Uneven application of tax regime (negotiated incentives, selective targeting for inspections) • Lack of guidelines/information for tax compliance (disallowed expenses, improper VAT invoices) • Complex and time-consuming procedures • Continued delays/lack of refunds (VAT, advance tax) but some progress • Breaks in VAT chain • Special customs regime

  13. Comparative METRs in Manufacturing

  14. Tourism • Overall sectoral METR of 40% (non-CPI) or 16% • Incentives look generous on paper but offer little benefit in practice • High imports and VAT reduce profitability, competitiveness and viability of projects • Irregular administration and fines troublesome especially in outlying tourist areas • Tax not only factor impacting growth • VAT simply and effectively applied • Tourism industry impacted by 20% withholding tax on un-registered purchases. Discourages informality and promotes formalization

  15. Financial Services • Relatively low sectoral METR of 57% (non-CPI) and 20% (with CPI). • Issues • Stamp duty – different rates for each transaction, hard to administer (especially for DGI), increases cost of borrowing • Inability to use overpayments/credits in one tax (e.g. stamp duty) to offset other tax liabilities (e.g. IPRC) • DGI lack of capacity to understand complex financial transactions and tendency to impose harsh and arbitrary fines • Capital gains treated as ordinary income • Exemption of listed securities and T-bills from tax

  16. Small Business • High overall sectoral METR of 71-78% • Tax system creates incentives for informality (fixed cost of complying with tax system; risk of severe penalties and illicit payments) • No harmonized definition for small business. • No special income tax regime • Simplified accounting system exists; indirect assessments • Withholding for unregistered suppliers to encourage formalization • Simplified VAT regime • 5% on sales • 40% of all VAT registered, mainly sole-proprietors • No ‘option’ to register for general VAT system; breaks in VAT chain • Municipality taxes • Lack of adequate outreach and education

  17. Customs Administration • Trade policy, liberalization, tariff reduction are all good, better than most SADC countries • Customs clearance delays are main problem: 41 days clearance time (exports and imports) • Physical congestion at border posts • Low skills base and capacity • High percentage of cargos inspected/no real risk profiling system • Possibly inappropriate information system • Continued reliance on pre shipment inspection • Main needs for future assistance: • Recruit, train, retain Customs officers, agents, brokers • Increase automation, reduce physical documentation requirements • Develop dry port at Ressano Garcia • Adopt ASYCUDA or other compatible MIS and train officers in its use • Harmonization with neighboring countries, especially RSA

  18. Licensing • Previous FIAS work in 1996 & 2001 • Some progress (OSS, provisional license); • Municipal Licenses, Fees & Taxes • Annual business tax; • Daily business tax for small businesses; • Property tax; • Other activity licenses.

  19. Licensing on a National Level • General Business License from the Ministry of Industry and Commerce: • Environment; • Health; • Industry and Commerce; • City Council. • Line-Ministries

  20. Issues • Municipality taxes, fees and activities are not considered as problematic; • However, input approval from municipalities for license from Ministry of Industry and Commerce is discretionary • Time-consuming (at least 4 weeks) despite OSS and provisional license • Requirements and decision criteria are non-transparent; • Unreasonable inspections; • Wrong incentives for inspectors; • High fines.

  21. Thank you! Obrigado!Questions?

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