AgendaAgenda BackgroundBackground Doing Business Indicators for TaxDoing Business Indicators for Tax

METRsMETRs AgricultureAgriculture MiningMining ManufacturingManufacturing TourismTourism Financial ServicesFinancial Services Small BusinessSmall Business

CustomsCustoms LicensingLicensing

BackgroundBackground

FIAS series of studies across Africa FIAS series of studies across Africa (Mozambique = # 8)(Mozambique = # 8)

Previous FIAS Admin Barriers work in Previous FIAS Admin Barriers work in Mozambique, in 1996 and 2001Mozambique, in 1996 and 2001

Rise of tax as an IC issue, partly due to rise of Rise of tax as an IC issue, partly due to rise of independent RAs in Africaindependent RAs in Africa

Mozambique has strong P-P engagement (e.g. Mozambique has strong P-P engagement (e.g. CTA Bolnick Report 2004)CTA Bolnick Report 2004)

FIAS work: more ‘grist to the mill’; sector FIAS work: more ‘grist to the mill’; sector analysis; additional role of licenses, fines etc.analysis; additional role of licenses, fines etc.

Mozambique: Doing Business (Tax) Mozambique: Doing Business (Tax) IndicatorsIndicators

  Moz SAMauriti

us Africa

Payments (number) 35 32 7 41.4

Time (hours per year) 230 350 158 394

Total tax payable (% of gross profit) 50.9 43.8 38.2 58.1

Marginal Effective Tax Rates (METR)Marginal Effective Tax Rates (METR)

Summary measure of the impact of the tax Summary measure of the impact of the tax system on the incentive to invest in capitalsystem on the incentive to invest in capital

Captures the impact of the statutory tax Captures the impact of the statutory tax rate, investment allowance, depreciation, rate, investment allowance, depreciation, and various other taxes imposed on the and various other taxes imposed on the return to capitalreturn to capital• Can be amended to incorporate local Can be amended to incorporate local

taxes etc.taxes etc.

What is the METR?What is the METR?

NOTNOT the the AVERAGEAVERAGE Effective Tax Rate Effective Tax Rate (AETR)!(AETR)!• AETR is the share of AETR is the share of total incometotal income

required to pay taxesrequired to pay taxes AETR = Taxes/IncomeAETR = Taxes/Income

METR is the share of the METR is the share of the before-tax rate before-tax rate of returnof return on a marginal investment on a marginal investment required to pay taxesrequired to pay taxes

ExampleExample

Say shareholders demand an Say shareholders demand an after-taxafter-tax rate of return of rate of return of at leastat least 10% on an 10% on an investmentinvestment

In order to earn this In order to earn this after-taxafter-tax rate of rate of return the investment must earn a return the investment must earn a before-taxbefore-tax rate of return of 12% rate of return of 12%

METR = (12%-10%)/12% = 16.7%METR = (12%-10%)/12% = 16.7%

What does this mean?What does this mean?

16.7% of the before-tax rate of return on a 16.7% of the before-tax rate of return on a marginal investment is required to cover marginal investment is required to cover its taxesits taxes

The higher the METR the more the tax The higher the METR the more the tax system discourages investmentsystem discourages investment

Aggregate METRs for MozambiqueAggregate METRs for Mozambique

Manuf. Agric. Mine Finance Tourism

11%11% 6%6% 5%5% 20%20% 16%16%

Manuf. Agric. Mine Finance Tourism

40%40% 16%16% 51%51% 57%57% 40%40%

CPI Regime

Mozambique vs Peer EconomiesMozambique vs Peer Economies

Rwanda South Africa

Tanzania (with cess)

Lesotho Mozam-bique

Mozambique (investment

through CPI)

Agriculture 7% 5.7% 23.1% 18% 16% 6%

Manufac-turing 7% 21.3% 15.3% 11% 40% 11%

Tourism 13% 13.9% 14.9% 43% 40% 16%

Finance 28% 29.8% 28.9% 51% 57% 20%

AgricultureAgriculture

Tax not Tax not the the investment issue.investment issue. Yet still (as is common) receive significant Yet still (as is common) receive significant

tax benefits.tax benefits. Biggest tax burden remains fuel.Biggest tax burden remains fuel. Crop specific tax issues (cashews, sugar).Crop specific tax issues (cashews, sugar). Large exporters face many common Large exporters face many common

problems (VAT refunds, customs, etc).problems (VAT refunds, customs, etc). METR of 16% (no CPI) 6% (with CPI)METR of 16% (no CPI) 6% (with CPI)

MiningMining Mining METR of 51% for non-CPI, 5% CPI. Mining METR of 51% for non-CPI, 5% CPI. Issues:Issues:

• Many incentives such as accelerated depreciation can’t Many incentives such as accelerated depreciation can’t be used because of 5-year limit on loss carry-forward.be used because of 5-year limit on loss carry-forward.

• Almost all companies can negotiate own tax rate and Almost all companies can negotiate own tax rate and royalty payments. System is untransparent and royalty payments. System is untransparent and uncertainuncertain

Proposed new mining fiscal regime corrects most Proposed new mining fiscal regime corrects most of these problems: 10-year loss carry-forward, of these problems: 10-year loss carry-forward, standardized royalties and taxation, reduced standardized royalties and taxation, reduced disparities in taxation of mining compared to disparities in taxation of mining compared to other sectors, liberalized ring-fencing provisions, other sectors, liberalized ring-fencing provisions, reduced withholding tax. Reduces disparities with reduced withholding tax. Reduces disparities with taxation of other sectors. taxation of other sectors.

ManufacturingManufacturing Overall sectoral METR of 40% (non-CPI) or 11% Overall sectoral METR of 40% (non-CPI) or 11%

(with CPI)(with CPI)

Issues are common to general regime:Issues are common to general regime:• Uneven application of tax regime (negotiated incentives, Uneven application of tax regime (negotiated incentives,

selective targeting for inspections)selective targeting for inspections)• Lack of guidelines/information for tax compliance Lack of guidelines/information for tax compliance

(disallowed expenses, improper VAT invoices)(disallowed expenses, improper VAT invoices)• Complex and time-consuming proceduresComplex and time-consuming procedures• Continued delays/lack of refunds (VAT, advance tax) but Continued delays/lack of refunds (VAT, advance tax) but

some progresssome progress• Breaks in VAT chain Breaks in VAT chain

Special customs regimeSpecial customs regime

Comparative METRs in Comparative METRs in ManufacturingManufacturing

TanzaniaTanzania South AfricaSouth Africa ZambiaZambia RwandaRwanda LesothoLesotho MozambiqueMozambique

15%15% 21%21% 30%30% 17% (no 17% (no incentives)incentives)

-7% (incen--7% (incen-tives)tives)

11%11%

0% 0% (Exporters)(Exporters)

40%40%

11% (CPI)11% (CPI)

TourismTourism Overall sectoral METR of 40% (non-CPI) or 16%Overall sectoral METR of 40% (non-CPI) or 16% Incentives look generous on paper but offer little Incentives look generous on paper but offer little

benefit in practicebenefit in practice High imports and VAT reduce profitability, High imports and VAT reduce profitability,

competitiveness and viability of projectscompetitiveness and viability of projects Irregular administration and fines troublesome Irregular administration and fines troublesome

especially in outlying tourist areasespecially in outlying tourist areas Tax not only factor impacting growthTax not only factor impacting growth VAT simply and effectively appliedVAT simply and effectively applied Tourism industry impacted by 20% withholding Tourism industry impacted by 20% withholding

tax on un-registered purchases. Discourages tax on un-registered purchases. Discourages informality and promotes formalizationinformality and promotes formalization

Financial ServicesFinancial Services Relatively low sectoral METR of 57% (non-Relatively low sectoral METR of 57% (non-

CPI) and 20% (with CPI).CPI) and 20% (with CPI). Issues Issues

• Stamp duty – different rates for each transaction, Stamp duty – different rates for each transaction, hard to administer (especially for DGI), increases hard to administer (especially for DGI), increases cost of borrowingcost of borrowing

• Inability to use overpayments/credits in one tax Inability to use overpayments/credits in one tax (e.g. stamp duty) to offset other tax liabilities (e.g. stamp duty) to offset other tax liabilities (e.g. IPRC)(e.g. IPRC)

• DGI lack of capacity to understand complex DGI lack of capacity to understand complex financial transactions and tendency to impose financial transactions and tendency to impose harsh and arbitrary finesharsh and arbitrary fines

• Capital gains treated as ordinary incomeCapital gains treated as ordinary income• Exemption of listed securities and T-bills from taxExemption of listed securities and T-bills from tax

Small BusinessSmall Business High overall sectoral METR of 71-78%High overall sectoral METR of 71-78%

Tax system creates incentives for informality (fixed cost of Tax system creates incentives for informality (fixed cost of complying with tax system; risk of severe penalties and illicit complying with tax system; risk of severe penalties and illicit payments)payments)

No harmonized definition for small business.No harmonized definition for small business.

No special income tax regimeNo special income tax regime• Simplified accounting system exists; indirect assessmentsSimplified accounting system exists; indirect assessments• Withholding for unregistered suppliers to encourage formalizationWithholding for unregistered suppliers to encourage formalization

Simplified VAT regime Simplified VAT regime • 5% on sales5% on sales• 40% of all VAT registered, mainly sole-proprietors40% of all VAT registered, mainly sole-proprietors• No ‘option’ to register for general VAT system; breaks in VAT chainNo ‘option’ to register for general VAT system; breaks in VAT chain

Municipality taxesMunicipality taxes

Lack of adequate outreach and educationLack of adequate outreach and education

Customs AdministrationCustoms Administration Trade policy, liberalization, tariff reduction are all Trade policy, liberalization, tariff reduction are all

good, better than most SADC countriesgood, better than most SADC countries Customs clearance delays are main problem: 41 Customs clearance delays are main problem: 41

days clearance time (exports and imports)days clearance time (exports and imports)• Physical congestion at border postsPhysical congestion at border posts• Low skills base and capacityLow skills base and capacity• High percentage of cargos inspected/no real risk High percentage of cargos inspected/no real risk

profiling systemprofiling system• Possibly inappropriate information systemPossibly inappropriate information system• Continued reliance on pre shipment inspectionContinued reliance on pre shipment inspection

Main needs for future assistance:Main needs for future assistance:• Recruit, train, retain Customs officers, agents, brokersRecruit, train, retain Customs officers, agents, brokers• Increase automation, reduce physical documentation Increase automation, reduce physical documentation

requirementsrequirements• Develop dry port at Ressano GarciaDevelop dry port at Ressano Garcia• Adopt ASYCUDA or other compatible MIS and train Adopt ASYCUDA or other compatible MIS and train

officers in its useofficers in its use• Harmonization with neighboring countries, especially Harmonization with neighboring countries, especially

RSA RSA

LicensingLicensing

Previous FIAS work in 1996 & 2001Previous FIAS work in 1996 & 2001 Some progress (OSS, provisional Some progress (OSS, provisional

license);license);

Municipal Licenses, Fees & TaxesMunicipal Licenses, Fees & Taxes• Annual business tax;Annual business tax;• Daily business tax for small businesses;Daily business tax for small businesses;• Property tax;Property tax;• Other activity licenses.Other activity licenses.

Licensing on a National LevelLicensing on a National Level

General Business License from the General Business License from the Ministry of Industry and Commerce:Ministry of Industry and Commerce:

Environment;Environment; Health;Health; Industry and Commerce;Industry and Commerce; City Council.City Council.

Line-MinistriesLine-Ministries

IssuesIssues Municipality taxes, fees and activities are not Municipality taxes, fees and activities are not

considered as problematic;considered as problematic; However, input approval from municipalities for However, input approval from municipalities for

license from Ministry of Industry and Commerce is license from Ministry of Industry and Commerce is discretionarydiscretionary

Time-consuming (at least 4 weeks) despite OSS Time-consuming (at least 4 weeks) despite OSS and provisional license and provisional license

Requirements and decision criteria are non-Requirements and decision criteria are non-transparent;transparent;

Unreasonable inspections;Unreasonable inspections; Wrong incentives for inspectors;Wrong incentives for inspectors; High fines.High fines.

Thank you! Obrigado!Thank you! Obrigado!

Questions?Questions?