Fiscal reforms improve Côte d’Ivoire's tax revenue

In its ambition to maintain sustainable growth, one of the main challenges faced by Côte d’Ivoire is its capacity to increase income, particularly its tax revenue. Although the amount of duties collected rose steadily in recent years, the tax-to-GDP ratio has remained relatively low, rising modestly from 15.1% in 2015 to 16.5% in 2018, some way from the government’s target of 20% by 2020. By comparison, South Africa boasts a rate of 26%.

Taxable Base

Although Côte d’Ivoire made a significant jump in the World Bank’s ease of doing business index in 2019 – moving up 17 places from a year before to be ranked 122nd out of 190 economies – the country came a modest 175th place for the paying taxes segment. The tax system still faces a number of issues, explaining the relatively depressed rate of tax collection.

First, with the informal sector employing approximately 90% of the Ivorian workforce, there are not enough companies, particularly small and medium-sized enterprises (SMEs), that are officially registered and paying taxes. “The tax burden is low because it relies on a very reduced fiscal base. There are very few SMEs in the formal system, and the country does not have many big companies, so you only have a limited number of companies that are paying duties,” Alban Ahouré, economist at the Ivorian Centre for Economic and Social Research, told OBG. “The tax burden is heavy for large firms, which can also negatively affect investment inflows.”

International institutions – including the IMF and the World Bank – have been calling for the Ivorian government to improve its collection of the value-added tax (VAT). While a new investment code was ratified in August 2018, it has yet to be implemented. The 2012 Investment Code, which replaced the previous version of the code launched in 1995, offers a lot of incentives for investors, including tax breaks and exemptions from VAT. According to the World Bank, the Ivorian system is based on a relatively unattractive common law scheme that has as many as 63 exemptions. Conversely, a number of countries – including Malaysia and Mauritius – have successfully based their economies on common law fiscal systems that have limited exceptions.

“Today, Côte d’Ivoire seems to be going in the opposite direction. The common law scheme is not attractive, with a VAT at 18% and corporate taxes at 25%, in addition to the use of multiple taxes and duties that contribute to the increase in the fiscal burden on businesses. In these conditions, it is not surprising that the country multiplies exceptions,” the World Bank said in a report published in July 2018. “This multiplicity reduces the tax base and contributes to increasing the system’s complexity.” VAT’s nominal rate is 18%, but the actual rate is around 4-5%, according to the World Bank.

Database

The IMF has similarly called for the Ivorian authorities to update the taxpayer database, which has not been reviewed for years. The decade-long political crisis deeply disrupted the Ivorian administration, and particularly the tax system.

Between 2002 and 2011 Côte d’Ivoire was divided between a government-held south and rebel-controlled north. As a result, people living in the northern area did not pay water and electricity bills or taxes to the central government.

Since the end of the crisis in 2011 the government has made significant efforts to raise awareness among the northern population about the importance and processes of paying taxes, and tax collection in the area has significantly increased over the past few years as a result. However, given this shift will take time, combined with the fact that most economic activity is concentrated within the commercial capital of Abidjan, located in the south, these efforts have so far had a somewhat limited impact on the country’s overall tax collection rate.

2019 Targets

In its 2018 Finance Law, the government attempted to widen the tax base by scrapping some duty exemptions, while at the same time trying to tax more of the informal sector and SMEs. However, these measures caused a wave of discontent from both small and bigger companies, which forced the authorities to either retract or scale back some of their plans. This, along with other conjectural decisions – such as the lowering of the export tax on cashew nuts because of weak international prices – resulted in the total tax collected in 2018 being slightly below the target that was outlined in the IMF’s programme for Côte d’Ivoire.

In the 2019 budget that was adopted by Ivorian lawmakers in December 2018, the government plans to collect CFA3.67trn (€5.5bn) of taxes, representing a 12% increase from what was estimated to be collected in 2018. This would boost the tax-to-GDP ratio to around 17%, from an estimated 16.5% in 2018, and would serve as a significant source of income for the Ivorian authorities to meet their commitment of fiscal consolidation. As part of its programme with the IMF, the government is seeking to reduce the fiscal deficit from 4.5% in 2017 to 3% in 2019.

Moussa Sanogo, the prime minister’s secretary of state, told international media that the government intends to meet its target by pursuing significant reforms of tax and Customs systems that are already under way, modernising the financial administration, strengthening fiscal control and improving the effectiveness of tax collection.

“The stakes for the government’s strategy to boost the state’s tax incomes are two-fold,” Ahouré told OBG. “The first component is to broaden the tax base through further formalisation of businesses and increased collection of some duties, including land tax. The second is to improve the efficiency of fiscal administration, a central component of which will be the digitalisation of the tax system,” he added.

Policy Amendments

According to the IMF, the Ivorian government plans to mobilise more taxes in 2019 through the reintroduction of the cocoa registration tax for exporters at 1.5% of free-on-board value – which had previously been scrapped in 2017 in order to support exports in the context of plummeting cocoa prices – as well as a range of new tax policy measures. Notably, this will include a number of additional export taxes on cottonseed and a readjustment of the export tax on cashew nuts, which had been lowered from 10% to 3.5% in 2018 because of weak prices and the phasing out of certain VAT exemptions.

Another important measure is the implementation of the new Investment Code, adopted by the government in August 2018, which is aimed at rationalising tax exemptions. Among other objectives, the new code intends to optimise the tax system and fix certain weaknesses of the 2012 Investment Code, including inefficient fiscal spending and incentives that are not aligned with investor expectations. The new code separates exemptions treatment between the investment and operational phase. There are plans for a full exemption from Customs duties and a VAT suspension for companies in their investment phase, with a mix of both gradually implemented during the operational phase.

Improving Efficiency

As part of its efforts to modernise and improve the efficiency and transparency of the country’s tax administration, in April 2017 the government introduced an e-tax portal, where businesses can declare and pay tax online. This new channel is particularly important as it helps to reduce corruption linked to tax payments, which is seen as a major impediment to attracting higher levels of investment, and it contributes to increasing the rate of tax collection.

In 2018 the online tax payment system was extended to all large and medium-sized businesses, and at the end of August 2018 the rate of compliance had reached 78%, while taxes and fees paid online accounted for 50.5% of all domestic state revenue. In the meantime, the authorities launched an “e-bundle” system, which allowed companies and institutions to submit their financial statements online. As of September 2018, 764 financial statements had been submitted on the system. Then, in February 2018, the government rolled out an initiative that allows taxpayers to use mobile phones to pay property tax and impôt synthétique, which is the simplified tax regime.

Other planned reforms of the tax administration include introducing a single taxpayer identification number and establishing a trader registration card. In addition, the authorities are looking into implementing census programmes for taxpayers, as part of efforts to update the country’s tax database, as well as for real estate owners in order to improve the collection of land taxes. The IMF has stated that such measures could help Côte d’Ivoire successfully bring its tax-to-GDP ratio up to 17.8% by 2023.