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Oil bonuses for four out of the six blocks were received in 2005 and 2007. Receiving the oil bonuses from Blocks 5 and 6 is uncertain, given disagreements between the investors in the two blocks and the Joint Development Agency. See IMF country report number EBS/08/64.
The tax payer base is significantly reduced by the lack of tax-payer registration, reflecting both weaknesses in the tax administration side, where enforcement is week, and the weak voluntary tax compliance. See below.
One core element of the MDGs is for all low-income countries to increase their own resource mobilization and devote budget revenues to priority investments.
In 2007, a fall in petroleum product imports significantly affected tax revenue during that year. The high international oil prices during the majority of 2008 resulted in higher excise tax revenue from imports of petroleum products.
Tax buoyancy measures the responsiveness of tax revenue to changes in nominal GDP. A buoyancy of 0.5, for example, implies that a 1 percent increase in GDP results in 0.5 percent increase in tax revenue.
As part of the agreement between Nigeria and São Tomé and Príncipe on the Joint Development Zone for oil exploration, Nigeria agreed to provide São Tomé and Príncipe with the revenue from the sale of a limited number of oil barrels per year.
This is similar to having a fiscal rule that specifies that current expenditure must be financed by domestic revenue collection, thus limiting public sector financing to fund investment projects (the so called “Golden Rule”). There is an abundant literature on why unconstrained discretion over revenue and spending can erode public finances, given the generally strong pressure on expanding government expenditure and a reluctance to raise taxes to the extent necessary to fully finance public outlays.
These two spending categories alone use up about 86.1 percent of total domestic revenue in 2008.
Revenues in São Tomé and Príncipe exclude oil signature bonuses, since only a portion of these bonuses are available for budgetary use on an annual basis.
Expenditures in the Seychelles are the highest in the selected group, but the country also has higher revenues to finance the higher expenditures.
São Tomé and Príncipe also has a high risk of debt distress compared to 21 Sub-Saharan African countries that have low to medium risk, 7 countries with high risk, and 6 countries which are already in debt distress (out of 35 low-income countries with debt sustainability analyses).
São Tomé and Príncipe also rates “weak” in the World Bank Country Policy and Institutional Assessment (CPIA) rating, which assesses the quality of a country’s present policies and institutional framework in terms of fostering poverty reduction, sustainable growth, and the effective use of development assistance. There are 35 Sub-Saharan African countries in the rating, with 18 countries having strong and medium CPIA and 17 countries, including São Tomé and Príncipe, having week CPIA.
The full results of the model, shown in Appendix I, indicate that São Tomé and Príncipe’s tax potential could range from 20.4 to 36.4 percent. As such, this study should be considered only as indicative of the room available to increase domestic resources, rather than a benchmark for the optimal level of tax potential for São Tomé and Príncipe, since factors such as tax incentives, tariff rates, and tax administration issues are not taken into consideration in the model.
Madagascar and São Tomé and Príncipe both have the largest gap between actual revenue performance and the potential revenue performance (at 12 percentage points).
The PRSP was finalized in 2003 and discussed at the IMF’s Executive Board in 2006. See IMF Country Report No. 05/332 of September 2005.
The audit function has limited personnel. There are no existing written procedures or guidelines for use by the audit staff. There is no systematic approach used to conduct the audits or prepare the audit documentation. Selection of taxpayers for audit is accomplished by a small committee using their experience and knowledge. An average of 15–20 cases per year have been audited over the years.
It is estimated that only 35–40 % of businesses are actually tax registered and an even lower percentage is filing and paying taxes. This is due to both weaknesses in the tax administration side, where enforcement is week, and the weak voluntary tax compliance
The weak tax enforcement has resulted in a significant stock of tax arrears of about 132 billion dobra by September 2008. For reference, this stock of arrears is equivalent to 35 percent of tax revenue in 2008 alone and 5.1 percent of GDP.
Countries that rank highly on the ease of paying taxes (closer to a ranking of 1) tend to have lower and less complex taxes with simple administrative processes for paying taxes and filing tax returns.
Portugal also provides extensive technical assistance to help improve the revenue administration.
The Code of Tax Processes and Procedures created a Tax Tribunal to hear taxpayer appeals and to take enforced collection action. The law was enacted in December 2006 and became effective in August 2007. An Organic Law is required for the actual creation of the Tribunal.
Without a clear and credible commitment to administrative reforms, an amnesty may serve as a signal of weak enforcement capacity of the tax administration, with adverse revenue consequences during and after the amnesty. A number of studies on the impact of one-shot and intermittent amnesties have shown negative revenue effects. Moreover, tax amnesties can be can result in unfair tax treatments, as they pardon tax evaders at the expense of voluntarily compliant taxpayers. See Torgler, Schaltegger (2005), Baer, Le Borgne (2008), and Bird (2003).
At the seaport, customs’ inspectors must wait for a ship to send a boat ashore for them or ride on a fisherman’s boat to conduct inspections. Moreover, due to a lack of imaging equipment, all containers are completely unpacked for inspection.
There are currently three tariff bands, down from more than 100 bands.
Improving Tax Administration in Developing Countries, IMF 1990.
For example, stamp duties are required on all forms, including school registration forms for children.
Structural reforms to boost private sector activity include legislative reforms to reduce the administrative burden on businesses and labor market reforms to increase flexibility. The country will also highly benefit from significantly improving basic infrastructure, including roads, ports, and utility provision. Such improvements will not only be beneficial for business, but also can help develop the still small yet highly promising tourism sector.
The model was run with up to 65 countries. See below for results.
The results of the model should be considered only as indicative of the room available to increase domestic resources, rather than a benchmark for the optimal level of tax potential for São Tomé and Príncipe, since factors such as tax incentives, tariff rates, and tax administration issues are not taken into consideration in the model.