In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.


In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Tax Revenue Mobilization in Madagascar1

Madagascar’s tax revenue ratio is among the lowest in Sub-Saharan Africa and falls far short of the levels required to meet the country’s sizeable development needs. The government’s objective is to raise the tax ratio to about 14 percent of GDP in the medium-term. Reaching this target will require actions to broaden the tax base, including limiting tax incentives raising compliance and reducing opportunities for avoidance. In order to boost tax morale, these efforts will also have to go hand-in-hand with improved public service provision. This paper reviews the level and structure of tax revenues in Madagascar, analyzes tax effort and efficiency, and discusses strategies to increase revenues. It also draws lessons from other countries’ experiences.

A. Background

1. Madagascar has one of the lowest tax-ratios in Sub-Saharan Africa. Over the period 2005–13, it raised on average about 10 percent of GDP in total tax revenue (Figure 1). This placed it ahead of only five low-income Sub-Saharan African (SSA) economies, primarily post-conflict countries (Guinea-Bissau, South Sudan, Central African Republic, Democratic Republic of Congo and Sierra Leone), and stands about 2–3 percentage points of GDP below other economies with similar characteristics (Uganda and Tanzania).

Figure 1:
Figure 1:

Tax Revenue in Selected SSA Countries, 2005–13

Citation: IMF Staff Country Reports 2015, 025; 10.5089/9781498353069.002.A002

Source: World Economic Outlook Database, October 2014; and IMF staff calculations.

In addition, Madagascar’s tax ratio has been declining since 2008. In 2013, it was below the average of the past nine years. This trend is in sharp contrast to the improvements in the tax rated observed in other low-income developing economies, both within Africa and elsewhere (Figure 2).

Figure 2:
Figure 2:

Tax Ratios in Madagascar and Other Low-Income Countries: 2007–13

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 025; 10.5089/9781498353069.002.A002

Source: Malagasy authorities; and IMF staff estimates.

2. Tax revenue mobilization is thus now more pertinent than ever. Over the last two decades, Madagascar’s tax ratio ranged between 7.7 percent and 11.8 percent of GDP, consistently ranking among the lowest in the world. At end-2013, it reached 9.3 percent of GDP, 1 percentage point above its 1995 level. This performance is underpinned by a “boom-bust” pattern of tax revenue collection that reflects not only tax policy changes (IMF, 2007), but also the political crises and the ensuing economic contractions (Figure 3). The 2009 domestic political crisis and related uncertainties have had deleterious effects on growth and have set back progress initiated with the tax reforms of 2008.

Figure 3:
Figure 3:

Madagascar’s Tax Revenue, 1995–2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 025; 10.5089/9781498353069.002.A002

Source: Malagasy authorities; and IMF staff estimates.Note: Figures for 2011-2013 are adjusted for unpaid VAT credits.

3. The government’s objective is to raise the tax ratio to about 14 percent of GDP in the medium-term. This targeted magnitude is consistent with various estimates of tax potential for Madagascar, but will require concerted actions to address policy and compliance gaps. Policy gaps include those related to tax rates and exemptions and compliance gaps are those related to weaknesses in tax and customs administration and low tax morale.

4. This paper analyzes why Madagascar’s tax revenues have been underperforming and what can be done about it. The rest of the paper is structured as follows. Section B reviews the level and structure of taxes in Madagascar in a cross-country setting. Section C discusses options to mobilize revenue. Section D reviews the experience of countries in mobilizing revenues and draws lessons for Madagascar.

B. Diagnostics: How Low is Madagascar’s Tax Ratio and Why?

5. A large empirical literature links tax revenue performance to a wide range of developmental, structural and institutional factors. Results differ depending on the dataset and estimation methods, but there is some convergence in findings. Tax performance is positively associated with higher income per capita, trade openness, financial sector depth and better institutions. By contrast, larger shares of agriculture in total value-added and higher inflation are negatively associated with tax revenues. The effect of demographics, public debt and aid dependency is ambiguous (IMF, 2011).

6. Studies of tax performance and tax effort suggest that, based on its developmental, structural and institutional features, Madagascar could increase its tax ratio up to 17 percent of GDP. In IMF (2007), cross-country regressions using tax revenue data for 2005 found that Madagascar’s tax potential was about 15 percent of GDP.2 Torres (2014), applying the same methodology but using panel data covering 165 countries for 2007–13, finds similar magnitudes for the tax potential. Moreover, he estimates that the gap of roughly 7 percentage points of GDP between Madagascar’s tax revenues and the sample average could be filled roughly equally by direct and indirect taxes (Figure 4).3 Fenochietto and Pessino (2013) employ a different methodology, namely stochastic frontier analysis (Box 1), for 113 countries during 1991-2012 and also report estimates of the tax potential for Madagascar at about 17 percent of GDP (Figure 5).4

Figure 4:
Figure 4:

Tax Gaps in Selected Low-Income Countries

Citation: IMF Staff Country Reports 2015, 025; 10.5089/9781498353069.002.A002

Source: Torres (2014).Note: The tax gap estimates for each country the distance between a country’s actual tax ratio and the conditional sample average. A positive estimate means that the country is below the conditional average.
Figure 5:
Figure 5:

Tax Revenue, Taxable Capacity and Tax Effort for Selected SSA Countries

Citation: IMF Staff Country Reports 2015, 025; 10.5089/9781498353069.002.A002

Source: Fenochietto and Pessino (2013).Note: Tax ratio is for 2011 or 2012, depending on data availability. It is estimated using Stochastic Frontier Analysis (SFA). It shows how much a country is collecting relative to its tax potential as determined by economic and other fundamentals. The additional taxable capacity shows how much more the country could collect in taxes if it were fully efficient.

Tax Potential: A Comparison of Two Empirical Approaches

There are two commonly used approaches used to determine tax performance and tax potential.

The first, referred to as “peer analysis” in the October 2013 IMF Fiscal Monitor, defines revenue (ri) in country i (in percent of GDP) as a function of observable characteristics xi (such as income per capita, the share of agriculture in value-added, trade openness, the old-age dependency ratio and political participation). The ‘potential’ for additional revenue is the fitted residual, ε^i.


This method has been applied, for example, in IMF (2007) using cross-section data and, more recently, by Torres (2014) who extended the methodology in by applying it to panel data and to sub-categories of taxes using data constructed from IMF WEO and country documents such as Article IV reports. Results suggest that the tax potential is positively associated with per capita income, the old-age dependency ratio and political participation.

An alternative approach determines tax potential by estimating empirically a tax frontier using the stochastic frontier analysis (SFA). SFA models revenue potential according to the following function:


Where M denotes maximum revenue, dependent on observables exogenous to policy, and U is an index between zero and one capturing ‘effort’ (which depends on inefficiencies in tax administration and policy choices regarding tax legislation, rates and exemptions). zi is analogous to xi above.

The concept of tax potential differs slightly across methodologies. In “peer analysis”, tax potential is derived indirectly based on the difference between actual tax performance and the fitted value of the tax ratio. This difference, the fitted residual ε^i, averages zero by construction over the sample. As a result, using this methodology, about half of the countries will be estimated to be operating above their revenue potential. By contrast, SFA calculates tax potential directly as the maximum attainable revenue given that the effort index is at its maximum value (of one).

7. A closer look at the structure of taxes in Madagascar provides some insights as to the proximate causes of tax revenue underperformance. The greater reliance on indirect taxes relative to direct taxes is in line with what is observed in other countries in SSA. However, a few issues are evident5, especially in the light of the 2008 tax reforms which drastically simplified the tax structure and brought it closer to those of middle-income countries in SSA (Box 2, Figure 6):

  • Revenue from direct taxes is low, both in relation to other taxes and to other countries in SSA.

  • The value-added tax (VAT) is the mainstay of the tax system, accounting for close to 50 percent of all taxes on average during 2004–13. Its performance has however declined since 2004, particularly for VAT levied on domestic goods.

  • Excises raised about 1 percent of GDP on average during 2004–13, almost the same as customs duties.

Figure 6:
Figure 6:

Madagascar: Performance of Major Tax Categories

Citation: IMF Staff Country Reports 2015, 025; 10.5089/9781498353069.002.A002

Sources: Malagasy authorities; IBFD (2013); USAID Collecting Taxes 2011/12; and IMF staff estimates.Note: In the bottom right chart, VAT productivity is measured as the ratio of VAT collections to the standard VAT rate.

Madagascar’s 2008 Tax Reform

In 2008, Madagascar implemented a wide-ranging domestic tax policy reform. The reform’s objectives were to increase the tax yield and improve the business environment. It included the following elements:

  • Reduction in the number of taxes from 28 to 14;

  • Harmonization of taxes on income and consolidation into a single tax rate of 25 percent;

  • Elimination of excise duties on several items;

  • Increase of the VAT rate from 18 to 20 percent and of the VAT threshold;

  • Announcement of the elimination of the Export Processing Zone (EPZ) regime for new firms, with ‘grand-fathering’ of existing firms. No firm date had however been announced for this measure and it was subsequently never applied.

In parallel, tax administration procedures were overhauled, resulting in the revitalization of the directorate for large enterprises, the restructuring of several regional service centers, and the modernization of procedures for tax filing and payment.

8. VAT. A cross-country comparison with other low-income developing countries suggests that Madagascar’s standard VAT rate is among the highest, but its productivity6 is very low. Thus, VAT underperformance appears to be linked to policy gaps other than the rate, such as those related to the refund of VAT credits, and importantly to compliance gaps. Available data suggests that about a fifth of enterprises with turnover of between MGA 50 and 200 million are not complying with their obligations to file VAT returns. Moreover, the share of these non-compliant enterprises has been increasing since 2010. Another indicator of weaknesses in VAT collection is the high share of enterprises submitting nil VAT obligations or requesting VAT credits. This share was 65 percent for large enterprises in 2013 and related not only enterprises of the Export Processing Zone (EPZ), but in all sectors of the economy.

9. Income Taxes. The tax reform of 2008 envisaged a reduction of Madagascar’s PIT and CIT rates from 30 percent in 2007 to 25 percent in 2008 and a progressive downward adjustment to 20 percent from there. Madagascar now has a flat tax of 20 percent on personal and corporate income taxes, but there is also a simplified regime for small businesses. In 2013, the rates were at the lower end of the range for selected SSA economies and closer to those in middle-income economies. However, direct tax collection is significantly lower than in middle-income economies, suggesting that low rates are only part of the explanation for the low income tax yield. The narrowness of the tax base and compliance issues also appears to be at play. In 2013, less than half of all enterprises filing returns declared a taxable profit.

10. Taxes on international trade and transactions. The contribution of international trade to tax revenue has declined over time, reflecting in part lower imports during the political crisis. But this performance is also symptomatic of more wide-ranging challenges in customs administration. In particular, exemptions, evasion and challenges in administration are the key issues to tackle following recent diagnostic exercises. Policy measures on rates include the lowering of customs tariff rates in 2007, the reduction of excise duty rates with the 2008 tax reform, and more broadly, the pursuit of trade liberalization, including in the context of trade agreements. In terms of challenges, the following appears to be relevant:

  • Current procedures do not allow for adequate tracking of the activities of importers despite the fact that a few large importers account for the bulk of all imports. Many of these importers benefit from accelerated customs procedures, but are not followed by ex-post verification.

  • As a result, at least partly, false declarations are an issue. First, there is the intentional misreporting of content of imported containers to benefit from lower duties and tariffs and exemptions. The second concerns the declared value of imports. About 70 percent of all imported containers have a declared value of less than US$ 20,000, which is abnormally low as it translates into a declared value of less than US$1/kg for imports.

  • The duty and tariff structure also leads to incentives to divert lower-taxed products for unintended uses. This is the case, for example, for fuel products such as kerosene which can be mixed with diesel and used to operate machinery.

  • Special procedures for customs clearance also give rise to opportunities for fraud. Derogations introduced during the transition years have weakened the purview of the customs administration. EPZ companies, for example, are no longer required to declare to customs the value of their sales in local market. Consequently, the risk of unauthorized duty free sales on the domestic market has increased.

  • A relatively high share of imports (16 percent) is granted temporary admission. This seems to stem from the fact that temporary admission is often granted on an ad-hoc basis and for relatively long periods of time.

  • Last, but not least, there is anecdotal evidence of governance issues at customs.

11. Summary. Overall, it would appear that Madagascar’s low tax revenue yield is not so much related to rates, but to policy gaps linked to exemptions, non-compliance, and to weaknesses in revenue administration. Achieving the government’s medium-term objective will require priority actions in these areas. Moreover, there is increasing evidence in the theoretical and empirical literature that non-compliance is also linked to low tax morale, which in turn reflects “trust in government”.7 Therefore, tax revenue mobilization has to go hand-in-hand with a strategy to increase the quality and efficiency of government services and to tackle corruption.

C. Strategy for Tax Revenue Mobilization

12. The diagnosis on the causes of weaknesses in revenue collections in Madagascar as well as international experience with revenue mobilization strategies (IMF, 2011), point to several areas for policy action. These include:

Broadening the tax base by limiting tax exemptions and improving tax administration

Madagascar’s 2008 tax reforms drastically simplified the tax structure, making it more comparable to that of middle-income countries in SSA such as Mauritius than other low-income developing countries. As such, the scope for further substantive gains through further changes in the tax structure is limited. However, an important policy gap which remains relates to tax incentives, including tax exemptions. According to Gupta and Tareq (2008), although the number of countries offering tax holidays, including through free zones, has increased dramatically since the 1980s, foreign direct investment in Sub-Saharan Africa, other than in the resource sector, has increased very little over the past two decades. Instead, these incentives not only shrink the tax base but also create challenges for tax administration and are a major source of revenue loss and leakage from the taxed economy. They argue that rationalizing tax incentives can also generate substantial tax revenues without hurting the investment climate.

With regards to revenue administration, the immediate focus should be on improving collections from existing taxes and taxpayers as the integration of the informal sector into the formal sector can take time.8 However, it is also important that measures to deal with non-compliance be carefully designed to preserve tax morale among existing compliant taxpayers. In the light of the diagnostics in section B, the main priorities are the following:

  • Improving the ability of the tax and customs administration directorate to detect taxpayer fraud. In the case of the tax administration, this could be achieved by a rebalancing of the responsibilities of the large corporate taxpayers unit (DGE) and regional service centers (SRE) to enable the DGE to focus on very large enterprises. For the customs administration, it will be important to increase physical inspections of containers, verifications of the declared value of imports and ex-post verifications once merchandises have cleared customs.

  • Greater use of risk-based management tools. Collection and analysis of taxpayer data can help identify trends, patterns and flag potential irregularities.9 It can thus help more focused, pertinent and timely controls for the tax and customs administration.

  • Modernization and simplification of procedures. For domestic taxes, the focus should be on improving procedures for filing and paying taxes and for taxpayer audit to make them as taxpayer friendly and cost-effective as possible. At customs, a move towards more paperless and automated processes could help achieve the dual objectives of limiting opportunities for fraud while facilitating trade.

In addition to the above, it will also be important to implement policies and procedures that limit opportunities for rent-seeking and help identify and punish inappropriate behavior in the tax and customs administrations.

Exploring the revenue potential of mining and hydrocarbons

Madagascar’s Mining Code is generally sound, but mining-related revenues (royalties) currently contribute relatively little to the government budget.10 A cross-country comparison of mineral royalty rates within SSA suggests that Madagascar’s royalty rate on mining of 2 percent is at the lower end of the range and could be increased to 3 or 4 percent. It would be important that such an increase, if envisaged, be applied to future projects only and that the fiscal stability clause of existing mining projects be respected. The Petroleum Code of 1996, on the other hand, is outdated and would benefit from being brought up-to-date to international best practice before more licenses for exploration and production are granted.

D. Lessons from Other Countries’ Experience

13. Other countries’ experience with revenue mobilization can offer some useful lessons for Madagascar. A recent study by Drummond and others (2012) suggests that almost all LICs in SSA were able to increase their revenue ratios by more than 2 percentage points of GDP in the short-to-medium term, and at least once in the last two decades. Over half of the LICs in SSA increased their revenue ratios by 5 percentage points of GDP or more in at least one 3-year period in the last two decades. Five countries achieved double-digit increases in their revenue ratios. They also find that fragile countries were less able to sustain these gains over time and sustainability tended to be associated with relatively modest but steady increases in revenues rather than a few large exceptional increases. Analysis by the IMF (2013) emphasizes that the political economy can and does constrain tax reform along several dimensions, namely the scope of the reform, its objective, its timing and “quality”, the timeframe for implementation. Abstracting from the specifics, there seem to be three main lessons from these studies:

  • Macroeconomic stability and strong governance aid revenue mobilization.

  • Extensive political consultation and a clear and broad communication strategy can help ease resistance to reforms and have figured large in the landmark reforms such as the 1986 tax reform in the United States. There are several other advanced economies examples where reforms relied on consultations with the business community, labor unions and other stakeholders, a public relations program and the use of the media, and the appointment of a “champion” for the reforms. These include New Zealand (VAT reform, 1984), the Netherlands (PIT, 2001) and Denmark (2010).

  • Reforms should be adapted to the domestic institutional setting, including the structure of the government, such as the degree and nature of fiscal decentralization, and institutional capacity. A recent example, among developing countries, is Bangladesh where the introduction of a VAT was preceded by a strengthening of tax administration capacity in order to increase the chances of a successful implementation.


  • Bursian Dirk, Alfons Wierchenrieder and Jochen Zimmer, 2013, “Trust in Government and Fiscal Adjustment”, CESifo Working Paper series 4310, CESifo, Munich.

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  • Cummings, Richard, Jorge Martinez-Vazquez, Michael McKee and Benno Torgler, 2009, “Tax Morale affects tax compliance: Evidence from surveys and an artefactual experiment”, Journal of Economic Behavior and Organization, vol. 70, issue 3, pages 447457.

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  • Drummond, Paulo, Wendell Daal, Nandini Srivastava and Luiz Edgard Oliveira, 2012Mobilizing Revenue in Sub-Saharan Africa: Empirical Norms and Key Determinants”, IMF Working Paper 12/108.

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  • Fenochietto, Ricardo and Carola Pessino, 2013, “Understanding Countries’ Tax Effort,IMF Working Paper 13/244.

  • Gupta, Sanjeev and Samshuddin Tareq, 2008, “Mobilizing Revenue”, Finance and Development, September, available at:

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  • International Bureau for Fiscal Documentation (IBFD), 2013, database available at

  • International Monetary Fund, 2007, “Madagascar-Tax Policy Priorities to Improve Revenue Performance”, Selected Issues Paper CR07/239, (Washington: International Monetary Fund).

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  • International Monetary Fund, 2011, “Revenue Mobilization in Developing Countries”, Policy Paper available at

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  • International Monetary Fund, 2013, “Fiscal Monitor-Taxing Times” (Washington, October 2013).

  • Schneider, Friedrich, 2002, “Size and Measurement of the Informal Economy in 110 countries around the world,World Bank.

  • Torgler, Benno, 2007, Tax Compliance and Tax Morale: A theoretical and Empirical Analysis, Edward Elgar Publishing, United Kingdom.

  • Torres, Jose L., 2014, “Revenue and Expenditure Gaps: A Cross-Country Analysis,” (forthcoming).

  • World Bank, 2014, “Madagascar’s Reengagement Policy Note Collection 2014.


Prepared by Priscilla Muthoora.


The characteristics controlled for were the share of agriculture in GDP, imports to GDP and real GDP per capita.


Recent IMF technical assistance suggests that meeting the revenue objective of the government will require improving customs revenue from about 5 percent of GDP currently to 7 percent of GDP in the medium term.


I would like to thank Jose Torres and Ricardo Fenochietto for sharing their data.


Based on the recent analysis of the main features of Madagascar’s tax system (World Bank, 2014).


Defined as the ratio of revenue collected to the standard rate.


Torgler (2007) provides theoretical and empirical evidence for Latin America, Germany and Switzerland. Cummings and others (2009) use survey and experimental data for Botswana and South Africa to illustrate. Finally, Bursian, Wiechenrieder and Zimmer (2013) present evidence from the Eurobarometer survey showing that tax revenue tends to be lower in European countries with the least trust in government.


IMF (2007) noted that in the pre-political crisis period the size of the informal sector was estimated to be about 39 percent (Schneider, 2002), a high share but close to the average for low-income countries, and that as such it was unlikely to explain weak revenue performance. Anecdotal evidence and data on employment point to an increase in the size of the informal sector since, but this cannot alone explain the declining revenue yield.


In this regard, the recent steps to move towards greater and more systematic information exchange between the tax and customs directorates is a welcome first-step. The creation of a database on indicative import values at customs would be another improvement.


Per the provisions of the General Tax Code (GTC) of 1999, the royalty rate of 2 percent (1 percent for processed minerals) is split according to the following formula: 70 percent for local governments, 35 percent of the remaining 30 percent to the Bureau du Cadastre Minier de Madagascar (an autonomous agency) and the rest to the budget. The effective royalty rate for the budget is thus 0.4 percent for unprocessed minerals.

Republic of Madagascar: Selected Issues
Author: International Monetary Fund. African Dept.