Guinea: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
29 Jul 2016
eISBN:
9781475520958
ISBN:
9781475520958
Language:
English
Keywords:
ISCR; CR; Guinea; financial service; indirect tax; direct tax; firm; collection effort; Guinea's revenue performance; goods and services tax; growth rate; revenue target; Consumption taxes; Income and capital gains taxes; Income tax systems; Public investment spending; Sub-Saharan Africa; fitted value
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Guinea: Selected Issues

Abstract

Guinea: Selected Issues

Revenue Needs, Tax Potential and Revenue Mobilization in Guinea

A. Introduction

1. The Guinean authorities intend to significantly increase public investments in the coming years in order to boost growth. However, given the limited capacity to raise debt and foreign aid, domestic resource mobilization will be a central part of the growth strategy. What are the financing needs of an infrastructure program capable of lifting Guinea’s growth rate? Can authorities meet these needs with additional domestic revenue and if so, to what extent? This note estimates the tax potential of the Guinean economy in order to identify realistic revenue objectives, guide the authorities in their effort to improve the tax system, and finance their growth strategy.

B. Determing the Revenue Target

2. Income per capita in Guinea has not progressed in the past 15 years (Figure 1). Boosting growth will demand significant private and public investments, but Guinea’s performance on that count has been disappointing: with an average of 18.5 percent of GDP in total investment between 1990 and 2014 (Figure 2), Guinea is well below best-performing African countries (Mauritius, Botswana, Mozambique, etc.).

Figure 1.
Figure 1.

Guinea: GDP per Capita in Selected Sub-Saharan Countries, 2000–14 1/

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Source: WEO.1/ 2000 = 1. Based on inflation-adjusted national currency.
Figure 2.
Figure 2.

Guinea: Investment and Growth in Sub-Saharan Africa 1/

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Sources: WEO; and IMF staff calculations.1/ Excludes oil producers and Zimbabwe. Using all available data for each country.

3. Based on Figure 2, Guinea would need to sustainably increase overall investment by roughly 7 to 8 percent of GDP in order to reach average per capita growth rate of about 3.0 percent, and by roughly 10 percent of GDP to catch up with the best African performers and enjoy annual per capita GDP growth rate of 4 to 5 percent (i.e., enough to double income per capita in about 15 years). This would probably require a minimum increase of 5 percent of GDP in public investment.1

4. Such a performance and ensuing revenue needs would dovetail with plans discussed with the authorities during the 2016 Article IV mission. The Souapiti dam, significant increases in public infrastructure spending, irrigation projects, higher spending on education and health infrastructure and ensuing outlays in goods and services, personnel and transfers outlined in the mission’s alternative scenario would generate additional public investments of 6.5 percent of GDP by 2018, plus an additional 0.4 percent additional spending in personnel, goods and services, and transfers in the same year (Figures 3 and 4). The financing gap however would swell from almost nil in 2016 to 7.2 percent of GDP in 2018, before stabilizing between 3 and 4 percent of GDP in the long run, for average financing needs of about 5 percent over the medium term.2

Figure 3.
Figure 3.

Guinea: Base Scenario

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Source: IMF staff calculations.
Figure 4.
Figure 4.

Guinea: Alternative Scenario

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Source: IMF calculations.

C. Guinea’s Recent Revenue Performance

5. Compared to other African mining and/or neighboring countries, Guinea’s revenue performance has been relatively good, increasing from 11.4 to 17.9 percent of GDP from 2000 to 2015 (Figure 5). Yet, this represents a progress of merely 0.4 percent of GDP per year and at that pace, it would take 13 years to reach the target mentioned above. A significant and immediate effort is therefore needed to change the course of the revenue collection effort. Guinea’s tax structure provides some indications on potential sources of additional revenue (Figure 6). The country is heavily reliant on international trade as well as indirect taxes, two thirds of which are collected at the border (e.g., VAT, fuel taxes, etc.). In contrast, direct taxes are less important than in other mining countries, including Mali and DRC.

Figure 5.
Figure 5.

Guinea: Tax and Non-tax Revenue in a Selection of African Countries

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Source: Authorities, IMF staff calculations.1/ 2015 is projected data.
Figure 6.
Figure 6.

Guinea: Tax Structure in Guinea and Comparable Countries

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Sources: Authorities; and IMF staff calculations.1/ Mining revenue were allocated to Direct and Non-tax revenue to improve comparability.

6. Worryingly, this situation is not improving. Between 2008 and 2014, the performance of indirect taxes has markedly improved, and that of international trade taxes moderately so, while direct taxes had a very mixed performance and non-tax revenue fell. Again, given that most of the international trade and indirect taxes are collected at the border, it is clear that control of the domestic tax base is problematic. This also reflects the weakening commodity prices, which affect main direct taxes (corporate income tax) and non-tax revenue (royalties).

Figure 7.
Figure 7.

Guinea: Evolution of the Tax Structure 1/

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Sources: Authorities; and IMF staff calculations.1/ Mining revenue were allocated to Direct and Non-tax revenue to improve comparability.

D. Revenue Mobilization and the Tax Potential in Guinea

7. Can Guinea increase its Revenue-to-GDP ratio by at least 5 percent of GDP in the medium term? This depends on the extent to which it already uses its tax potential. In this section, we discuss the determinants of the tax potential and estimate it for Guinea, with available data.

Determining the tax potential: a brief overview of the literature

8. The tax potential depends mainly on the size of the economy and on the capacity of the authorities to access different tax bases at a reasonable cost and without jeopardizing the population’s basic needs. There is no easy way to determine the tax potential, but the literature generally tends to proceed through international comparisons, taking into account a host of differences between countries: taking all relevant characteristics into account, if a country has a lower tax-to-GDP ratio than another one with the same characteristics, it is assumed that it could improve its performance to at least the same level as the comparator country. An econometric relationship is therefore established between various measures of tax-to-GDP (i.e., total tax, VAT, income tax, etc.) and what is considered to be a complete set of relevant factors. Fitted (estimated) values based on regression estimates are then used to estimate the tax potential and the difference between actual and fitted values can provide objectives for revenue mobilization.

9. Bahl (1971) provides a good description of the early literature on the tax potential, while Stotsky and WoldeMariam (1997), Sen Gupta (1997), Teera and Hudson (2004), and more recently Le et al. (2008 and 2012), Thomas and Treviño (2013), and Khwaja and Iyer (2014) together provide a good overview of more recent developments. The focus of the literature has shifted in time. It was for example initially concerned with development issues such as the relationship between tax levels, tax structure and income in the development process, and more recently with the distinction between tax potential and tax effort or with specific issues, such as the impact of corruption and governance on tax levels. However, in the process of studying tax levels, all contributions are recurrently concerned with finding a complete set of explanatory factors as well as with econometric issues. Indeed, given the absence of a strong theoretical framework to describe the relationship between tax potential (or tax structure) and various socio-economic, political or geographic factors, ad hoc rationales are proposed to include certain factors, leaving it to empirical work to accept or reject them. In general, the following factors are considered:

Table 1.

Guinea: Main Explanatory Factors Considered in the Literature

article image

Econometric issues are mainly about problems arising from the data at hand. The use of panel data techniques (e.g., fixed vs non-fixed effects, structure of error terms etc.), lag structures, colinearity between regressors, and other data-driven issues have been addressed in various ways - see for example Sen Gupta (1997), and Khwaja and Iyer (2014).

Data

This paper relies on the most common tax measures and explanatory factors found in the literature to assess the determinants of tax potential in Guinea. Dependent variables are tax-to-GDP ratios provided by the International Center for Tax and Development over the period 1987 to 2013,3 for 38 non-oil Sub-Saharan African countries. Angola, Equatorial Guinea, Congo Republic, and Gabon4 were excluded given their highly peculiar tax structures. Total revenue excluding grants, non-tax as well as tax revenue and within it direct and indirect tax revenue, which are further subdivided into personnel income tax, corporate income tax, goods and services tax and international trade taxes together provide nine initial dependent variables. Independent variables are mostly from the World Bank’s World Development indicators (WDI) and from the IMF’s World Economic Outlook (WEO) and new investment database. Country fixed effects5 were used, thus in the end excluding recourse to other country-related categorical variables, such as mining or African sub-region.

Table 2.

Guinea: Regressors Used for this Study 1/

article image

Not all regressors were used in the final set of results. See Table 3.

Methods

As per standard practice, the data is assembled into a panel and transformed in logs. The following equation is then estimated for the nine dependent variables:

Ri,t = αi + βXit + εit

Where: i and t are indices for country and year, α the set of country fixed effects, X is a matrix of regressors and ε the error term (no lags are used). A first round of estimation relied on a standard ordinary least square with fixed effects. The reference country was selected as the one with the highest constant among countries comparable to Guinea,6 so as to calculate the tax potential as Guinea’s fitted value corrected for the difference in constants, thus implicitly identifying a comparator country. Given the particular structure of the error terms’ variance-covariance matrix in such panel datasets, a more robust regression was then estimated, correcting for heteroscedasticity within, as well as correlation between panels.7,8

E. Main Results

10. Various specifications were tested in turns on the nine dependent variables both for the standard least squares and robust estimation, and econometric estimates are generally in line with the main results of the literature. The second set of regressions broadly confirmed the results of the first set, although the level of significance of the estimated parameters generally decreases and the breakdown of the calculated tax potential changes somewhat. Data availability limits the estimates for corporate and individual income tax to the period 1991 to 1999, and the short period probably explains the less stable coefficients across specifications for those variables. Similarly, the finer the breakdown of tax aggregates (e.g., goods and services or international trade taxes vs. indirect taxes in general), the more diverse and unstable the results are. Results for non-tax revenue are also less conclusive, given the importance of idiosyncratic factors for this revenue category.

Table 3.

Guinea: Estimation Results by Type of Tax 1/2/3/

article image

Source: staff calculations.

t-stats are in brackets, under coefficients. Country fixed effects coefficients are excluded to save space, except for Guinea.

Significance levels (p-values): “***”: 0.001; “**”: 0.01; “*”: 0.05.

11. The most telling results are for tax revenue, as well as its breakdown into direct and indirect taxes (see Table 3, which provides econometric results for standard least squares for a specification that generally provided best results across all dependent variables).9 The estimated tax potential in recent years is around 2 to 3 percent of GDP for the former and 1 to 2 percent of GDP for the latter, for a total of 3 to 5 percent of GDP. The tax potential has been relatively stable until the mid-2000s and has significantly increased afterwards, with the significant increase in imports and exports of goods and services. The tax revenue gap narrowed until then and remained stable afterwards. The larger gap for direct taxes is consistent with Guinea’s recent tax performance and international comparison of the previous section. Although the gap remains sizeable, estimations suggest that resources needed to finance the authorities’ infrastructure and development plans are indeed available to be taxed.

Figure 8.
Figure 8.

Guinea: Tax potential – Direct Taxes

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Source: staff calculations.
Figure 9.
Figure 9.

Guinea: Tax Potential – Indirect Taxes

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Source: staff calculations.

F. Mobilizing Revenue: Issues and Policy Recommendations

12. Collecting direct taxes (i.e., income, real property, etc.) typically demands higher administrative capacity because they require identification of the taxpayer and are tailored to his/her specific circumstances. Indirect taxes, by contrast, are based on the characteristics of a transaction, regardless of the characteristics of the individuals who transact: it requires less information. In many low-income countries, indirect taxes also benefit from the fact that they are mostly collected at the border (customs duty, VAT, excises, etc.), which thus offers a convenient control point to tax agencies (typically customs offices along a border, ports and airports). In this respect, Guinea is no exception: between 2013 and 2015, the share of tax and non-tax revenue collected at customs oscillated between 51 and 55 percent, up from an average of 42 percent in the 2008–12 period (Figure 10).10

Figure 10.
Figure 10.

Guinea: Revenue by Collection Agency

Citation: IMF Staff Country Reports 2016, 262; 10.5089/9781475520958.002.A002

Sources: Authorities; and staff calculations.

13. The key to controlling the direct tax base is to improve compliance through ample and reliable information: taxpayer identification (correct names,11 addresses – if possible linked to a cadaster-, taxpayer identification numbers, etc.), proper invoicing of labor and consumption transactions, and especially significant analytical capability to cross and compare information are necessary. In addition to a better control of the mining sector taxation and higher fuel taxes to raise non-tax and indirect tax revenue, immediate steps to improve direct taxation should include:

  • Crossing taxpayer-level import figures with declared turnovers. Based on preliminary data provided by DGD and DGI, the mission estimated in December 2015 that roughly only a quarter of such imports passing through the DGD are finally declared at the DGI.

  • Tighter control of liberal professions. This is an area where tax base is hard to control, given the absence of a material proof of a transaction (and of its real value) once the service is delivered. The ongoing effort to update the taxpayer registry of professionals at the DGI is a step in the right direction and should be strongly supported.

  • Eliminating tax exemptions. It remains very difficult to comprehensively identify and quantify exemptions in Guinea, given the absence of a proper tax expenditure assessment: this should be a priority.

  • Revising the taxation of individual wages and income. Recent salary increases in the public sector and the forthcoming revision to the civil servants’ base salary grid is a good opportunity to re-assess the one-off downward tax adjustment provided in 2011.

  • Taxing real property. Although the overall potential is limited,12 and the necessary administrative infrastructure heavy, authorities should slowly but systematically start setting up a property tax system.

References

  • Bahl, R. W., (1971), “A Regression Approach to Tax Effort and Tax Ratio Analysis”. IMF Staff Papers 18(3): 570–612.

  • Khwaja, M. S., Iyer, I. (2014), “Revenue potential, tax space, and tax gap”. World Bank Policy Research Working Paper No. 6868, World Bank.

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  • Le, T. M., Moreno-Dodson, B., Rojchaichaninthorn, J. (2008). Expanding taxable capacity and reaching revenue potential: cross-country analysis. Policy Research working paper; no. WPS 4559, World Bank.

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  • Le, T. M., Moreno-Dodson, B., Nihal, B. (2012), “Tax Capacity and Tax Effort: Extended Cross-Country Analysis from 1994 to 2009”. World Bank Policy Research Working Paper No. 6252, World Bank.

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  • Sen Gupta, A. (1997), “Determinants of Tax Revenue Efforts in Developing Countries.” IMF Working Paper 07/184, International Monetary Fund.

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  • Stotsky, j. g., WoldeMariam A. (1997), “Tax Effort in Sub-Saharan Africa.” IMF Working Paper 97/107, International Monetary Fund.

  • Teera, J. M., Husdon, J. (2004), “Tax performance: a comparative study,” Journal of Internaitonal Development 16:785-802.

  • Thomas, A., Treviño, J. P. (2013), “Resource Dependence and Fiscal Effort in Sub-Saharan Africa” IMF Working Paper WP/13/188, International Monetary Fund.

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1

Nearly two-thirds of current overall investments in Guinea come from the private sector, a fifth from the national budget, and the remaining from foreign aid (based on 2011-2013 averages). Keeping these proportions and assuming a 10 percent of GDP increase in public and private investments would represent a 2 percent of GDP increase in budget-financed public investments, a 6.3 percent of GDP increase in private investment and 1.7 percent of GDP increase in foreign-financed projects. This is not realistic, as the conditions for such large increases in private and foreign-financed investments are not met, and as a result, domestically-funded investments would probably need to increase by a minimum of 5 percent of GDP so that overall investment and growth reach the level of best African performers.

2

These figures take into account the reduced transfers to Électricité de Guinée following the introduction of Souapiti.

3

ITCD was favored over other sources, given its long time horizon (1980 to 2013). However, availability of various dependent variables limits most regressions to the 1987-2013 period.

4

Chad was included, as oil revenue started in 2004. The inclusion of country fixed effects mitigate the impact of oil.

5

Haussman tests were performed to decide on whether random or fixed effects should be used. Random effects were rejected for direct and indirect taxes, as well as total revenue, taxes on goods and services and international trade taxes. Fixed effects were used for all regressions in order to present results for a single representative model.

6

For example, Botswana had by far the highest constant for non-tax revenue, but given its endowment in diamonds, it is probably not reasonable to use the difference between Guinea’s and Botswana’s categorical variables as a measure of Guinea’s non-tax revenue potential. Reference countries are specified in Table 3.

7

Econometric estimation is performed in R, using the lm and plm procedures. Standard errors for the plm procedures are then computed taking into account heteroscedasticity within and correlation across panel.

8

This may in part be due to the fact that the tax potential was based on fitted values using the average of all countries’ fixed effects in the robust technique, due to technical constraints.

9

The landlocked dummy was surprisingly almost systematically significant and positive in regressions without fixed effects. As this could be related to peculiar situations (for example, many landlocked countries are in the vicinity of, or surrounded by South Africa, hence a possible positive influence on the tax to GDP ratio), the variable was dropped in favor of country fixed effects that could thus pick up remaining idiosyncratic factors.

10

High non-tax revenue at the DNT in 2008, 2009 and 2010 are related to high minerals prices.

11

Getting names right is often more difficult than it seems in West Africa: homonyms are widespread.

12

Best-performing low- and middle-income countries can expect a maximum of 1 to 2 percent of GDP in property taxation revenue, whose performance is often linked to gradual decentralization, and the presence of a functioning cadaster and construction permit system.

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Cover IMF Staff Country Reports
Guinea: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2016: Issue 262
Publisher:
International Monetary Fund
ISBN:
9781475520958
ISSN:
1934-7685
Pages:
46
DOI:
https://doi.org/10.5089/9781475520958.002

Guinea: GDP per Capita in Selected Sub-Saharan Countries, 2000–14 1/

Guinea: Investment and Growth in Sub-Saharan Africa 1/

Guinea: Base Scenario

Guinea: Alternative Scenario

Guinea: Tax and Non-tax Revenue in a Selection of African Countries

Guinea: Tax Structure in Guinea and Comparable Countries

Guinea: Evolution of the Tax Structure 1/

Guinea: Tax potential – Direct Taxes

Guinea: Tax Potential – Indirect Taxes

Guinea: Revenue by Collection Agency