Selected Issues

Abstract

Selected Issues

Tax Revenue Mobilization in Mali1

Mobilizing more revenue to keep up with raising spending will be critical to implement the new government’s priorities while preserving fiscal sustainability in the context of declining external support. This paper shows that the tax-to-GDP ratio, at about 12.6 percent is low relative to West African Economic and Monetary Union (WAEMU) and SSA averages. Using the peer (SSA) analysis and stochastic frontier approach, the tax revenue gap in Mali is estimated at about 0.7 percent of GDP in 2010–15, implying a significant potential to raise revenue. The estimated gap is even larger for trade taxes at about 2 ½-3 percentage points of GDP below their tax capacity during the same period. The analysis suggests that closing the tax policy and tax gap will require sustained reforms, both in tax policy and tax administration. On tax policy, progress achieved with the law to forbid granting new discretionary exemption in 2017 can be consolidated by reviewing provisions of the tax and customs codes related to the tax base, duties and taxes to limit the cases of exemptions to considerations of economic policy and social nature. Consideration should also be to developing property taxation and address the under-taxation of agriculture and trade. With regard to tax administration, actions include cleaning up the taxpayer registration and accounting, upgrading the IT system and strengthening compliance risk management, and building the capacity of tax agents, including through on the-job training, the use of modern management tools and procedures, the reinforcement of the analysis and control capacities of the tax administrations, particularly in areas experiencing a marked economic growth.

A. Background and Recent Developments

1. Revenue mobilization in Mali has been in the last decade a pillar of the successive governments’ economic and financial programs supported by the IMF. In the context of growing population and large development needs, domestic revenue mobilization has helped support investment in education, health, social protection, and critical infrastructure while preserving fiscal sustainability. Reliance on domestic revenue mobilization has also emerged as a top priority because of the significant decline in donor support. Over the last 12 years, external grants dropped from 3.5 percent of GDP in 2005 to 1.6 percent of GDP in 2017.

2. Mali’s tax revenues have increased significantly in recent years, reflecting stronger economic growth and the impact of tax policy and administration reforms. Tax revenue increased by 13 percent per year during 2012–16, well above the nominal annual GDP growth of 7 percent (Figure 1 and 2). As a result, the tax-to-GDP ratio increased from 11.9 percent in 2012 to 14.9 percent in 2016 (Figure 1), following an average decline by 0.2 percentage points of GDP per year over 2005–2012 (from 13.5 percent of GDP in 2005). The recent performance helped Mali score an average increase of 0.6 percent of GDP above the WAEMU average for the same period (Figure 3). In 2017, there was a further increase in tax revenue by 0.3 percent of GDP largely due to a 0.3 percentage point increase in income tax revenue and a modest increase of 0.1 percentage point in trade tax revenue offset by a 0.1 percentage point decrease in goods and services tax revenue (Figures 2). The tax-to-GDP ratio grows faster in Mali than in other WAEMU countries, albeit starting from a weak base.

Figure 1.
Figure 1.

Mali: Tax Revenue and GDP Growth

(percent)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Sources: Malian authorities; and IMF staff calculations.
Figure 2.
Figure 2.

Mali: Tax Revenue in Mali

(percent of GDP)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Sources: Malian authorities; and IMF staff estimates.
Figure 3.
Figure 3.

WAEMU: Evolution of Total Tax Revenue

(percent of GDP)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Sources: Malian authorities; FAD Revenue database; and IMF staff calculations.

3. Revenue collection has often fallen short of budget targets, complicating budget management. The shortfall has been predominantly driven by optimistic projections. Figure 4 shows that except in 2016 and 2017, the execution of the budget had resulted in a gap in revenue, which led to a scaling back in planned investment programs to keep the budget deficit within target. Difficulties to reduce expenditure in the second half of the year led to significant float, especially when committed external support could not be fully mobilized.

Figure 4.
Figure 4.

Mali: Tax Revenue Collection and Budget Forecast, 2013–17

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Sources: Malian authorities; and IMF staff estimations.

4. The increase in tax-to-GDP ratio is due to tax policy and administrative measures. The authorities implemented series of tax reforms and administrative measures including, increase in taxes on financial transactions and telecommunication, the expansion of the tax base, increase in tax rates and improvement in tax payers’ compliance. However, given this notable improvement in tax revenue, the WAEMU target of 20 percent tax-to-GDP ratio is far from being reached.

Mali: Tax policy and administrative measures, 2014–16

article image
Sources: Malian authorities and Staff estimates.

This rate applies to every entreprise, business not paying VAT.

The TARTOP increased from 2 % to 5%.

The TAF was increased from 15% to 17%.

Excise taxes on tobacco, alcohol and passenger vehicles

5. Most policy makers and stakeholders see scope for Mali to further increase its tax revenue. The strengths of the current tax system lie in the continued increase in the tax-to-GDP ratio, in part due to good coverage of the Industrial sector (Manufacturing, Energy, Mines) and certain Services (Telecommunications, Banks and Insurance, etc.). At the same time, the system has weaknesses inherent to the sectoral approach, with the under-taxation of agriculture and trade. There is also room to improve the tax administration, especially with regard to the identification system of companies and other economic agents; and the administration of tax exemptions. This paper reviews the level and structure of tax revenues in Mali and compares them to peers; provides a quantification of Mali’s tax capacity and discusses policy options for reforms.

B. Benchmarking of Mali’s Revenue Performance

6. Mali’s tax-to-GDP ratio is low in comparison with most WAEMU peers, but stood at the level implied by its level of development. Over the 2013–17 period, Mali reached a tax-to- GDP ratio of 13.8 percent of GDP, below the average of WAEMU countries and SSA, respectively at 14.8 percent of GDP and 15.6 percent of GDP (Figure 5). At the same time, Mali’s revenue collection stood broadly at the level implied by its GDP per capita (Figure5).

Figure 5.
Figure 5.

Mali: Tax Revenue and Income Level in Low-Income Countries

(average 2013–17)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Source: IMF, World economic Outlook; and staff estimates.

7. Mali’s income tax revenue is broadly in line with WAEMU peers, but out-of-line with SSA. Over 2013–17, Mali’s income tax averaged 4.4 percent of GDP, while it stood at 4 percent of GDP and 5.5 percent of GDP in WAEMU and SSA peers, respectively (Text Table). As in most WAEMU countries, direct taxes, consisting of taxes on companies and individuals, remain the weak point in the mobilization of tax revenues. These taxes are much lower than the indirect taxes, the direct taxes represent hardly half of the indirect taxes; unlike OECD countries where tax revenues from both types of taxes are of the same magnitude. Thus, the effort to mobilize tax revenues tends to focus more on VAT than on taxes on companies and individuals. This situation reflects the large share of the informal sector in the economy (close to 55 percent of GDP in 2015).

Text Table Mali:

Total Tax Revenue and Sub-categories, Cross Country Comparison

(Average 2013–17)

article image
Source: Country authorities; and IMF staff estimates.

8. Mali’s goods and services (G&S) tax revenue was significantly higher than in peers, mostly reflecting VAT performance. Over 2013–17, Mali’s G&S tax revenue averaged 7.6 percent of GDP, well above the average of 5.8 percent of GDP in both the WAEMU and SSA. VAT contributed about 40 percent total tax revenue in Mali, compared to about 26 percent of GDP in WAEMU and

9. Mali’s trade tax revenue is significantly out-of-lines with peers, notwithstanding customs duty harmonization and liberalization process within the WAEMU. Trade tax revenue amounted to about 1.8 percent of GDP, well below the average of 4.3 percent of GDP for WAEMU countries, but quite far from the 2.8 percent of GDP for SSA (Figure 4). Low trade taxes are likely due to full trade liberalization within the WAEMU region, with a growing share of Mali’s imports originating from WAEMU countries. However, inefficiencies in customs administration also weigh on low collection of trade taxes, suggesting that there is a potential to raise more revenue while proceeding with the trade liberalization agenda.

Figure 6.
Figure 6.

Mali’s Total Tax Revenue and Sub-categories with Comparators

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Source: World Economic Outlook; and staff estimates.Note: SSA= sub-Saharan Africa; SSA LICs= sub-Saharan Africa Low Income Countries; WAEMU= West African Economic and Monetary Union.

10. With Mali’s CIT and VAT rates comparable to those applied in peers, the lower tax revenue performance instead results from a lower tax productivity. Mali’s CIT and VAT rates stood at 30 and 18 percent, respectively. These rates were close to those in peer countries (Figure 7). However, the tax productivity, measured by the revenue collected (in percent of GDP) for each percentage point of tax rate, is lower than in peers (Figure 8). This lower productivity may be linked to administrative inefficiency, compliance issues and policy gaps other than the rate (e.g., exemptions).

Figure 7.
Figure 7.

Mali: CIT and VAT Rates in Mali and Other WAEMU Countries, 2013–16

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Sources: FAD Tax Rate Database and IMF staff estimates.
Figure 8.
Figure 8.

Mali: Income and VAT Productivity in Mali and Other WAEMU Countries, 2013–16

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Sources: IMF, World Economic Outlook; FAD Tax Rate Database; and staff estimates.

11. The benchmark analysis offers a useful perspective to assess Mali’s tax revenue performance relative to peers, but does not look at Mali’s tax capacity. For the comparison to be meaningful, there is a need to supplement it by an investigation of the factors determining Mali’s tax capacity, including its level of development and structural characteristics. The tax capacity, defined as the maximum level of tax revenue Mali should be able to collect, could provide an appropriate target to guide ongoing fiscal reforms.

C. Estimating Potential Tax Revenue

12. Two methods are employed to estimate tax revenue potential in this paper: the “peer analysis” and the “stochastic tax frontier analysis”. First, the peer analysis, which relies on a standard fixed-effect panel analysis is utilized to estimate Mali’s potential tax revenue based on determinants2 identified in the literature to drive tax revenue collection. The predicted tax revenue based on the country’s current characteristics is a proxy of the tax capacity, and the difference with the actual revenue level is the combination of the tax policy gap and the tax gap. In the second step of this analysis, the stochastic tax frontier (Box 1), also a regression-based analysis, which aims to estimate the maximum tax revenue a country can achieve given its characteristics is used to crosscheck the robustness of the findings of the peer analysis. The tax frontier is akin to a production frontier with the output being the tax revenue-to-GDP ratio and the inputs being a set of macroeconomic fundamentals (including GDP per capita, consumption, inflation, trade openness and so on). The distance to the frontier captures administrative inefficiencies and policy choices (such as differences in tax legislation of a country, tax rates and exemptions) resulting from differences between actual tax revenue and potential tax.

13. The two analyses are carried out using dataset covering the period 1995–2015 for a sample of 38 sub-Saharan African countries. WAEMU and other sub-Saharan African countries are used as reference groups. The standard fixed-effect panel analysis is used to predict potential tax revenues for total tax and its subcategories (goods and services tax revenue, income tax revenue, and trade tax revenue) while Greene (2005a)’s true fixed effects estimator is used to estimate the technical inefficiencies.

Stochastic Frontier Analysis

Building on a large set of empirical studies, we specify a model similar to that of Aigner, Lovell, and Schmidt (1977); Alfirman (2003) and Pessino (2010 and 2013). The stochastic tax frontier model can be represented as follows:

yit=αi+βxit+νituit

Where yit is the log of tax to GDP ratio for country i at time t

  • αt represent a set of country-specific intercepts

  • β is a vector of unknown parameters to be estimated

  • xit is a vector of tax revenue determinants for country i at time t

  • νit is the statistical noise or the disturbance term. It is assumed to be independently and identically distributed N(0,σv2) random errors and is independently distributed of the uit

  • uit represent the level of inefficiency; the “failure” to obtain the maximum amount of tax collection. It is a non-negative random variable associated with country specific factors such as technical inefficiencies and policy issues (such as differences in tax legislation of a country, tax rates and exemptions) which contribute to country i not tax potential at time t

This analysis seeks to estimate the technical efficiencies of Mali’s total tax revenue and its subcategories relative to WAEMU and other sub-Saharan African countries. To do so, we first estimate the technical inefficiencies (uit) and obtain the technical efficiencies as (1 – uit).

14. The results from the peer analysis are broadly as expected (Annex I). The coefficient of GDP per capita is positive and strongly significant, suggesting that economic development is associated with higher demand for public expenditure and higher level of tax capacity to pay for the higher expenditure. The value added of agriculture as a proxy for the ease of tax collection has a negative and significant impact, reflecting the fact that in most countries agriculture is tax-exempted and highly informal. Capital investment, measured by the gross fixed capital formation, is expected to have a positive effect on government revenues through the potential expansion of economic activity and tax. Broad money (as a ratio to GDP), as a measure of the degree of economy’s monetization has a significant positive impact on the tax potential, suggesting that an economy that is highly monetized will realize high tax revenue than that which is less monetized. Finally, the negative and significant impact of inflation, as a proxy for the quality of macroeconomic management, suggests that higher inflation would reduce the tax-to-GDP ratio due to decrease in purchasing power of consumer and investing capacity of investors (Baunsgaard and Keen, 2009). Other factors including demographic, trade openness, and natural resource rent were not statistically significant.

15. Mali’s tax capacity is estimated at 13.2 percent of GDP, suggesting that there is considerable scope to raise revenue. Using the coefficients in Appendix I and the average value of the explanatory variables in 2010–15, it is estimated that Mali could have achieved a total tax-to-GDP ratio of 13.2 percent of GDP compared to the actual collection of 12.6 percent of GDP over the same period Figure 9. This implies that tax administration inefficiencies, tax evasion and tax policy design cost up to 0.7 percentage point of GDP in revenue annually. Nevertheless, the large increase in the tax revenue ratio in 2015 helped reduce the gap to 0.2 percentage point of GDP assuming an unchanged tax capacity.

Figure 9.
Figure 9.

Mali: Tax Performance in Mali and Predicted Values Relative to WAEMU Countries

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Source: IMF staff estimations.

16. The results from peer analysis point to the need to raise more tax revenue on trade. Overall, Mali’s total tax revenue performs well relative to WAEMU and sub-Saharan African peers as a result of the good performance of the goods and services tax revenue, with a positive tax gap close to 2 percentage points of GDP over 2013–15. At the same time, it is quite possible to improve the collection of trade revenue by 2½-3% of GDP Figure 9.

17. The results of the stochastic tax frontier analysis are broadly similar to those obtained from the SSA peer analysis. Mali’s total tax revenue does well largely due to goods and services tax revenue. However, its trade tax revenue is less efficient when compared to WAEMU and other sub-Saharan African countries Figure 10.

Figure 10.
Figure 10.

Mali: Efficiency in Mali by Category

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Source: IMF staff estimates.

D. Conclusion and Main Recommendations

18. Strong revenue performance in recent years helped Mali improve its regional stand, but there is room to further increase tax revenue. The benchmark analysis shows that Mali’s tax-to-GDP ratio is below the average of WAEMU and SSA countries, with weakness in trade tax revenue being the most pronounced. Using the peer analysis, Mali’s trade tax performance is estimated at about 2 ½-3 percentage points of GDP below their tax capacity in 2010–15. Mali’s tax performance is estimated at about 0.7 percentage point of GDP below their tax capacity in 2010–15, implying that there is potential to raise revenue, especially in trade taxes, to finance critical social and growth-enhancing expenditure, while preserving fiscal sustainability.

19. Closing the tax policy and tax gap will require sustained and deep reforms, both in tax policy and tax administration. There is significant revenue mobilization potential through the elimination of tax exemptions. To consolidate progress achieved with the elimination of discretionary exemption in 2017, there is a need to review provisions of the tax and customs codes related to the tax base, duties and taxes to limit the cases of exemptions to considerations of economic policy (regulation, incentive) and social nature (income redistribution) adapted to the current context. Another tax potential relates to property tax, which requires the establishment of a property cadaster, a system drawing up the status and legal status of all landholdings, in the cities first, then the agricultural areas and then the rest of the national territory remains an underutilized source of revenue particularly for the rapidly growing urban centers. In the areas of tax administration, actions include cleaning up the taxpayer registration and accounting, upgrading the IT system and strengthening compliance risk management. And building the capacity of tax agents, including through on the-job training, the use of modern management tools and procedures, the reinforcement of the analysis and control capacities of the tax administrations, particularly in areas experiencing a marked economic growth.

20. A timely implementation of technical assistance advice will be key to move forward. Mali is participating in the IMF capacity building framework, which aims to develop a medium term strategy to strengthen institutions and includes a component on revenue mobilization. 3 Other donors such as France and the EU are also providing support.

Annex I. Determinants of Tax Potential in Mali

Determinants of Total Tax Potential

article image
Robust standard errors in brackets*** p<0.01, ** p<0.05, * p<0.1

Determinants of Income Tax Potential

article image
Robust standard errors in brackets*** p<0.01, ** p<0.05, * p<0.1

Determinants of Trade Tax Potential

article image
Robust standard errors in brackets*** p<0.01, ** p<0.05, * p<0.1

Determinants of G&S Tax Potential TaPotential

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Robust standard errors in brackets*** p<0.01, ** p<0.05, * p<0.1
Source: IMF staff estimates.

Annex II. Mali’s Tax Gap Indicators

uA02fig01

Annex Figure: Mali’s Tax Gap Indicators

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A002

Source: IMF staff estimations.

References

  • Aigner, Lovell, and Peter Schmidt. 1977. “Formulation and Estimation of Stochastic Frontier Production Function Models.” Journal of Econometrics 6: 2137.

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  • Alfirman L., (2003), “Estimating Stochastic Frontier Tax Potential: Can Indonesian Local Governments Increase Tax Revenues Under Decentralization?”, Center for Economic Analysis Working Paper No. 03–19, Department of Economics, University of Colorado at Boulder, Colorado 80309.

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  • Baunsgaard, T. and Keen, M., 2010. Tax Revenue and (or?) Trade Liberalization. Journal of Public Economics, Vol. 94, pp.563577.

  • Fenochietto, R. and Pessino, C., 2013, “Understanding Countries’ Tax EffortIMF Working Paper 13/244.

  • Greene, W., 2005, “Reconsidering heterogeneity in panel data estimators of the stochastic frontier model,” Journal of Econometrics, 126, pp. 269303.

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  • Pessino, C., and R., Fenochietto. 2010. “Determining Countries’ Tax Effort.” Hacienda Pública Española / Revista de Economía Pública 195 (4): 6587.

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1

Prepared by Jemma Dridi and Edna Mensah.

2

GDP per capita, consumption, gross fixed capital formation, inflation, trade openness (import and exports as a share of GDP), share of agriculture in GDP, share of the urban population, natural resource rents and broad money as a share of GDP.

3

In 2017, the IMF begun implementing capacity building strategies with selected countries in fragile situations. Medium-term strategies for capacity development were discussed with country authorities and will be implemented through focused technical assistance and training. The strategies have monitorable outcomes and goals to strengthen institutions and macroeconomic management.

Mali: Selected Issues
Author: International Monetary Fund. African Dept.