Abstract
Selected Issues
Tax Revenue Mobilization in Benin: Lessons from Successful Experiences in Lidcs1
Tax revenue mobilization is improving in Benin but remains low compared to its peers and given the large development needs. Some low-income countries have managed in the past to durably increase their tax revenue. This paper draws some lessons from their experiences. The analysis shows that Benin would benefit from: (i) implementing tax policy reforms that exploit further the potential of consumption taxation, particularly VAT and excises; (ii) making the revenue administration more effective to reduce compliance risks and; (iii) getting the buy-in of all stakeholders to facilitate reform implementation.
A. The Need for Revenue Mobilization in Benin
1. Tax revenue is relatively low in Benin. Benin had a tax-to-GDP ratio of 13.2 percent of GDP in 2017, compared to 15.4 percent of GDP in non-resource rich low-income and developing countries (LICDs) and 15.1 percent of GDP in Sub-Saharan African (SSA) countries.
2. Enhancing revenue mobilization is crucial to achieving development objectives in a sustainable manner. Improving tax collection could enhance the country’s ability to (i) create fiscal space to achieve the Sustainable Development Goals (SDGs); (ii) improve the debt repayment capacity and; (iii) meet the WAEMU convergence criteria given that most of them are directly or indirectly affected by tax performance. Aware of the benefits of revenue mobilization, the authorities have recently taken steps to eliminate selected tax expenditures as part of the 2019 budget.
3. Benin could learn from the experience of other countries, in particular those that are not rich in natural resources. IMF staff has identified 65 episodes of large tax increases in LICDs that are not rich in natural resources (Non-RR) between 2000 and 2015. Large revenue increases are defined as an improvement in the tax-to-GDP by a minimum of 0.5 percent per year. A cyclical adjustment is performed to ensure that these increases are driven by fiscal policy and reforms, not by the economic cycle.
4. The analysis of these successful experiences reveals some commonalities. Two main stylized facts were observed in countries that managed to successfully increase their tax revenue:
Durability. In the sample, the average period of increase of tax ratios in LIDCs that are non-RR countries was 3.4 years and some countries managed to preserve the increase over 5 years (Figure 1a).
Mostly occurred in countries with low initial tax ratios. Episodes of large tax revenue mobilization happened mostly in countries with low initial tax-to-GDP ratios2 in the sample of non-RR LIDCs (Figure 1b).
Tax Revenue Mobilization Episodes in LIDCs and non-RR Countries
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculations.Tax Revenue Mobilization Episodes in LIDCs and non-RR Countries
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculations.Tax Revenue Mobilization Episodes in LIDCs and non-RR Countries
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculations.Taken together, these stylized facts suggest that the payoff of revenue reforms can be big, durable, and occur in countries with an initially-low tax performance.
B. Lesson 1: Exploit the Full Potential of Consumption Taxation
5. Successful tax policy reforms often start with untapped and low hanging fruits, such as excises.
Country experiences. Excise duties generally concern a limited number of goods (tobacco, alcohol, luxury goods, etc.) whose elasticity of demand in relation to price is low. Some of these goods have been targeted by countries that aimed to increase revenues. For example, Gambia increased the tax rate on cigarettes by about 25 percent in 2013; excise revenues from tobacco products increased by 0.5 percentage points to reach 0.8 percent of GDP in 2014. Burkina Faso also increased the excise tax for alcoholic beverages from 25 to 30 percent.
Application to Benin. Excises remain an untapped source of revenue in WAEMU countries in general and in Benin particularly (Figure 2). Excise rates in Benin are in general far below the ceilings set by the WAEMU Commission for almost all products that are subjected to excise taxation (Figure 3). The country could also consider introducing excise taxes on new goods (e.g. on imported mineral water and energizing drinks).
Revenue from Excises in Benin and in Selected Comparators
(Percent of GDP)
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculations. Note: LAC (Latin American Countries)Revenue from Excises in Benin and in Selected Comparators
(Percent of GDP)
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculations. Note: LAC (Latin American Countries)Revenue from Excises in Benin and in Selected Comparators
(Percent of GDP)
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculations. Note: LAC (Latin American Countries)
Excise Rates in Benin
(in percent)
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: Benin authorities and IMF staff calculations.Excise Rates in Benin
(in percent)
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: Benin authorities and IMF staff calculations.Excise Rates in Benin
(in percent)
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: Benin authorities and IMF staff calculations.6. Large tax revenue increases often require exploiting the full potential that VAT offers.
Country experiences. The gap between the VAT currently collected and the VAT that could be collected—approximated the C-efficiency—tends to be high in LIDCs (Figure 4). This points out to inefficiencies in the management of VAT from tax policy (e.g. high tax exemptions) and/or from revenue administration (compliance gap). In general, successful experiences have primarily focused on improving the C-efficiency rather than increasing VAT rates. For example, in 2012, Rwanda removed some tax exemptions particularly those related to its investment code. In 2014, Uganda reformed its VAT system through a new tax code (“revenue package”) by reducing many exemptions (e.g., eliminating VAT exemptions on sales of motor vehicles or trailers, extending VAT to computers), eliminating VAT exemptions on hotels, and increasing the VAT threshold.
Application to Benin. Like many LIDCs, Benin has a low C-efficiency (Figure 4) pointing out to a high VAT gap. Reducing the VAT gap would require that the authorities pursue the rationalization of VAT exemptions to improve the policy gap and develop a strategy to reduce the compliance gap (primarily by improving the VAT management capacity within the tax administration, promoting voluntary compliance3, increasing the VAT threshold to ease the burden of the tax administration and enable it to focus on a smaller VAT-liable taxpayers, and better implement the VAT reimbursement scheme to assure the credibility of the VAT system).
C-Efficiency, 2000–14
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculation using R-GAP.Notes: Advances Economies (AEs); Emerging Markets (EMs); Low-Income and Developing Countries (LIDCs); Sub-Saharan Africa (SSA).C-Efficiency, 2000–14
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculation using R-GAP.Notes: Advances Economies (AEs); Emerging Markets (EMs); Low-Income and Developing Countries (LIDCs); Sub-Saharan Africa (SSA).C-Efficiency, 2000–14
Citation: IMF Staff Country Reports 2019, 204; 10.5089/9781498323864.002.A003
Sources: IMF staff calculation using R-GAP.Notes: Advances Economies (AEs); Emerging Markets (EMs); Low-Income and Developing Countries (LIDCs); Sub-Saharan Africa (SSA).C. Lesson 2: Reform Revenue Administration to Improve Tax Compliance
7. Resources of the tax administration should be reoriented toward higher-risk taxpayers.
Country experiences. Many successful countries implemented some human resource management changes that aim to better monitor and sanction the riskiest taxpayers. Identifying, assessing and mitigating compliance risks is important to support the functioning of the tax administration. Reforms should be comprehensive by covering all domain of compliance risk management (registration, filing, payment, and reporting). Recently, Senegal, Rwanda, and Uganda have established fundamental elements of a compliance management system.
Application to Benin. There is an urgent need to optimize the management of human resources in the tax administration of Benin by easing the staff responsible for automated functions for the benefit of expert pools (risk analysis, control, research, investigation, recovery). For example, audit and research services account only for 5 percent of the overall workforce. This is five to six times lower than in tax administrations that perform well in the fight against tax fraud. A first step for the authorities should be to strengthen the Bureau d’enquete, de recherche et d’analyse des risques (BERAR) by providing it with more skilled staff (statisticians, computer scientists, etc.) and train its staff on the use of SIGTAS and risk analysis.
8. Information and Technology (IT) systems should be leveraged to improve the efficiency of tax collection and compliance.
Country experiences. Many successful experiences have taken advantage of IT systems to improve tax collection. For example, the Uganda Revenue Authority improved the quality of its taxpayer services by using e-tax services to facilitate taxpayers’ registration, filling and payment. Rwanda recently introduced electronic filing and implemented electronic registration which helped improve the registration process. Senegal introduced a systematic use of e-filling and e-payment in 2017.
Application Benin. The tax administration has recently been upgrading its IT system. This should, in principle, enable the tax administration to provide e-tax services to its taxpayers. However, these are not yet fully operational. The delay is due to the low quality of the data to be processed by the IT system, the need to train staff, and the absence of a communication strategy towards the adoption of this new technology by taxpayers. At the moment, large and medium corporates have access to e-payment. Manual treatment of tax declarations remains predominant and this hinders the improvement of data quality. The tax administration should make systematic the use of e-service to improve the quality and quantity of information collected from taxpayers.
9. Cooperation between tax and customs administrations could be improved to limit cross-border frauds.
Country experiences: The coordination between tax and customs administrations needs to be upgraded particularly in the area of information exchange. Some taxpayer information gathered at the border (on importers, in particular) need to be fully exploited by the tax administration to reduce compliance risk. In turn, some information collected by the tax administration (tax identification numbers for example) could be leveraged by the customs administration to limit tax fraud on imported goods. For example, in 2012 Burkina Faso has introduced two management systems to improve information sharing between the tax and customs administrations to combat fraud and limit tax avoidance.
Application to Benin: Given the importance of international trade4 for revenue collection in Benin, improving the cooperation between the two tax administrations is crucial. There are loopholes in the collection of customs revenue which in turn impact the collection of non-customs revenues. A recent crosscheck of the two revenue agencies’ databases showed that many importers are still unknown to the tax administration, highlighting the lack of collaboration between the two administrations.
D. Lesson 3: Get the Buy-in of All Stakeholders
10. Political willingness is key to foster the implementation of tax reforms.
Country experiences. When institutions are weak—as is often the case in many LIDCs—and large taxpayers can use their political connections to avoid tax compliance, political commitment is necessary to contain vested interest and pursue reforms that are politically difficult. In addition, political commitment can facilitate coordination between all relevant agencies, particularly between tax and customs administrations.
Lessons for Benin. By starting the rationalization of tax expenditures under the 2019 Budget Law, the authorities have shown their willingness to take the road of revenue mobilization. More needs to be done though, given the still high level of tax expenditures and the scope to enhance the cooperation between the different tax agencies.
11. Outreach through education, social dialogue and consultation can secure better compliance.
Country experiences. Taxpayer compliance is essential in achieving durable revenue mobilization gains. For example, in Senegal, the authorities adopted in 2012 a tax code that were prepared in consultation with employers and labor unions. They had the opportunity to provide inputs and comments on the draft version of the new tax code. This inclusive approach created a greater acceptance of the reforms.
Lessons for Benin. The authorities could improve their communications strategy particularly in the management of the VAT. For example, to improve VAT collection, the public should be aware that they must demand tickets for every purchase. This would force businesses to engage in VAT compliance, thus reducing informal trading. In addition, the authorities should involve taxpayers at all stages of tax reforms.
12. Synergies between tax policy and tax administrations should be developed to maximize the benefits of revenue reforms.
Country experiences. The most successful experiences (defined as those with the largest and most persistent gains) have pursued both revenue administration and tax policy reforms. Indeed, tax policy measures need to be implemented by an efficient tax administration. In turn, tax administration reforms could be constrained by an inefficient tax policy system (e.g. high tax exemptions make the implementation of the tax code more complicated and resource-intensive).
Lessons for Benin. Synergies can be exploited in both directions in Benin. On the one hand, the rationalization of tax expenditures initiated by the authorities will bear its fruits only if it is supported by an efficient tax administration. On the other hand, the efficiency of tax administration also requires efforts on the tax policy side to simplify the tax code. In this regard, the authorities should carefully consider the possible downsides of introducing new tax incentives for investment, which can have a large budgetary cost without clear effect on FDIs.5
E. Conclusions
13. The analysis of country experiences has identified three main ingredients for success:
An emphasis on consumption taxation. Countries that managed a significant increase in tax revenue mostly focus on consumption taxation by: (i) broadening the VAT base (for example, with a rationalization of tax exemptions) and; (ii) raising excises (either by increasing tax rates or introducing new excise taxes on selected goods).
A focus on the riskiest taxpayers. Success relied on (i) reforming tax administration functions to improve the compliance of the riskiest taxpayers and leverage on IT and; (ii) reinforcing the cooperation between domestic and customs administrations to reduce cross-border tax evasion and avoidance.
Getting the buy-in of all stakeholders. This required (i) joint efforts on tax policy and revenue administration side; (ii) political commitment to facilitate the implementation of reforms and; (iii) social dialogue and consultation.
Prepared by Mouhamadou Sy (FAD). This paper builds on: Akitoby et al. (2018), “Tax Revenue Mobilization in Emerging Markets and Low-Income Countries: Lessons from a New Dataset”, IMF Working Paper No 18–234, Akitoby et al. (2019), “Case Studies in Tax Revenue Mobilization in Low-Income Countries” IMF Working Paper No 19–104 and various technical assistance reports on Benin by the Fiscal Affairs Department. It also builds on the Regional Economic Outlook (2018), “Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities?”, African Department, International Monetary Fund. This paper expands the scope of the previous paper by analyzing LIDCs outside the SSA; it also enriches the analysis by using the case studies in Akitoby et al. (2019).
70 percent of LICs had a tax-to-GDP ratio below 15 percent before the tax reform period.
The launch of the experimentation phase of the electronic VAT invoicing machines system and the improvement of taxpayer services (by providing taxpayers with a personalized tax space) are moves in the right direction.
In 2017, Benin had an openness rate (exports plus imports in percent of GDP) of 79 percent comparing to 59 percent in Sub-Saharan Africa.
See IMF (2015), “Options for LIC Effective and Efficient Use of Tax Incentives for Investment”, and Anderson et al. (2018), “Corporate Tax Incentives and FDI in Developing Countries”.
