Abstract
Selected Issues
Non-Oil Revenue Mobilization: Key Challenges and Reforms1
Non-oil revenue mobilization in the Republic of Congo has become a key strategic priority for the authorities to support fiscal consolidation efforts and restore debt sustainability. Revenue mobilization is particularly important given the projected decline in oil revenues over the medium-term, as oil production declines from the peak levels it is projected to achieve in 2019–20. This Selected Issues Paper (SIP) discusses reforms that could generate higher revenues from the non-oil sector through measures to rationalize the tax code, broaden the tax base, and increase administrative efficiency. These efforts should be complemented by economic diversification policies that support non-oil growth and thereby expand the potential tax base. The paper also reflects on lessons learned from other country experiences that could be relevant for the Republic of Congo.
A. Context
1. Non-oil revenue mobilization is a key strategic priority in the Republic of Congo. It would provide strong support for the financing of increased social demands, contribute to fiscal consolidation to restore debt sustainability, and rebuild buffers that can be used to increase resilience to future shocks. This paper discusses several steps that could help the authorities boost domestic non-oil revenue mobilization, including through reforms to strengthen basic institutions, broaden the tax base, and launch tax policy initiatives focusing on the modernization and optimization of existing taxes. In line with recent research,2 the authorities’ plans to mobilize domestic revenues should be supported by a medium-term strategy, a high level of political commitment, and capacity development. In addition, improvements in transparency and a reduction in corruption should increase compliance as citizens and companies become more convinced that the taxes they pay will have a broader positive impact on the economy.
2. Non-oil revenues in the Republic of Congo have followed a generally positive trend since 1995, though there has been a substantial decline in recent years. From 1995 to 2014, non-oil revenues doubled (Figure 1), reaching 30 percent of non-oil GDP. However, this positive trend was reversed in 2014 due to the decline in oil prices that triggered a deep economic crisis. Non-oil revenues in Congo are relatively high compared to other oil producing countries in sub-Saharan Africa (Figure 2). However, these calculations need to be interpreted with caution given the fact that non-oil GDP could be underestimated.3
Non-Oil Revenues
(Percent of non-oil GDP)
Citation: IMF Staff Country Reports 2020, 027; 10.5089/9781513528052.002.A001
Sources: Congolese authorities and IMF staff estimates.Note: In Figure 1, the dotted line represents 2019 and 2020 projections.Non-Oil Revenues
(Percent of non-oil GDP)
Citation: IMF Staff Country Reports 2020, 027; 10.5089/9781513528052.002.A001
Sources: Congolese authorities and IMF staff estimates.Note: In Figure 1, the dotted line represents 2019 and 2020 projections.Non-Oil Revenues
(Percent of non-oil GDP)
Citation: IMF Staff Country Reports 2020, 027; 10.5089/9781513528052.002.A001
Sources: Congolese authorities and IMF staff estimates.Note: In Figure 1, the dotted line represents 2019 and 2020 projections.
Non-Oil Revenues in Oil Producing Countries
(Percent of non-oil GDP)
Citation: IMF Staff Country Reports 2020, 027; 10.5089/9781513528052.002.A001
Sources: Congolese authorities and IMF staff estimates.Note: In Figure 1, the dotted line represents 2019 and 2020 projections.Non-Oil Revenues in Oil Producing Countries
(Percent of non-oil GDP)
Citation: IMF Staff Country Reports 2020, 027; 10.5089/9781513528052.002.A001
Sources: Congolese authorities and IMF staff estimates.Note: In Figure 1, the dotted line represents 2019 and 2020 projections.Non-Oil Revenues in Oil Producing Countries
(Percent of non-oil GDP)
Citation: IMF Staff Country Reports 2020, 027; 10.5089/9781513528052.002.A001
Sources: Congolese authorities and IMF staff estimates.Note: In Figure 1, the dotted line represents 2019 and 2020 projections.B. Reforms Over the Last Decade
3. Some tax reforms were introduced in the last decade. Since 2009 several CD missions have suggested a series of reforms that would increase non-oil revenue mobilization by 3 to 5 percent of GDP. These recommendations have mainly focused on how to rationalize the tax code, broaden the tax base, and increase administrative efficiency. The authorities have mainly focused their efforts on reducing the most important taxes including the rate of Corporate Income Tax (CIT), which was reduced from 38 to 30 percent over the past few years. They have also reduced personal income tax (PIT) rates, but without simplifying the tax structure. Additionally, the authorities introduced a reduced rate of VAT and new custom duties and have implemented several other measures for revenue mobilization since the 2017 budget (e.g., an increase in excise rates, a new tax on car imports, and taxes on real estate transactions).
4. Tax reform efforts have had limited success so far. In parallel, the authorities adopted measures that undermined the tax base, for example, through the introduction of many new ad hoc taxes (parafiscalité), and the excessive use of exemptions. For example, the use of tax incentives for special economic zones, the proliferation of new conventions with generous tax exemptions envisaged by the investment code, and widespread use of reduced VAT rates and exemptions from the PIT code (notably for agricultural revenue).
5. Tax reform was not accompanied by a revised institutional framework, which has exacerbated the fragmentation and lack of tax policy coherence. In particular, tax policy responsibilities were split among (i) the tax departments of the Budget Ministry, (ii) the National Commission on Investments (in charge of the investment code), and (iii) a separate agency in charge of the administration of special economic zones.
C. Short-term Measures Proposed by the Authorities (2019–20)
6. The success of the authorities’ revenue mobilization in the short term will depend on the effective implementation of three key reforms. These include: (i) the strict implementation of new tax measures incorporated in the recent budget laws, including the elimination of the reduced VAT rate for imports, reductions in the VAT threshold, and new provisions on excises, including on beverages and tobacco; (ii) administrative measures to strengthen tax compliance, the collection of tax arrears, and the taxation of refined oil imports; and (iii) other legislative measures, including telecommunication taxes. Specifically, discussions with the authorities have focused on strategies to estimate the probability of collection of tax arrears and to reduce exemptions; the feasibility of implementing measures proposed by the Tax and Customs Directorates for 2019–20; and the status of the work of the Congolese Commission which is responsible for renegotiating with private companies investment conventions and other bilateral agreements aimed at reducing exemptions.4
7. Administrative measures to recover tax arrears are critical. Recovery of tax arrears is a major challenge for the Congolese government, as they represented more than 29 percent of non-oil GDP in 2018. There are two main sources of arrears to be collected by the Tax and Customs Directorates: (i) large and medium-size private companies’ arrears, estimated at 374 CFA billion (14.7 percent of non-oil GDP) that are currently being reviewed by administrative courts; and (ii) public enterprise arrears and associated penalties, estimated at 330 CFA billion (13 percent of non-oil GDP).5
8. A combination of measures approved by the Tax Directorate includes the potential recovery of private sector tax arrears equivalent to 6 percent of GDP (Table 1). Other measures identified for 2019–20 include (i) improving IT interconnections within the tax administration and with other entities and departments; (ii) intensifying tax audits; and (iii) analyzing and streamlining tax expenditures. However, the total expected recovery of tax arrears up to September 2019 had been insignificant and remains a concern. Furthermore, the potential recovery of these arrears could be much lower than current estimates and the challenge of recovering arrears could increase over the years if authorities contest their existence in court. When the arrears are older, the companies’ incentives to repay them are also weaker. To improve the probability of recovering tax arrears, the authorities will prepare by February 2020 an inventory of tax arrears and administrative agreements and will define a medium-term strategy to collect them. The authorities noted the challenges faced by the Tax Directorate in recovering arrears from public corporations, and indicated that the Treasury is responsible for collecting those arrears.
Republic of Congo: Projection of Non-Oil Revenues by Tax Directorate (2020)
(Billions of CFA francs)
Projection of tax collection (without measures).
Establishment of an IT connection between the Treasury, Direction Générale des Impôts et des Domaines (DGID) and the Customs Directorate.
Republic of Congo: Projection of Non-Oil Revenues by Tax Directorate (2020)
(Billions of CFA francs)
| Evolution of the Tax Base | 509 |
| New Legislative and Administrative Measures | 208.2 |
| 1. 2020 Budget Law | 27.2 |
| |
| 2. Interconnexion of the various tax administrations2 | 20 |
| 3. Recovery of tax arrears for large companies in 2020 | 80 |
| 4. Recovery of tax arrears for small and medium companies | 60 |
| 5. Recovery of other tax arrears. | 13 |
| 6. Tax increase on telecommunications | 8 |
| Total | 717.2 |
Projection of tax collection (without measures).
Establishment of an IT connection between the Treasury, Direction Générale des Impôts et des Domaines (DGID) and the Customs Directorate.
Republic of Congo: Projection of Non-Oil Revenues by Tax Directorate (2020)
(Billions of CFA francs)
| Evolution of the Tax Base | 509 |
| New Legislative and Administrative Measures | 208.2 |
| 1. 2020 Budget Law | 27.2 |
| |
| 2. Interconnexion of the various tax administrations2 | 20 |
| 3. Recovery of tax arrears for large companies in 2020 | 80 |
| 4. Recovery of tax arrears for small and medium companies | 60 |
| 5. Recovery of other tax arrears. | 13 |
| 6. Tax increase on telecommunications | 8 |
| Total | 717.2 |
Projection of tax collection (without measures).
Establishment of an IT connection between the Treasury, Direction Générale des Impôts et des Domaines (DGID) and the Customs Directorate.
9. The Customs Directorate proposed to IMF staff to eliminate some exemptions, and to improve the efficiency of collections and the effective application of the Hydrocarbons Code. Additional steps are being taken to improve information systems and reduce corruption. The following three measures could increase revenue mobilization by 17 CFA billion (0.6 percent of GDP) in 2020 (Table 2):
Elimination of exemptions related to the export of natural resources and raw materials;
Application of the provisions of the Hydrocarbons Code to petroleum sector imports; and
Taxation of imports of refined petroleum products.
Republic of Congo: Custom Administration Revenues Estimates (2020)
(Billions of CFA francs)
Republic of Congo: Custom Administration Revenues Estimates (2020)
(Billions of CFA francs)
| Evolution of trade flows and non-oil GDP | 110 |
| Improvement of information systems and interconnections | 6 |
| Revenue mobilization measures | 17 |
| Other measures to combat corruption and strengthening good governance | 1.5 |
| Total | 134.5 |
Republic of Congo: Custom Administration Revenues Estimates (2020)
(Billions of CFA francs)
| Evolution of trade flows and non-oil GDP | 110 |
| Improvement of information systems and interconnections | 6 |
| Revenue mobilization measures | 17 |
| Other measures to combat corruption and strengthening good governance | 1.5 |
| Total | 134.5 |
10. The authorities estimate that tax exemptions to the oil sector accounted for 18 percent of non-oil GDP in 2018 and investment-specific exemptions contributed a further 6 percent of non-oil GDP (Table 3). However, a recent study by the Commission responsible for assessing investment-specific exemptions suggests that the fiscal costs associated with investment specific exemptions could be even higher (325 CFA billion, 12 percent of GDP). Furthermore, oil sector and administrative exemptions continued to increase in 2019 as shown in Tables 3 and 4. The discussions with the authorities focused on the Commission’s work to assess the fiscal costs of (i) incentives and exemptions provided for in laws and regulations;6 and (ii) other incentives provided by the government which are outside the legal framework.
Republic of Congo: Types of Tax Exemptions (2016–19)
(Billions of CFA francs)
Republic of Congo: Types of Tax Exemptions (2016–19)
(Billions of CFA francs)
| Types of Tax Exemptions | 2016 | 2017 | 2018 | 2019* |
|---|---|---|---|---|
| Oil sector exemptions Regulatory exemptions | 742 0 | 216 0 | 454 0 | 474 3 |
| State contribution to investment | 151 | 0 | 152 | 114 |
| Conventional exemptions | na | 128.4 | 245.9 | 25.3 |
| IS (Corporate Tax) | na | 10.5 | 126.9 | 8.2 |
| TSS (Special Corporate Tax) | na | 22.1 | 87.5 | 0.7 |
| TUS (Special Payroll Tax) | na | 0.3 | 0.6 | 0.1 |
| TVA (Value Added Tax) | na | 95.3 | 21.5 | 16.4 |
| TVTS (Tax on Passengers Vehicles Companies) | na | 0.0 | 0.0 | na |
| TTF (Tax on Remittances) | na | na | 9.0 | na |
| Local Taxes | na | 0.3 | 0.4 | 0.0 |
| Administrative exemptions | na | 3.6 | 8.5 | 9.7 |
Republic of Congo: Types of Tax Exemptions (2016–19)
(Billions of CFA francs)
| Types of Tax Exemptions | 2016 | 2017 | 2018 | 2019* |
|---|---|---|---|---|
| Oil sector exemptions Regulatory exemptions | 742 0 | 216 0 | 454 0 | 474 3 |
| State contribution to investment | 151 | 0 | 152 | 114 |
| Conventional exemptions | na | 128.4 | 245.9 | 25.3 |
| IS (Corporate Tax) | na | 10.5 | 126.9 | 8.2 |
| TSS (Special Corporate Tax) | na | 22.1 | 87.5 | 0.7 |
| TUS (Special Payroll Tax) | na | 0.3 | 0.6 | 0.1 |
| TVA (Value Added Tax) | na | 95.3 | 21.5 | 16.4 |
| TVTS (Tax on Passengers Vehicles Companies) | na | 0.0 | 0.0 | na |
| TTF (Tax on Remittances) | na | na | 9.0 | na |
| Local Taxes | na | 0.3 | 0.4 | 0.0 |
| Administrative exemptions | na | 3.6 | 8.5 | 9.7 |
11. Many of the incentives enjoyed by investment companies do not comply with existing laws and regulations. These include a wide range of exemptions on (i) taxes and custom duties on imported products; (ii) profits and revenues generated by investment projects; (iii) a special payroll tax; (iv) the tax on funds denominated in foreign exchange; (v) PIT on non-resident members of the boards of these investment companies; (vi) the registration fees for the creation of companies, capital injections, and mergers; and (vii) social security taxes on retirement pensions.
12. The preliminary estimates of tax expenditures are based on a survey that demonstrates substantial problems in compliance with the investment code and other regulations. In particular, over one third of companies were not compliant with the existing regulatory framework and bilateral agreements. The Commission should finalize its work to produce full assessment. In addition, the fiscal cost estimates should include the loss of income to the state due to (i) private sector non-compliance with social security contributions; (ii) the environmental and social cost of private investment projects that have not been audited; and (iii) non-compliance with foreign exchange regulations.
D. Recommendations
Tax Policy
13. The expansion of the tax base should be at the top of the government’s reform agenda. It is a pre-requisite to create space for possible reductions in rates and tax simplification that could help the business environment and the development of the non-oil economy. The most critical reform area would be to address without further delay the challenges associated with the proliferation of tax exemptions that are currently eroding the tax base and limiting potential revenue mobilization.
14. Other steps on tax policy reform can help complement the ongoing efforts to expand the tax base. In particular, there is scope to raise additional revenue from property taxes, and improve the capacity of the audit office to enhance tax compliance in extractive industries. Reviewing international tax rules (notably in relation to natural resources) to assess the impact of double taxation treaties and transfer pricing issues could also play a useful role. Consideration should also be given to the expansion of excises and simplification of the VAT, through the elimination of exemptions and reduced rates. However, other options remain limited. For example, creating new taxes in an already clogged up tax system would further complicate and depress the business environment.
Institutional Reforms
15. A key step to reduce fragmentation and improve fiscal policy is the recent creation of a Tax Policy Unit (UPF) in the Ministry of Finance. This unit can develop medium-term plans for tax mobilization, provide a strategic orientation to reforms and help coordinate various tax policy initiatives.7 The main challenge for the UPF is to ensure that it has a mandate to guide fiscal policy, and provide the Minister of Finance with advice on tax policy issues.
16. Further progress to modernize tax administration is also needed. The government should prepare and publish a medium-term strategy for reforming the customs and tax administrations and improving service delivery. These reforms should focus on modernizing human resource management, implementing a results-based management system, and increasing transparency and reducing corruption. In addition, the formalization of a framework for consultation and collaboration with the private sector, civil society, and international development partners can also play a useful role to ensure broader understanding and ownership of tax reform efforts.
17. Reversing the current trend will require institutional reforms and steps to strengthen the tax policy framework. A proper assessment and evaluation of tax expenditures should be a key instrument to help the authorities focus on the dangers of eroding the tax base through an excessive use of exemptions. A similar approach has been used in other countries in Africa (e.g., Senegal and Morocco), and can play a useful role to assess the trade-offs associated with the use of tax exemptions.
E. Conclusion
18. The authorities should step up revenue mobilization as a key component of their medium-term fiscal strategy. This will require a well-sequenced structure of reforms that includes three key elements. First, the newly created Tax Policy Unit in the Ministry of Finance should reduce institutional fragmentation and facilitate the design, coordination and implementation of a medium-term revenue strategy. Second, the government should urgently address the erosion of the tax base generated by an excessive and discretionary use of tax exemptions that do not comply with existing laws and regulations. Finally, the government should continue to focus on rationalizing the tax code, and increasing administrative efficiency to recover tax arrears, including through the modernization of existing IT systems.
Reference
International Monetary Fund, 2018. “Domestic Revenue Mobilization in Sub-Saharan Africa: What Are the Possibilities?” April Regional Economic Outlook: Domestic Revenue Mobilization and Private Investment.
Prepared by Concha Verdugo-Yepes (FAD) and Jose Sulemane.
The authorities are currently reviewing the nominal GDP series. The adoption of a new base year and incorporation of additional information from various economic sectors could lead to a substantial upward revision.
The Minister of Finance created a Commission (2018) in charge of controlling the investment conventions and other regulatory framework. (November 2018, Note de Service N 0735/MFB-CAB).
More than 60 percent of the public companies’ arrears are related to the Electric National Company and the Chemin de Fer (Railway), Congo.
Set of regulatory frameworks including advantages and exemptions includes: Law n° 2003–06 (on investment charter), decree n° 2004–30 setting the terms of agreements of companies to the benefits of the investment charter; General Tax Code; Customs Code, Mining Code, Hydrocarbons Code, Forest Code; and the Budget Laws.
The Tax Policy Unit was created by the Minister of Finance in October 2019 by note num. 0242/MFB-CAB. The creation of a Fiscal Unit was proposed by previous IMF Technical Assistance reports.
