PARPA II Review—The Tax System in Mozambique - UNICEF ...

PARPA II Review—The TaxSystem in MozambiqueVolume ISeptember 2009This publication was produced by Nathan Associates Inc. for review by the United StatesAgency for International Development.

PARPA II Review—The TaxSystem in MozambiqueVolume IDISCLAIMERThis document is made possible by the support of the American people through the United States Agency forInternational Development (USAID). Its contents are the sole responsibility of the author or authors and do notnecessarily reflect the views of USAID or the United States government.

ContentsExecutive Summaryvii1. Introduction 12. Background 3The Tax System at the Start of PARPA II 3Tax Issues in PARPA II 6Major Tax Reforms 2006-2009 73. The Current Tax System 13The Tax System in 2009 13Doing Business Rankings of Mozambique’s Tax System 23Tax Administration 25Plans for Modernizing Tax Administration 294. Revenue Performance 33Revenue Targets 33Revenue Growth 35International Comparisons 42Revenue Effort 445. Impact of the Tax System 47Investment 48Employment 53Saving 55Private Sector Development 57Fairness and Equity 686. Priority Issues 73Medium-Term Revenue Target 73

IITax Rates 74Tax Policy Analysis 75Functional Integration of Tax Operations 76E-Taxation 76Risk Management 77Simplification 78Taxpayer Services 79Tax Culture 80Tax Training 80EITI Implementation 81Donor Coordination 81References 83IllustrationsFiguresFigure 3-1. Principal Sources of Domestic Revenue, 2005 and 2008 14Figure 4-1. Domestic Revenue & Expenditure as a Share of GDP 34Figure 4-2. Principal Tax Revenues as a Share of GDP 38Figure 4-3. Revenues from Taxes on Income as a Share of Total Domestic Revenues 41Figure 5-1. Lowering Taxes on Capital to Stimulate Investment 48Figure 5-2. Company Tax Rates in the SADC Region, 2009 50Figure 5-3. Company Tax + Dividend Withholding Tax in the SADC Region, 2009 52Figure 5-4. Tax Rates as a Constraint to Business, by Firm size 63Figure 5-5. Tax Administration as a Constraint to Business, by Firm Size 64Figure 5-6. Responses on Sales Declared for Tax Purposes, by Firm Size 64Figure 5-7. Applied Tax Rates 69Figure 5-8. Share of Rural and Urban Expenditures Potentially Subject to VAT 72TablesTable 2-1. Tax Objectives, Actions, and Strategic Indicators in PARPA II 8Table 2-2. Major Changes in the Tax Law, 2006 – 2009 10Table 3-1. Approved Tax Exemptions, by Major Tax (10^6 MT) 22Table 3-2. Doing Business 2009, Paying Taxes Indicator Components 26Table 4-1. Principal Revenues as Share of GDP(%) 35Table 4-2. Revenue Buoyancy with Respect to Nominal GDP 37Table 4-3. Mozambique VAT Productivity 39Table 4-4. VAT Productivity for Mozambique and Comparator Country Groups 40

IIITable 4-5. Fiscal Indicators, Three-year Averages, 2006-2008 (% GDP) 43Table 4-6. Mozambique Actual & Predicted Revenue-Ratio & Revenue-Effort 45Table 5-1. Reasons for Being Informal 59Table 5-2. Fiscal Benefit Code Investments as a Share of Total Approved Investments 61Table 5-3. Number of Firms by Size, Industry, and City 62Table 5-4. Shares of Firms Reporting 0% and 100% Sales Declared 65Table 5-5. Distribution of Sales Turnover by Firm Size 66Table 5-6. IRPS Rates 68Table 5-7. Rural and Urban Expenditure Share by Quintile 71Volume II: AppendicesAppendix A. Basic DataAppendix B. Fiscal Benefits in MozambiqueAppendix C. Taxes and Fiscal Benefits: International ComparisonAppendix D. Taxation and Business Environment RatingsAppendix E. Operational Efficiency IndicatorsAppendix F. Revenue EffortAppendix G. Tax Incentives for Investment—Pros and ConsAppendix H. Interview Results—Main Concerns and IssuesAppendix I. Persons Interviewed

AcknowledgementsThis report was written by Bruce Bolnick of Nathan Associates Inc. and Bruce Byiers, aconsultant to Nathan Associates, with contributions from Alexander Greenbaum and Molly Jamesof Nathan Associates and Egildo Massuanganhe, a consultant to the firm. The report reflectsinformation available as of July 2009.The authors wish to express their deep gratitude for the support provided by everyone listed inAppendix I of Volume II, which contains the full list of people interviewed for the study. Specialthanks are reserved for the assistance provided by Ashok Menon, Sabina Sequeira, and SteliaNarotam from USAID’s Trade and Investment project; Herminio Sueia and Ali Algy at theRevenue Authority; Brendan Kelly at the Ministry of Planning and Development; and EmmyBosten and Andrea Lemgruber from the IMF. As always, the authors are fully responsible for thecontent of the report.

Executive SummaryThis study is part of a wider evaluation of government performance in achieving the objectives ofPARPA II, which has the ultimate goal of promoting rapid, broad-based and sustainable growthto reduce poverty and improve standards of living for the people of Mozambique. The studyexamines the impact of the tax system on revenue mobilization, investment, savings, job creation,and private sector development, with special attention to small and medium enterprises, as well asthe issue of tax equity. The study draws on a review of the tax laws and other documents relatingto the tax system; an analysis of data on revenue performance, including internationalcomparisons; and extensive field interviews conducted in July 2009. Based on the analysis, thestudy identifies 12 priority issues for the next PARPA and recommends corresponding measuresfor consideration by the government.The Tax SystemSince 1998, all of the main tax instruments have undergone deep reform. Principal features of thesystem are now well aligned with best practices for developing countries, including primaryreliance on a broad-based value-added tax and a modern income tax, supplemented by exciseduties on selected products and moderate import duties. The government has made notableprogress, too, in improving tax administration since establishing the Revenue Authority (AT) in2006. As a result, most of the PARPA II tax objectives have been realized, including the centralaim of boosting revenue from 14.0 percent of GDP in 2005 to 16.2 percent by 2009. The actualfigure for 2009 will fall short of this mark due to weak economic conditions, but AT data showthat the ratio reached 16.4 percent in 2008. Other achievements include enacting a new GeneralTax Law clarifying rules for tax collection and taxpayer rights; rationalizing fiscal benefits, inparticular ending the special regime for large projects; passing a new Municipal Finance Act;easing the burden on small businesses by increasing tax thresholds and enacting a Simplified Taxfor Small Contributors (ISPC); and strengthening the tax regime for the mining and petroleumsectors. Several objectives, however, are still works in progress. These include integrating tax andcustoms information systems; tax collection via the banks; improving audit revenues relative tototal revenue; modernizing tax administration; and implementing tax courts.There is little scope for revenue gains through further tax policy measures, but great potential forincreasing revenue by broadening the effective tax base, allocating AT resources more efficiently,and facilitating taxpayer compliance through further measures to modernize tax administration.These include functional integration of tax and customs operations; automation of procedures andsystems; risk management; human resource management; and development of a service cultureamong tax officials. Most of the required measures are incorporated in the AT’s Strategic Plan for

VIIIPARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUE2009–2010. To be effective, it is essential that the reforms be carefully planned, properlysequenced, adequately funded, and well managed.The tax system in Mozambique is reasonably progressive. The poor bear very little of the taxburden as a result of high thresholds for entering the tax net (relative to per capita income), thelow tax rate on small contributors via the ISPC, the progressive rate structure under the individualincome tax, and the structure of zero ratings and exemptions for basic necessities under the VAT.However, import duties and excise taxes on goods consumed by the poor have regressive effects.Taking into account the strong revenue growth since 2000, the likely effects of recent policyreforms, prospective reforms to tax administration, and the natural responsiveness of revenues toeconomic growth, it should be possible for the government to achieve a revenue ratio of 18.5percent of GDP by 2015, including tax and non-tax revenues. International benchmarks suggest,however, that it is very difficult for low-income countries to boost revenue beyond 18 to 19percent of GDP without special conditions such as oil wealth. In setting the medium-term revenuetarget, the government should strike a balance between public and private resource requirementsfor national development, job creation, and sustainable growth. This consideration suggests that aportion of the revenue gain from reforms and the underlying economic dynamics should be usedto reduce tax rates, rather than aiming solely for a maximum revenue ratio.Effects of the Tax System on Private Sector DevelopmentStandard tax rates on businesses in Mozambique are now slightly above the regional andinternational averages, due to the global trend towards lower company taxes. Nonetheless, theprevailing tax rates should not be a deterrent to most investments, because other aspects of thebusiness environment are far more important in determining the viability of most projects. Lowertax rates would, however, increase the capacity of existing firms to finance expansion andimprove productivity by boosting net earnings and cash flow. One case where tax rates have acritical effect is on internationally mobile (“footloose”) investments that could easily go to othercountries; these investments, however, should be covered by the fiscal benefits applying to IFZenterprises, which are highly competitive. In contrast, the effective tax rate is very burdensomefor investments that lack special incentives and face double taxation of dividend distributions toindividual shareholders. This feature of the tax code creates a disincentive for incorporation.The tax system affects the efficiency of investment, as well as the level. Special tax breaks underthe Code of Fiscal Benefits tend to have the greatest impact on investments with relatively lowrates of return, since projects with an intrinsically high return would be undertaken anyway. Thefiscal benefits also tilt the playing field in favor of new investors who qualify for tax breaks,relative to existing businesses and other investors—especially small businesses. Similarly, taxbenefits that lower the cost of imported capital tend to encourage capital intensity and importdependence, which inhibits the extent of job creation and domestic linkages. Business linkages tosmall enterprises are also hindered, in less obvious ways, by the need for registered entities toobtain proper tax receipts from suppliers under the VAT and income tax, as well as provisions for20 percent withholding tax on various transactions.The quality of tax administration also has an important effect on investment and businessoperations. Indeed, concerns about arbitrary and punitive enforcement practices by tax officials,

E XECUTIVE S UMMARYIXcomplexity of the tax system, lack of taxpayer services, and difficulties in recovering refunds arefar more prevalent than complaints about the level of taxes. These problems particularly affectsmall and medium size enterprises: the primary engine of job creation for the economy.Tax rates, compliance costs and complexity of the tax system also affect decisions by smallbusinesses to formalize. The Simplified Tax (ISPC) passed in 2009 should go a long way towardsreducing these tax-related barriers, if effectively implemented. The VAT, too, creates incentivesfor formalization, for any small enterprises that wish to do business with VAT-registeredcompanies. Incentives to formalize are also influenced by the cost of non-compliance, which isdetermined by the AT’s capacity to enforce registration requirements.The effect of the tax system on saving is complex. Higher taxes could reduce business andhousehold saving but increase government saving, leaving an ambiguous net effect in the shortrun. In the medium to long term, however, the most important consideration is how the taxsystem affects the growth of income, which is the primary determinant of saving.Priority Tax IssuesFrom the analysis of the tax trends and features of the current tax system, 12 issues emerge asmedium-term priorities for the next PARPA.• Medium-term revenue target. As noted above, a revenue ratio of 18.5 percent of GDPshould be achievable by 2015, with a strong commitment to further reform. Yet revenuemaximization is not the sole aim of tax policy. Depending on the desired balance betweenrevenue enhancement and tax relief for the private sector, the study suggests optionsranging from 16.5 to 18.5 percent of GDP. In any case, the revenue target for each year’sbudget program should be determined from an analysis of prevailing conditions.• Tax rates. Moderate tax cuts would provide the private sector with additional financialresources for expansion, innovation, and job creation. Furthermore, Mozambique shouldnot lag too far behind the global and regional trend towards lower tax rates on companyincome. The study therefore recommends planning for income tax reductions as revenueprospects improve. Also recommended are a reduction in the withholding tax andelimination of double taxation on dividends disbursed to individual shareholders.• Capacity for tax analysis. Decisions on tax policy should be informed by a carefulanalysis of the revenue effects and economic impacts. The study recommendsestablishing a Tax Policy Unit at the Ministry of Finance and training a group ofspecialists to conduct quantitative and qualitative analysis of tax policy issues.• Functional integration within the AT. The Revenue Authority can greatly improveefficiency and effectiveness by further modernizing tax administration. One majorrequirement is functional integration of common operations between customs and taxservices, including audit, risk management, debt management, and customer services, aswell as human resource management and master data files for each taxpayer.• E-taxation. The government and the AT recognize the importance of informationtechnologies (e-Tributação) and have begun planning and implementing major reforms.Priorities include e-declarations, electronic payments through the banks, an automated

1. IntroductionThis study examines the impact of tax policy on sustainable revenue mobilization, broad-basedeconomic growth, the development of small and medium enterprises, and other basic objectivesof the government’s second Plano de Acção para a Redução da Pobreza Absoluta, or PARPA II.The study forms one part of a wider evaluation of government performance in achieving thePARPA II objectives, with the ultimate goal of reducing poverty, promoting rapid, yet broadbasedand sustainable growth, to improve the standards of living and welfare of the people ofMozambique.Consistent with the terms of reference, the study provides an overview of the principal issues, themain reforms, and their impacts on PARPA II objectives, leading to recommendations onpriorities for further improvement of the tax system in the next PARPA period. The study drawson three sources of information: a thorough review of documents and studies relating to the taxsystem, including the main tax laws; an analysis of data on revenue performance, includinginternational comparisons; and extensive field interviews conducted in July 2009. The analysisfocuses on developments during the PARPA II time frame of 2006 to 2009, but also examines alonger period of data to put recent trends in perspective. 1A number of general points that emerge from the study are worth highlighting at the outset. Thefirst is that large strides have clearly been taken to improve the efficiency and capacity of the taxauthorities since the establishment of the Mozambique Revenue Authority (AT) in 2006. This iswidely acknowledged by all parties, and reflects very positively on the recent reforms.A second basic observation, encountered in many of the field interviews, is the scale of thechallenge in designing and administering tax laws that must deal effectively with firms rangingfrom large multinational firms with access to highly-skilled accounting services to very smallenterprises and even family farmers, many of whom are illiterate and lack basic legal documents.Integrating all types of economic actors into a single tax system is no easy task for any taxadministration. Many of the issues raised in this study relate to this aspect.A third point meriting emphasis is the divergence of views on the performance of the AT,depending on the background of the interlocutor. Government officials generally emphasize the1 Although the stated objective of the study is to analyze the “impact” of the tax system on PARPA IIobjectives, the analysis does not include formal modeling to quantify cause and effect in the complexrelationship between tax variables and indicators representing PARPA objectives. This approach isnecessitated by time and resource constraints, as well as the limited period of time-series data forMozambique.

2 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEpositives, focusing on recent and planned reforms to broaden the tax base and improve taxadministration. In contrast, many business representatives, while acknowledging the progress,emphasize the lack of a service culture on the part of the tax authorities, and the correspondingabsence of a tax-paying culture on the side of many firms and individuals. One widely citedgrievance is that many tax officials continue to arbitrary and punitive enforcement actions inresponse to minor and unintentional infractions, in order to meet revenue targets, rather thanencouraging compliance through education and support for the taxpayers. This approach createsobstacles and costs for businesses, undermines the PARPA objective of using the tax system topromote the national business community, and leads to an unhelpful perception of the AT as apredatory bureaucracy. These deep-seated problems will not be overcome quickly, but attention isurgently needed.Alongside the divergent perceptions about AT performance are differing views on the role of thetax system. Government officials typically focus on the need for higher revenue yields, relative toGDP, to finance public services while reducing dependency on donor support. In contrast, manyin the private sector argue that measures to broaden the tax base and improve collectionefficiency should be used as an opportunity to reduce tax rates in order to stimulate privateinvestment and foster more rapid growth. All parties recognize the importance of both objectives,but opinions differ widely on the appropriate balance.Finally, it is clear from the research conducted for this study that few opportunities remain toachieve sizeable revenue gains through changes in tax policy. Yet there is huge potential forimproving the revenue yield by strengthening and modernizing tax administration throughmeasures that will broaden the effective tax base, allocate AT resources more productively, andfacilitate taxpayer compliance.The remainder of this study is organized as follows: Chapter 2 provides an overview of the taxsystem, covering its characteristics at the start of the PARPA II period, the major issues arisingduring that period, and recent reforms. Chapter 3 discusses in more detail the current tax system,including issues relating to tax administration. Chapter 4 provides an analysis of revenueperformance over recent years, looking at revenue targets, revenue performance, and internationalcomparisons. Chapter 5 assesses the impact of the tax system on broader outcomes for theeconomy in light of the goals set out in PARPA II. Chapter 6 then draws on the analysis fromearlier chapters to highlight key issues that warrant attention as priorities for the next PARPAperiod, along with preliminary recommendations for addressing these concerns. In a separatevolume, Appendix A presents basic data tables used in the revenue analysis; eight otherappendices provide supplementary information on aspects of the report, as referenced in the text.

2. BackgroundAs a prelude to the analysis of the current tax system, this chapter briefly reviews the system as itstood at the start of the PARPA II period. This is followed by a summary of PARPA II prioritiesand targets in the area of taxation, progress to date in achieving these goals, and major taxreforms adopted during the time frame for PARPA II.THE TAX SYSTEM AT THE START OF PARPA IIBetween 1998 and 2002, all of the main tax instruments were subject to deep reforms.Subsequent studies by the IMF and the World Bank’s Foreign Investment Advisory Service(FIAS) concluded that the tax system in Mozambique conformed broadly to international bestpractices for developing countries. 2The value added tax (Imposto sobre o Valor Acrescentado, or IVA) was enacted in 1998 andintroduced in 1999 at the rate of 17 percent for the normal regime. Exports and other designatedgoods were subject to zero tax (isenção completa) and qualified for a full refund of VAT paid oninputs. In addition, a long list of goods and services were exempt from VAT. The VAT code alsooffered a simplified regime (regime simplificada) to enterprises with a turnover less than 250million MT per year (about $12,500), consisting of a 5 percent tax on gross sales. Enterpriseswith a turnover below 100 million MT per year (about $5,000) were exempt from VAT. Note thatlocal currency figures in 2005 referred to the old metical (equal to .001 new MT).In 2002, a new income tax system was introduced, with separate tax codes for corporations(Imposto sobre o Rendimento das Collectivas, or IRPC) and individuals (Imposto sobre oRendimento das Pessoas Singulares, or IRPS). The standard IRPC tax rate was 32 percent,though income from agricultural activity was subject to a tax rate of 10 percent until 2010. TheIRPS had progressive marginal tax rates ranging from of 10 to 32 percent applied to nearly allsources of personal income, 3 with an adjustment for marital status and deductions for dependents.Income under 24 million MT (about $1,200) per year was not taxable, while the top rate appliedto incomes in excess of 1,008 million MT (about $50,000). The IRPC and IRPS also provided asimplified regime for small enterprises that lack organized accounts and have a turnover of nomore than 1,500 million MT (about $75,000) per year. For these entities, taxable income could be2 See IMF (2005a); Versano et al. (2006); FIAS (2006).3 Technically, the IRPS defines five categories: income from employment (“dependent” income);professional and business income; capital income; income from buildings; and other incomes. Eachcategory covers multiple types a variety of income.

4 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEdetermined by tax officials on the basis of “technical-scientific indicators” or deemed to be 20percent of the value of sales of merchandise or products, or 30 percent for other income.After several rounds of import duty reductions, standard duties in 2005 ranged from 0 to 25percent, according to the import category:• 25 percent of consumer goods (Class C)• 7.5 percent for intermediate materials (Class I)• 5 percent for capital goods (Class K) and fuel (Class N)• 2.5 percent for raw materials (Class M)• 0 percent for basic goods (Class E)The simple average tariff was 12 percent, and the trade-weighted average was 9 percent. Bothfigures were among the lowest in the region. According to the Diagnostic Trade IntegrationStudy (DTIS) for Mozambique, the tariff rate for Class C still provided a fairly high level ofeffective protection to most final goods produced in Mozambique. 4 Beyond the standard tariffs,Mozambique had begun by 2005 to reduce duty rates on imports from SADC member states,under the SADC trade protocol. Duty free imports of SADC origin covered over 1,500 tarifflines, all involving products that did not compete against local enterprises. Other duty exemptionswere granted under the tax incentive regime for investors (Código de Benefícios Fiscais) and aspecial customs regime for selected manufacturing industries (Regime Aduaneiro para aIndústria Transformadora).The Specific Consumption Tax (Imposto sobre Consumos Éspecificos, or ICE) was restructuredin 1998 to complement the VAT. The ICE is an ad valorem excise tax on more than 140 products,at rates that ranged from 15 to 65 percent in 2005. Items subject to ICE included luxuries (such ascars, jewelry, perfume, and sporting goods) and health risks (particularly tobacco and alcohol).The tax is charged on both domestic products and imports. In addition, the Fuel Tax (Taxa deCombustíveis) was adopted as a specific nominal levy per liter of various types of fuel. The taxwas restructured in 2003 with a formula for quarterly inflation adjustments to maintain the realvalue of the tax per unit.Under Decree n o 6/2004 of 1 April, the tax stamp is imposed on a lengthy list of documents,contracts, papers, and economic activities. Many of the charges are fixed amounts per item, butothers are ad valorem assessments at rates ranging from 10 percent on the fee for land useconcessions, to 0.02 percent on certain collateral guarantees.In 2002, the government adopted a major reform of the Code of Fiscal Benefits for investment(Código de Benefícios Fiscais, or CBF). The reform was designed to rationalize the incentivesregime and improve its cost-effectiveness by concentrating on investment tax credits andaccelerated depreciation, while scaling back tax holidays. Partial tax holidays were retained foragriculture and for enterprises in Industrial Free Zones (IFZs). The new code also retainedexemptions from import duty on capital goods, and standard exemptions from indirect tax forexporters operating in an IFZ.4 Nathan Associates (2004), p. 7-4.

B ACKGROUND 5By 2006 the government had therefore taken major strides to transform what had been an archaicand inefficient tax system into one that was largely in line with international best practices.Virtually every observer acknowledged great progress. Yet the post-reform system was stillsubject to sharp criticism, especially from the private sector. 5 As PARPA II was being prepared,the most prominent tax issues included:• Low tax yield. In 2005, government revenues totaled 13.8 percent of GDP, and taxrevenues amounted to 11.2 percent of GDP. An IMF analysis found the tax ratio to bewell below the norm for sub-Saharan Africa, and far short of what could be achieved inMozambique. 6 The government, too, was deeply concerned to improve the revenue yieldin order to reduce dependency on donor funding. This was reflected in the PARPA goalof boosting revenue to 16.2 percent of GDP by 2009.• High tax burden on companies. Two studies found that the tax rate on companies wasbroadly in line with regional averages, and that investors obtaining fiscal benefits faced amarginal effective tax rate (METR) that was very competitive compared with othercountries in the region. For businesses without tax incentives, however, the METR wasunusually high by regional and international standards, due to the combined effect of thecompany tax plus the tax on distributed dividends.• Narrow tax base. The combination of high effective tax rates and low tax revenuesunderscored the problem of gaping holes in the tax base. Both the local private sector andthe IMF recommended stronger efforts to broaden the tax base, improve tax compliance,and reduce the generosity of tax breaks for large scale projects.• Tilted playing field and inequitable tax burden. The tax system gave a competitiveadvantage to companies enjoying tax incentives, and also to enterprises that escaped thetax net by virtue of informal operations, bribery, or tax fraud. The system tendedespecially to penalize tax-registered small and medium enterprises.• Excessive complexity. Representatives of the private sector were especially critical of thecomplexity of the income tax and the value added tax. One commentator likened the taxcode to a “Mercedes stuck in the sand” – modern, well engineered and powerful, butinappropriate for conditions in Mozambique.• Lack of public information and taxpayer services. Even though the income tax and VATservices conducted seminars and public appearances to present the 2002 tax codes, theeffort fell far short of the need. Equally important was the general absence of a serviceculture among tax officials.• Arbitrary and punitive enforcement. Another major complaint by the private sector wasarbitrary and punitive behavior by tax inspectors, especially outside of Maputo. Becausethe tax code was complex, many businesses (especially SMEs) could not comply fully5 See FIAS (2006); Bolnick (2004); Versano et al. (2006); Arndt, Tarp and Jones (2009); CTA (2006).6 Versano (2006); IMF (2005a). Jones (2009), however, conducted an econometric analysis showing thatMozambique’s tax ratio through 2003 was very close to the value predicted, based on the country’sstructural characteristics.

6 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEwith all of its technicalities. Consequently, many entrepreneurs faced arbitrary treatmentand costly penalties, which created incentives for unofficial side payments to taxofficials.• VAT refund delays. The single most contentious issue in 2006 was the problem faced bymany businesses, especially exporters and contractors, in obtaining timely payment ofVAT refunds. Even large businesses had problems submitting acceptable refundpetitions, due to the complex paperwork requirements.Since 2006 the government has been addressing many of these issues. Even so, every point on thelist remains today as a major concern.TAX ISSUES IN PARPA IITax issues appear at various points in PARPA II. The Macroeconomic and Fiscal Scenario inChapter V (paragraphs 130-131) targets an increase in total State revenues from 14.0 percent ofGDP in 2005 to 16.2 percent in 2009. This is a primary target in the Matrix of StrategicIndicators, for the category of Public Finance Management. According to the fiscal scenario, theadditional revenue “must be mobilized in a way that does not jeopardize growth of the privatesector or undermine the incentives to pursue economic activities in the formal sector, byexpanding the tax base curbing tax evasion, and reducing tax incentives.” 7PARPA II addresses tax policy explicitly under the Economic Development Pillar, in the sectionon Macroeconomic Management (Chapter VIII, paragraph 489). The objective here is “to reformand increase the efficiency of the tax administration with a view to gradually increasing themobilization of domestic funds as a percentage of GDP, with the idea of reducing externaldependency.” To this end, the PARPA lists eight priority actions:• “Domestic revenues will gradually be increased;• “The tax system will be simplified and refined, and the tax base broadened;• “Reforms made in direct and indirect taxes will be consolidated;• “Simplified taxation regimes will be reviewed, the effectiveness of tax and investmentincentives will be evaluated, and the process of establishing tax courts will be continued;• “Work on modernizing the tax administration will be continued, to make it an efficienttax-collection system and to curb fraud and tax evasion;• “Legislation will be approved that simplifies the relationship between the taxadministration and the taxpayers, making it easier for them to exercise their rights andreceive the protection assured them;• “Tax and customs courts will be effectively implemented; and7 The statements cited here from PARPA II are based on the English translation posted by the IMF asCountry Report No. 07/37.

B ACKGROUND 7• “Legislation on local government finances will be refined and the conditions of theresponsible for collection and control of local government taxes will beimproved.”Revenue issues also appear in other parts of the PARPA. In the section on Promoting PrioritySectors, Broadening the Business Base, and Creating Jobs: Industry (Chapter VIII, paragraph537) one key action is to “establish tax-free zones, on the condition that an evaluation be made, inadvance, of the net contribution to the national economy and to tax revenues.” The section onMining (Chapter VIII, paragraph 551) covers several objectives, one of which is to strengthen thelegal and fiscal framework “as a way of increasing investment, tax revenues, and exports by themining sector.” Finally, the section on Assistance from Cooperation Partners (Chapter IXparagraph 611) states that the government will, among other things, examine “the ideal balancebetween the weight of domestic funds (tax revenues) and external aid as regards Stateexpenditures.”Table 2-1 lists the major PARPA II objectives, actions and strategic indicators relating to the taxsystem, along with notes on the status of implementation. Most targets have either been achievedor are now in process. In particular, the government succeeded in 2008 in meeting the targetrevenue ratio that was set for 2009; this year will see a shortfall in the revenue ratio, however, dueto the adverse effects of the global economic crisis via slower growth of GDP and trade, and asharp reduction in commodity prices. The government also succeeded in introducing a newsimplified tax regime for small businesses, and revising the code of fiscal benefits.In some respects, however, achievements fell well short of the PARPA II targets. The areas ofdeficiency or delay include the program for implementing new tax information systems,increasing the collection rate from tax audits, establishing tax courts, and curbing tax fraud andtax evasion.MAJOR TAX REFORMS 2006-2009A series of reforms to the tax code and measures to improve tax administration have beenundertaken during the period 2006 to 2009. By and large, the reforms have aligned well with thePARPA II objectives and targets for tax policy.The period began with a new law (Law 1/2006) establishing the Mozambique Tax Authority(Autoridade Tributária, or AT), combining formerly separate organizations for tax and customs.The purpose of this reform was to create a new organizational foundation for modernizing taxadministration and professionalizing the tax service in order to strengthen enforcement, improveservices, combat evasion, and expand the tax-base. Since the AT began operations, the number ofregistered taxpayers (individuals plus enterprises) has more than doubled from 374,181 in 2006 to864,317 by July 2009. The AT expanded its staff by 18 percent and opened 14 new collectionoffices between 2007 and the first half of 2009; introduced new programs for public educationand customer service; reduced delays in the approval of VAT refunds; increased the number ofaudits of large tax payers; introduced post-clearance audits for customs; simplified tax declaration

8 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEforms; and reduced the average time to release imported goods at the border. In addition, the ATopened a new training institute in 2009 to intensify staff training. 8Table 2-1Tax Objectives, Actions, and Strategic Indicators in PARPA IIPARPA II Element Source in PARPA Status: July 20091. Objective: Progressively increasedomestic revenues and expand tax base.Goal for 2009: Total Revenues as % ofGDP = 16.2%2. Action: Rationalize the granting andimproving the management of fiscalbenefits.Goal: Systematize data on benefits;published statisticsStrategic Indicators Matrix,Management of Public Finances,Objective 5As aboveAT (2009): Total Revenue = 16.4% of GDP for2008IMF (2009): Total Revenue = 16.0% of GDP for2008AT target of 17.3% for 2009 will not be met due toeffects of the global economic crisis; IMF projectsratio declining to 15.7% this year.New Code of Fiscal Benefits approved in January2009, ending the special negotiation regime forlarge projects. (For details see Appendix B of thepresent report.)According to CPI, procedures for approval of aninvestment remain largely unchanged, but theprocess of obtaining tax and duty relief has beenstreamlined since the AT was established.Survey of investors obtaining CPI approvals in2005, 2006 and 2007 shows that 47 of 60 had nosignificant problem with the procedures, but 13 of60 reported major problems in terms of costs ordelays (Bolnick, 2009).AT reports data on tax expenditures in its AnnualReports since 2007; the data also appear in theAnnual Report on the Conta Geral do Estado fromthe Tribunal Administrativo (without information onmethodology).3. Action: Integration of informationsystems management into the ATM withinthe context of the approved PDTI.Goal: By 2009 integrated systems in fulloperation, including banking collectionmanagement moduleAs above Planning well advanced for e-taxation module of e-SISTAFE, including e-declarations, electroniccollection via banks, and customs single window;pilot system for e-tax module procured and trainingbegun via UTRAFE.4. Action: Increase audits.Goal: To be defined. Baseline annualrevenue recovered by audit = 0.2% ofGDP.5. Objective: Strengthen institutionalcapacity of local governments.Action: Development of municipalrevenue collection capacity.Goal for 2009: Own revenues, % ofannual budget:Capital cities 60%Other cities 55%Villages 45%As aboveStrategic Indicators Matrix, PublicSector Reform, Objective 9AT Annual Report for 2008 (Table 18) showsrevenue collection from audits = 0.4% of totalreceipts in 2007, and 0.2% of total receipts in 2008.Municipality of Maputo (calculated from OrcamentoRectificativo 2009 do Municipio de Maputo):Own current revenue/current revenue2008 = 71.5%Budget 2009 = 76.5%Own total revenue/total revenue = Own totalrevenue/budget2008 = 36.8%Budget 2009 = 27.8%8 The data are from IMF (2008, 2008a, 2009b and 2009c), AT Annual Reports for 2007 and 2008, andinformation provided by the AT’s Gabinete de Planeamento Estúdios e Cooperação Internacional.

B ACKGROUND 9PARPA II Element Source in PARPA Status: July 20096. Domestic revenues will gradually beincreasedEconomic Development pillar,Macroeconomic Management and TaxPolicy - Paragraph 489See item 1 above.7. The tax system will be simplified andrefined, and the tax base broadened8. Reforms made in direct and indirecttaxes will be consolidatedAs above AT Annual Report for 2007 (Table 15) and 2008(Table 30) show new income tax registrations =100227 in 2006; 190019 in 2007; 191140 in 2008.Various IMF reports show total number of taxpayersincreasing from 295000 in 2005 to 587205 in 2007(latest figure).New Simplified Tax (ISPC) approved 2009 (seeitem 9)As above New IRPC, IRPS, IVA codes approved in 2007consolidating amendments and other statutorychanges.9. Simplified taxation regimes will bereviewed, the effectiveness of tax andinvestment incentives will be evaluated,and the process of establishing tax courtswill be continued10. Work on modernizing the taxadministration will be continued, to makeit an efficient tax-collection system and tocurb fraud and tax evasionAs aboveAs aboveNew Simplified Tax (ISPC) approved 2009 forsmall businesses with turnover up to 2,500,000 MT.ISPC replaces simplified regimes for income tax andVAT with single tax at 3% of turnover, up to amaximum liability of 75,000 MT.Mozambique Revenue Authority (AT) establishedby Law in 2006, with operations starting 2007.General agreement among stakeholders interviewedfor this report (government, private sector, anddonors) that AT has achieved major gains inprofessionalism and efficiency in tax collection –but also widespread view that tax fraud and taxevasion are still rampant.11. Legislation will be approved thatsimplifies the relationship between the taxadministration and the taxpayers, makingit easier for them to exercise their rightsand receive the protection assured themAs above New General Tax Code approved in 2006establishing clear rules and procedures for exerciseand protection of taxpayer rights.12. Tax and customs courts will beeffectively implemented13. Legislation on local governmentfinances will be refined and the conditionsof the responsible for collection andcontrol of local government taxes will beimproved.14. Establish tax-free zones, on thecondition that an evaluation be made, inadvance, of the net contribution to thenational economy and to tax revenues.15. Strengthen the legal and fiscalframework for mining “as a way ofincreasing investment, tax revenues, andexports16. Examine the ideal balance between theweight of domestic funds (tax revenues)and external aid as regards Stateexpenditures.As aboveAs aboveEconomic Development pillar,Promoting Priority Sectors,Broadening the Business Base, andCreating Jobs: Industry - Paragraph537Economic Development pillar,Promoting Priority Sectors,Broadening the Business Base, andCreating Jobs: Mining - Paragraph551Factors Determining Success,Assistance from Cooperation Partners(Chapter IX paragraph 611)Customs courts in operation; few cases on thedocket. Legal framework for tax courts in place;judges selected and trained; operations expected tostart soon in Maputo followed by Beira andNampula. Large backlog of tax disputes(contenciosos) requiring attention.New Local Government Finance Act passed in2008, clarifying authority of local governments forexpenditures and own revenue sources.New Fiscal Benefits Code includes incentives forSpecial Economic Zones (ZEEs); plans welladvanced for establishment of ZEE in Nampula.Study conducted on revenue effects of the NampulaZEE.New Mining and Petroleum Act approved in 2007,restructuring the regime of tax incentives applicableto investment in these sectors to increase revenuesfor the state while remaining attractive to investors.PARPA II target for increasing the ratio of domesticrevenue to GDP by 0.5% percentage points eachyear largely achieved, except for shortfall in 2009due to effects of the global economic crisis.

10 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEThe administrative reforms have been accompanied by a raft of new tax legislation andaccompanying regulations, which are summarized in Table 2-2.Table 2-2Major Changes in the Tax Law, 2006 – 2009Legal InstrumentTitle and DescriptionLaw 1/2006 of 22 March and Decree29/2006 of 30 AprilLaw 2/2006 of 22 MarchTax Authority of Mozambique – Organic statute for establishment of the AT.General Law on Taxation – General principles and provisions regulating responsibilities andobligations of the tax authorities at all levels and taxpayer rights and responsibilities.Law 3/2007 of 7 February Customs Law – Reduces the duty rate on consumer goods from 25% to 20%.Laws 11/2007, 12/2007, 13/2007 of27 June and Decrees 4/2008 and5/2008 of 9 AprilLaw 28/2007 of 4 DecemberLaw 32/2007 of 31 December andDecree 7/2008 of 16 AprilLaw 33/2007 of 31 December andDecree 8/2008 of 16 AprilLaw 34/2007 of 31 December andDecree 9/2008 of 16 AprilLaw 1/2008 of 16 January andDecree 632008 of 30 DecemberLaw 4/2009 of 12 JanuaryLaw 5/2009 of 12 January andDecree 14/2009 of 14 AprilEITI Board Approval of candidacyfor Mozambique, 18 May 2009Law ??/2009 [forthcoming]Mining and Petroleum Laws – Reforms the tax regime and surface concessions for mining andoil production activities, and the incentives regime for investment projects falling under theMining Law and the Petroleum Law.Inheritance and Gift Tax CodeValue Added Tax Code (IVA) – Consolidates amendments and other legal changes relating to theVAT code; raises the threshold for registration and expands the scope of the simplified taxscheme; revises the list of exempt goods and transactions.Personal Income Tax Code (IRPS) - Consolidates amendments and other legal changes relatingto the VAT code, and adjusts tax bracket thresholds and family allowances; also introduces taxon income from traded securities and term deposits.Corporate Income Tax Code (IRPC) - Consolidates amendments and other legal changes relatingto the VAT code, and raises the threshold for paying tax.Municipal Finance Law – Defines the financial, budgetary and asset regimes for localgovernments, and reforms the municipal tax system.Code of Fiscal Benefits (CBF) – Reforms the available package of fiscal benefits for investmentsapproved under the Investment Act, including both generic benefits and specific benefits fordesignated types of projects.Simplified Tax for Small Taxpayers (ISPC) – Introduces a new simplified tax system for smallenterprises, replacing simplified tax regimes for both income tax and VAT.This measure begins the formal process of qualifying Mozambique for participation in andadherence to the Extractive Industries Transparency Initiative.Excise Tax Code (ICE) – Restructures the excise tax rates on certain goods including wines,tobacco products, jewelry, and vehicles; eliminates excise tax on some toys and sporting goods.SOURCE: Deloitte, GTZ APSP and ACIS (2009) and MozLegal, Mozambique Investor (2006-2009).In March 2006, a new General Law on Taxation redefined the basic framework governing the taxsystem, including the duties and responsibilities of the tax authorities, and the obligations andrights of the taxpayers. In 2007, the government adopted a new VAT code that altered the list ofexempt products, and increased the turnover thresholds for VAT exemption and for coverage bythe simplified VAT regime. At the same time, the government revised the tax codes for individualand corporate income taxes. Both tax codes were shortened considerably, as some provisionswere shifted into the regulations, and others were covered by the new General Law on Taxation.In addition, the new IRPC code updated thresholds for coverage by the simplified regime, and the

B ACKGROUND 11IRPS code updated the threshold for non-taxable income and the various tax brackets. Tax rates,however, were unchanged, and the tax structure itself was not noticeably simplified. 9Perhaps the most important reform of 2007, in terms of future revenue potential, was the passageof new laws governing mining and petroleum concessions. Among other things, the legislationremoved the authority of the Council of Ministers to negotiate special tax arrangements formining and petroleum investments and reduced the fiscal benefits for such projects. Morerecently, in May 2009, the government followed this up by formally initiating procedures toqualify for the Extractive Industries Transparency Initiative. Once completed, the EITI processshould institutionalize improvements in transparency and management of revenue frominvestments in extractive industries.Other policy reforms in 2007 involved a reduction in the top rate of customs duty on consumergoods from 25 percent to 20 percent and a new code for inheritance and gift tax. In 2008 thegovernment adopted a new Municipal Finance Law, including reforms to the municipal taxsystem in line with the PARPA objective of decentralization.The SADC free trade area came into effect in January 2008, entailing duty-free treatment of mostimports from other SADC member states, though the complex rules of origin have impairedaccess to duty-free trade in both directions (IMF 2009a). Additional tariff reductions will beintroduced through the Interim Economic Partnership Agreement (EPA) between Mozambique,other participating SADC members, and the EU. Once the EPA is finalized and approved,participating SADC states will retain quota- and duty-free access to the EU and, on a reciprocalbasis, will reduce customs tariffs on EU imports.In response to civil unrest caused by a steep rise in fuel and food prices in early 2008 (of 27 and15 percent respectively), the government suspended fuel price increases until June and thendeferred fuel-related taxes until end-2008 (IMF 2008), though this measure was reversed in 2009(IMF 2009a).More recently, in 2009, the National Assembly revised the Fiscal Benefits Code, passed a newSimplified Tax for Small Taxpayers (ISPC) and revised the excise tax code, includingadjustments in the tax rates on designated alcoholic beverages, tobacco products and luxurygoods. These major reforms are discussed in more detail in the next chapter.9 Frei, A. The Mozambican Investor, Issues 81 (February 26, 2008) and 82 (March 04, 2008).

3. The Current Tax SystemThe main features of the tax code prevailing in 2009 are essentially the same as the baselinesystem in 2005, outlined in the previous chapter. The discussion here provides more details andupdates the information to 2009. Particular attention is focused on the 2009 Simplified Tax forSmall Taxpayers (ISPC) and the 2009 Code of Fiscal Benefits (CBF). The chapter also examinesthe standing of Mozambique’s tax system in the World Bank’s Doing Business ratings. The finalsection summarizes the Revenue Authority’s plans for further reforms to modernize taxadministration.THE TAX SYSTEM IN 2009The current tax system in Mozambique conforms broadly to international standards for goodpractice in developing countries, with the main sources of revenue coming from the value addedtax (IVA) and modern corporate and individual income taxes (IRPC and IRPS, respectively), andtaxes on trade declining in importance. 10Figure 3-1 shows the principal sources of domestic revenue (excluding grants) in 2008 comparedto the baseline conditions in 2005. 11 In 2008, total revenue amounted to an estimated 16.0 percentof GDP, with tax revenue (receitas fiscais) at 13.5 percent of GDP. Both numbers represent anincrease by more than two percentage points relative to GDP between 2005 and 2008, despitereductions in the top rate of customs duty, implementation of SADC trade preferences, higherthresholds for entering the tax net for the VAT and income tax, and temporary deferment of thefuel tax in 2008 to cushion the effects of soaring world prices for petroleum. These facts showthat government efforts to improve tax administration and enlarge the tax base have indeed beenbearing fruit.10 The IMF (2008a, p.13) states that “The legal framework for the tax system is modern, comprehensive,and generally broadly disseminated.”11 These figures are from the Medium-Term Fiscal Framework of the Ministry of Planning andDevelopment (MPD), as of June 2009. Some figures differ from those in the IMF’s Article IV Reviewfrom May 2009 (IMF, 2009b), and from data presented by the AT in their Annual Report for 2008 (AT,2009). For example, for 2007 the three sources, respectively, show a ratio of total revenue to GDP of 16.2,15.9, and 16.6 percent. For 2008 the corresponding figures are 16.0, 16.0 and 16.4 percent.

14 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEFigure 3-1Principal Sources of Domestic Revenue, 2005 and 2008Revenue Structure, 2005 and 2008Percent of Total Revenue100%90%80%70%60%50%40%30%20%10%0%2005 2008Source: Calculated from data provided by DNEAP, Ministry of Planning and DevelopmentOther revenueFuel taxCustoms dutiesExciseVATIRPC (company)IRPS (personal)Revenue Structure, 2005 and 2008Percent of GDP18.0%16.0%14.0%12.0%10.0%8.0%6.0%4.0%2.0%0.0%2005 2008Source: Calculated from data provided by DNEAP, Ministry of Planning and DevelopmentOther revenueFuelCustoms dutiesExciseVATIRPC (company)IRPS (personal)

C URRENT T AX S YSTEM 15Looking at the structure of tax receipts, the value added tax (including imports) in 2008 raised 5.4percent of GDP, up from 4.5 percent in 2005. Income taxes amounted to 4.9 percent of GDP, splitalmost evenly between the IRPS (2.5 percent) and IRPC (2.4 percent). This is a hugeimprovement from 2005, when IRPC revenues amounted to just 1.0 percent of GDP, and IRPSrevenues raised 1.9 percent of GDP. In contrast, revenue from customs duties has declined inrelative importance to 1.5 percent of GDP in 2008, from 1.9 percent in 2005. In absolute terms,however, even customs revenue increased by 29 percent over the period, indicating that the risingvolume and value of imports, and a higher nominal exchange rate have more than offset theeffects of SADC trade liberalization.Revenues from the excise tax (ICE) in 2008 totaled 1.1 percent of GDP, slightly higher in relativeterms than the 1.0 percent yield in 2005. Hence, ICE receipts grew slightly faster than nominalGDP, though declining as a share of total revenue. Revenue from the fuel tax also declined inrelative importance from 1.2 percent of GDP in 2005 to 1.0 percent in 2008, reflecting thetemporary suspension of fuel taxes last year. The stamp tax generated just 0.1 percent of GDP inrevenues in 2008. Finally, the government earned negligible revenue from royalties and surfacetaxes on mining and petroleum in 2008, amounting to just 0.2 percent of tax receipts–unchangedfrom 2005–and 0.0 percent of GDP.The remainder of this section describes the main features of the current tax structure. 12Value Added TaxThe standard value added tax rate of 17 percent applies to imports and domestic supplies of goodsand services from businesses with turnover greater than 2,500,00 MT per year (approximately$95,000 at the exchange rate in July 2009). 13 The 2007 revision of the VAT code retained thesimplified regime (regime simplificada) consisting of a 5 percent tax on gross sales, applying toenterprises with an annual turnover below 2,500,000 MT, excluding exporters and importers.Enterprises with a turnover below 750,000 MT per year (about $28,000) qualify for VATexemption (isenção). Firms registered under the simplified or exempt regimes cannot claim creditfor VAT paid on inputs; they also do not need to maintain organized accounts conforming toestablished standards. Another provision of the 2007 code (Article 15, section l) reduces the VATliability by 60% for enterprises contracted for construction of public roads, bridges and watersupplies.In line with international norms, exports are subject to zero tax (isenção completa) and qualify fora full refund of VAT paid on inputs. Zero rating also applies to certain basic foods, animal feed,and kerosene for lighting. In addition, the system continues to exempt a long list of goods andservices from VAT, meaning that they do not charge VAT on sales, and do not recover VAT paidon inputs. Exempt items include medical services and drugs, financial services, basic inputs toagriculture, and products of agriculture, forestry, animal husbandry, and fishing. Clearly, these12 This short review excludes the vehicle tax, municipal taxes, and other fees and levies.13 For a detailed explanation of the VAT Code, see Deloitte and ACIS, Legal Framework for Taxation inMozambique: Value Added Tax Manual, Edition 1, October 2008, and separate manuals covering IRPC,IRPS, and VAT. The documents are available for downloads at: http://www.acisofala.com/ .

16 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEprovisions are designed to minimize the burden of VAT on basic goods consumed heavily by thepoor.Taxpayers in a VAT credit position—which arises when a firm owes less VAT on its taxablesales than it the tax paid on its inputs—can claim a refund (re-embolso) after twelve months if thecredit balance continues to exceed 50,000 MT (approximately $1,900). Exporters can claim arefund without a twelve month wait with a credit balance above 5,000 MT, as can firms withzero-rated supplies constituting at least 75 percent of total receipts. All parties interviewed forthis study remarked that the VAT refund process has improved since 2005, but it is still a majorsource of grievance due to the extremely cumbersome procedures. This issue will be addressedfurther in Chapters 5 and 6.Income TaxThe standard tax rate on corporate income (Imposto sobre o Rendimento das Collectivas, orIRPC) remains at 32 percent, with a special rate of 10 percent for agriculture and animalhusbandry until December 2010. Withholding tax at a rate of 20 percent is due on a variety ofpayments such as rentals, services provided in Mozambican territory, and royalties for the use ofintellectual property. On payments to nonresidents, withholding tax is a final payment; in othercases it is a pre-payment against tax due for the year. There is also a special tax rate of 35 percentapplying to expenses that are not adequately documented, and therefore disallowed asdeductions. 14As with the VAT, the IRPC code includes a simplified regime applying to companies with aturnover below 2,500,000 MT (about $95,000), which are not required to maintain organizedaccounts. Under the simplified regime, taxable income is deemed to equal 20 percent of revenuesfrom the sale of produced goods or the supply of lodging, restaurant or beverage services, and 30percent on gross revenue for other economic activities. In cases where the coefficient of 0.2 isapplicable, the tax due would amount to 6.4 percent of gross receipts (=.20 x 32%). Taxauthorities can also use “indirect methods” to assess income in cases where the taxpayer cannotprovide appropriate or credible and timely accounts.The income tax on individuals (Imposto sobre o Rendimento das Pessoas Singulares, or IRPS)retains progressive marginal tax rates of 10, 15, 20, 25, and 32 percent, assessed on totalhousehold income after allowance for personal and family deductions. 15 No tax is due on incomesbelow 36 times the maximum minimum wage in force at the end of the previous year. For 2008,the highest minimum wage was 2139.50 MT per year, giving an IRPS threshold of 77,022 MT(about $2,900). In turn, the top marginal tax rate of 32 percent applies to chargeable incomeexceeding 1,512,000 MT (about $57,000). Compared to the zero-tax threshold in 2005 of 24million (old) MT, or just $1,200, the 2007 IRPS revision frees many more households with very14 For a detailed explanation of the IRPC Code, see Deloitte and ACIS, Legal Framework for Taxation inMozambique: Manual on Corporate Income Tax, April 2009.15 As in 2005, the IRPS defines five categories: income from employment (“dependent” income);professional and business income; capital income; income from buildings; and other incomes. Eachcategory covers multiple types of income, with restrictions on loss offsets across categories.

C URRENT T AX S YSTEM 17low incomes from tax liability. In addition, the zero-rate bracket is now implicitly indexed forinflation because it is defined relative to the national minimum wage. By the same token, thislinkage in the tax law could create a problem with revenue loss if the government were ever toapprove a hike in the minimum wage far above the inflation rate. For employees of registeredbusinesses, the IRPS on wage income is withheld at source and remitted monthly to the AT. 16Those earning employment income of up to MT 100,000 are not obliged to file returns.Under both the IRPC and IRPS, taxpayers can claim refunds if the amount of tax withheld atsource or pre-paid as provisional estimated payments, which are required for corporations and forindividuals receiving professional or business income. The widely discussed problems with VATrefunds apply as well to the procedures for obtaining timely refunds of income tax.Simplified Tax for Small TaxpayersThe National Assembly approved the new Simplified Tax for Small Taxpayers (ImpostoSimplificado para Pequenos Contribuintes–ISPC) on 26 December 2008 and the law entered intoforce on 1 January 2009. The Council of Ministers published the first regulations in the Boletimde República on 14 April 2009. During the first half of 2009 the Revenue Authority and otheragencies, including private sector organizations, engaged in a broad campaign of meetings andmedia coverage to inform the public about the ISPC and their obligations to contribute to nationaldevelopment. The underlying aim is to use this new tax tool to make formalization moreattractive (or at least less daunting) for small enterprises, and thereby attract large numbers ofnew taxpayers into the system.In June, the Revenue Authority began registering taxpayers under the ISPC, even though formsand procedures were still being developed. According to information provided by the AT, 1,800new contributors registered under the ISPC in the first month, while 300 taxpayers elected toswitch their status to coverage under the ISPC instead of the simplified regimes for VAT andincome tax.The main features of the ISPC are as follows:• Enterprises with an annual turnover up to 2,500,000 MT (just under $100,000) may electto register under the ISPC. This is the same threshold as provided in the 2007 codes forVAT and IRPC to qualify for the respective simplified regimes.• For income covered by the ISPC, taxpayers have an exclusion from VAT, IRPC, andIRPS. Other income is subject to IRPS.• Enterprises with a turnover of up to 36 times the highest minimum wage in force as of theprevious year-end are exempt from tax. This provision of the ISPC matches the thresholdfor entering the IRPS, except that the former relates to turnover while the latter relates toincome. Hence, the ISPC will be charging tax to individuals operating micro and smallenterprises who would fall below the tax threshold under the individual income tax.16 For a detailed explanation of the IRPS Code, see Deloitte and ACIS, Legal Framework for Taxation inMozambique: Manual on Individual Income Tax, January 2009.

18 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUE• The applicable tax rate is 75,000 MT per year (about $2800), or 3 percent of salesvolume, at the option of the taxpayer. 17• For new businesses, the tax is reduced by half for the first year of operations, as a lure toregister in the system.• The tax is paid in four quarterly installments.In essence, the ISPC is designed as a substitute for the simplified schemes under the VAT andincome tax laws. Recall that the simplified VAT imposed a tax equaling 5 percent of turnover; inaddition, income above the zero-bracket threshold is subject to a minimum 10 percent tax rateunder the standard IRPS. Under the IRPC code, the income tax would amount to 2 percent ofturnover for enterprises subject to the coefficient of 0.2 for presumed income. Hence, the ISPCrepresents not only a consolidation of what had been two separate simplified tax regimes, but alsoa reduction in the effective tax rate from approximately 7 percent of turnover to just 3 percent. Inaddition, the AT is developing simpler procedures for registration and simpler formats for officialreceipt books under the ISPC. They further plan to make it easier for small enterprises outsidemajor cities by opening additional offices in new localities and launching mobile tax units. Thereis also discussion of possibly engaging local authorities as tax collection agents in more remotelocations, with appropriate incentives to make it worth their participation in the system.According to sources within the AT, the Ministry of Finance, and the Ministry of Planning andDevelopment, the budget program does not anticipate a significant revenue contribution from theISPC in the near term. The expectation is that the simplified tax, by drawing large numbers ofnew contributors into the formal tax system, will capture a growing stream of revenues over timefrom the natural growth of enterprises that enter the system due to the ISPC.Import DutiesAs of 2009, the standard duty rates range from 0 to 20 percent according to the import category:• 20 percent for consumer goods (Class C)• 7.5 percent for intermediate materials (Class I)• 5 percent for capital goods (Class K) and fuel (Class N)• 2.5 percent for raw materials (Class M)• 0 percent for basic goods (Class E)Under the SADC trade protocol most imports from member states enter Mozambique duty-freewhen accompanied by the required (and complicated) documents for compliance with SADCrules of origin. Customs duties will fall to zero by 2012 on all complying imports from memberstates other than South Africa, and for imports from South Africa by 2015. The SADC InterimEconomic Partnership Agreement (EPA) with the European Union, which Mozambique signed inJune of 2009, will also reduce the tax base for collecting customs duties as duties are graduallyremoved on imports from the EU. In addition, extensive duty exemptions are granted to qualifiedinvestors under the Code of Fiscal Benefits (Código de Benefícios Fiscais), which is discussedbelow.17 The latter condition is clarified in the regulations.

C URRENT T AX S YSTEM 19Excise Tax and Fuel LevyThe National Assembly recently approved a revision to the tax code for the Specific ConsumptionTax (Imposto sobre Consumos Éspecificos, or ICE). As of this writing, the new ICE code was notyet gazetted, but it should come into force at the beginning of 2010. The ICE continues to applyad valorem tax rates to an extensive list of domestic products and imports, mainly alcoholicbeverages, tobacco products, vehicles, and jewelry, and other luxury goods. In 2005 the ICE ratesranged from 5 to 65 percent. The 2009 ICE code increases the top rate to 75 percent, for tobaccoproducts. It also increases the tax rate on jewelry and several vehicle categories, while reducingthe ICE rate on some alcoholic beverages, sporting goods and art works, among other things.Another feature of the new ICE law is a minimum specific tax (per quantity) on most alcoholicbeverages and tobacco products, as a safeguard against undervaluation.The Fuel Levy (Taxa de Combustíveis) remains unchanged as a tax per liter of various types offuel, subject to a formula for quarterly adjustments reflecting changes in the cost of petroleumproducts and the exchange rate. Because a large share of the levy is earmarked for use by theRoad Fund, special provisions are in place to compensate non-road producers who use largeamounts of fuel, particularly mechanized farmers, mines, and fishing boats. In mid-2008, thegovernment suspended the fuel levy on kerosene until year-end, as well import duties and VATon petroleum products, in order to cushion the impact of rising world fuel prices, which hadsparked civil unrest.Stamp TaxThe stamp tax has not changed since 2005 (see Chapter 2.) The study team understands that theAT is examining the implications of eliminating or narrowing the scope of the stamp tax. Manytax experts view this as an archaic “nuisance tax” with a low revenue yield relative to the cost ofadministration and compliance. Elimination of the stamp tax is often recommended in the interestof simplification. While the elimination of any tax reduces revenue, in this case the revenue effectis very small and could easily be offset by other measures as part of the overall tax reformprogram.Other Elements of the National Tax SystemIn addition to the components discussed above, the national tax system also includes:• Special tax on gambling income• Inheritance and gift tax• Property transfer tax• Royalties on mineral and petroleum extraction and surface tax on resource concessions• Vehicle tax• National reconstruction taxMunicipal TaxesConsistent with the government’s plans for decentralization and devolution, one of the strategicindicators in PARPA II is to increase the percentage of municipal and local government budgetsfinanced by their own revenue sources. To support this objective, the Municipal Finance Act of2008 establishes clear guidelines for the types of revenue falling within the jurisdiction of

20 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEmunicipalities, and limits on the tax rates. Without going into detail here, 18 municipalities havethe authority to impose the following taxes and charges:• Municipal individual tax• Municipal property tax• Municipal property transfer tax• Municipal tax on vehicles• Contributions for infrastructure improvements• Levies for issuing operating licenses• Tariffs and charges for the provision of municipal servicesTax Incentives for InvestmentUnder the Investment Act of 1993, investments approved by the Center for Investment Promotion(CPI) qualify for specified fiscal benefits. Eligibility requires a minimum investment of $50,000for foreign companies, and $5000 for domestic companies, as well as detailed business plans andevidence of financial and management capability. CPI approval is subject to a fee of 0.1% of thetotal investment, up to a maximum of $50,000 for large projects.In January 2009, the government introduced a new Code of Fiscal Benefits (Código de BenefíciosFiscais, or CBF), to replace the 2002 Code. The stated aim of the 2009 Code is to “rationalize thefiscal benefits for investments and make them more effective as an instrument of the politicaleconomy.” 19 Appendix B provides a detailed point-by-point comparison of the 2009 and 2002Codes. The new CBF provides “specific” benefits for ten categories of investments: basic publicinfrastructure projects; rural commerce and industry; manufacturing and assembly industries;agriculture and fisheries; hotels and tourism; science and technology parks; large-scale projects;rapid development zones; industrial free zones, and special economic zones. The specific benefitsgenerally involve exemption from customs duty and VAT, partial tax holidays in the form ofincome tax reductions for defined periods of time, and additional provisions such as accelerateddepreciation and deductions for professional training.For the specific benefits, major changes in 2009 are as follows:• Elimination of “exceptional incentives” for large-scale projects, which previously werenegotiated with the Council of Ministers. Large projects now bear the standard companytax. The former regime usually applied a 1 percent tax on gross receipts in lieu of theincome tax, in line with the precedent set for Mozal in the 1990s. Large projects stillbenefit from an exemption from customs duty—extended now to include VAT—onimported capital goods, plus accompanying spare parts and accessories.• Elimination of a 25 percent tax reduction for eight years for investments in mining.• Deep reductions in income tax rates for approved investments in basic publicinfrastructure projects, phased over 15 years; for agriculture and fisheries, phased through18 Deloitte and ACIS, General Overview of the Tax System in Mozambique, Edition 1, October 2008, pp.30-35, provides a summary of the revenue provisions of Law 1/2008 of 16 January.19 CPI, Code of Fiscal Benefits, Law 4.2009 of 12 January (English version), p. 3.

C URRENT T AX S YSTEM 212025; for science and technology parks, phased over 15 years; and for enterprises inIndustrial Free Zones (ZFIs) and Special Economic Zones (ZEEs), phased over 15 years.ZFI and ZEE operators (as distinct from enterprises within a zone) are exempt fromincome tax for 10 and 5 years, respectively, followed by 5 years with a 50 percentreduction and then a 25 percent tax reduction without time limit. Investments inagriculture and IFZs already enjoyed tax rate reductions in the 2002 Code, but the timeframes are now longer and the IFZ reduction more generous.• Extension of the customs duty exemption to a broader range of goods in addition tocapital goods in category “K.” The specification varies by type of investment, andincludes, for example: accompanying spare parts, accessories and raw materials formanufacturing and assembly industries; goods required for construction and “outfitting”of tourism and hotel investments; and “essential goods” for investments in ruralcommerce.• Extension of the exemption from customs duty to include exemption from VAT forspecified purchases by most investments that qualify for specific incentives (theexception being manufacturing and assembly industries).The 2009 Code also offers “general” fiscal benefits for investments that do not fall into a categorycovered by “specific” incentives. These benefits cover import duty exemptions (but not VATexemptions) on class “K” goods; investment tax credits; accelerated depreciation; deductions formodernization and new technology; deductions for professional training; and deductions forcertain expenses on infrastructure that will benefit the public. 20 The 2009 Code introducedseveral changes to the general benefits provided in the previous Code, including:• Scaling back accelerated depreciation from 200 percent to 150 percent of the normal rate.• Scaling back tax deductions for investments in specialized equipment involving newtechnology, as well as expenditures on public infrastructure.• No exemption from the stamp tax and real property transfer tax.One bizarre “benefit” is the deduction for expenses on professional training of Mozambicanlocals, which is capped at 5 percent of taxable income (or 10 percent for training on advancedtechnology equipment). With the cap defined in this way, the benefit is worthless for aninvestment in a tax-loss condition, which is common for start-ups during early years of operation.More to the point, it makes no sense to limit the deduction for a legitimate business expense,especially one that creates positive externalities for the economy by upgrading labor force skills.Indeed, some countries in the region such as Botswana and Swaziland allow a super-deduction(more than 100 percent) for training expenses, to provide an effective subsidy for these desirableactivities.Both the 2002 and 2009 Codes state that fiscal benefits are to be considered as a form ofgovernment expenditure, requiring a declaration of benefits used each year. Table 3-1summarizes government estimates of the “tax expenditures” for 2006 and 2007, with partial20 The 2009 Code specifies that general benefits may not be cumulated with specific benefits, except asstated in the designation of the latter.

22 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEestimates for 2008. 21 It is interesting to see that value of fiscal benefits in 2007 under the IRPCjumped to over 90 percent of actual company tax receipts. The Tribunal Administrativo (2008)points out that this large increase reflects high profits at Mozal, CFM, M-Cel and BancoInternacional de Moçambique. 22 These figures underscore the importance of the 2009 revision tothe CBF, which closes off the special income tax benefit for large projects in the future, though itleaves the benefits unchanged for existing large projects.Table 3-1Approved Tax Exemptions, by Major Tax (10^6 MT)Import Duty VAT Excise IRPC IRPS SumTax exemptions2006 822.8 1534.3 271.8 517.4 0.2 3146.52007 923 1857.1 112.8 3967.2 0.9 68612008 710 1291.6 188.1 na na naTax receipts2006 3260.6 9385 1818.6 2535.5 3784.4 20784.12007 3803.8 11314 2076.2 4364.9 4859.1 264182008 3597.4 12969.6 2634.3 5425.9 5957.2 30584.4Exemptions as % receipts2006 25.2% 16.3% 14.9% 20.4% 0.0% 15.1%2007 24.3% 16.4% 5.4% 90.9% 0.0% 26.0%2008 19.7% 10.0% 7.1% na na naExemptions, by type of tax (%)2006 26.1% 48.8% 8.6% 16.4% 0.0% 100.0%2007 13.5% 27.1% 1.6% 57.8% 0.0% 100.0%2008 na na na na na naNotes: IRPC = Company Income TaxIRPS = Individual Income TaxSources: 2006 and 2007 exemptions from Tribunal Administrativo, Relatório e Parecer sobre a Conta Geral do Estado de 2007, p. V.2008 exemptions from Autoridade Tributária, Relatório de Actividades 2008, p. 50.Receipts, by type of tax from Autoridade Tributária, Execução da Receita do Estado 2008Appendix C provides an international perspective on tax rates and tax incentive regimes in theSADC member states and four other comparator countries in Africa (Ghana, Kenya, Senegal, andUganda). It difficult to judge from this information the extent to which Mozambique’s tax systemis regionally competitive because the incentive regimes contain many technical details that defysimple comparison, and in any case the effects depend on characteristics of particularinvestments. The most useful comparisons come from several studies that are discussed inChapter 5 (see Investment), showing that the 2002 Code of Fiscal Benefits in Mozambique washighly competitive within the region. No comparable studies have been conducted, however, onthe 2009 Code.It is also important to emphasize that the question of tax competition only arises in the context ofinternationally mobile investment projects. For investments that are motivated by access toparticular natural resources, opportunities in the domestic market, or proximity to ports and21 The IMF (2008a) notes that government documents fail to explain the methodology behind theseestimates.22 Using conservative assumptions, Versano and others (2006) estimate that the income tax benefit forMozal, alone, in 2004 was worth approximately $37.5 million, compared to total company income taxreceipts of approximately $45.6 million that year.

C URRENT T AX S YSTEM 23corridors – and are therefore anchored geographically – tax rates in other countries do not enterinto consideration. 23DOING BUSINESS RANKINGS OF MOZAMBIQUE’S TAX SYSTEMThis section reviews Mozambique’s performance on tax system rankings from the World Bank’sannual Doing Business reports. 24 Although there are technical problems with the indicators (seeExhibit 3-1), the ratings have proven to be useful in highlighting constraints to the businessenvironment, providing both an impetus and political leverage for reforms to improve marketconditions, including reforms to establish a more efficient, transparent and effective tax system.The Doing Business reports are designed to provide a set of “standard tools used across a broadrange of jurisdictions to measure the impact of government rule-making on business activity…,”particularly with reference to the effect of institutional conditions on opportunities for domesticsmall and medium-size enterprises. 25 In Doing Business 2009, Mozambique ranked 141 out of182 countries for the overall ease of doing business. For the category “paying taxes,” however,Mozambique fares much better, with ranking 88. This is ahead of all but two other SADCcountries with comparable income levels, though Malawi (at 58) and Zambia (at 38) show thatbetter rankings can be achieved even for low income countries. The overall SADC median rank is58, with the best performers being Mauritius and South Africa, at 11 and 23, respectively.The Doing Business score for paying taxes is calculated for a specific case involving a mediumsizedlimited liability company that started operations one year earlier, undertaking generalcommercial or industrial activities. 26 The score consists of three components, which have equalweight: the number of tax payments; the hours spent in preparation and payment of taxes; and acomputation of the total tax rate as a percentage of profits for the representative business. Thetotal tax rate itself has three components: the tax on profits; taxes and contributions on labor thatare borne by the employer; and other taxes.In Doing Business 2009, the World Bank team estimates that the standardized case-studybusiness would require 230 hours of work to prepare and submit taxes in Mozambique (rank 89)involving 37 payments (rank 120), and face a total tax equaling 34.3 percent of the assumed profitmargin (rank 52). Over the past three years these tax scores have not improved for Mozambique,while some other countries have leapfrogged ahead by implementing reforms affecting one ormore of the indicators. Consequently, Mozambique’s rank on paying taxes dropped from 77 to 8823 Bolnick (2009) reports the results of a survey of 60 investments in Mozambique that were approved byCPI in 2005, 2006 and 2007. The most important and frequent motive for investment was opportunity inthe domestic market; only 7 of 60 investors even considered alternative locations, and only 10 of 60 ratedtax incentives as being critical to their investment decision.24 Appendix C provides a summary of tax indicators from the World Economic Forum’s AfricanCompetitiveness Report for 2009, and executive survey results from the WEF’s Global CompetitivenessReport for 2007-2008.25 http://www.doingbusiness.org/documents/DB09_About.pdf. Accessed June 24, 2009.26 For the full set of assumptions see:http://www.doingbusiness.org/MethodologySurveys/PayingTaxes.aspx.

24 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEExhibit 3-1The Paying Taxes Indicator: How does it measure up?The World Bank’s Independent Evaluation Group (IEG) criticized this the indicator on two grounds in its recentreport, Doing Business: An Independent Evaluation. First, whereas most Doing Business indicators gauge theburden of business regulation, the paying taxes indicator includes subjective judgments about fiscal efficiency andequity by including an estimate of the total tax rate (TTR) as a share of profits for an illustrative business case. Thisindicator implicitly equates low tax rates with a more efficient and equitable tax system. In reality the situation ismore complex. For instance, in a country where revenue mobilization is a paramount concern, lower taxes are notnecessarily advisable. Moreover, including the TTR, as calculated, within the score for paying taxes leads to thecurious result that Mozambique ranks ahead of advanced countries like Finland, Austria and Japan in this category.A second criticism raised by the IEG report is that Doing Business relies on a single source and an opaquemethodology for calculating TTR. The analysis was developed by PricewaterhouseCoopers (PwC) and PwC is thesole informant for the paying tax scores in 142 countries. Collaborating with a single source is inconsistent with theoverall approach used by Doing Business, and increases the likelihood of anomalous results, especially for acomplex calculation like TTR.As an example, Doing Business regularly accords Zambia a very strong ranking on paying taxes, largely because ofthe TTR estimate. Doing Business 2009 shows a TTR for Zambia of 16.1 percent, 8 th best in the world. Looking atthe TTR elements, the estimated company tax equals 1.7 percent of profits for the standard business case(compared to 27.7 percent for Mozambique). Yet Zambia imposes a standard company tax rate of 35 percent,versus 32 percent in Mozambique. The extremely low TTR for Zambia appears to be an artifact of the particularcost structure assumed for the standard business case. (Note that the methodology is based on the standard taxsystem without reference to any special fiscal benefits.)Another problem with the TTR calculation is that it does not take into account the tax on distributed dividends,which directly affects the net rate of return to shareholders. a Countries that have eliminated double taxation ofdividends therefore get no advantage in the TTR score. Furthermore, the methodology adopts a restrictiveassumption about how profit margins are set for the standardized business case, leading to the implausible resultthat the businesses bear a tax exceeding 200 percent of their profit in several countries, including Burundi andDRC.Estimating the number of tax payments would appear to be straightforward, but there is an arbitrary element to thecount for electronic payments. Suppose a country moves from a paper system of monthly VAT returns to a systemallowing electronic payments. By assumption, Doing Business would reduce the tax payment count from 12 to 1,producing a big jump in the ranking for paying taxes. This jump is difficult to justify. If the case-study business hascomputerized accounts, then printing out and signing monthly forms is not that much more onerous than sending anelectronic version. And if the case-study business lacks computerized accounts, it cannot take advantage of theoption for electronic filing.In short, Doing Business scores for paying taxes should be viewed with caution, though they may be useful inhighlighting problems with the tax system that require attention.a World Bank, IFC and PwC (2008), Paying Taxes 2009: The Global Picture, Appendix 2 (Methodology).

C URRENT T AX S YSTEM 25between 2008 and 2009. 27 Looking at the components, Mozambique’s rank slipped from 112 to120 on the number of payments; from 83 to 89 on the time required; and from 43 to 52 on thetotal tax rate.These scores suggest that complexities affecting tax compliance in Mozambique are a moreserious barrier to doing business than the tax rates–an observation corroborated in all of theinterviews conducted for the present study. To ascend in the rankings and significantly improveits score for the ease of paying taxes–and the overall ease of doing business ranking as well – thefocus of attention should be on reducing the time and number of payments involved in payingtaxes. The most important action to jump in the rankings would be to introduce electronicdeclarations and payments for the VAT, the corporate income tax, and social insurancecontributions for workers. Given the methodology used by the World Bank, automating these taxpayments would reduce the number of payments for these three taxes from 31 to 3. In Tocalculate the impact of this measure on the Doing Business score, we assume that automation ofthe payments would also halve the estimated time to pay taxes. If other countries maintain theirpresent policies, these reforms would improve Mozambique’s rank on paying taxes from 88 to 14,and its overall ease of doing business rank from 141 to 130. Eliminating the stamp duty wouldfurther reduce the number of payments by one, and improve the ranking by one more place.The same measures would boost Mozambique’s rank from 10 to 3 in the SADC region in thecategory of paying taxes, trailing only Mauritius and South Africa (see Table 3-2). In addition,these measures would improve Mozambique’s SADC ranking on the overall ease of doingbusiness from 10 to 8. Of course, if other SADC countries are simultaneously pursuing taxreforms there will be less improvement in Mozambique’s relative position. Nonetheless, thesemeasures would still significantly improve the ease of paying taxes in absolute terms–which is theprimary objective.TAX ADMINISTRATIONChapter 2 outlined an impressive number of reforms to tax administration during the PARPA IIperiod. All of the available information—from documentary evidence, interview results, and dataanalysis—show that the reforms genuinely improved the quality of tax administration andsignificantly increased the revenue yield relative to GDP.Nonetheless, the glass is still less than half full when it comes to modernization of taxadministration in Mozambique. This section examines the current conditions, focusing onshortcomings relative to best practices for developing countries. The final section of the chaptersummarizes the AT’s plans for dealing with many of these challenges. It must be emphasized thatinstituting major reforms to tax administration is a complex and difficult task that requiresdetailed technical planning, careful sequencing, diligent attention to change management,adequate financial, technical and personnel resources, and coordination of administrative reforms27 In 2007, Mozambique ranked 80 on the ease of paying taxes. The jump to 72 in 2008 occurred despitethe absence of improvement in any of the country’s component scores. The 2007 rankings, however, arenot directly comparable to those for 2008 and 2009. In fact, the time series data set on the World Bank’sDoing Business website shows scores for 2007 and 2008 only in the category of paying taxes.

26 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUETable 3-2Doing Business 2009, Paying Taxes Indicator ComponentsPaying TaxesEconomyRankPayments(number)Time(hours)Profit tax(%)Total tax rate(% profit)Angola 130 31 272 24.6 53.2Botswana 17 19 140 17 17.1Congo, Dem. Rep. 153 32 308 0 229.8Lesotho 54 21 324 14.5 18Madagascar 92 25 238 19.6 42.8Malawi 58 19 292 29.6 31.4Mauritius 11 7 161 11.3 22.2Mozambique 88 37 230 27.7 34.3Namibia 96 37 375 16.7 25.3Seychelles 40 16 76 23.6 46.6South Africa 23 9 200 24.5 34.2Swaziland 52 33 104 28.1 36.6Tanzania 109 48 172 19.8 45.1Zambia 38 37 132 1.7 16.1Zimbabwe 157 52 256 0 63.7SADC Median 58 31 230 19.6 34.3SOURCE: Doing Business, 2009with supporting legal and regulatory changes, all driven by strong champions of reform inleadership positions. Otherwise, deep administrative reforms can be highly disruptive to the AT’sbusiness processes, to the point of jeopardizing the revenue yield and prospects for success of thereforms themselves.OrganizationThe establishment of the Revenue Authority was a giant step towards professionalizing taxservice. Compared to the previous organizational arrangements under the civil service, the AT isendowed with a high degree of managerial autonomy, including flexibility in determiningremuneration and decisions on hiring, promotion, and retention of staff. Creation of the AT alsoprovides the basis for achieving major gains in efficiency through the integration of commonoperations. To date, however, the integration of customs and domestic tax services has beenlimited, largely involving back office functions. Greater efficiency can be achieved through theintegration of revenue operations such as audit, debt management, risk management, and refundprocessing, as well as support functions such as human resource management, taxpayer databasepooling, IT systems development, and customer services.

C URRENT T AX S YSTEM 27Procedures and Information SystemsEvery department in the AT uses computer applications in the daily course of business. Yet manybasic interactions with taxpayers still operate in a cumbersome pre-automation mode relying onpaper documents, error-prone manual inputs of data into the IT systems, and physical movementof hard-copy files for processing and approvals. This description applies to tax declarations andpayments, customs clearances, refund claims, and case management for appeals, among otherbusiness processes. The introduction of electronic systems will cut compliance costs for taxpayersand free AT personnel time from pushing paper to tasks that generate a higher revenue yield. Thegovernment and the AT are committed to implementing a modern system of e-taxation, includingelectronic declarations, electronic payments through commercial banks, and the introduction ofan automated single window (ASW) for customs clearances.Another serious source of administrative inefficiency and burdensome compliance costs fortaxpayers arises from the continued use of out-dated approaches to risk management. Manydeveloping countries have been adopting systems using automated statistical analysis of past taxrecords and other third-party data to select high-risk taxpayers as targets for the verification ofreturns, tax investigations, customs inspections, and integrated audits. This system supportsbroader application of “green channel” procedures to allow simple and rapid processing of mostcustoms and tax transactions with minimal revenue risk.Automated systems are also the hallmark of good practice in screening tax returns and otherincoming documents to catch arithmetic errors or other inconsistencies, and for identifying andnotifying non-filers, stop-filers, and late filers. Here, too, more effective use of computerizedsystems can free AT personnel from routine low-value tasks and allow a reallocation of humanresources to activities that are more productive in generating revenue.The VAT refund process is a prime case in point. Over the past few years the AT has reducedrefund delays and improved its support to taxpayers who have difficulty dealing with theprocedures and documentation requirements. But the system is still paper based, with detailedmanual verification of every refund petition, and approvals centralized in Maputo. A moreefficient system would be based on electronic refund petitions, automated error-checking in realtime, prompt electronic transmission to a centralized approval center, without requiring theshipment of paper files, selective risk-based verification based on the taxpayers overallcompliance record, and prompt payment of low-risk claims.The VAT refund system also illustrates the critical importance of thoroughly re-engineeringworkflows in conjunction with IT modernization. To realize the potential benefits of electronictax systems, it is essential to restructure basic business practices rather than simply puttingcurrent practices onto a computer. This applies to virtually every area of operation.Accompanying procedural reforms, the AT also needs to expand the management informationsystem (MIS) to include more indicators of operational efficiency (indicadores de desempenho).The Annual Reports (ARs) of the AT are filled with tables and figures providing importantinformation on issues such as revenue results relative to targets; the number of registrations,audits, inspections, refunds, and other proceedings; the size and composition of AT staff; and thebudget for tax administration. But management also needs regular reports on operational

28 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEefficiency, such as data on added revenue per audit and per auditor; the ratio of late-filers andnon-filers to registered (non-exempt) taxpayers; the time distribution of refund payments; thepercentage of customs clearances or VAT refunds benefiting from Green Channel treatment; andsurveys of taxpayer knowledge and customer satisfaction. 28Another major challenge is that the software systems currently in use by customs (DGA) and thedomestic tax department (DGI) do not share data.. 29 The software platforms need to be changedso that all of data for each taxpayer can be integrated into a single master file, based on his or herunique taxpayer identification number (NUIT). Integration of the data systems is a basicrequirement for efficient risk management and case management.Human ResourcesThe AT has made notable progress in increasing the complement of staff, upgrading educationalcredentials, and expanding training programs. However, the AT still needs to embed thesedevelopments in a strategic approach for integrated human resource management to ensure thatpersonnel are deployed across the organization to maximum advantage in generating revenue andimproving taxpayer compliance. As noted above, the introduction of e-taxation systems andmodern approaches to risk management will open new avenues for reallocating staff andincreasing operational efficiency.The on-going process of administrative reform also creates new training needs. For example, theestablishment of a large taxpayers unit to handle all aspects of tax administration for largecorporations with sophisticated financial planning capabilities, accentuates the need for trainingin advanced audit techniques and comprehensive taxpayer services involving even arcanetechnicalities in the tax code.The Culture of TaxationComments on the tax culture in Mozambique were among the most frequent observations arisingin field interviews. Three related elements stand out. First, nearly every interlocutor from theprivate sector offered vivid anecdotal examples illustrating the lack of a customer service cultureamong many tax officials, especially outside of Maputo. The incidents generally involveencounters where tax officials pursue a punitive approach to enforcement, such as levying heavypenalties for inadvertent and inconsequential mistakes, or errors stemming from inadequateinformation about tax system, rather than taking these opportunities to educate taxpayers and helpthem avoid errors. The interviews and the documentary evidence suggest that the AT isimproving taxpayer services and tax education programs. Yet there are still many complexities orprocedural requirements that can trip up even well meaning taxpayers. Also, the incentive28 Appendix E contrasts the type of data contained in the Annual Reports with the type of datarecommended for monitoring operational efficiency, as suggested in IMF(2009c). The Appendix alsotabulates data showing trends in selected indicators of tax administration performance, drawn from theAT’s Annual Reports.29 The customs data system has other significant technical limitations which will not be discussed here.These limitations have been identified in restricted reports to the AT from the IMF and a Quality AssuranceGroup (QAG) of tax experts representing donors contributing to a Common Fund in support of tax reforms.

C URRENT T AX S YSTEM 29structure within the AT encourages harsh enforcement practices whenever a local tax office isfalling short of an assigned revenue target. Revenue targets that are overly ambitious relative toeconomic conditions and institutional capacity tend to create costly problems for small andmedium businesses at the local level.Many interviewees emphasized equally the lack of a “taxpaying culture” in Mozambique. The AThas been working to address this problem through public information highlighting the role oftaxation in financing public services, and the obligation of citizens to contribute to nationaldevelopment. The AT is also in the final stages of developing its website to provide ready accessto any businesses or citizens with Internet connections. This information campaign is animportant step in the right direction, though it will take time to alter deeply ingrained attitudesand habits. Changing the culture of taxpaying is particularly difficult if tax officials are oftenperceived as being predatory rather than supportive, and if the public does not see correspondingbenefits from government expenditures.A related observation on the tax culture, also widely encountered, is that tax evasion andsmuggling are still rampant and blatant, along with bribery and corruption. Here, too, the AT hasmade progress in adopting and publicizing a code of conduct for tax and customs officials, andpromoting greater integrity and professionalism throughout the organization. By all accounts,however, the revenue loss from unethical practices on the part of taxpayers and tax officials isstill very large.PLANS FOR MODERNIZING TAX ADMINISTRATIONThe discussion of tax system would be incomplete without including a summary of plans forfurther modernization of tax administration. The Autoridade Tributária (AT) recently developedand adopted a Strategic Plan for reform in 2009 and 2010, along with a Tactical Plan for 2009setting deadlines and responsibilities for each activity. The Strategic Plan includes an overallstatement of vision, mission, and values for the AT: 30• Vision: To establish premier quality services in collecting revenues and promoting andprotecting the economy and society.• Mission: To collect revenues for financing public sector activities by applying the tax andcustoms laws effectively, efficiently and equitably, with greater convenience fortaxpayers in complying with their obligations, as well as protecting the economy andsociety.• Values: Confidence and mutual respect, fairness, integrity, transparency, courtesy,dedication and excellence.The Plan defines three strategic objectives and actions:• Strategic objective 1: To increase tax collection in a sustainable manner.30 Translation by the authors of the present report.

30 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUE⎯ Strategy 1.1: Help taxpayers understand and comply with the tax laws. Actionsinclude promoting tax education; providing taxpayer assistance; and simplifyingprocedures for paying taxes.⎯ Strategy 1.2: Strengthen measures to improve compliance with tax obligations.Actions include the formulation of legislation to combat tax evasion; simplificationand improvement in processes for inspection, investigation and audit; more effectivesystems for collection and control of tax debts; and strengthening regional andinternational cooperation.⎯ Strategy 1.3: Create an integrated central management for large taxpayers and megaprojects.Actions include development and implementation of a new organizationalunit to provide more professional treatment of large taxpayers; and strengthening thespecialized capabilities needed by tax auditors dealing with mega-projects.• Strategic objective 2: To modernize and strengthen tax administration.⎯ Strategy 2.1: Develop the human resource management system and improve thequality of life for tax officials. Actions include recruiting, training and promoting ATfunctionaries based on qualifications, experience and performance; establishing aunified career framework for AT personnel; and providing social and professionalassistance to AT staff.⎯ Strategy 2.2: Improve the organizational structure and management system toguarantee well planned and well managed operations. Actions include developing anew organizational structure; implementing an effective system of changemanagement; and extending geographical coverage of tax services throughout thenational territory.⎯ Strategy 2.3: Improve the infrastructure to support effective functioning of TaxAuthority. Actions include new and rehabilitated buildings; new equipment andfurnishings, including vehicles; and effective management in providing essentialgods and services.⎯ Strategy 2.4: Strengthen the organizational culture of the Tax Authority. Actionsinclude programs to promote integrity and combat corruption; and development of aculture of controls in accounting, legal procedures and systematic risk management.• Strategic objective 3: To develop information technology that permits the improvementof management of tax processes⎯ Strategy 3.1: Modernise businesses processes of tax administration through theapplication of information technology and maintenance of the functioning of thecurrent system. Actions include designing modern software applications for e-NUITs,e-Taxation, and the automated Single Window for customs; provision of modernhardware, integration of software systems, and implementation of an efficientcommunication environment; effective education and training for AT personnel; andsystems maintenance to guarantee smooth functioning of operations andadministration while new integrated systems are developed.

C URRENT T AX S YSTEM 31Finally, the Strategy establishes four quantitative and qualitative indicators for measuringperformance against the objectives:• Annual increase in revenues of 0.5 percentage points of GDP.• Minimum annual increase in collections of 2 percent over the previous year.• Survey results on taxpayer satisfaction.• Survey results on AT personnel satisfactionThe Strategy acknowledges major issues facing the AT in order to improve efficiency,effectiveness and fairness in tax administration. Particularly important are the need for taxpayereducation and taxpayer support services; stronger enforcement and collection, especially relatingto large taxpayers; the introduction of modern and integrated IT systems; better training for taxofficials; and creation of a culture of integrity and control within the organization. The difficulty,of course, comes in translating the strategy into effective action.

4. Revenue PerformanceThis chapter reviews revenue performance over the PARPA II period and preceding years. Thechapter begins with a discussion of revenue targets in the PARPA and the government’s mediumtermfiscal framework (MTFF), and follows this with a descriptive overview of the revenuetrends. For insight into what might be an appropriate revenue target for Mozambique the chapteralso examines international benchmarks for the ratio of revenue to GDP, and presents aregression analysis based on cross-section data for developing countries.While tax revenues for 2009 are projected to fall short of the PARPA II target, the chapterconcludes that overall revenue growth has been strong over the PARPA II period, reflectingpositively on AT efficiency and the policy reforms carried out over the last ten years. Inconjunction with evidence presented elsewhere in this study, the analysis of revenue buoyancyand appropriate international comparisons indicate that there is still scope for increasing therevenue ratio in the coming years.REVENUE TARGETSAs shown in Chapter 2, PARPA II set a target for total domestic revenue target to reach 16.2percent of GDP in 2009, up from 14.0 percent in 2005. For the longer term, the indicative targetin PARPA II is to increase revenues to 16.6 percent of GDP in 2014 (p.39, Table 11). ThePARPA also states that these targets are to be achieved without placing an undue burden on theformal sector, by broadening the tax-base and reducing tax exemptions and evasion.The long-term need to increase revenues is highlighted by the persistently large fiscal gap – thedifference between total expenditures and total revenues, excluding grants and loans.Figure 4-1 illustrates the scale of the issue, 31 showing that external grants and loans financed 49percent of expenditures in 2006 and 43 percent in 2008. While a reliance on external finance isacknowledged as a necessity for the foreseeable future in PARPA II, the long-term goal is toreduce this dependency by increasing government revenues.31 As the latest wave of major tax reforms in Mozambique goes back to the introduction of VAT in 1999,this is taken as the starting point for analyzing revenue performance, permitting a longer time horizon foranalysis of trends and patterns although the focus will remain on the PARPA II period 2006 to 2008.

34 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEFigure 4-1Domestic Revenue & Expenditure as a Share of GDPSOURCE: MPD, "Quadromacro Revisto CFMP Proposta", received June 2009.This long-run goal is reflected in government annual budget programs which, in agreement withthe IMF, have targeted an increase in revenues of 0.5 percent of GDP per year since 2005 (IMFreports from 2005 to 2009a). In fact, the latest Medium Term Fiscal Framework (Cenário Fiscalde Médio Prazo- CFMP) projections target average growth of nearer 0.6 percent of GDP from2005 to reach 17.4 percent of GDP in 2011, reflecting more ambitious targets than thoseexpressed in PARPA II. 32 Further, a recent IMF Debt Sustainability Analysis assumes that taxrevenue will reach 21 percent of GDP in 2028, with total revenues reaching 23.5 percent of GDP(IMF 2009a).This optimistic long-term view is based at least to some degree on two IMF studies. 33 An internalstudy in 2004 used a combination of macroeconomic data, household surveys and foreign tradestatistics to estimate the potential tax base for VAT, income tax and import duties, and thenapplies the respective tax rules and rates to the estimated tax base to arrive at an estimate ofpotential revenue. Comparing potential revenue with actual collection, Schenone estimates thatthe maximum revenue potential for these three taxes was roughly double the realized revenue of11 percent of GDP in 2001 and 2002, illustrating a large degree of foregone revenue due toexemptions, evasion, and weak administration as of the reference dates. The second IMF studyapplied an econometric “tax frontier” model to estimate the potential tax revenue from crosscountrypanel data for the period 1995 to 2005. This study also estimated the tax capacity forMozambique at around 22 percent of GDP. The authors note that this would be on a par withKenya’s performance.32 From MPD, DNEAP's "Quadromacro Revisto CFMP Proposta", received June 2009.33 Both studies are discussed in Varsano et al. (2006).

R EVENUE P ERFORMANCE 35Notwithstanding these conclusions and ambitious revenue targets, growth and revenue forecastshave recently been revised downwards, reflecting effects of the world economic downturn. Themost recent IMF report from June 2009 projects total revenue on the order of 15.7 percent ofGDP in 2009, rising to 16.5 percent in 2011 (IMF 2009b).The following section discusses revenue performance and the observed trends for the maincontributing taxes in light of the PARPA II and other targets mentioned above.REVENUE GROWTHRecent revenue growth has been strong. After a dip in the ratio of revenue to GDP in 2004,growth in the ratio resumed in 2005 and continued for the first two years of PARPA II, coincidingwith the introduction of the AT. This helped to narrow the gap between domestic revenues andexpenditures (illustrated in Figure 4-1). In fact, domestic revenues reached the 2009 PARPA IItarget of 16.2 percent of GDP in 2007, and narrowly missing this mark in 2008, with 16.0 percentof GDP, as shown in Table 4-1.Table 4-1Principal Revenues as Share of GDP (%)1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Total revenues 10.8 11.5 11.2 11.4 13.1 12.4 13.8 15.2 16.2 16.0Tax revenues 10.0 10.5 10.0 10.5 12.3 10.8 11.1 12.3 13.4 13.5Income taxes 1.5 1.6 1.8 2.1 2.9 2.7 2.9 3.5 4.5 4.9Personal income tax 0.8 1.0 1.1 1.4 2.0 1.9 1.9 2.1 2.3 2.5Corporate income tax 0.7 0.6 0.6 0.7 0.8 0.8 1.0 1.4 2.1 2.4Expenditure taxes 6.6 7.3 6.9 7.2 7.9 7.2 7.4 8.0 8.3 8.0Value-added tax (VAT) 3.9 4.4 4.2 4.4 4.9 4.5 4.5 5.2 5.4 5.4VAT on domestic transactions 1.0 1.8 1.9 2.0 2.1 1.9 1.8 2.1 3.2 2.4VAT on imports 1.4 2.6 2.4 2.6 2.7 2.6 2.7 3.2 2.2 3.0Spec. consumption tax (SCT) dom. 0.6 0.6 0.6 0.6 0.7 0.6 0.6 0.6 0.6 0.7SCT Beer and soft-drinks 0.0 0.5 0.4 0.5 0.5 0.4 0.5 0.5 0.5 0.5SCT – tobacco 0.0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1SCT – Other products 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1Specific consumption tax imports 0.4 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4Customs duties and sugar surtax 1.7 1.9 1.8 1.9 2.0 1.7 1.9 1.8 1.8 1.5Other tax revenues 1.9 1.6 1.3 1.2 2.2 0.9 0.8 0.7 0.7 0.6Other revenues 0.7 1.0 1.2 0.9 0.9 1.8 2.9 3.0 2.7 2.5Mem: Imposto s/ Combustivel 1.3 1.2 1.0 0.9 1.2 1.3 1.2 1.0 1.1 1.0Notes: Years 1999 to 2007 from Conta Geral do Estado, 2008 from Relatorio de Execucao. Data MPD"Quadromacro Revisto CFMP Proposta", received June 2009. Note that here Imposto de Combustivel is presented separately asbut is otherwise included partly in "Non-tax revenues" and partly in "Consigned revenues".Within total revenues, tax receipts also increased as a share of GDP from 10.8 percent in 2004to13.5 percent in 2008. The difference between total revenue growth and tax revenue growth is

36 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEdue to “other revenues”, comprising non-tax revenues, pre-assigned revenues and capitalrevenues, with assigned fuel tax and capital revenues mostly responsible for growth in thiscategory.Despite missing the PARPA II goal for 2008 and 2009, overall revenue performance suggestssignificant gains from the introduction of the AT, reforms to tax administration, and efforts tobroaden the tax base. This is particularly impressive given that several tax policy measures werecarried out that were likely to reduce revenues, namely lowering the top import tariff rate,implementation of the SADC trade protocol, raising the VAT threshold, and the temporarysuspension of fuel tax. Part of the increase in revenues is also due to the natural elasticity of thetax system.Revenue Elasticity and BuoyancyIn discussing revenue performance, it is important to understand the concepts of revenueelasticity and buoyancy. Revenue elasticity refers to the increase in revenues which occursnaturally as a result of economic growth, excluding the revenue effects of changes in tax policy oradministrative reforms. Economic growth itself moves individuals into higher tax brackets,increases the number of households and businesses above the exemption threshold, pulls moreworkers and firms into the formal sector, increases the incomes of successful firms, and expandsexpenditure on taxable goods and services relative to GDP. These basic factors suggest that boththe corporate and individual income tax, as well as the VAT are inherently elastic sources ofrevenue. That is to say that they tend to generate higher revenues relative to GDP as the economygrows, aside from any measures to broaden the tax base, improve collection efficiency, orimprove tax compliance. To a lesser extent the same is true of the excise tax, because sumptuaryspending tends to increase relative to total consumption expenditure as incomes rise. Customsduties, on the other hand, may be less elastic, depending on trends in the ratio of trade to GDPand changes in the composition of imports.Revenue elasticity is hard to quantify due to the difficulty of separating the effect of policymeasures from the underlying dynamics due to growth. Revenue buoyancy is an alternativemeasure that is easier to calculate because it simply looks at the overall change in revenuesrelative to income and expenditure, without trying to distinguish the effects of policy oradministrative measures. Table 4-2 presents revenue buoyancy measures by type of tax, averagedover two periods: 2000 to 2008, and the PARPA II period of 2006 to 2008. The averagebuoyancy of total revenues over the period 2000-2008 is 1.38, implying that revenues increasedby 1.38 percent for each 1 percent increase in GDP. Over the shorter PARPA II period, totalrevenue buoyancy has been nearly the same, at 1.34. For both periods the buoyancy rate has beenhigher than one, showing that revenues grew considerably faster than nominal GDP.Tax revenues were less buoyant than total revenues over the full period 2000 to 2008, but therelationship reversed in the PARPA II period, with a strong buoyancy factor of 1.48 for taxreceipts. Income tax revenues have been especially buoyant over this period, particularly thecorporate income tax (IRPC) for which revenues increased by 3.5 percent for every 1 percent risein GDP. VAT revenues have also been highly buoyant over the past three years, with domesticrising by 2 percent and the VAT on imports rising by 1.58 percent for every 1 percent rise inGDP.

R EVENUE P ERFORMANCE 37Table 4-2Revenue Buoyancy with Respect to Nominal GDPAve. 00-08 Ave. 06-08Total revenue 1.38 1.34Tax revenue 1.32 1.48Income taxes 2.08 2.35Personal income tax 2.13 1.62Corporate income tax 2.10 3.49Expenditure taxes 1.22 1.18VAT on domestic transactions 2.16 2.00VAT on imports 2.00 1.58Specific consumption tax - domestic 1.15 1.15Specific consumption tax - imports 1.17 1.28Customs duties and sugar surtax 0.97 0.52Fuel tax 1.06 0.78Other revenues 2.37 0.64SOURCE: Authors’ calculations using data from MPD, "Quadromacro Revisto CFMP Proposta",received June 2009.This is important to keep in mind in discussing the prospects for further revenue increases as ashare of GDP. The buoyancy evidence suggests that administrative and tax policy measures,combined with the inherent effects of rapid GDP growth, have produced strong growth in taxrevenue relative to GDP over the PARPA II period. There is no reason to expect the favorabledynamics to dissipate over the medium term given the prospective revenue effects of recentchanges in tax policy relating to future large projects, including mineral and petroleum ventures,the rapid expansion in tax registrations, and the scope for substantial revenue gains throughfurther administrative reforms, as discussed in Chapter 3.Revenue SourcesFigure 4-2 disaggregates total revenues into the main components: income taxes; VAT; customsduties (plus the surcharge on sugar imports); fuel tax; “other taxes;” and “other revenues.” 34 Thisclearly shows that the largest contributors to revenue are income taxes and VAT and that thesehave been increasing as a share of GDP at least since 2005, although VAT revenue growth tailsoff in 2008. The next largest contributor to revenues is customs duties and the sugar surtax,followed by “other revenues” which have seen a leap in their share of GDP since 2004. These arediscussed in more detail below.34 Revenues from the specific consumption tax (excise tax) on domestic goods and imports are left out to avoidclutter, and given their relatively low share of GDP through time. More detailed data are presented above in Table 4-1.

38 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEFigure 4-2Principal Tax Revenues as a Share of GDPSOURCE: MPD, "Quadromacro Revisto CFMP Proposta", received June 2009.Expenditure TaxesExpenditure taxes are the primary source of domestic revenue, representing 9.0 percent of GDP in2008, with 60 percent of this sum coming from VAT. 35 VAT revenues have increased as a shareof GDP from 3.9 percent of GDP in 1999 to 5.2 percent in 2006 and 5.4 percent in 2007 and2008, making VAT by far the most important tax, providing approximately one third of totalrevenues and 40 percent of overall tax receipts in 2008.Given the importance of VAT revenues, it is useful to examine revenues from domestictransactions and imports separately. As can be seen in Table 4-1 above, VAT collections onimports fell from 3.2 percent of GDP in 2006 to 2.2 percent of GDP in 2007 before rebounding in2008 to 3.0 percent of GDP. At the same time, revenues from import duties and the sugar surtaxdeclined in 2008 from 1.8 percent of GDP to 1.5 percent. While this decline in duty revenuesmakes sense following the reduction in the tariff rate on imports of consumer goods and thephasing in of SADC trade preferences, the accompanying VAT surge should reflect the broadertrend in imports. In fact, the local currency value of imports increased by just 8.6 percent in 2007– below the growth rate for nominal GDP. Imports by value then jumped by 24.7 percent in 2008,reflecting in part the surge in world commodity prices. 3635 Note for 2005 that the breakdown of VAT between domestic and imported goods, and the breakdownof the ICE on national products between beverages, tobacco and other goods is imputed as an average ofthe breakdown in 2004 and in 2006 due to the absence of the relevant data.36 Figures from the DNEAP Quadromacro from June 2008.

R EVENUE P ERFORMANCE 39In contrast to VAT on imports, domestic VAT receipts increased markedly in 2007 and then fellin 2008 as a share of total revenue. This may be a consequence of the revised VAT code whichintroduced a 60 percent reduction in VAT on supplies of services to the state for public workssuch as roads, bridges and water supply infrastructures. The increase in the turnover threshold forVAT exemption may also have had an effect on revenues beginning in 2008. Even though a largenumber of firms may have been affected (no figures are available), this is not likely to have beena major factor given that affected firms would be very small, and the exemption only eliminatesVAT on a firm’s final sales margin, without providing relief from VAT paid on inputs. Furtheranalysis would be needed to explain more fully the recent behavior of VAT receipts. Analysis ofthis sort should be a routine function of the studies office (GEST) in the Ministry of Finance.Overall VAT performance can also be examined in terms of a standard indicator called VATproductivity. This is defined as the ratio of VAT receipts to GDP, divided by the VAT rate, whichin this case is 17 percent. The resulting value lies between zero and one, where an estimate closeto one implies that actual VAT collections are high relative to the theoretical maximum, or highVAT productivity, while a value close to zero implies low productivity due to a combination ofexemptions, zero-rating, tax evasion, and weak tax administration. Table 4-3 shows that VATproductivity in Mozambique has broadly been rising since 2000, the first full year ofimplementation, with minor declines in productivity 2005 and 2006 only.Table 4-3Mozambique VAT Productivity2000 2001 2002 2003 2004 2005 2006 2007 2008VAT Productivity 0.23 0.26 0.25 0.26 0.29 0.26 0.26 0.31 0.32SOURCE: Authors’ calculations using data from MPD, "Quadromacro Revisto CFMP Proposta", received June 2009.The Mozambican average for the period 2006 to 2008 is 0.30 which, as shown in Table 4-4, isabove the average of 0.25 for sub-Saharan Africa, and the average of 0.24 for low-incomeeconomies worldwide. Although this still puts Mozambique below the levels attained in the lowmiddle-incomeeconomies group of 0.47, it should be noted that VAT productivity is 0.37 forWestern Europe, and 0.32 for the United States and Canada.In relation to other expenditure taxes, the revenue yield from the domestic excise tax and theexcise tax on imports has remained roughly constant at around 0.6 percent of GDP and 0.4percent of GDP, respectively. Revenues from fuel tax have also been relatively stable, rangingbetween 1.0 and 1.3 percent of GDP, despite the foregoing of fuel tax receipts as of June 2008mentioned above.

40 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUETable 4-4VAT Productivity for Mozambique and Comparator Country GroupsCountry/GroupVATProductivityLow-income economies group 0.24Sub-Saharan Africa 0.25South Asia 0.28Mozambique 0.30United States and Canada 0.32Western Europe 0.37High-income economies group 0.39Upper-middle-income economies group 0.43Latin America and the Caribbean 0.44East Asia and Pacific 0.45Central Europe and Central Asia 0.45Middle East and North Africa 0.47Low-middle-income economies group 0.47Note: Fiscal Reform data does not refer to one particular year, but employs the most recently available data as of December 2007,the most part coming from 2005, 2006 and 2007 (Fiscal Reform, 2009, accessed athttp://www.fiscalreform.net/index.php?option=com_wrapper&Itemid=132).SOURCE: Fiscal Reform (2009).Income TaxIncome tax revenues increased markedly from 1.5 percent of GDP in 1999 to 3.5 percent in 2006and then to 4.9 percent in 2008. This overall growth stemmed from implementation of the revisedincome tax code (the IRPS and IRPC) in 2003 which, from 2004, led to a higher growth path forrevenues, and from more efficient tax enforcement following establishment of the AT.Figure 4-3 shows that income tax revenues climbed from under 15 percent of total revenues in1999 to over 30 percent in 2008. The graph shows that much of the growth has been due to thecorporate income tax revenues (IRPC). These revenues increased from five percent of the total in2003 to 15 percent in 2008. In addition to the effects of the new tax regime and improvements inadministration, this rapid growth in company tax revenue is likely related to strong growth in thefinancial sector, which doubled its share in GDP from 1.6 percent in 1999, to 3.3 percent in 2003and continued rising to 5.6 percent of GDP in 2008. Expansion of the financial sector wasparticularly strong in 2004 and 2005, with growth rates of 25.2 and 49.2 percent, respectively (seethe data on GDP in Appendix A). 37 The transport and communication sector is also likely to havebeen instrument here, given its high average growth rate of 13.1 percent over the period 2006 to2008 and share of around ten percent in GDP.37 The manufacturing sector also displayed a higher accumulated growth than most other sectors over theperiod 1999 to 2008, but this is mainly due to megaprojects, and Mozal in particular, which contributesdisproportionately little to government revenue due to the special negotiated tax regime for this project.

R EVENUE P ERFORMANCE 41In contrast, personal income tax receipts received a one-off increase in revenues with theintroduction of IRPS in 2003 and the inclusion of public sector salaries into the tax-net, but havesince remained around 15 percent level of total revenue, even declining as a share of totalrevenues in 2005 and 2006.Figure 4-2Revenues from Taxes on Income as a Share of Total Domestic RevenuesSOURCE: MPD, "Quadromacro Revisto CFMP Proposta", received June 2009.As a result, income tax revenue in 2008 was almost equally shared between companies andindividuals (15.0 percent and 15.6 percent of total revenues, respectively). While the currentgrowth slowdown may dampen company profits in the short run, the overall trend suggests thatcompany tax revenues should overtake personal income tax revenues in coming years. This trendsuggests that efforts to strengthen tax administration have had a disproportionate impact oncompany tax collects, as would be expected given that the individual income tax is largely paidthrough monthly withholding by employers in the formal sector. The trend is likely to be furtherhelped by the new fiscal benefits code, discussed above, which reduces the level of benefits tofuture mega-projects and mining and petroleum investments, bringing these under the IRPC(though the revenue potential from large projects is generally very low in the initial years ofoperation due to deductions for capital expenditures and loss carry-forward provisions of the taxcode).Other Revenue SourcesAn important consideration is the distinction between total domestic revenues and tax revenues.As illustrated in Figure 4.1 the gap between the two revenue figures has increased since 2004,with total revenues broadly in line with the PARPA II target even though tax revenues are belowtarget. A part of the increase in this gap is due to the reclassification of a portion of fuel tax from“Other Taxes” to non-tax “Consigned Revenue” as of 2004. This statistical artifact increased“Other Revenues” by 0.8 percent of GDP. Even excluding this reclassification effect, however,the gap between total revenues and tax revenues has still increased due to growth in “Own

42 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUERevenues” (Receitas Proprias) of central and district government agencies, from zero percent ofGDP in 2004 to 0.5 percent since 2005, and also an increase in capital revenues from 0 percent ofGDP in 2004 to 0.7 percent in 2005, declining to 0.4 percent of GDP in 2008. As privatizationrevenues are now mostly exhausted, capital revenues are mainly derived from dividends earnedon government investments state-owned corporations and government shares in private ventures.These might be expected to rise further as government stakes in Mozal and other mega-projectsbear more fruit.Finally, some commentators contend that tax cuts may increase revenue by stimulating highercompliance and faster growth. There is no empirical evidence, however, to support theproposition that a moderate reduction in the tax rates would have a large enough impact oninvestment, productivity, or compliance to avert a revenue loss. One possible exception,mentioned in Chapter 4, is the extremely high tax on certain products like vehicles from thecombined effect of import duties, VAT, and excise tax. Experience in other countries suggeststhat lowering the excise tax or the import duty in such cases can actually boost revenue. Thisoption warrants study.INTERNATIONAL COMPARISONSTo gain perspective, it is instructive to compare the revenue performance in Mozambique withthat of other countries. In fact, international comparisons were frequently mentioned in interviewsconducted for this report, particularly in connection with discussions of an appropriate revenuetarget. Mozambique currently has a revenue ratio that is one of the lowest of the 15 SADCmember states, and well below the SADC median of 23.3 percent of GDP (averaged over theperiod 2006 to 2008). Closer examination, however, shows that this is not an appropriatecomparison. Several member states benefit from having abundant natural resources (Angola,Botswana, Namibia, South Africa), while some have access to extraordinary revenues throughallocations from the SACU common revenue pool (Botswana, Lesotho, Namibia, Swaziland), andfive are irrelevant to Mozambique due to very different economic and political conditions(Mauritius, Seychelles and South Africa as much wealthier countries, and DRC and Zimbabwe ashighly disrupted economies). This leaves only Malawi, Zambia, Tanzania, and Madagascar asrelevant comparators within the SADC region.Table 4-5 presents fiscal indicators for SADC countries and some additional comparators.Malawi and Zambia have revenue ratios that are higher than in Mozambique, at 18.7 percent and18.2 percent of GDP, respectively, while Madagascar and Tanzania have revenue sharesconsiderably lower than in Mozambique, at 12.1 and 13.2 percent of GDP, respectively. Notably,Malawi and Zambia also score better than Mozambique in the World Bank’s Doing Businessranking for “ease of paying taxes” (as discussed in Chapter 3). Although not in SADC, anotherstrong reformer in the region is Uganda, which also has a revenue ratio well below that ofMozambique at 12.7 percent of GDP. This basic comparison might lead to the conclusion thatthat Mozambique is well placed, given its level of development and economic structure, and inparticular given the continuing level of administrative reforms underway.According to World Development Indicators (WDI) data from the World Bank for 2008, onlythree low-income countries managed to generate revenue ratios above 19 percent of GDP in2006. These are Ghana (21.9 percent), Kenya (21.1 percent) and Vietnam (27.9 percent). For

R EVENUE P ERFORMANCE 432007, this group also includes Senegal at 21.1 percent of GDP. However, all of these countriesdiffer considerably from Mozambique in economic conditions. All four have much higher levelsof per capita income. Measured in terms of purchasing power parity, the respective income levelsin 2007 were $2,602 for Vietnam, $1,424 for Ghana, $1,672 for Kenya, and $1,698 for Senegal,compared to $842 for Mozambique (IMF, 2009b). These figures are only illustrative, butMozambique clearly lags far behind the high-revenue countries of the low income group in termsof overall development. In addition, Vietnam benefits from having substantial amounts of oilrevenue.Table 4-5Fiscal Indicators, Three-year Averages, 2006-2008 (% GDP)Overall Fiscal BalanceIncludinggrantsExcludinggrantsGovernmentRevenue(excludinggrants)GDP percapita(currentUSD)SADC Mean 2.5 -1.7 28.0 3,106SADC Median 0.6 -4.85 23.3 1876SADC C OUNTRIESAngola 12.9 12.9 46.9 3,813Botswana 4.6 3.9 35.7 7,011Congo, Dem Rep -0.7 -5.8 15.4 165Lesotho 11.8 10.3 59.8 666Madagascar 10.6 -8.3 12.1 373Malawi -2.4 -5.2 18.7 273Mauritius -4.3 -4.5 20 5,803Mozambique -3.7 -13.5 15.8 408Namibia 1 0.8 30.3 4,146Seychelles -4.4 -6.2 37.8 10,943South Africa 0.2 0.2 26.6 5,686Swaziland 5.8 5.3 41 2,750Tanzania -2.8 -8.1 13.2 442Zambia 5.7 -5.8 18.2 1,002COMPARATOR COUNTRIESGhana -9.7 -15 22.5 665Kenya -3.1 -4.3 21.8 766Senegal -4.6 -6.7 20.1 925Uganda -1 -5.2 12.7 391Vietnam n/a -0.9 27.3 866Note: Data on Zimbabwe as a SADC country is excluded as unreliable.SOURCE: Sub-Saharan Africa Regional Economic Outlook, April 2009; World Economic Outlook April 2009

44 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEIn discussing a suitable revenue target for Mozambique, Varsano et al. (2006) draw attention tothe structure of the Mozambican economy. In particular, they highlight the importance of thecommerce, transport and communications sectors which were responsible for 36.9 percent ofGDP in 2004, higher than in Tanzania, Kenya, Uganda and Malawi. As they point out, thesesectors should provide relatively good sources of VAT revenue. They also point out that thatMozambique and Kenya have a similar share of manufacturing in GDP (13.7 and 13.0 percent ofGDP, respectively) and conclude that their revenue capacity should also be similar, at around 22percent of GDP. This comparison ignores the fact that the Mozambique is considerably poorerand less developed than Kenya. Overall, these international benchmark comparisons suggest thata revenue target above 19 percent of GDP would be highly ambitious for Mozambique.Nonetheless, simply comparing revenue ratios across countries ignores a wide range of factorsrelating to taxable capacity and demand for tax revenue. The following section presents furtheranalysis relating to the appropriate target which takes economic characteristics moresystematically into account.REVENUE EFFORTRevenue performance can be analyzed in terms of tax effort or revenue effort by comparing acountry’s revenue yield with a predicted value of the revenue ratio as estimated from a crosscountryregression analysis relating revenue ratios to economic and other characteristics. Thisstatistical form of benchmarking takes into account differences in economic characteristics likelyto influence potential revenues.Jones (2009) carried out this exercise for Mozambique by comparing tax ratios across low andmiddle-income countries for the period 1990 to 2003 in a panel analysis. He controls statisticallyfor differences in economic structure and institutional factors, the implication being thatremaining differences in the observed tax ratios relate to differences in policy preferences and thequality of tax administration. 38 His econometric results suggest that 13 percent of GDP was arealistic tax ratio for Mozambique, circa 2003. He also shows that the actual tax ratio over thisperiod closely followed predicted values, given the prevailing economic and institutionalconditions.For the present paper, a similar analysis was conducted using more recent data, and with the ratioof total revenues to GDP as the dependent variable. To capture basic characteristics of the countrythat affect revenue performance, the independent variables in the regression analysis include GDPper capita, measured in constant US$2,000; the annual consumer inflation rate; the trade share ofGDP (defined as exports plus imports divided by GDP); the nonagricultural share of GDP; andthree widely cited measures from the World Bank on institutional quality, covering government38 Economic structure variables include GDP per capita, imports as a share of GDP, industry as a share ofGDP, whether or not the country is resource-rich; while institutions are controlled for indirectly byintroducing the share of the country found in the tropics, whether or not the country is landlocked, and whothe colonial power, all variables variously associated with institutions in the cross-country empiricalliterature on growth.

R EVENUE P ERFORMANCE 45effectiveness, regulatory control and control of corruption, all of which are indices rangingbetween -2.5 to 2.5. 39The regression equation is estimated for low and middle-income countries. To verify robustnessof the estimates, the regression is run for three periods: 1999-2007, 2003-2006, and 2005-2007.Table 4-6 presents the results. In particular, it shows the actual ratio of revenues to GDP and thepredicted ratio, as estimated from the regression equations. Assuming that the predicted revenueshare indicates the expected revenue yield for a country with Mozambique’s level of developmentand structural characteristics, the revenue effort can be defined as the ratio of the actual topredicted revenue ratios. This is reported in the final column of the Table 4-6.Table 4-6Mozambique Actual & Predicted Revenue-Ratio & Revenue-EffortPeriodActualR/YPredictedR/YS.E. Normal Range Revenue-Effort99-07 14.28 15.17 1.30 14.30 16.05 0.9403-06 13.85 16.49 1.45 15.51 17.47 0.8405-07 15.03 17.04 1.67 15.91 18.16 0.88Note: Normal range is defined as the (predicted T/Y)+/-0.67*S.E., which provides the 50 percentile range around the predictedvalue. The S.E. is the standard error of the predicted tax ratio.SOURCE: Authors’ estimation using WDI and WEO data as described in the text.Table 4-6 also shows the standard error of estimate for the predicted value of the revenue ratio,and a corresponding “normal range” around the predicted value, taking into account the fact thatthe expected value is estimate with a margin of error. Specifically, the “normal range” is definedhere such that 50 percent of the observations should fall inside this interval, with 25 percentabove and 25 percent below. 40The most important point to note in Table 4-6 is that the actual ratio of revenue to GDP is belowthe predicted value, implying that Mozambique is consistently collecting less revenue than wouldbe expected given its economic structure and other characteristics, based on evidence from othercountries. This is reflected in the revenue-effort measures, which are all below one (where arevenue effort of one would imply that Mozambique was achieving its predicted ratio). For themost recent period, the revenue ratio is even outside the normal range on the low side. This resultadds weight to the view that there is considerable scope for improvements in the revenue effort,and that a target ratio of slightly more than 18 percent should be achievable.In contrast to earlier econometric studies which provided evidence for a very low revenue targetof around 13 percent of GDP (Jones 2009) or a very high tax ratio of around 22 percent of GDP(Varsano et al., 2006), the message to emerge from the present analysis is that an appropriate39 See Appendix F for a complete discussion of the methodology and other studies of this sort.40 The “Normal Range” is calculated as Y+/-(0.67428*S.E.), where Y is the predicted tax ratio, 0.67428is the Z-score from the normal distribution associated with the middle 50 percentiles, and S.E. is thestandard error of the predicted tax ratio.

46 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUErevenue ratio for Mozambique lies between those extremes, most likely between 16 and 18percent of GDP.

5. Impact of the Tax SystemPrevious chapters presented an overview of the structure and recent performance of the taxsystem. This chapter provides a more detailed analysis of the impact the tax system on majorobjectives of PARPA II. The chapter assesses in broad terms the impact of the tax system oninvestment, saving and employment, on private sector development, and on fairness and equity.This analysis leads into to a discussion of major tax issues for consideration in the preparation ofPARPA III, which is the subject of Chapter 6.The discussion of tax impacts on the PARPA objectives parallels in many ways a review of basicprinciples of taxation. The fundamental purpose of taxation, of course, is to raise revenue tofinance the provision of public goods and services. The first principle is therefore that the taxsystem should be effective in mobilizing and sustaining revenue. But taxes have a pervasiveinfluence on economic decisions of individuals and businesses, and on social equity. In view ofthese effects, the tax system should achieve the appropriate level of revenue as efficiently andfairly as possible. Hence, a well designed tax system should also conform to three otherprinciples:• Economic efficiency. An efficient tax system minimizes tax-driven distortions ofeconomic behavior in order to foster productivity and economic growth. Economicefficiency considerations are especially important for low-income countries, which canleast afford the cost of avoidable resource misallocation. Efficiency effects are alsorelated to predictability. A tax regime that is subject to unexpected changes or arbitraryenforcement is a major risk factor for investors.• Equity. A fair tax system is characterized by vertical equity (collecting proportionatelymore from those with higher incomes) and horizontal equity (provides relatively uniformand non-discriminatory treatment of taxpayers with similar economic circumstances). Italso minimizes the tax burden on the poor, and avoids excessive tax burdens or arbitraryimpositions all around. Fairness is a fundamental objective in its own right. In addition,perceptions of unfairness can erode compliance and undermine the sustainability of thetax system.• Administrative efficiency. The tax system should also be administered efficiently, withdue regard to both the direct costs of collecting taxes and compliance costs imposed ontaxpayers. Even the best tax code produces poor results when it is not well administered.In countries with limited institutional capacity and weak capacity on the part of taxpayersto deal with complexities of financial management, simplicity is a virtue.

48 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEThese principles are implicitly related to the PARPA II objective of raising governmentrevenues without increasing the tax burden on the formal sector, by expanding the tax base,curbing tax evasion, and reducing tax incentives.INVESTMENTThis section examines the effects of the tax system on two central building blocks for sustainablegrowth: the level and quality of investment.How Taxes Affect Investment: The BasicsFigure 5-1 illustrates the general relationship between taxes and investment decisions. Line AArepresents the returns to capital. The downward slope shows that there is a continuum ofinvestments ranging from high to low returns. Line MC 0 represents the “user cost of capital”(UCC), which includes cost of funds, the effective tax rate on income from capital, and theimpact of indirect taxes on the acquisition cost of capital goods. A reduction in any of the taxcomponents shifts the UCC downward from MC 0 to MC 1 , and stimulates an increase ininvestment from INV 0 to INV 1 .Figure 5-1Lowering Taxes on Capital to Stimulate InvestmentMarginalproduct &marginalcost ofcapitalBAValue of the marginalproduct of capitalMC 0MC 1Tax ReductionABINV 0INV 1InvestmentAA = Strong investment climate strong effectBB = Weak investment climate weak effectThis picture illustrates two important points. First, tax cuts have little effect on investmentprojects with inherently high rates of return (along the upper segment of AA) or inherently lowrates of return (along the lower segment of AA). Tax considerations mainly affect projects that

I MPACT OF T AX S YSTEM 49are marginally viable (in the mid-range of AA). This selective impact matters because economicgrowth depends on quality of investment as well as the quantity. 41Second, attracting investment with fundamentally high rates of return requires policies to improvethe business environment and hence shift the entire line AA to the right. The investment climatealso has a strong effect on the amount of new investment that will occur as a result of loweringthe cost of capital through tax breaks. With favorable business conditions a reduction in the costof capital may induce a large investment response (as along AA), but the same tax incentives mayinduce very little new investment if business conditions are poor (as along BB). Overall, non-taxconsiderations are likely to be of paramount importance for most investment decisions.Various tax tools can be used to stimulate investment by reducing the cost of capital: cutting thestandard company tax rate; reducing the double taxation of dividend income; offering special taxincentives to selected investments; providing more generous investment deductions or credits inthe calculation of taxable income; or reducing indirect taxes on the acquisition of capital goods.Many tax experts regard the latter two approaches as most cost-effective in terms of balancing theimpact on investment against the revenue loss from special incentives. 42 The government’sdecision in 2002 to reform the Code of Fiscal Benefits was consistent with this view, as iteliminated most tax holidays in favor of investment allowances, accelerated depreciation, andinvestment tax credits, on top of the exemption from import duty on capital goods.Taxes and Investment in MozambiqueDuring the PARPA II period, Gross Domestic Investment ranged between 18 and 19 percent ofGDP, according to figures reported by the IMF. The latest actual data point (as distinct fromestimates) is 18.0 percent for 2007, of which two-thirds comes from government investment andjust one-third, or 6 percent, from non-government investment. Private investment has fluctuatedbetween 6 and 13 percent of GDP since 2004, with variations driven by the timing of megaprojects.These investment rates are exceedingly low, to the point of being seriously inconsistentwith the objective of sustaining rapid economic growth. 43Is the low level of investment a sign that tax rates in Mozambique are too high? Several studiesundertaken prior to PARPA II found that company tax rates in Mozambique have been broadly inline with regional and international norms (see Bolnick 2004a; FIAS 2006; and IMF 2006). 44 Asseen in Chapter 3, Mozambique also scores well on the World Bank’s Doing Business estimate of41 A 10 percent increase in productivity delivers the same boost to growth as a 10 percent increase in theamount invested Hence, a policy that adds 10 percent to the amount invested while reducing investmentefficiency by 10 percent adds nothing to the growth rate.42 See Zee, Stotsky and Ley (2002) and Bolnick (2004, chapter 5)43 The National Statistics Institute (INE) may systematically underestimate investment in farm works,rural buildings, and machinery and equipment used by small enterprises, though it does obtain reasonablygood data on public sector capital expenditures, FDI inflows, imported machinery and equipment, andmajor construction projects.44 Mozambique also scores well on the World Bank’s Doing Business estimate for the Total Tax Rate oncompany profits, but the methodology behind this measure is seriously flawed, as seen in Chapter 3.

50 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEthe Total Tax Rate on company profits (though the methodology behind this measure is seriouslyflawed, as discussed earlier).Figure 5-2 compares company tax rates in the SADC region, based on the latest availableinformation for each country. The SADC average of 30.3 percent is now slightly lower than the32 percent rate in Mozambique. Five years ago, the regional average was slightly higher than therate in Mozambique, at 32.5 percent (Bolnick 2004). In the interim, the SADC average declineddue to the entry of Madagascar, with a 24 percent tax rate, as well as company tax reductions inSouth Africa (from 30 to 28 percent), Lesotho (from 35 to 25 percent) and Mauritius (from 25 to15 percent). In Mauritius, the reduction in tax rates was part of a move to a “flat tax,” which alsoeliminated special tax incentives and discretionary tax breaks. 45 These tax cuts reflect a globaltrend towards lower taxes on capital. With the advent of the SADC free trade area, taxdifferentials among member states will become more prominent in affecting location decisions, asmore investments will be driven by a regional perspective.Figure 5-2Company Tax Rates in the SADC Region, 2009Standard Company Tax RatesSADC AverageMAURITIUSMADAGASCARLESOTHOBOTSWANASOUTH AFRICAZIMBABWETANZANIASWAZILANDMALAWIMOZAMBIQUEZAMBIANAMIBIAANGOLASEYCHELLESDR CONGO0% 10% 20% 30% 40% 50%SOURCE: Internet information accessed between July 27 and August 6, 2009 from 2009 Tax Highlights produced by Deloitte officesin most SADC countries, plus: for Lesotho, Southern Africa Regional Poverty Network and US Embassy; for Mauritius, PKFInternational Ltd. Mauritius Tax guide 2009; for Seychelles, Revenue Commission.The studies cited above by Bolnick and by FIAS also showed that investments subject to thestandard tax regime faced an extremely high marginal effective tax rate (METR) in both absoluteterms and relative to regional norms, to the point of being a severe impediment to investment.The principal cause of the elevated METR was the double taxation of dividends paid to individualshareholders. (Investments within a corporate group would not face this high METR, sincedividend payments in this case are exempt from double taxation, subject to conditions of the45 Bolnick (2009) explains the flat tax concept. He concludes that while Mozambique can benefit frommeasures to broaden the tax base and reduce tax rates, the flat tax as such is but one possible means to thisend.

I MPACT OF T AX S YSTEM 51IRPC.) Figure 5-3 shows, for SADC member states, the combined effect of the company incometax and withholding tax on dividend payments to individual shareholders. 46 For both residentsand non-residents as shareholders, the combined tax in Mozambique is far higher than theregional average. Reducing the double taxation of dividend income earned by individualshareholders would therefore remove a significant barrier to investments that do not enjoy fiscalincentives and are not part of a larger corporate group. As a by-product, this measure would alsoeliminate a serious disincentive for domestic enterprises to incorporate.For investment covered by the Code of Fiscal Benefits (CFB), the same METR studies showedthat the effective tax rates in Mozambique were very competitive under the 2002 Code. The 2009Code has not been subject to detailed analysis, but it clearly offers even more attractive taxbenefits for investments in agriculture and fisheries, public infrastructure, and science andtechnology parks, as well as projects in Industry Free Zones (IFZs) and the Special EconomicZone (SEE) planned for Nacala. As discussed in Chapter 3, the 2009 Code also curtails benefitsfor large projects. This change is warranted because the tax breaks for large projects proved to bevery costly, and in any case internationally mobile investments, for which tax competition wouldbe a major factor, can still qualify for special treatment under the 2009 CFB provisions forIndustrial Free Zones or the planned Special Economic Zone in Nacala. 47In conclusion, the tax burden is very high for investments subject to double taxation. For otherinvestments the level of tax rates should not be a serious problem – though it a concern to see thatthe standard tax rate in Mozambique is now above the regional average. Unfortunately, there isno empirical basis for estimating the extent to which lower tax rates would stimulate additionalinvestment in a country like Mozambique. Given the prominence of other barriers to investment,one would not expect a large impact from a moderate tax reduction. Lower tax rates would,however, increase the capacity of existing firms to finance expansion plans or investments toimprove productivity, by boosting net earnings and cash flow. Empirical studies for othercountries show that lower taxes do have a positive overall effect on investment (Klemm 2009).The quality of tax administration, too, has an important effect on the investment climate,independent of the level of tax rates. In the interviews for this study, grievances about arbitraryand punitive enforcement practices by tax officials were far more prevalent than complaints aboutthe level of taxes. These complaints undoubtedly reach the ears of many potential investors.Hence, problems with tax administration take precedence over concerns about the level of taxrates. Besides, improvements in tax administration can provide the revenue leverage needed tosupport reductions in the tax rates.46 The calculations here assume that after-tax earnings at the company level are distributed in full toshareholders. Using some other illustrative assumption would alter the absolute values of the combined tax,but would not change the relative comparisons.47 Klemm (2009) finds that international tax competition is the most prominent reason for countries tooffer tax incentives. Appendix 7 summarizes the on-going debate about tax incentives as a tool forinvestment promotion.

52 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEFigure 5-3Company Tax + Dividend Withholding Tax in the SADC Region, 2009(a) Resident ShareholdersSADC AverageMAURITIUSMADAGASCARSOUTH AFRICANAMIBIALESOTHOBOTSWANATANZANIASWAZILANDMALAWISEYCHELLESANGOLAZIMBABWEZAMBIAMOZAMBIQUEDR CONGO0% 10% 20% 30% 40% 50% 60%(b) Non-Resident ShareholdersSADC AverageMAURITIUSMADAGASCARSOUTH AFRICABOTSWANATANZANIAMALAWISWAZILANDNAMIBIAANGOLALESOTHOZIMBABWEZAMBIAMOZAMBIQUESEYCHELLESDR CONGO0% 10% 20% 30% 40% 50% 60%SOURCE: See note to Figure 5.2.The tax system also affects investment efficiency. While virtually all taxes create efficiencylosses by distorting economic behavior, sharp differences in the METR by sector or by type ofinvestment, as found by FIAS (2006), accentuate the misallocation of resources, to the detrimentof economic growth. To illustrate, an investment in agriculture that has a 15 percent pre-tax rateof return produces a better after-tax yield under the current tax system than an alternativeinvestment in manufacturing that would generate a 20 percent pre-tax rate of return. Yet the latterinvestment is more productive and contributes more to growth. The greater the tax differentials,the greater the efficiency loss for the economy through distortions of this kind.

I MPACT OF T AX S YSTEM 53Another source of inefficiency arises when the provision of special fiscal benefits creates arevenue loss that necessitates higher tax rates on other business activities. 48 Also, tax concessionsthat reduce the price of imported goods, such as the exemption from import duty and VAT oncategory “K” imports for investments approved by CPI, create a strong incentive favoring the useof imports rather than the establishment of linkages to domestic suppliers. For these reason, andalso on grounds of equity, most economists favor more uniform application of broad-based taxesat moderate rates, rather than offering special tax breaks to some investors while imposing highertax rates on others.EMPLOYMENTThe tax system affects both the supply and demand side of the labor market, as well as thedevelopment of labor force skills. Starting on the supply side, taxes on labor income – both thepersonal income tax and payroll tax for social insurance (INSS) – create a “tax wedge” betweenthe cost of labor to employers and the income received by the workers, at least in the formalsector. Economic models indicate that market interactions tend to shift the effective burden ofthese taxes onto the workers, in the form of lower take-home pay. In Mozambique, the tax wedgeis very low for most unskilled workers, but may be high enough to affect labor supply decisionsfor some workers at the higher end of the income scale.One method for comparing the tax wedge across countries is to examine tax thresholds in relationto per capita GDP. Since 2007 a worker in Mozambique enters the ISPC tax net at an income of36 times the highest minimum wage, which was approximately 7.6 times per capita GDP in 2009.Hence, most unskilled workers in Mozambique suffer no ISPC liability. By comparison, themedian value for this ratio among low-income countries globally is 1.3, and for sub-SaharanAfrica, 0.9. 49 Lower numbers indicate a lower threshold for entering the tax net, relative toaverage income levels in each country.The INSS imposition in Mozambique, at 7 percent (with 3 percent paid by the employee and 4percent by the employer) is also on the low side, compared to the median of 10 percent for lowincome countries, and 10.3 percent for sub-Saharan Africa. Both the high tax threshold and lowsocial insurance charge in Mozambique produce a low tax wedge for most workers. Given theabundance of job seekers for any unskilled labor position in the formal sector, it is safe to say thatthe tax system has no serious effect on the labor supply at this level. High income workers,however, face a 32 percent marginal tax rate plus INSS charges. This tax wedge is large enoughto impair incentives to work in the formal sector. While there is no empirical evidence to estimatethe size of this effect, stories of rampant income tax evasion and resistance to formalizationsuggest that the tax system probably does affecting labor market decisions for some members ofthe economically active population.48 A basic proposition in tax analysis is that the efficiency loss from taxation rises with the square of thetax rate. Hence, if tax breaks for A necessitate higher tax rates on B and C, the result is a net loss ofeconomic efficiency.49 Calculations by the study team, using the “Collecting Taxes” data base from the USAID Fiscal Reformwebsite, at www.fiscalreform.net, accessed on July 2, 2009.

54 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUETurning to the demand side of the labor market, the impact of the tax system is determined bythree elements: the effect on investment; on enterprise development and formalization; and on thecapital intensity of business operations. The analysis presented in the Investment section suggeststhat the present tax system is not a significant deterrent to most types of investment. Nonetheless,lower tax rates would likely stimulate additional investment demand for labor by enhancingreturns and increasing the flow of earnings as a source of financing for business expansion. At thesame time, other deficiencies in the business environment are much more important than taxes asbarriers to investment and job growth.A more serious concern is the impact of the tax system on business development, and inparticular the growth of small and medium sized enterprises, which are the main engine ofemployment creation in most countries. As discussed below (see Private Sector Development),the complexity of the tax system, the lack of clear information on the tax code, and punitiveenforcement practices by tax officials serve to deter formalization. Furthermore, several taxtechnicalities of the tax system, such as withholding requirements and the denial of expenses dueto minor errors in documentation have inhibited the development of linkages between large andsmall enterprises, to the detriment of both. In addition, the difficult procedures and long lagsinvolved in obtaining VAT refunds greatly diminish the scope for small business entry into exportmarkets. The implication is that tax simplification, improved customer services by the AT, andbetter tax information can, in principle, help to spur job growth.A less obvious factor is that the tax system also effects decisions about the capital intensity orlabor intensity of investment, and hence job creation. As an example, a survey of 60 recentinvestors in Mozambique found that projects depending critically on fiscal benefits were far morecapital intensive than project that were viable in their own right without tax breaks (Bolnick2009a). Business plans for latter group envisioned five times as much job creation, even thoughtotal planned investment was far higher in the former group. More generally, tax breaks such asexemption from import duty and VAT on capital goods, investment tax credits, and accelerateddepreciation favor capital-intensive projects. These tools may have some positive influence on thevolume of investment, but they have less pronounced effects on expanding employmentopportunities for Mozambican workers.A final aspect of the employment issue is the effect of the tax system on workforce development.In most countries, legitimate training expenses are recognized as a cost of doing business. Indeed,some countries in the region, such as Botswana and Swaziland, allow a super-deduction of morethan 100 percent for training expenses, to provide an effective subsidy for these activities. InMozambique, Article 18 of the Code of Fiscal Benefits allows a deduction in calculating taxableincome for “investments in professional training” only during the first five years of operation,only for qualifying investment projects, and only up to a maximum of 5 percent of taxableincome (10 percent for new technology). Consequently, many businesses are not allowed todeduct training expenses, or can do so only to a limited extent. The effect is to discourage greaterinvestment in training, even though training activities generate positive externalities for theeconomy through employee turnover, worker interactions. This provision of the tax systemrequires reconsideration in the interest of upgrading worker skills and improving laborproductivity. Higher productivity, in turn, contributes to an increase in the demand for labor, andhigher incomes for the workers.

I MPACT OF T AX S YSTEM 55SAVINGThere are three components of Gross Domestic Saving (GDS): saving by households (Sh); bybusinesses (Sb); and by the government (Sg). The gap between gross domestic investment andgross domestic saving is filled by net foreign saving (Sf), which includes foreign aid and netinflows private capital. In Mozambique, the IMF estimates that GDS has been extremely low overthe PARPA II period, at around 3 percent of GDP. 50 Most of the meager supply of domesticsaving originates in the private sector, as Sg has been under 1 percent of GDP. Foreign saving hastherefore financed virtually all of the capital formation in the government sector, and most privateinvestment as well.Household SavingThe main determinant of household saving is the level of personal income. Since lower taxeswould boost personal income, they would encourage more saving. Over the long term, however,the critical consideration is whether the tax system fosters rapid and sustainable growth, to boosthousehold income and, with it, household saving.Household saving is also strongly affected by the distribution of income, which in turn is heavilyinfluenced by the tax system. A progressive tax system, as in Mozambique (see Fairness), taxeshigh-income families more heavily, and minimizes the tax burden on the poor. This tax structureis justified on equity grounds, and is fully consistent with the central PARPA goal of povertyreduction. But it does tend to reduce household saving because affluent families tend to have ahigher propensity to save.Taxes also reduce the rate of return on assets, and hence the incentive to save. Concern has beenexpressed that the decision in 2007 to tax income from tradable securities will have an adverseeffect on saving. For developing countries, however, there is little evidence of a strong effect ontotal saving from moderate changes in the yield, as long as the returns to saving are significantlypositive in real terms. The main effect of this measure is likely to be a more level playing field forallocating saving across different financial assets. Hence the 2007 measure was justified not onlyon grounds of equity, but also to eliminate a tax distortion that increased the cost of credit to theprivate sector by making (tax-free) government securities more attractive to the banks.Several tax measures could improve the incentive to saving. In theory, the best approach wouldbe to eliminate the tax on income from capital, but this would be extremely regressive. Morepractical measures include a reduction in the double taxation of dividend income earned byindividual shareholders, as discussed earlier; 51 implementation of the monetary adjustment forthe calculating capital gains, as called for in the tax laws (and long overdue); and eliminating theStamp Tax on financial transactions. No estimates are available on the likely impact of these50 See the Selected Economic Indicators tables in IMF (2007) and IMF (2009b).51 Hassan (2009) shows that the tax system in Mozambique strongly favors debt financing over equityfinancing, due to the deductibility of interest expenses and the double taxation of dividend income.

56 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEmeasures on domestic saving, but they all have the basic advantage of being consistent with goodtax practices. 52Business SavingGross saving by the business sector consists of retained earnings plus the accumulation ofdepreciation allowances (capital amortization). These internal sources of saving are a major formof finance for private investment everywhere in the world, and especially in countries likeMozambique where credit access is limited and borrowing costs are high. A reduction in thecompany tax rate would clearly enhance net earnings, and some portion of the extra cash flowwill be retained to finance business expansion. This is one of the strongest arguments in favor ofusing base-broadening measures to reduce the tax rate on business income, rather thanchanneling the benefits fully into boosting government revenue. The extent to which additionalearnings are channeled to investment depends, however, on the availability of profitopportunities, which in turn depend on the quality of the business environment and growthprospects for the economy.Another important tax factor affecting business saving is the familiar problem of delays anddenials in obtaining refunds of VAT and income tax. These refund problems impair businesscash flow and reduce the availability of internal earnings that could be used for businessexpansion.Government SavingGovernment saving is the difference between current revenues and current expenditures – inother words, the funds available for capital formation from current government income.(Government borrowing is a claim on the saving of some other sector, rather than a source ofsaving by government.) An increase in Sg can be achieved by reducing current expenditures orincreasing current revenue – or any combination of the two that would provide more resourcesfor capital formation.Sum of the PartsThe tax effect on any one component of GDS is less important than the sum of the parts. Forexample, a tax cut might reduce Sg while increasing Sh and Sb. The net impact on GDS could bepositive or negative, depending on the conditions. In addition, the short run effects on savingfrom a change in the tax yield could be very different from the effects in the medium to long run,depending on how the government spends the revenue. A more concrete conclusion is that taxpolicy should avoid creating undue disincentives to saving or unnecessary distortions favoringcertain forms of saving over others. This principal lends support to the measures noted above inthe sections on household and business saving.52 Versano et al. (2006) recommended retaining the stamp tax on financial transactions on the argumentthat income from financial assets was not taxed. This condition changed in 2007.

I MPACT OF T AX S YSTEM 57PRIVATE SECTOR DEVELOPMENTThis section examines how the tax system affects private sector development. Given the smallsize of most businesses in Mozambique, this objective is inseparable from the promotion of smalland medium sized enterprises (SMEs), and efforts to increase formalization. Thus, PARPA IIprioritizes (on page 1) “greater integration of the national economy and an increase inproductivity” via “measures to help small and medium-size companies to flourish in the formalsector.” To this end, the Council of Ministers in 2007 adopted an “SME Development Strategy,”which identified an excessive tax burden and the high cost of paying taxes as a major obstacle toSME development. Tax considerations also significantly affect a second issue highlighted in thestrategy document: the lack of vertical and horizontal linkages between firms. 53Tax Policy and Enterprise PerformanceThe most direct (and obvious) impact of the tax system on enterprise performance results fromthe fact that income tax payments reduce net earnings, which, in a credit-constrained economy,are a primary source of finance for investment and expansion. Import duties and export taxessimilarly affect business conditions by increasing the cost of competing imports and thus prices inthe domestic market; the benefits are greatest for firms that are otherwise uncompetitive.Inefficient processing of tax refunds, for both VAT and income tax, further constrain workingcapital and funds for expansion. Ebrill et al. (2002, p.6) highlight the “tension between theimportance of assuring prompt refunds—without which the VAT loses many of its economicmerits—and the desire of governments to guard their revenues against fraud and the temptationthey face to strengthen revenues by simply delaying refund payments.” 54 The adoption ofmodern information technology and risk-based procedures for verifying and approving refundrequests can go a long way towards reducing this tension (see Chapter 3: Tax Administration).The tax code and the Code of Fiscal Benefits also affect investment efficiency (see Investment)and business decisions on labor intensity and job creation (see Employment). Furthermore, theprovision of fiscal benefits tilts the playing field in favor of new investors who qualify for CPIapproval, relative to existing businesses and investors who do not enjoy the same tax advantages.Enterprise development is also strongly affected by the quality of tax administration. Highcompliance costs, particularly for SMEs, stem from the complexity of the tax code, the use ofoutdated procedures by the AT for many tax operations, and inadequate public information andtaxpayer services (see Chapter 3: Tax Administration). 55 Faced with these complexities, even53 Other major obstacles identified in the SME Development Strategy are excessive regulatory barriers;high finance costs and limited access to finance; poorly qualified labor; poor market access; and a lack ofentrepreneurial spirit.54 Given the apparently widespread under-declaration of sales (discussed below), some firms may bereporting a credit position with regards to VAT only because they are fully declaring VAT paid on inputswhile under-declaring that collected through sales.55 According to private sector tax specialists, many technical details of the tax code have not yet beenclarified through supporting regulations or formal interpretations from the AT. Faced with ambiguities ofthis sort, even companies who try to comply fully with the tax law using professional accounting servicescan be vulnerable to costly penalties.

58 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEwell intentioned firms are vulnerable to arbitrary and unpredictable decisions by AT officialsregarding interpretation of the law, and costly penalties for even inconsequential infractions (suchas misspelling a name on a receipt). Cases of this sort were mentioned by nearly every privatesector interlocutor interviewed for this study, with particular reference to situations in which localtax offices need additional revenue quickly to meet revenue targets.As discussed in Chapter 3, plans by the AT to modernize tax administration will eventuallyaddress many of these issues. In the meantime, administrative problems impose extra costs formany firms and create unequal competitive conditions in the market place, as some firms beardisproportionate tax costs while others benefit from generous tax breaks or elude the tax netaltogether.Taxes and FormalizationEncouraging formalization of micro and small enterprises is an important objective ofgovernment policy. Informal sector activity is undoubtedly a large part of the economy.Widespread informality deprives the government of revenue, and limits the scope for businessexpansion and thus growth potential for the economy. Informal business activities even alsoimpair the growth potential of firms in the formal sector. This can be seen in the World Bank’smost recent Business Climate Assessment for Mozambique, which found that informal sectorcompetition ranked first on the list of “major or severe” obstacles to business operations, in asurvey of almost 600 firms in 2008 (World Bank 2009). In the World Bank study, “formality”was synonymous with tax registration. An earlier Informal Sector Survey (INFOR) by INE in2005 defined “informality” more broadly to include firms that are not fully registered taxes orother purposes as obliged by law. From this survey INE estimated that 75 percent of theeconomically active population earns their livelihoods in the informal sector (GoM 2006b).The extent of informality in any economy depends on the benefits and costs of formalizing, whichare strongly influenced by the tax system. In particular, the costs include both tax payments andexpenses related to tax compliance, as well as direct and indirect expenses for registration andlicensing, and identity cards. Even travel costs to government offices can be a significant barrierfor very poor household enterprises. Informality avoids these costs, though it often requires thepayment of bribes, and restricts the scope for business expansion. On the other side of theformula, the benefits of formalization include access to the banking sector, access to the legalsystem for contract enforcement, greater flexibility to expand operations, and protection fromexposure to penalties or various forms of official harassment. If the costs of formalizationoutweigh the benefits, as perceived by each firm, or if the benefits are not sufficiently clear toallow an informed judgment, then informality is the default option for micro and smallenterprises.Tax evasion is widely considered to be one of the primary motives for informality inMozambique. Data from INE’s most recent survey of the informal sector (INFOR), conducted in2004, cast doubt on this hypothesis (INE 2006). Table 5-1 summarizes the INFOR findings forself-employed non-agricultural informal operators.

I MPACT OF T AX S YSTEM 59Table 5-1Reasons for Being InformalFrequencyPercentToo complex 113 11.7Too expensive 144 14.9In process 71 7.3Not obligatory 198 20.5Don't know if need 398 41.2Anti-state 8 0.8Other 35 3.6Total 967 100SOURCE: Sub-sample of self-employed, nonagricultural informal firms from INE's 2004INFOR Survey (INE 2006).These results indicate that a lack of information is far more important as a reason for informalitythan the cost of formalization or complexity of the process. Yet better information would notnecessarily lead to a surge in formalization; it could instead convince many informal firms thatthe costs of formalization indeed outweigh the benefits.In particular, tax rates, tax compliance costs and the complexity of the tax system, as applied tovery small businesses, strongly influence firm-level decisions on formalization. The newSimplified Tax (ISPC) passed in 2009 should go a long way to reduce these tax-related costs, andtherefore shift the balance towards formalization for many more enterprises. For some smallbusinesses, however, even the ISPC will be too heavy a tax to bear because the 3 percent rateapplies to sales volume rather than income or profit. For many small enterprises, the tax liabilityunder the ISPC will exceed the standard IRPC tax rate as well as the maximum effective tax onhigh-income households under the IRPS. Take the case of an enterprise operating with a narrowprofit margin of 5 percent, for example: the 3 tax on sales represents a 60 percent tax on income.Finally, registered entities start paying tax at a much lower level of income under the ISPC thanunder the income tax, because the exemption threshold–equal to 36 times the minimum wage ineach case – relates to sales rather than income. The risk is that many informal enterprises,especially those with highly variable income from one year to the next, will still have an incentiveto avoid registration under the ISPC.In practice, the outcome from introduction of the ISPC will depend on how the program isadministered. Prospects will be favorable if the AT succeeds according to plan in establishingsimple procedures, simple forms and receipt documents, and extensive geographic coverage oftax services. Early evidence is very positive: the AT reported that 1800 new taxpayers registeredunder the ISPC in June, 2009, the first month of operation for this new tax. In addition, 350 smallenterprises converted their registration from the simplified VAT and income tax regimes, to takeadvantage of the lower tax rate under the ISPC (as discussed in Chapter 3).The VAT, too, is designed to create incentives for formalization. Registered firms are allowed todeduct the VAT component of input costs only if the supplier is VAT-registered and provides aproper VAT receipt. This feature of the tax encourages all participants in the value-chain to

60 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEregister, for any product or service that passes through a formal sector entity on its way to thefinal consumer. The same incentive does not arise for value chains operating entirely within theinformal sector, or among VAT-exempt registered businesses. Hence, the incentive forformalization due to VAT depends in part on the extent to which the economy is alreadyformalized.Another important feature of the VAT, highlighted by Keen (2008), is that this tax effectivelygenerates revenue from informal activities, to the extent that unregistered enterprises purchaseinputs or supplies though channels that have been subject to VAT, including either registereddomestic enterprises or imports (other than smuggled goods). Since the unregistered enterprisecannot claim credit for VAT paid on these inputs, the tax (to this extent) is incorporated into thecost of doing business.The incentives for formalization are also influenced by the capacity of the AT to monitor taxcompliance. Effective enforcement of registration, filing, and payment requirements, along withbroader geographical coverage of tax inspections, increase the likelihood of detection and the costof noncompliance. This can shift the benefit-cost balance in the direction of encouragingregistration (and also paying an appropriate amount of tax). The danger here is that punitive andarbitrary enforcement practices applied to registered enterprises could undermine the advantagesof compliance, and foster bribery and corrupt practices rather than formalization. Improvementsin taxpayer services must therefore go hand in hand with efforts to strengthen enforcement.As noted above, one problem with informality is that it deprives the government of revenue.Many people interviewed for this study expressed the view that getting large numbers of informalsector enterprises to register will significantly enhance revenue, and provide fiscal space thatcould be used to reduce the tax burden on firms that are already complying with the tax laws.This is probably a false hope, for two related reasons. First, the amount of revenue that can beobtained from very small businesses is likely to be very small, even in the aggregate.International experience suggests that large taxpayers account for 70 to 80 percent of totalrevenues, and small taxpayers just 5 to 10 percent. 56 The potential revenue yield from registeringsmall, informal enterprises is further reduced by virtue (and it is indeed a virtue) of the relativelyhigh exemption threshold under the income tax and the ISPC, and the low tax rate that nowapplies to firms registered under the ISPC. Neither the Ministry of Finance nor the AT areexpecting substantial revenue gains in the near term from the ISPC.The second reason not to expect a large revenue gain from the ISPC is that the AT should notdevote substantial resources to chasing large numbers of very small enterprises. It is important, ofcourse, to enforce the tax law and promote tax compliance across the board. But resources for taxadministration are limited, and there is a high opportunity cost from trying to cover very smallenterprises thoroughly, in the form of revenue foregone from allocating AT personnel and budgetresources to other operations with a higher yield.56 IMF (May, 2009c), , pp. 26-27.

I MPACT OF T AX S YSTEM 61These remarks about the limited revenue potential from bringing informal enterprises into the taxnet do not apply to informal or unreported operations of larger enterprises or high-incomeindividuals. In the interest of both revenue generation and tax equity, this set of “informal”activities should be a primary target for tax investigations and audits, using all available legaltools.Differential Tax Effects by Firm SizeWhat is the differential effect of the tax system on small, medium, and large firms? Byiers (2009)examined this question using data from a 2006 enterprise survey. Although the survey involved arelatively small sample, and limited information on financial issues, the analysis suggests that theeffective tax burden does vary considerably by firm size, across firms in similar sectors andlocations. The results show an inverted-U relationship: small firms tend to bear a low tax burdenthrough evasion or exemption, and large firms tend to minimize taxes through sophisticated taxplanning and exemptions provided under the Code of Fiscal Benefits. Middle-size, in contrast,cannot easily escape the tax net or afford professional services to engage in sophisticated taxplanning. These findings provide only a crude indication of inequities, because the observed taxdifferentials could reflect legitimate and systematic differences in firm structure, such asdeductions due to capital costs, interest expenses, and loss carry forward among large firms, andthe policy of exempting very small incomes from tax through the threshold level. Nonetheless,the evidence suggests that the tax system tends to be a greater hindrance to business operations asfirms reach a certain “visible” size.Table 5-2 provides some insight on access to fiscal benefits, by size of firm, using CPI data for2006 and 2007. Out of 192 investments approved in 2007, more than half were fully foreigndirect investments (FDI), rising to 79 percent including joint ventures with a majority foreignequity share. Just 17 percent were fully national enterprises, with 3 percent being joint ventureshaving a national majority and 3 percent with equal shares. The story is the same for 2006.Table 5-2Fiscal Benefit Code Investments as a Share of Total Approved InvestmentsCategory 2006 2007Total approved investments 157 192FDI only 46% 51%Joint ventures 36% 33%FDI majority share 31% 28%National majority share 2% 3%Equal shares 3% 3%National only 18% 17%Equity < $50,000 6% 5%$50,001 to $100,000 2% 2%$100,001 to $250,000 3% 4%> $250,000 8% 6%SOURCE: Calculations based on data provided by CPI.

62 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUENational enterprises can qualify for CPI approval and fiscal benefits with an investment as low as$5,000. Yet only 10 national projects were approved in 2007 with equity capital less than$50,000, and only 13 with equity capital under $100,000. The fact that very few smallinvestments by national companies qualify for fiscal benefits suggests that the procedural costsexceed the prospective benefits. Moreover, anecdotal evidence from the interviews suggests thateven with project approval, the stipulated fiscal benefits are not always obtained due toprocedural complications at the implementation stage.The World Bank’s recent Investment Climate Assessment (ICA) provides further information onthe relationship between taxation and firm size, based on a survey of business managers coveringthe main economic sectors and cities, as summarized in Table 5-3 (World Bank 2009). 57Table 5-3Number of Firms by Size, Industry, and CityFirm SizeTotalMicro (1-4) Small (5-19) Medium (20-99) Large (100+)I NDUSTRYFood 7 37 42 10 96Garments 5 41 8 3 57Other manufacturing 5 56 15 0 76Retail 86 74 26 6 192Other services 17 100 51 10 178C ITYMaputo 71 239 97 18 425Matola 15 19 25 3 62Beira 24 17 12 2 55Nampula 9 33 8 6 56Unknown 1 0 0 0 1Total 120 308 142 29 599SOURCE: Authors' calculation using World Bank (2009).Figure 5-4 shows survey responses on the extent to which tax rates are an obstacle to firmoperations, on a scale from 0 (no obstacle) to 4 (serious obstacle). For micro-enterprises themedian response is 1 (minor obstacle) while small, medium and large firms all have medianresponses of 2 (moderate obstacle). Also, the spread of responses is more concentrated around themedian for micro and small firms than for medium and large firms. (The shaded box representsthe middle fifty percent of firms, those in the 25 th to 75 th percentiles). This evidence suggests that57 The World Bank survey data discussed here is from the Investment Climate Survey carried out in2007, which surveyed approximately 600 manufacturing and service industry firms in Maputo, Matola(Maputo province), Beira and Nampula, stratified by location and firm size.

I MPACT OF T AX S YSTEM 63micro-firms are not much affected by tax rates, but as firms increase in size, tax rates become amore significant burden. The higher variation among medium to large size firms may indicateinconsistent implementation of the tax laws. Nonetheless, very few of the firms in the surveyregarded tax rates as a serious hindrance, and fully 160 of the 599 firms interviewed did notregard tax rates as an obstacle at all.Figure 5-4Tax Rates as a Constraint to Business, by Firm sizetax rates0 1 2 3 4Micro (1-4) Small (5-19) Medium (20-99) Large (100 and above)excludes outside valuesNote: This graph displays the distribution of responses. The middle line is the median response, and the shaded box shows therange between the 25 th and 75 th percentiles. Source: Authors’ calculations using data from World Bank (2009).The number of zero-obstacle scores rises to 276 for tax administration, suggesting (surprisingly)that administrative issues are viewed as an obstacle less frequently than tax rates. Here, too, theresponses differed by firm size, as shown in Figure 5-5. For micro-firms the median score wasactually zero (no obstacle), while for large firms the median was 2 (moderate obstacle). This maybe due to a greater concentration by the AT on large firms, to ensure greatest revenue gains, alongwith the fact that many micro-firms are outside the tax net through avoidance or exemption.Finally, Figure 5-6 shows the response by firm managers when asked to estimate the share ofsales declared for tax purposes by firms similar to theirs. This question is a proxy for the extent oftax evasion. The results indicate that large firms are, on average, perceived as declaring a veryhigh share of sales for tax purposes, with small firms reporting the lowest share.

64 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEFigure 5-5Tax Administration as a Constraint to Business, by Firm Sizetax administration0 1 2 3 4Micro (1-4) Small (5-19) Medium (20-99) Large (100 and above)excludes outside valuesNote: This graph displays the distribution of responses. The middle line is the median, and the shaded box shows the rangebetween the 25 th and 75 th percentiles. For micro-firms, the median score coincides with the bottom of the shaded box.SOURCE: Authors’ calculations using data from World Bank (2009).Figure 5-6Responses on Sales Declared for Tax Purposes, by Firm Sizesales tax0 20 40 60 80 100Micro (1-4) Small (5-19) Medium (20-99) Large (100 and above)excludes outside valuesNote: This displays the distribution of responses as follows: the middle line is the median, the surrounding shaded box the middle50 percentiles (between the 25 th and 75 th percentiles).SOURCE: Authors’ calculations using data from World Bank (2009).To highlight an important detail from this question, Table 5-4 reports the share of respondents, byfirm size, who estimate that firms declare either zero or 100 percent of sales. Among large firmsin the survey, 45 percent estimated that a typical firm reports 100 percent of sales for taxpurposes, compared to just 22 percent for small firms and 20 percent for micro firms. And in allsize categories, the percentage of zero estimates is very small, with the highest fraction (just 4.2percent) coming from micro-firms. While highly subjective, these results suggest that tax evasion

I MPACT OF T AX S YSTEM 65varies substantially by firm size, most likely due to the varying ability of firms at different scalesto avoid the scrutiny of the tax authorities. The results also support the contention, mentioned inmany interviews, that the tax system creates unfair competition for firms that are compliant, tothe degree that other firms evade taxes or hide sales.Table 5-4Shares of Firms Reporting 0% and 100% Sales DeclaredFirm Size 0% Declared 100% Declared NMicro (1-4) 4.2 20.0 120Small (5-19) 3.2 22.1 308Medium (20-99) 2.8 32.4 142Large (100 and above) 3.4 44.8 29Total 3.3 25.2 599SOURCE: Authors’ calculations using data from World Bank (2009).The World Bank survey results indicating that under-reporting is greatest among small and microfirms does not invalidate the point made earlier (see Formalization) that the AT should not devotesubstantial resources to pursuing small taxpayers. The argument is that the revenue yield fromdealing with a large number of small payments will be low relative to the opportunity costs ofdeploying personnel to other uses. Information on this point can be seen in INE’s most recentAnnual Enterprise Survey of over 24,000 firms (INE, 2009) that are registered in one form oranother. Table 5-5 presents the distribution of number of firms and sales turnover, by size of firm.Micro-enterprises constitute 82.4 percent of the firms, which account for 36.2 percent of theaggregate sales turnover. In contrast, the top 9.3 percent of firms account for 50 percent of salesturnover, and more than half of the total sales come from the largest 1.1 percent of firms. Bycomparing turnover shares with the number of firms in each size category, one can see that theaverage large firm in this sample generates more than 50 times as much business volume as theaverage micro firm on INE’s list of enterprises. These figures imply that the tax authorities needto deal with more than 50 times as many micro firms to cover the same volume of business aswould be covered, on average, with one large firm. 58 If anything, the data appear to underestimatethe sales share of large firms. This could be the case if very small firms registered with INE tendto be those with higher revenues, such as professional service providers.58 A similar calculation from Enterprise Survey can be made using data by sector, rather than firm size.This calculation shows that the volume of business per firm is greatest by far in the electricity, water andgas sector. Other sectors with relatively high sales per firm are, in descending order: transport, storage andcommunication; extractive industries; construction; and manufacturing.

66 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUETable 5-5Distribution of Sales Turnover by Firm SizeWorkers Share of firms Share of SalesTurnoverRatio: sales share tofirms share=100 1.1 25.5 24.1Total 100.0 100.0SOURCE: INE (2009) and authors’ calculations.The problems arising from VAT and income tax refunds also have a differential effect by firmsize, because large firms are much more capable of dealing with filing and documentationrequirements. They are also more able to cope with working capital costs of long delays inobtaining a refund, by having a stronger financial position and better access to credit. VAT refundproblems are especially pernicious for small businesses that may have an eye on export markets.Exports are zero-rated under the VAT to ensure that Mozambican products do not bear the burdenof home-country indirect taxes when competing in external markets. If small businesses areeffectively blocked from obtaining VAT refunds due to complex procedures and long delays, thenthey are also largely blocked from penetrating export markets. See Bolnick (2007) for moredetails.Taxes and Business LinkagesAs stated above, one of the PARPA priorities is to strengthen linkages within the domesticeconomy. The tax system actually discourages the achievement of this objective in severalunintended ways. Import duties have an obvious influence on business decisions to use importedversus domestic inputs, and thus the development of linkages within the domestic economy. Inparticular, the full remission of duty and tax on imported capital goods and other inputs forcertain types of investments under the Code of Fiscal Benefits creates an incentive favoring theprocurement of imported inputs. An example is the purchase of imported versus locally producedfurniture by a new tourism facility.In less obvious ways, the VAT and income tax also affect the development of business linkages.Looking first at the VAT, the same feature that encourages formalization–namely, the need forsuppliers to registered businesses to provide VAT receipt–serves to impede linkages betweenformal businesses and small suppliers who are not registered for VAT and have reasons tomaintain this status (see Formalization). In an economy with a large informal sector, smallbusinesses may decide against registering if they purchase their own supplies of goods andservices from unregistered enterprises, and would face substantially higher costs in dealing withregistered vendors. The complexity of the VAT refund process is another factor hindering thedevelopment of linkages. This occurs in cases where a small domestic supplier would be eligibleto claim a refund of VAT paid on inputs to goods or services that are sold to potentially important

I MPACT OF T AX S YSTEM 67clients operating in IFZs, such as Mozal. Without timely refunds, small suppliers may be unableto sustain these transactions, even if they would otherwise be a very favorable businessopportunity.The income tax, too, creates unintended barriers to the development of linkages between largeand small businesses. Under the income tax code, “expenses not duly documented” aredisallowed as business deductions and subject to a tax of 35 percent. This provision may beinvoked by tax officials wherever a tax-registered firm has purchased goods or services from asmall-scale supplier who could not issue a receipt complying with legal requirements in everydetail, including proper spelling and abbreviations that match tax registration records. In theory,this provision creates incentives for formalization on the part of small-scale suppliers, but inpractice it raises serious problems similar to those noted for VAT. Examples encountered duringinterviews for this study include large food processors purchasing crops from large numbers ofsmall family farmers in outgrower schemes; tourist facilities in remote locations purchasing foodsor crafts from local households; and two instances of medium sized firms (one in manufacturingand one in services) being constrained from procuring transportation services from small businesspartners.Under the income tax code, larger enterprises can avoid disallowance of a deduction and thepenalty tax rate on improperly documented expenses by withholding 20 percent at source onpayments to suppliers who cannot issue formal and accurate tax receipts. Even with this course ofaction, the tax system still impedes linkages, because 20 percent withholding on gross receiptscreates an onerous burden on small suppliers. If, for example, the small supplier operates on a 20percent gross margin, then withholding tax would absorb 100 percent of the income – from abusiness that ought to be paying a very low effective tax rate, or even no tax at all if net incomefalls below the tax threshold. In theory, prompt payment of income tax refunds could mitigate theproblem, but, as discussed earlier, the AT is very inefficient in paying such claims, and in anycase small businesses are least able to deal with the required forms and procedures. Of course, thesmall supplier could mark up its invoice by 25 percent in order to obtain full payment after theclient withholds 20 percent on the transaction, 59 but this alternative makes the small suppliermuch less price-competitive.The new ISPC should go a long way towards mitigating tax impediments to the development ofbusiness linkages. But it is unlikely to overcome the problems altogether, given the practicaldifficulties of registering every family farmer, local trader, and handicraft producer – many ofwhom are illiterate, and often lack even a proper identity card. Also, as noted above, the actualimpact of the ISPC remains to be seen.On balance, these features of the tax system work at cross purposes to the stated PARPAobjectives of increasing the integration of the national economy and promoting SMEdevelopment. The fundamental problem is the difficulty of designing a tax system suitable for thefull range of economic actors in Mozambique. Nonetheless, the discussion above points to several59 To see this, suppose the small supplier seeks a payment of $100. This can be obtained by invoicing for$125, from which 20 percent of the gross amount (in this case $25) will be withhold at source as tax.

68 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEmeasures that can reduce the disconnect. In addition to effective implementation of the ISPC,these include streamlining the payment of refunds (with risk-based management of the revenueeffects), reducing the withholding tax rate, allowing business to deduct legitimate expenses evenwhen there are minor and inconsequential mistakes on receipts or invoices, and reducing theincentive under the CFB for using imported inputs rather than domestic products.FAIRNESS AND EQUITYThe Enterprise section above discussed effects of the tax system on equity and fairness acrossenterprises, particularly in connection with wide variances in tax compliance. This sectionfocuses equity across households, through tax effects on incomes and prices, as well as taxdifferentials resulting from tax evasion and corruption.Income TaxesAs noted earlier, the IRPS has a progressive structure. Annual incomes below 36 times theminimum monthly wage are free of tax, 60 and marginal tax rates above that threshold range from10 to 32 percent (Table 5-6). This structure conforms to the principle of vertical equity, byeliminating the tax on very poor households, and subjecting households with higher incomes tohigher marginal and effective tax rates. The IRPS code also broadly satisfies the principle ofhorizontal equity, because the tax applies to nearly all sources of personal income, 61 adjusted formarital status and deductions for dependents.Table 5-6IRPS RatesTaxable Annual Income (MT) Rate (%) Deducted (MT)Up to 42000 (US$1.570) 10 0From 42.001 to 168.000 (US$1.570-6.279) 15 2,100From 168.001 to 504.000 (US$6.279-18.839) 20 10,500From 504.001 to 1.512.000 (US$18.839-56.519) 25 35,700More than 1.512.000 (US$56.519) 32 141,540SOURCE: IRPS Law 33/2007.To illustrate the progressivity of IRPS, Figure 5-7 shows the effective tax rate in 2009 at differentlevels monthly income, for the case of a married couple, assuming for simplicity no otherdependents or deductions. The tax structure results in an effective tax rate that gradually increasesfrom zero percent at the exemption threshold of MT 8,235 per month ($308), rising to 8.1 percentfor a monthly income of MT23.000 ($860), 13.2 percent for monthly income of MT50.00060 There are nine minimum wages, by sector, for agriculture, fisheries, mining, manufacturing, electricity,construction, non-financial activities, financial activities, and public service:http://allafrica.com/stories/200904280769.html .61 The IRPS defines five categories: income from employment (“dependent” income); professional andbusiness income; capital income; income from buildings; and other incomes. Each category covers multipletypes a variety of income.

I MPACT OF T AX S YSTEM 69($1,869), 17.0 percent at an income of MT 100,000 ($3,738) and so on up to 32 percent as anasymptotic ceiling. Detailed data on the distribution of income in 2009 would be needed todetermine the population share subject to each tax rate, but it is clear enough that the effective taxrate is very low for most households, and that very few are facing an effective tax rate above 20percent.Figure 5-7Applied Tax Rates25%Effective Tax Rate20%15%10%5%0%010,00020,00030,00040,00050,00060,00070,00080,00090,000100,000110,000120,000130,000Monthly Income (MT)140,000150,000160,000170,000180,000190,000200,000SOURCE: Authors’ calculations based on IRPS Law33/2007.Even though the statutory structure of the individual income tax is suitably progressive, manyinterviewees suggested that there are major problems of horizontal equity due to widespread taxevasion. While formal sector employees cannot easily avoid paying IRPS on wage income, due towithholding by employers, it is easy for evaders to under-report incomes from professionalservices, housing rentals, and business activities lacking modern accounts. It is difficult andcostly in such cases for the AT to assess directly the unreported incomes. For individuals withhigh unreported incomes, however, the benefits of tougher enforcement–in terms of both revenueand equity–greatly outweigh the administrative costs. The AT has the authority to use third partydata to determine gross under-declarations of income and to use “indirect methods” to assess taxin cases there is clear evidence of improper declarations. In combination with tougherenforcement, efforts by the AT to provide better information to the public about taxresponsibilities and obligations, and to instill pride in contributing to national development, mayalso have a positive effect in improving compliance and reducing inequities from tax evasion.Another equity aspect of the personal income tax involves administrative problems similar tothose discussed above regarding VAT refunds. Under the IRPS, taxpayers should be reimbursedby the AT when the amount of tax withheld at source plus estimated payments during the tax yearexceeds the final amount payable on reconciled total income at the end of the tax year. In reality,the AT handles refund very slowly and inefficiently, resulting in long delays in payment or nopayment at all. This problem creates serious inequities, and contributes to a perception ofunfairness that undermines incentives for tax compliance. Apart from devoting more personnel

70 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEand resources to handling claims for income tax refunds, the AT could facilitate these paymentsthrough two measures that are warranted in their own right (for reasons discussed elsewhere inthis report): reducing the withholding tax rate; and developing risk-based management of refundclaims with immediate settlement of low-risk declarations, subject to selective audit. Anothermeasure that might be considered, though it would entail minor inequities of its own, would be tosimplify the system by disallowing refund claims below a certain threshold (as done in the case ofVAT refunds). This would probably require an amendment to the law.Consumption TaxesTurning to taxes on consumption, the most important equity effects of the tax system involve theVAT, because it is the largest source of revenue for the government. There is a widespread viewthat the VAT, as a broad-based tax on consumption, is inherently regressive. This view is notsupported by the data on household consumption patterns.Table 5-7 presents a breakdown of rural and urban expenditure patterns for rural and urbanhouseholds by income quintile, based on 2002/03 data. For rural households, between 52 and 61percent of total expenditure is auto-consumption across all quintiles, and therefore not subject totax. In addition, there is little or no VAT on important items like farm products, wheat flour,health and education expenditures, and kerosene for lighting. Thus, for the bottom two ruralquintiles, only about 12 percent of household expenditures are potentially subject to VAT, risingto 23 percent for the top rural quintile. This implies a maximum VAT burden of around 2 percentof income for the poorest quintiles. Even this figure is too high to the extent that poor householdspurchase taxable goods from small enterprises that qualify for VAT exemption. Figure 5-8converts the data to visual form, showing the share of expenditures potentially subject to VAT forboth rural and urban households, by income quintile. The graph demonstrates that the VATstructure in Mozambique is progressive, because higher shares of expenditures are subject toVAT for households in the top quintiles.A similar analysis applies to the equity effects of trade taxes on consumer goods. While importduties affect the prices and availability of many basic goods, the link is very weak for ruralhouseholds, which devote a large share of expenditure to auto-consumption or the purchase oflocally produced goods. The effect of trade taxes on household welfare is stronger in urban areas,where market purchases of imported goods are far more important. 62Sonne-Schmidt (2009) provides further information on the equity effects of indirect taxes. Thisstudy estimates for selected goods the combined effect of import duties, VAT and excise taxes onhouseholds at different income levels, using household expenditure data. Sonne-Schmidt findsthat the import duty on flour and tomatoes is highly regressive, despite a VAT exemption, andthat taxes on kerosene, sugar, and tobacco have a significant adverse impact on the poor, due to62 This issue is discussed in detail in Chapter 2 of Nathan Associates (2004), Diagnostic TradeIntegration Study for Mozambique.

I MPACT OF T AX S YSTEM 71the relative importance of these items in their consumption basket. 63 In contrast, he finds thattaxes on automobile fuel, bottled gas, wine and beer have a progressive effect, due to the lowshare of spending on these products by poor household. 64 More studies of this sort are needed toprovide better information on the poverty impact of the tax system.Table 5-7Rural and Urban Expenditure Share by QuintileProduct Group Rural UrbanQI QII QIII QIV QV QI QII QIII QIV QVFood: Autoconsumption46.0 52.1 52.8 54.0 47.4 11.7 16.6 16.2 12.4 4.6Food: purchased 15.8 15.2 14.9 13.2 15.5 39.1 36.3 35.2 31.9 24.3Housing & fuel: AutoconsumptionHousing and fuel:Purchased11.4 8.3 6.8 6.8 4.8 7.1 4.3 3.5 1.7 0.514.1 11.1 10.2 8.5 8.4 24.6 23.3 21.7 25.1 28.4Beverages 0.8 1.0 1.0 1.7 1.7 0.6 1.0 1.1 1.8 2.5Clothing 2.3 3.7 4.6 6.3 7.8 2.8 3.7 6.0 6.5 8.7Furniture anddecoration6.1 5.1 5.4 5.5 7.3 6.6 6.7 7.5 9.7 14.6Health 0.9 0.7 0.6 0.7 0.7 1.0 1.1 1.2 1.5 1.5Transport 1.0 1.3 1.8 1.7 3.8 2.7 3.1 3.1 4.0 6.1Communication 0.0 0.0 0.0 0.1 0.1 0.1 0.3 0.5 0.8 2.0Recreation and leisure 0.5 0.3 0.5 0.3 0.4 0.8 0.7 0.6 0.9 1.8Education 0.3 0.1 0.1 0.1 0.1 0.8 0.7 0.6 0.6 1.1Restaurants, hotels 0.4 0.6 0.7 0.7 0.9 0.9 0.7 1.0 1.8 1.6Other goods andservices0.3 0.5 0.4 0.5 1.1 1.1 1.3 1.8 1.5 2.3Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Note: Quintile breakdowns computed by MPF differ from those reported by INE because the former use regional deflators tonormalize expenditure levels.SOURCE: MPF calculations based on IAF 2002/03 household survey data.63 Sugar is subject to import duties of 7.5 percent (putting it in the category of intermediate good), VATand a sugar surtax ranging from 90 percent to 100 percent in order to provide protection to domestic sugarproducers.64 This is in broad agreement with the Fuel Tax Poverty and Social Impact Analysis (PSIA) carried outin 2003 which found that “the aggregate short-term impact of a rise in fuel tax on poverty is modest”(Nicholson et al., 2003), while there was some qualitative evidence of pockets of longer-term impact on“vulnerable activities” such as rural transport and marketing, grain milling, and fishing.

72 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEFigure 5-8Share of Rural and Urban Expenditures Potentially Subject to VATSOURCE: Authors’ calculations based on IAF 2002/03 household survey data.

6. Priority IssuesThis chapter identifies twelve issues that emerge from the analysis in previous chapters asmedium-term priorities for the next PARPA period, and offers recommendations for addressingeach. 65 The priorities include the overall revenue target, several policy and process issues, and aset of inter-related requirements for modernizing tax administration, which overlap in manyrespects with the AT’s agenda for reform.MEDIUM-TERM REVENUE TARGETThe strategic objective in PARPA II for tax policy is “to reform and increase the efficiency of taxadministration with a view to gradually increasing the mobilization of domestic funds as apercentage of GDP, with the idea of reducing external dependency” (paragraph 489). Morespecifically, PARPA II targeted a revenue ratio of 16.2 percent of GDP by 2009. Looking aheadto the next PARPA period, determination of a medium-term revenue target is again a centralstrategic issue for tax policy. This is inherently a political decision, but one that should beinformed by an analysis of economic conditions and the trade-offs involved in levying taxes. Ininterviews for this study, some government officials contended that the government shouldcontinue aiming at an increase in revenue by 0.5 percentage points of GDP per year up to theSADC average, now 23 percent (using the median). This target is consistent with estimates of themaximum potential revenue yield from two IMF technical studies in 2004 and 2006. Otherofficials, however, expressed concerns about the economic effects of squeezing the private sectorto achieve such a large increase in the revenue ratio.As discussed in Chapter 4, the SADC average is largely irrelevant for Mozambique due tostructural differences in the economies of member states. International benchmarks suggest that amedium-term target in the range of 18 to 19 percent of GDP is the maximum that should beexpected. This target should be attainable in view of recent reforms to broaden the tax base,continuing efforts to modernize tax administration, and the underlying elasticity of the tax systemin response to economic growth. And yet one must also recognize that the optimal tax ratio maybe lower than the maximum potential ratio (which was the object of the IMF studies). Just asgovernment borrowing crowds out financing for the private sector, boosting the revenue ratio alsodraws resources away from both enterprises and households. The objective of tax policy shouldbe to balance public and private requirements in the interest of national development, jobcreation, and sustainable growth. The government should therefore use a portion of the65 This report is not intended to provide a comprehensive analysis of the agenda for tax reforms.According to several sources, there are plans for a comprehensive review of the tax system in 2010 throughtechnical assistance from the IMF and the World Bank.

74 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEprospective gains in revenue capacity to reduce tax rates, rather than focusing exclusively onincreasing the revenue ratio.The extent and timing of gains in revenue capacity will depend on the implementation of taxreforms, the pace of global economic recovery, and the flow of new investment to Mozambique.Considering the effects of the depressed global economy, the latest IMF estimates (from May2009) project that the revenue ratio will not increase significantly for the next few years.Recommendation. Modify the strategic objective for tax policy from PARPA II as follows: “toreform and increase the efficiency of the tax administration with a view to gradually increasingdomestic revenue as a percentage of GDP to reduce external dependency, while also reducing taxrates affecting private sector development.”Recommendation. Consider three options for the medium-term revenue target, depending onpolitical decisions on the balance between higher revenues and lower tax rates:• If the central objective is to increase revenue, an ambitious upper-bound target for 2015would be approximately 18.5 percent of GDP. This option continues the recent practiceof targeting a revenue increase of around 0.5 percentage points of GDP per year.• If the objective is to balance revenue gains with tax relief for the private sector, aplausible mid-range target for 2015 would be 17.5 percent of GDP. 66• If the objective is to use base-broadening measures and revenue enhancements to lowertax rates, a reasonable lower-bound target would be to stabilize the revenue ratio at 16.5percent of GDP.Recommendation. Medium-term targets are valuable guidelines, but revenue targets for eachbudget year should be determined from an analysis of prevailing economic conditions and therevenue effects of concurrent and recent measures to reform tax policy and tax administration.TAX RATESThe call for tax cuts is a common theme of policy discussions with the private sector, who viewthe prospect of lower tax rates as a major objective of measures to broaden the tax base andstrengthen tax administration. As the headline issue, the private sector would like to see areduction in the standard rates for income tax. Empirical evidence on the effect of a lower tax rateis actually inconclusive. The World Bank’s ICA survey in 2008 found that the majority ofrespondents did not view tax rates as a major or severe problem. International benchmarks showthat the tax on company income is not especially high. In contrast, studies of the marginaleffective tax rate (METR) on investment show it is very high for investors who do not enjoyspecial tax breaks under the code of fiscal benefits (though very competitive for those who doqualify). In any case, the quality of the business environment is far more important than tax ratesas a determinant of most investment decisions. Consequently, moderate tax cuts are unlikely tospur a wave of new investment. And yet a lower income tax rate would directly improve net66 This option is consistent with the revenue assumption used by the IMF in their most recent DebtSustainability Analysis for Mozambique. See IMF (2009b), p. 60

P RIORITY I SSUES 75earnings for most enterprises and provide an important resource for expansion, innovation and jobcreation. Furthermore, to compete for mobile capital, Mozambique should not lag too far behindthe global and regional trend towards lower taxes.The analysis in Chapter 5 (Private Sector Development) suggests that two technical tax cuts takepriority over general reductions in the tax rate: reducing the withholding tax rate, to facilitate thedevelopment of linkages between large and small enterprises; and reducing or eliminating thedouble taxation of dividend payments to individual shareholders, to lower the METR on newinvestments subject to the standard tax regime. These two measures target significant problemsfor the private sector, at a relatively low revenue cost.Because the VAT is the primary source of domestic revenue, the cost of reducing this tax ratewould be high. Furthermore, the VAT (as structured) falls primarily on non-poor households, noton businesses.Recommendation. To avoid revenue risks, package any tax cuts with measures to enhancerevenues, or calibrate the tax cuts so that the revenue costs are covered by expected gains fromearlier reforms. 67Recommendation. Reduce or eliminate the double taxation of dividend income paid toindividual shareholders, taking into account the effects on revenue.Recommendation. Reduce the withholding tax rate to 10 percent on all transactions currentlysubject to a 20 percent rate, taking into account the effects on revenue.Recommendation. Target a reduction in the company income tax (IRPC) and the individualincome tax (IRPS) as revenue prospects permit, to improve the earnings and growth prospects forboth corporate and non-corporate enterprises.TAX POLICY ANALYSISAll decisions on tax policy should be informed by a careful quantitative analysis of the revenueeffects and at least a qualitative analysis of the economic impacts. This includes the decisions onrevenue targets for the budget program each year. The MOF therefore requires the capability toundertake serious tax policy analysis. The standard approach is to establish a Tax Policy Unit(under various names and organizational arrangements) staffed by a small group of economistsand tax administration specialists. The mandate for the TPU can include: producing revenueforecasts for the annual budget cycle and revenue projections for the medium-term fiscalframework; analyzing the fiscal, economic and distributional effects of tax policy issues underconsideration; reviewing and analyzing the current tax system to make recommendations forimproving its effectiveness in generating revenues and facilitating an improved business climate;67 Tax reform packages are often designed to be revenue neutral, in which case the gains from revenueenhancement measures are fully passed along to the private sector in the form of tax cuts. One commonmethod for financing tax cuts is by eliminating or reducing the scope of special tax incentives or taxpreferences. Given that Mozambique recently adopted a new Code of Fiscal Benefits, however, majorchanges in the near term are best avoided in the interest of stability and predictability in the tax system.

76 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEand serving as the government’s focal point for dialogue with the public on tax policy issues,including the dissemination of data reports and policy briefs. The TPU should collaborate closelywith the Gabinete de Planeamento e Estúdos at the AT, with the latter focusing on monitoringand assessing revenue performance, maintaining and developing the tax data base, and providinganalytical support to AT management.Recommendation. Establish a Tax Policy Unit (TPU) at the Ministry of Finance, possibly withinthe Gabinete de Estudos, and train a group of specialists to conduct quantitative and qualitativeanalysis of tax policy issues. The TPU should have primary responsibility for revenueforecasting, technical analysis of tax policy issues, and dialogue with the public on tax policyissues.FUNCTIONAL INTEGRATION OF TAX OPERATIONSThe modernization of tax administration is a work in progress. The AT has achieved majorimprovements in tax administration, with highly favorable effects on revenue mobilization. Yetlarge additional gains in efficiency and effectiveness can be obtained through further steps tomodernize tax administration, improve compliance, and reduce the scope for tax evasion andunethical practices. These administrative reforms will also facilitate private sector developmentand improve the business environment for small and medium enterprises by simplifyingprocedures, lowering compliance costs, and reducing glaring inequities caused by uneven andarbitrary enforcement of the tax laws.One major requirement – the first of five to be cited here – is the functional integration ofcommon operations between customs and domestic tax services, including (in rough order ofpriority) audit, risk management, debt management, and customer services, as well as supportfunctions such as human resource management and an master files for each taxpayer covering alltax and customs transactions. The purpose of consolidating services is to reduce duplication ofeffort within the AT, strengthen synergies across different tax lines, and provide more seamlessservices to taxpayers. As discussed in chapter 4, progress on functional integration has beenlimited to date. Further action in this direction is part of the AT’s strategic plan.Recommendation. Formulate and implement specific plans for integrating basic operationalfunctions of the customs and tax departments of the AT, focusing first on audit, risk managementand debt management, and customer services.Recommendation. Formulate and implement specific plans for further integration of supportoperations in the AT, including compatible IT systems, a unified master data base for eachtaxpayer, and comprehensive systems for human resource management.E-TAXATIONThe government and the AT recognize the importance of introducing modern informationtechnologies into the tax system (e-Tributação), and have already begun the process of planningand implementing these reforms. The main focal points include integration of revenue accountsinto the government’s automated public finance management system (e-SISTAFE), introduction

P RIORITY I SSUES 77of electronic tax declarations and electronic payments through the banking system, andimplementation of electronic single window systems to facilitate border clearances.Compared to existing processes, IT-based systems offer enormous potential for enhancingrevenue by improving the efficiency of AT operations, while reducing compliance costs for theprivate sector. But caution is very much in order. The reforms must be carefully planned andsequenced, well managed, properly funded, and effectively coordinated with technical support, toavoid potentially serious pitfalls that could impede ongoing revenue operations, or lock insystems that will not meet future needs (as in the case of the TIMS system now being used byCustoms). It is extremely important, too, for the AT to use e-taxation as a catalyst forfundamental re-engineering of basic business and work-flow processes, instead of just automatingexisting systems. Finally, the transition to e-taxation may require supportive legal or regulatorychanges. 68Recommendation. Proceed expeditiously with the introduction of e-taxation systems, but withdiligent attention to the design, planning, sequencing, and management of the change process. Toimprove efficiency and effectiveness of the AT’s revenue operations, priorities include e-declarations, e-payments through the banks, the automated single window for customs, as well asautomating the systems for dealing with stop-filers and late-filers, and systems for riskmanagement.Recommendation. Use the introduction of e-taxation as a catalyst for fundamental reengineeringof business and work-flow processes in each of the areas covered.Recommendation. Carefully review the legal and regulatory environment to ensure that allrequired revisions are in to support e-taxation, including not only tax laws but also laws relatingto electronic information and transactions.RISK MANAGEMENTIn conjunction with the integration of tax and customs operations and the introduction of e-taxsystems, there is also enormous room for improvement in collection efficiency through theintroduction of modern risk management practices – which will simultaneously reduce thecompliance burden and facilitate tax transactions for most taxpayers. The concept is to usecomputerized data records and automated statistical systems to screen for cases with high revenuerisk, as well as those with low revenue risk, enabling the AT to focus its resources moreproductively on cases where the potential revenue gains are highest. For cases with low revenuerisk, most tax and customs procedures can and should be handled quickly and at minimum cost,effectively supporting broader application of automatic “green channel” approvals and “goldcard” treatment of taxpayers with excellent compliance records—in the interest of collectionefficiency. By comparison, existing risk management systems are rudimentary, subjective, and68 See, for example, Nathan Associates (2008), ASEAN Single Window: The Intersection of Law &Technology, for a detailed discussion of legal technicalities associates with the introduction of AutomatedSingle Window processes. The issues include not only enabling legislation for electronic transactions, butalso laws relating to the protection and storage of personal data, cross-border authentication of electronicsignatures, and electronic transfer of rights in goods.

78 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEhighly inefficient. Even low-risk cases must face the chance of audit, and serious penalties ifmajor infractions are detected; but the audit rate for this group should be low.Recommendation. Once taxpayer data systems are in a condition to support statistical riskanalysis, seek technical assistance for the development of automated risk-management systems.Priorities for modern risk management include customs clearances, audit selection, and thepayment of VAT and income tax refunds.Recommendation. Expand the application of “green channel” and “gold card” treatment forclearances and approvals with low revenue risk as identified by the risk management systemsSIMPLIFICATIONTwo of eight “priority actions” for tax policy in PARPA II dealt with simplification. One calledfor a review and evaluation of the simplified tax regimes under the income tax and VAT, whilethe second called for approval of legislation “that simplifies the relationship between the taxadministration and the taxpayers, making it easier for them to exercise their rights and receive theprotection assured them” (paragraph 489). These aims have been realized on paper at leastthrough adoption of the 2009 ISPC code for small taxpayers and the 2006 General Law onTaxation – though the implementation of both laws is still work in progress. In addition, the AThas simplified tax forms and greatly improved public information campaigns. The Authority isalso investing heavily in expansion of the physical infrastructure in order to make it easier fortaxpayers outside major cities to comply with tax obligations and seek assistance.Despite this genuine progress, simplification remains high on the agenda of key issues for taxreform. Complexities in the tax code, in tax forms, and in administrative procedures continue tocreate serious problems, especially for small and medium size enterprises with weak financialmanagement and lack of access to professional assistance. Taxpayers who, as a result, makeinadvertent errors are vulnerable to arbitrary reassessments and burdensome penalties – arecurrent theme in interviews for this study. Complicated documentation requirements andapproval procedures also continue to bog down the process of obtaining VAT refunds, despiteimprovements in recent years. The refund process also functions poorly for the IRPC and IRPS.Similar problems arise from the complex rules and cumbersome procedures involved in obtainingcertification for preferential tariff treatment under the SADC trade protocol and the emergingSADC free trade area. These problems affect both importers and exporters.The introduction of e-taxation and modern risk management systems should simplify taxcompliance and reduce payment problems for many taxpayers. Additional measures can also beconsidered to simplify the system, such as eliminating end-year reconciliations under the IRPSfor households whose sole source of income is from formal sector employment, even if more thanone member of the family is working.Recommendation. Ensure effective implementation of the simplified tax for small contributors(ISPC) and taxpayer protection provisions of the General Law on Taxation.Recommendation. Seek and pursue further opportunities to simplify tax forms and taxprocedures, with special attention to the refund process for both VAT and the income tax, through

P RIORITY I SSUES 79the application of information technology and efficient risk management procedures. A review ofthe legal and regulatory environment may also be needed to support simplification reforms.Recommendation. Simplify the procedures for certifying rules of origin (ROO) on exports toother SADC states. For example, ROO documents should be available in the provinces, not onlyin Maputo. The government should also negotiate with SADC partners to simplify ROOcertification on exports to Mozambique, so that importers in this country can benefit from thepreferential tariff rates.TAXPAYER SERVICESThe AT has been made impressive progress in improving taxpayer services through innovativepublic information and education programs, new tax service and call centers, geographicalexpansion of facilities, greater delegation of authority to regional offices (such as in checkingVAT refund documents for accuracy before transmission to Maputo), development of thewebsite, and upgrading human resources to provide taxpayers with better support and moreobjective treatment. These are important steps in the direction of facilitating compliance, helpingtaxpayers avoid costly errors, and improving taxpayer attitudes about the AT and their taxobligations.But the process of improving taxpayer services is far from complete. Better provision ofinformation is a central part of the problem. This includes not only continued media coverage ofbasic facts about the tax system, but also increased capacity within the AT to provide clear,consistent and correct answers to questions from taxpayers at all levels of sophistication about thetax code or procedural requirements. Many technical ambiguities in the tax code have not yetbeen clarified through subsidiary regulation, and several tax specialists told the study team that itis very difficult (or impossible) to obtain written rulings or interpretations from the AT.Another continuing problem is the long-standing concern of the private sector aboutunpredictable and punitive enforcement practices by tax officers, especially in reaction toinsignificant errors or unintended infractions caused by lack of information about details of thetax code. This behavior creates an adversarial relationship, incentives for corrupt practices, andsources of dispute, where educational support from tax officials would be more productive allaround.Recommendation. Develop and disseminate specific plans for improving taxpayer services in themedium term, applying computer technology where possible to improve efficiency. The planmust include implementation benchmarks and results targets. It should cover public informationprograms as well as direct services to taxpayers who require support.Recommendation. Maintain an active file of frequently asked questions, with authoritativeanswers presented in language that can readily be understood by most taxpayers. Wherenecessary, formulate and issue supporting regulations. These information products should bemade available to taxpayers through the Internet, through easily operated computer kiosks in taxservice centers nationwide, and through cooperating non-government organizations.

80 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUERecommendation. Expand training on taxpayer services for all tax officials who deal with thepublic, not just those assigned specifically to taxpayer service functions.Recommendation. Conduct regular surveys of taxpayer knowledge and satisfaction with AToperations, to provide management information for monitoring the results of the taxpayer serviceinitiatives.TAX CULTUREMany of those interviewed for the study emphasized the deep-seated weakness in the “taxculture” as a primary obstacle to improving compliance and curbing fraud and evasion. Asidefrom the inherent tendency for individuals and businesses to favor “free-riding” behavior if theycan get away with it, the weak tax culture also reflects a widespread lack of understanding of howtaxes contribute to national development. It is also influenced by the complexity of the taxsystem, and the limited geographical coverage of revenue services, which makes it hard to paytaxes in many regions of the country. Further fueling popular resistance to paying taxes is aperception of blatant tax evasion due to bribery and political favoritism.Strengthening the tax culture requires a combination of carrots and sticks to strengthen incentivesfor voluntary compliance and increase the costs (or reduce the benefits) of cheating. Actionsaddressing the priority issues discussed above will shift the balance of considerations in thedirection of compliance. But a more focused effort can hasten the cultural transformation. Thiscan be done most effectively through measures that resonate with the public and underscore theimportance of paying taxes, such as the two that follow. To be sure, these approaches are easiersaid than done, and require high-level political backing.Recommendation. Crack down on affluent taxpayers who have been escaping their taxobligations with impunity. The AT has legal authority to pursue and catch blatant tax evadersthrough indirect assessments based on external signs of wealth and third party data such asautomobile registrations. Where possible, consistent with tax privacy laws, make an example ofpenalizing or prosecuting these cases.Recommendation. Require senior members of the government and members of the nationalassembly to submit income and wealth declarations to an independent audit authority and to theAT.TAX TRAININGThere is an enormous need for expanding and improving tax training for both AT cadres and taxprofessionals serving the private sector. The AT has already embarked on an ambitious programto strengthen staff training, including the establishment in 2009 of a new Training Institute inMatola. The training program should be developed on the basis of a thorough assessment oftraining needs and a clear plan for prioritizing and sequencing training activities, taking intoaccount the benefits in revenue collection and customer services, as well as skill requirements forimplementation of the modernization program (as discussed above). From a revenue perspective,training in advance audit skills for dealing with large taxpayers is especially important.

P RIORITY I SSUES 81The private sector likewise suffers from an acute shortage of well trained tax professionals. Largecompanies, of course, have few problems in this respect. In addition, the new ISPC should allowvery small enterprises to manage their tax affairs without engaging accountants or trainedbookkeepers. For many other SMEs, especially outside of Maputo, professional services for taxsupport and advice are either unavailable or unaffordable. In large parts of the country, it isliterally impossible for a medium-sized business to submit properly certified accounts for taxpurposes, due to the absence of accounting services. This situation increases the costs and risks ofdoing business, because enterprises without properly signed accountant are vulnerable to heavypenalties. The problem involves the quality of tax training as well as the quantity.Recommendation. Conduct a thorough training needs assessment for the AT. On that basisestablish a training plan with priorities and targets for the short term and medium term, includingformal training courses, structured on-the-job training – and training of trainers. Priorities arelikely to include advanced audit for dealing with large taxpayers; taxpayer services; integrity intax administration; internal investigation; and new skills requirements relating to themodernization of systems and procedures.Recommendation. Devote far more attention and resources to expanding and improving thequality of training for accountants, including specialized courses on tax accounting.EITI IMPLEMENTATIONAlong with the adoption in 2007 of a new legal framework for investments in the mining andpetroleum sectors, and elimination of special negotiations on the tax treatment of future megaprojectsin the 2009 Code of Fiscal Benefits, the government’s formal application in May 2009 tojoin the Extractive Industries Transparency Initiative (EITI) is a landmark commitment torevenue mobilization from the exploitation of mineral resources, as well as fiscal transparency. Inbrief, the EITI is a mechanism requiring, first, that companies involved in oil, gas and mineralproduction disclose their tax and royalty payments to a participating government; second, that thegovernment discloses the receipt of these payments; and third, that these payments are subject toindependent verification.The formal application is one step in a multi-year validation process for full compliance with theEITI (see http://eitransparency.org). Ensuring follow-through over the next few years is one ofthe most important revenue issues for the medium term. As an objective, it also has the advantageof being well defined and easy to monitor.Recommendation. Adhere to the required schedule for full compliance with the EITI.DONOR COORDINATIONMost of the priority reforms outlined above require financial and technical support frominternational partner agencies. Several donors are now channeling financial support through aCommon Fund that is controlled by the AT but monitored periodically by a Quality AssuranceGroup of international tax and customs experts, who have been working with specialists from theIMF and the U.S. Treasury. The Common Fund streamlines the relationship between the AT andthe donors by establishing a single set of procedures and controls. It also helps to strengthen theAT’s capacity for planning and managing reforms. Another coordination mechanism is the Tax

82 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEWorking Group, which brings donors together to exchange information and discuss commonconcerns relating to tax and customs reforms. Recently, however, this group has not been veryactive.Looking ahead, it appears that other donors will be providing assistance to the AT throughchannels outside the Common Fund framework. It is important for these donors to develop anddeliver assistance in a manner that minimizes the burden on senior managers of the AT of copingwith a multiplicity of donor agency procedures and requirements.Recommendation. Revitalize the Tax Working Group as a primary mechanism for coordinatingdonor support on tax and customs issues, with particular attention to ensuring liaison betweenCommon Fund activities and other support programs. As far as possible, donors who chose tooperate outside the Common Fund should seek to develop mechanisms that minimize theadministrative burden placed on the AT.

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84 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUEDeloitte and ACIS. 2008. General Overview of the Tax System in Mozambique, Edition 1.____. 2008a. Legal Framework for Taxation in Mozambique: Value Added Tax Manual, Edition1.____. 2009. Legal Framework for Taxation in Mozambique: Manual on Corporate Income Tax.____. 2009. Legal Framework for Taxation in Mozambique: Manual on Individual Income Tax.Ebrill, L., Keen, M., et al. 2002. The Allure of the Value-Added Tax. Finance and Development,Vol. 39, No.2. Washington DC: International Monetary Fund.Foreign Investment Advisory Service. 2006. Study on the Impact of Taxes, Customs, Licensesand Other Fees on the Investment Climate.Frei, A. Various dates. The Mozambican Investor. Maputo: MozLegal.Hassan, S. 2009. Taxation and the Cost of Capital in Mozambique. Chapter 14 in Arndt, Tarp andJones.Instituto Nacional de Estatística (INE). 2004. CEMPRE: Censo das Empresas, Revisado 2004,[National Enterprise Census Data, Revised 2004].____. 2006. O Sector Informal em Moçambique: Resultados do Primeiro Inquérito Nacional(INFOR–2004). Direcção de Estatísticas Sectoriais e de Empresas.⎯⎯. 2009. Inquérito Annual ás Empresas – 2006: Principais Resultados. Presentation to PrivateSector Working Group, July 8. Maputo, Mozambique.International Monetary Fund. 2005. Republic of Mozambique: Article IV Consultation SecondReview. IMF Country Report No.05/318.____. 2005a. Tax and Customs Reforms in Mozambique: an Overview. In Republic ofMozambique: Selected Issues and Statistical Appendix. IMF Country Report No.05/311.⎯⎯. 2006. Republic of Mozambique: Fourth Review Under the Three-Year Arrangement Underthe Poverty Reduction and Growth Facility. IMF Country Report No. 06/254.____. 2007. Republic of Mozambique: Poverty Reduction Strategy Paper. IMF Country ReportNo. 07/37.⎯⎯. 2007. Republic of Mozambique: Fifth Review Under the Three-Year Arrangement Underthe Poverty Reduction and Growth Facility. IMF Country Report No.07/262.⎯⎯. 2007a. Republic of Mozambique: Selected Issues. IMF Country Report No.07/258.⎯⎯. 2008. Republic of Mozambique: Second Review Under the Policy Support Instrument.IMF Country Report No.08/220.

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86 PARPA II R EVIEW—TAX S YSTEM IN M OZAMBIQUESonne-Schmidt, C. 2009. Household Survey Evidence. In Arndt , Tarp and Jones.Tribunal Administrativo. 2008. Relatório e Parecer sobre a Conta Geral do Estado de 2007.United Nations Development Programme. 2007. Human Development Report 2007/2008.USAID. 2004. Diagnostic Trade Integration Study. Removing Obstacle to Economic Growth inMozambique.Varsano, R., et al. 2006. Post-Reform Evaluation of the Tax System. IMF Fiscal AffairsDepartment.World Bank. 2009a. Mozambique Investment Climate Assessment (Draft Report).World Bank and International Finance Corporation. 2008. Doing Business, 2009.World Bank, International Finance Corporation, and PriceWaterhouseCoopers. 2008. PayingTaxes 2009: The Global Picture.Zee, H., J. Stotsky and E. Ley. 2002. Tax Incentives for Business Investment: A Primer for PolicyMakers in Developing Countries. World Development 30:9. 1497-1516.

PARPA II Review—The TaxSystem in MozambiqueVolume II: AppendicesSeptember 2009This publication was produced by Nathan Associates Inc. for review by the United StatesAgency for International Development.

PARPA II Review—TaxPolicyVolume IIDISCLAIMERThis document is made possible by the support of the American people through the United States Agency forInternational Development (USAID). Its contents are the sole responsibility of the author or authors and do notnecessarily reflect the views of USAID or the United States government.

ContentsAppendix A. Basic Data 1Appendix B. Fiscal Benefits in Mozambique 9Appendix C. Taxes and Fiscal Benefits: International Comparison 19Appendix D. Taxation and Business Environment Ratings 27Appendix E. Operational Efficiency Indicators 33Appendix F. Revenue Effort 39Appendix G. Tax Incentives for Investment—Pros and Cons 45Appendix H. Interview Results—Main Concerns and Issues 49Appendix I. Persons Interviewed 53

Appendix A. Basic Data

Table A-1Revenues by Type of Tax, % GDP1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Receita Total 10.8 11.5 11.2 11.4 13.1 12.4 13.8 15.2 16.2 16.0Receitas fiscais 10.0 10.5 10.0 10.5 12.3 10.8 11.1 12.3 13.4 13.5Impostos sobre Rendimentos 1.5 1.6 1.8 2.1 2.9 2.7 2.9 3.5 4.5 4.9Imposto s/ rendimentos de pessoal 0.8 1.0 1.1 1.4 2.0 1.9 1.9 2.1 2.3 2.5Imposto s/ rendimentos de empresas 0.7 0.6 0.6 0.7 0.8 0.8 1.0 1.4 2.1 2.4Imposto Especial s/ o Jogo 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Impostos sobre Bens e Serviços 6.6 7.3 6.9 7.2 7.9 7.2 7.4 8.0 8.3 8.0Imposto s/ Valor Acrescentado (IVA) 3.9 4.4 4.2 4.4 4.9 4.5 4.5 5.2 5.4 5.4IVA Operações internas 1.0 1.8 1.9 2.0 2.1 1.9 1.8 2.1 3.2 2.4IVA Importação 1.4 2.6 2.4 2.6 2.7 2.6 2.7 3.2 2.2 3.0Imposto s/ Consumo Específico - Prod.s Nacionais 0.6 0.6 0.6 0.6 0.7 0.6 0.6 0.6 0.6 0.7ICE - Cerveja e Refrigerantes 0.0 0.5 0.4 0.5 0.5 0.4 0.5 0.5 0.5 0.5ICE - Tabaco 0.0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1ICE - Outros Produtos 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1Imposto s/ Consumo Específico - Prod.s Importados 0.4 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4Direitos Aduaneiros + sobretaxa de acucar 1.7 1.9 1.8 1.9 2.0 1.7 1.9 1.8 1.8 1.5Outros Impostos 1.9 1.6 1.3 1.2 2.2 0.9 0.8 0.7 0.7 0.6Imposto do Selo 0.2 0.2 0.1 0.1 0.2 0.2 0.2 0.1 0.2 0.1Imposto sobre Veículos 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Imposto Reconstrução Nacional 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Licenças de Pesca 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0Imposto s/ Combustíveis 1.3 1.2 1.0 0.9 1.2 0.5 0.4 0.3 0.3 0.3Royalties e Impostos de Superfície 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0Juros de Mora e Taxa de 3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0SISA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Diversos Outros Impostos 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1Receitas não fiscais 0.3 0.6 0.5 0.7 0.7 0.7 0.7 0.5 0.6 0.5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Taxas Diversas de Serviços 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.2 0.1Compensação de Apos. e Pensão de Sobrevivência 0.2 0.3 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3Recuperação Crédito B. Austral 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0Rendas de Casa 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0Outras Receitas Não Fiscais 0.1 0.1 0.0 0.0 0.1 0.1 0.2 0.1 0.1 0.1Receitas Consignadas 0.4 0.2 0.3 0.2 0.2 1.0 1.0 1.0 1.1 1.1Imposto s/ Combustíveis (consig.) 0.0 0.0 0.0 0.0 0.0 0.8 0.8 0.7 0.7 0.7Taxa de Sobrevalor. da Castanha de Caju 0.0 0.0 0.0 0.1 0.0 0.1 0.0 0.0 0.0 0.0Assist. Médica e Medicamentosa 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Taxas de Serviços Aduaneiros 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Outras Receitas Consignadas 0.0 0.2 0.3 0.2 0.1 0.2 0.2 0.3 0.2 0.3Receitas Próprias 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.9 0.5 0.5Receitas de Capital 0.0 0.2 0.4 0.0 0.0 0.0 0.7 0.6 0.5 0.4Dividendos 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.4 0.0 0.0Privatizações líquidas 0.0 0.2 0.4 0.0 0.0 0.0 0.1 0.1 0.0 0.0Mem: Imposto s/ Combustiveis 1.3 1.2 1.0 0.9 1.2 1.3 1.2 1.0 1.1 1.0Note: Years 1999 to 2007 from Conta Geral do Estado, 2008 from Relatorio de Execucao. All from DNEAP's "Quadromacro Revisto CFMP Proposta,"received June 2009. Note that here Imposto de Combustivel is presented separately as but is otherwise included partly in "Non-tax revenues" and partly in"Consigned revenues."

Table A-2GDP Sectoral Growth RatesAverage1999 2000 2001 2002 2003 2004 2005 2006 2007 20081999-08 2006-08PIB Real 8.4 1.5 12.3 9.2 6.5 7.9 8.4 8.7 7.4 6.8 7.7 7.6Agricultura, produção animal, caça e silvicultura 6.5 -13.1 10.6 12.1 5.2 5.1 6.9 10.4 9.8 9.4 6.3 9.9Pesca, aquacultura, e actividades relacionadas -2.1 4.8 0.6 1.1 8.6 0.2 0.9 7.7 6.1 4.5 3.2 6.1Industria Mineira -6.5 59.6 10.8 28.7 16.1 71.6 0.7 27.8 34.6 13.1 25.7 25.2Industria Manufactureira 14.7 15.1 34.7 8.7 17.0 13.2 2.1 3.0 1.3 2.9 11.3 2.4Electricidade e Agua 78.3 -8.3 9.9 10.4 10.1 16.3 17.2 13.1 8.7 -2.6 15.3 6.4Construção 3.4 13.0 6.7 10.8 9.7 -7.0 13.2 10.4 7.3 13.0 8.0 10.2Comercio e Serviços de Reparação 2.5 3.2 17.4 4.6 6.6 7.1 12.1 21.3 7.2 6.9 8.9 11.8Alojamento, restaurantes e similares 5.4 6.8 4.0 5.1 6.0 3.0 13.6 10.1 15.2 6.1 7.5 10.4Transportes, armazenagem e comunicações 9.0 2.6 6.9 8.4 2.9 9.6 7.9 10.4 10.6 18.3 8.7 13.1Serviços Financeiros -26.9 80.8 21.3 15.8 10.5 25.2 49.3 3.7 10.9 12.9 20.3 9.1Activ. imobiliarias, alugueres e serviços às empresas 3.0 1.3 5.0 0.7 1.1 5.9 1.3 0.8 0.6 0.1 2.0 0.5Administração pública, defesa e segurança social 18.1 6.1 22.3 7.4 4.8 4.6 6.9 11.2 5.1 7.4 9.4 7.9Educação 9.5 9.7 19.0 4.7 8.3 11.7 11.9 8.3 12.8 10.6 10.7 10.6Saúde e acção social 17.1 11.7 9.0 5.7 5.8 7.5 7.1 14.5 16.3 8.2 10.3 13.0Outras activ. de serviços colectivos, sociais e pessoais 10.0 18.3 6.8 3.3 2.4 2.4 2.4 2.4 2.4 0.5 5.1 1.8Dir.s de Importação - SIFIM (residual) -35.2 2.6 -3.9 26.9 -1.8 0.2 3.8 0.3 4.3 -8.2 -1.1 -1.2SOURCE: DNEAP Quadromacro, from June 2009.

Table A-3GDP Sectoral Shares(%)1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Agricultura, produção animal, caça e silvicultura 27.4 23.5 23.1 23.7 23.4 22.8 22.5 22.9 23.4 24.0Pesca, aquacultura, e actividades relacionadas 2.2 2.3 2.0 1.9 1.9 1.8 1.7 1.6 1.6 1.6Industria Mineira 0.3 0.5 0.5 0.5 0.6 0.9 0.9 1.0 1.3 1.4Industria Manufactureira 10.1 11.4 13.7 13.6 15.0 15.7 14.8 14.0 13.2 12.8Electricidade e Agua 5.0 4.5 4.4 4.4 4.6 4.9 5.3 5.5 5.6 5.1Construção 3.1 3.5 3.3 3.3 3.4 3.0 3.1 3.2 3.2 3.3Comercio e Serviços de Reparação 9.7 9.9 10.4 9.9 9.9 9.9 10.2 11.4 11.4 11.4Alojamento, restaurantes e similares 1.6 1.6 1.5 1.5 1.5 1.4 1.5 1.5 1.6 1.6Transportes, armazenagem e comunicações 10.2 10.3 9.8 9.7 9.4 9.5 9.5 9.7 9.9 11.0Serviços Financeiros 1.6 2.8 3.0 3.2 3.3 3.9 5.3 5.1 5.3 5.6Activ. imobiliarias, alugueres e serviços às empresas 11.7 11.7 10.9 10.1 9.6 9.4 8.8 8.1 7.6 7.1Administração pública, defesa e segurança social 3.4 3.5 3.9 3.8 3.7 3.6 3.6 3.6 3.6 3.6Educação 3.0 3.2 3.4 3.2 3.3 3.4 3.5 3.5 3.7 3.8Saúde e acção social 1.2 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.3 1.4Outras activ. de serviços colectivos, sociais e pessoais 2.1 2.5 2.4 2.2 2.1 2.0 1.9 1.8 1.7 1.6Dir.s de Importação - SIFIM (residual) 7.6 7.6 6.5 7.6 7.0 6.5 6.2 5.7 5.6 4.8SOURCE: DNEAP Quadromacro from June 2009.

Figure A-1Sectoral GDP Cumulative Growth

Appendix B. Fiscal Benefits inMozambiqueThis appendix provides a short history of fiscal benefits in Mozambique since 1993, and adetailed comparison of the 2009 Code of Fiscal Benefits with the 2002 Code. (See Tables B-1 forthe comparison of specific benefits, and Table B-2 for general benefits.)FISCAL BENEFITS IN THE 1990SThe peace accord in 1992 signaled the beginning of an era of stability and development inMozambique. One hallmark of this transformation was the adoption of a new Investment Law(Law No. 3/93 of 24 June) and a Code of Fiscal Benefits (Decree 12/93 of 21 July). The regimeincluded a guarantee of property rights, access to foreign exchange for remittance of capital andprofits, and generous tax breaks for a wide range of economic activities. Later in the 1990s thegovernment added special incentives for Special Economic Zones (SEZs) in 1998 and IndustrialFree Zones (IFZs)—another name for export processing zones—in 1999.During most of that period the standard tax on corporate profit (Contribuição Industrial) was 35percent for agriculture, 40 percent for industry (including construction and mining) and 45percent for the trade and service sectors. Customs duties ranged up to 35 percent, including a 10percent duty on capital goods. After 1998, the company tax rate was reduced to 35 percent for allsectors but agriculture and fisheries, which enjoyed a special 10 percent tax rate. Other specialbenefits applied to mining, oil and gas, hotels and tourism, and sugar. 1The main fiscal incentives were reductions in the tax rate for defined periods of time (partial taxholidays) together with exemptions on customs duties for certain capital goods. The “general”incentives included a 50 percent reduction in the company tax and complementary tax for up to10 years. In three northern provinces, the reduction was 80 percent for 10 years, and 50 percentfor another 6 years. In four other provinces, investments outside the capital obtained a 65 percenttax reduction for 10 years followed by a 40 percent tax break for 3 more years.The IFZ package included exemption from customs duty and indirect tax on inputs used forexport production, and an unusual “royalty fee” in lieu of income tax, set at 1 percent of gross1 Adrien Goorman, Randa Sab and Paulo Ramos, Moçambique: Raçionalização dos Incentivos Fiscais,IMF, August 2000, p. 13. This study was not released to the public.

10 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUErevenue or a flat rate per square meter of occupied area. For investments in the Zambezi RiverValley SEZ (from 1998), the incentives included an exemption from customs duty and indirecttax for both equipment and intermediate goods and a full tax holiday for 5 years followed by an80 percent reduction thereafter; for undertakings in agriculture and fisheries the full tax holidayapplies until 2025.Under this regime private investment increased substantially in the late 1990s (the trends areexamined more fully in the next section). There is no doubt that fiscal incentives were essential tothe negotiations on two early showcase projects of enormous strategic value to the country—theMozal aluminum smelter and the Maputo-Witbank toll road project. More generally, though, onecannot easily disentangle the impact of incentives from the effect of political stability,macroeconomic stabilization after 1996, and the privatization of hundreds of formerlynationalized enterprises.One piece of evidence came from a study conducted by Jose Macamo for the Ministry ofPlanning and Finance in 2000, to determine the importance of administrative barriers toinvestment as viewed through the eyes of a randomized sample of 30 recent investors. The studyfound that 76 percent of the respondents would have undertaken the same investment without taxand customs incentives. 2 Also in 2000 the IMF conducted a detailed study for the government onthe fiscal incentives regime. Based on calculations from a sample of tax files, the study concludedthat the existing benefits were “not cost effective.” The IMF team was especially critical of costlytax holidays, recommending instead investment tax credits and accelerated depreciation. 3THE 2002 REFORMIn the wake of these findings, the government in 2002 adopted a comprehensive reform of theincome tax, including a new Code of Fiscal Benefits. Major provisions of the tax reform programincluded a reduction in the standard corporate tax rate to 32 percent (with agriculture still at 10percent) and elimination of the complementary surtax. At the same time, the new Code of FiscalBenefits was designed “to rationalize the concession of fiscal incentives so that this regime can bemore efficient and efficacious as an instrument of economic policy” and to consolidate in onelegal instrument what had been “a very scattered system of fiscal benefits.” 4A central feature of the 2002 Code was the elimination of most tax holidays in favor ofinvestment tax credits and accelerated depreciation, along the lines recommended by the IMF.These general incentives applied to a wide range of activities, excluding most wholesale andretail undertakings other than rural commerce and investments involving new commercialinfrastructure. In addition, partial holidays remained in place for agriculture (80 percent reduction2 Jose Macamo, Administrative barriers to Investment in Moçambique: Lessons learned from theExperience of Recent Investors, Ministry of Planning and Finance, Gabinete de Estudos Discussion Paper#17, December 2000.3 Goorman et al, (2000), op. cit., pp. 5 and 13. This recommendation echoed the predominant IMF viewof tax incentives, as subsequently expressed in Zee, Stotsky and Ley (2002).4 Preamble to the Code of Fiscal Benefits, Decree n o 16/2002 of 27 th June.

A PPENDIX B 11in the company tax rate until 2012), mining (25 percent reduction for 8 years), and IFZ entities(60 percent reduction for 10 years). The thresholds to qualify for CPI authorization under theInvestment Act remained unchanged at $5,000 for domestic entities and $50,000 for foreignentities.FDI inflows declined when the 2002 Code took effect, but this was largely due to the timing ofmega-projects and uncertainties created by inflation, budget deficits, and exchange rate volatility.Still, average FDI in the four years after 2002 matched the average for the corresponding periodbefore 2002, at US$259 million and US$253 million, respectively. FDI then reached new heightsin 2007 once macroeconomic conditions stabilized. Similar trends are seen in the data on CPIapprovals, which indicate the level of interest by investors planning to commit resources toMozambique. Excluding large-scale projects (because they were covered by the special regimethat did not change in 2002), the average level of approvals was higher in the four years after2002 than in the prior four years—at US$552 million and US$ 508 million respectively.Building on Macamo (2000), Bolnick (2009) conducted a study of investment motives at the endof 2008, covering a stratified random sample of projects approved by CPI in 2005, 2006 and2007. The results were very similar. Of 60 companies covered in the survey, 83 percent indicatedthat tax incentives were not a critical factor in their investment decision; the corresponding figurefor import duty relief was 73 percent. While these findings confirm a very high redundancy ratefor the fiscal benefits, the study also found that the tax and duty benefits were critical factors forthe largest investments that were approved during this time frame. However, the business plansfiled with CPI showed that investments that hinged on the availability of incentives were verycapital intensive and were designed to create far fewer jobs than the projects that would havebeen undertaken with or without the tax breaks. 5THE 2009 CODE OF FISCAL BENEFITSA new Code of Fiscal Benefits came into force in January 2009 (under Law 4/2009 of 12 thJanuary). Major changes in the new Code are discussed in Chapter 4 of the text. Here we providea more complete description of the new benefits package in the form of a tabular comparison ofthe 2009 and 2002 Codes. Table B-1 shows the main features of the “specific benefits” under thetwo codes, while Table B-2 provides a direct comparison of the “general benefits.” Note thatspecific benefits apply to designated sectors or activities, whereas general benefits apply toqualifying investments not covered by designated specific benefits. Under Article 4 of the 2009Code, specific benefits may not be aggregated with other specific or general benefits, unlessotherwise indicated in the law.5 Bruce Bolnick, Investing in Mozambique: The Role of Fiscal Incentives, Nathan Associates, February2009.

Table B-1Specific Fiscal Benefits 2002 and 2009, Main FeaturesType of Investment Specific Benefits 2002 2009Public infrastructure investmentby private sector or by publicprivatepartnershipsCustoms duty and VAT exemption 2002 General Benefits only Exemption from payment of import duties and VAT on class “K”imports including spare parts and accessories.Income tax reductionSee Table of General Benefits, Item 6 Basicfor 200280% reduction in the IRPC tax rate for the first five (5) tax years;60% reduction in the IRPC tax rate for tax years 6 to 10;25% reduction in the IRPC tax rate for tax years 11 – 15.Rural commerce and industry Customs duty and VAT exemption 2002 General Benefits only For rural commerce, exemption from payment of import dutiesand VAT on class “K” imports as well as other essential goods asenumerated, such as freezers and scales.For rural industry, exemption from payment of import duties andVAT on class “K” imports including spare parts and accessories.Manufacturing and assemblyindustriesCustoms duty exemption 2002 General Benefits only Exemption from payment of import duties on imported rawmaterials for the production process.For assembly of motor vehicles, electronic equipment, computerand communications technology, exemption from payment ofimport duties on materials.Above exemptions require annual invoicing above 3 million MTand value added of at least 20%.Agriculture and fisheries(Agriculture only in 2002)Customs duty and VAT exemptionExemption from payment of customs dutieson class “K” equipment, for required goodsnot produced in Mozambique.Exemption from payment of customs duties and VAT on theimport of class “K” equipment and accompanying spare parts andaccessories.Income tax reduction80% reduction of the income tax rate until2012, on profits from agricultural ventures80% reduction of the income tax rate until 31 December 201550% reduction in the income tax rate between 2016 and 2025.Additional benefitsGeneral benefits for professional training,public infrastructure expenditures, stamptax and property transfer taxGeneral benefits for professional training and public infrastructureexpendituresHotel and tourism Customs duty and VAT exemption Exemption from payment of import dutieson class “K” equipment, for requiredgoods not produced in Mozambique.Exemption from payment of import duties and VAT on class “K”equipment and other indispensable goods for the construction andoutfitting of tourism and hotel activities (see list).

Type of Investment Specific Benefits 2002 2009Investment credit and accelerateddepreciationInvestment tax credit as per GeneralBenefits plus 3 percentage points.Accelerated depreciation up to 3 times thenormal rate on new immovable assets,automotive vehicles and other fixed assets.These benefits apply only until 31December 2007.Accelerated depreciation increased by 50% on new immovableassets, vehicles and other fixed assets.Additional benefits All general benefits. General benefits for the investment tax credit and accelerateddepreciation.Science and technology parks Customs duty and VAT exemption N/A Exemption from payment of import duties and VAT on scientific,teaching and laboratory equipment, including software and itssupport materials, including accessories and spare parts.Income tax reduction N/A Exemption from the income tax in the first 5 tax years.50% reduction in the income tax in years 6 to 10.25% reduction in the income tax in years 11 to 15.Large scale projects2002 Code: Investmentsexceeding US$500 million2009 Code: Investmentsexceeding 12.5 billion MTExemption of import duties andVATExceptional fiscal incentivesExemption from payment of import dutieson class “K” equipment, for requiredgoods not produced in Mozambique.To be granted by the Ministry of Planningand Finance under a contractual regimeapproved by the Council of Ministerscovering import duties, income tax,property transfer tax and stamp taxExemption from payment of import duties and VAT on importedconstruction materials, machinery, equipment, and accompanyingspare parts.Exceptional fiscal incentives eliminatedInvestment tax creditInvestment tax credit ranging from 5% to10%, subject to 5-year carry forward.For projects in Gaza, Sofala, Manica, Tete,Zambezia and Nampula provinces, ITC of10% to 20%.For projects in Cabo Delgado, Inhambaneand Niassa, ITC of 15% to 30%.General benefits for professional training,public infrastructure expenditures, stamptax and property transfer tax.General benefits for investment tax credit, accelerateddepreciation, deductions for modern technology, professionaltraining, and public infrastructure investments.Rapid Development Zones –designated eligible activities inZambezi Valley, Niassa Province,Nacala District, MocambiqueInsland and Ibo IslandExemption of import duties andVATExemption from payment of import dutieson class “K” and “I” imports, during first 3years of implementation, for goods notproduced in MozambiqueUntil 31 December 2015.Exemption from payment of import duties and VAT on the importof class “K” equipment, including accessories and spare parts.

Type of Investment Specific Benefits 2002 2009Income tax benefitsIncome tax credit equal to 20% of the totalrealized investment.Until 31 December 2015.Same, but without the “sunset” date.Additional benefitsExemption from property transfer tax andgeneral benefits for professional training,public infrastructure expenditures, stamptax.General benefits for professional training and public infrastructureexpenditures.Industrial Free Zones (ZFIs)Exemption of import duties andVATExemption from customs duty and VAT onthe importation of construction materials,machinery, accessories, spare parts andgoods and merchandise to be used in theimplementation of projects and operation ofapproved activities.VAT exemption includes internalacquisitions as well as importsSameIncome tax reduction60% reduction in the corporate income taxrate for 10 years.For operators and enterprises in ZFIsExemption from income tax for first 10 years.50% reduction for years 11 to 15.25% reduction for the remaining life of the project.For enterprises in isolated free zones:Exemption from income tax for first 5 years.50% reduction for years 6 to 10.25% reduction for the remaining life of the projectAdditional benefits Exemption from property transfer tax. N/ASpecial Economic Zones (ZEEs)Exemption of import duties andVATN/AExemption from customs duty on the importation of constructionmaterials, machinery, accessories, spare parts and other goodsused in carrying out licensed ZEE activity.VAT exemption includes internal acquisitions as well as imports.

Type of Investment Specific Benefits 2002 2009Income tax reduction N/A For ZEE operators:Exemption from company income tax for 5 years;50% reduction for years 6 to 10;25% reduction for the remaining life of the project;For ZEE enterprises:Exemption of company income tax for 3 years;50% reduction for years 4 to-10;25% reduction for years 11 to 15.For ZEE service enterprises:50% reduction in company income tax for 5 years.Investments under the Mines ActExemption of import duties andVATExemption from customs duty, VAT andexcise duty on the importation of all articlesrelating to prospecting, exploration andexploitation of mineral resources.Exemption from customs duty, VAT and excise duty on theimportation of class “K” equipment for prospecting, explorationand exploitation of mineral resources, for a period of 5 years fromthe date of commencement.Income tax reductionUntil 2010, a 25% reduction in thecorporate income tax rate for the first 5years of production, on investments above$500,000.N/AInvestments under the PetroleumActExemption of import duties andVATExemption from customs duty, VAT, andexcise duty on the importation of goodsintended for use in petroleum operations.Exemption from customs duty, VAT and excise duty on theimportation of class “K” equipment and other designated goodsfor use in oil operations, for a period of 5 years from the date ofapproval.Income tax reductionUntil 2010, a 25% reduction in thecorporate income tax rate during the first 8years following the start of production.N/A

Table B-2General Fiscal Benefits 2002 and 2009, Main FeaturesBenefit 2002 2009Benefits on the import of goodsFiscal benefits in respect of incomeAccelerated depreciationModernization and introduction ofnew technologyExemption from payment of import dutieson equipment included in class “K” of thecustoms Tariff ScheduleInvestment carried out under theinvestment law shall benefit for theperiod of five (5) years from aninvestment tax credit equal to 5% of thetotal investment realised.In Maputo province the percentage of theITC shall be of 5%; in other provinces theITC shall range from 10% to 15%.Permitted for new immovable assets.Accelerated depreciation at twice thenormal rate set by law for the purpose ofdetermination of taxable income subjectto Corporate Income Tax ( IRPC) andPersonal Income TaxThe amount invested in specialisedequipment shall during the first five yearsfrom the date of commencement ofactivity, benefit from a deduction fromtaxable income for the purpose of theIRPC up to a maximum amount of 15%of taxable income.Exemption from payment of import dutieson equipment and accessories included inclass “K” of the customs Tariff Schedule.SameIn Maputo province the percentage of theITC shall be of 5%; in other provinces theITC is 10%.Same.Accelerated depreciation at 50% above thenormal rate set by law for the purpose ofdetermination of taxable income subject toCorporate Income Tax ( IRPC) andPersonal Income TaxThe same conditions also apply torehabilitated immovable assets andequipment and machinery for industrialand/or agro industrial activities.The amount invested in specialisedequipment shall during the first five yearscounting from the date of commencementof activity, benefit from a deduction fromtaxable income for the purpose of theIRPC up to a maximum amount of 10% oftaxable incomeProfessional trainingInvestment expenditure for professionaltraining of Mozambican locals shall up toa maximum amount of 5% of taxableincome be deductible from taxableincome for the purpose of calculatingcorporate income tax.When the professional training is for theuse of technologically advancedequipment, the allowable income taxdeduction for the purpose of thecalculation of the Corporate Income Taxshall be a maximum amount equal to 10%of taxable income.Same.Same.Tax Deductible Expenditure – Duringa period of 10 years counting from thedate of production, enterprises certainexpenditures may be treated asdeductible expenditure for the purposeof calculation of Corporate IncomeTax (IRPC)In the case of undertakings carried out inthe city of Maputo, 120% of the value ofexpenditure in the construction andrehabilitation of roads, railways, airports,mail delivery, telecommunications, watersupply, electric energy, schools, hospitalsand other works that are considered to beof public utility by the competentauthority and documented by the TaxAdministration.In the case of other provinces, an amountequal to 150% of the expenditureIn the case of undertakings carried out inthe city of Maputo, 110% of the value ofexpenditure in the construction andrehabilitation of roads, railways, airports,mail delivery, telecommunications, watersupply, electric energy, schools, hospitalsand other works that are considered to beof public utility by the competent authorityand documented by the TaxAdministration.In the case of other provinces, an amountequal to 120% percent of the expenditure

Benefit 2002 2009Exemption from Stamp TaxReduction in the rate of the realproperty transfer taxThe acts for the incorporation ofcompanies including the alteration of theshare capital and article of association areexempt from stamp duty during the firstfive (5) years.Undertakings shall benefit from a 50%percent reduction in the rate of the realproperty transfer tax (SISA) with regardto the acquisition of immovable propertyused in industry, agro industry, and hotelas long as the property is acquired withinthe first three (3) years.N/AN/ANote: Under Article 13 of the 2009 Code, “general” fiscal benefits apply to investments that are not covered by any of the specificbenefits provided in the Code, and may not be cumulated with specific fiscal benefits unless otherwise specified in the latterprovision.

Appendix C. Taxes and FiscalBenefits: InternationalComparisonTable C-1 (in two parts) provides selected details about the tax structures and tax incentiveregimes in the SADC member states, as well as four other comparator countries in Africa (Ghana,Kenya, Senegal, and Uganda). It difficult to extract clear judgments from the comparative taxtables on the extent to which Mozambique’s tax system is regionally competitive, because theincentive regimes contain many technical details that defy simple comparison, and in any case theeffects depend on characteristics of particular investments. The most useful comparisons comefrom two studies that are discussed in Chapter 5 of the main text (see Investment) showing thatthe 2002 Code of Fiscal Benefits in Mozambique was highly competitive in the region. Nocomparable studies have been conducted on the 2009 Code.

Table C-1Overview of Incentives (Part 1)CountryStatutoryCorporateIncome TaxRate aSummary ofInvestment IncentivesTreatment ofDividends ofBusiness AssetsPersonalIncome TaxMarginalRatesFavorable Tax Rates or ExemptionsAngola 35 % Incentive code grants tax holidays forproject of national interest and projectlocated in special development zones.Favorable tax rates and incentive aregranted in agriculture, forestry, mining,and oil.10% withholding ondividends (residentsand non-residents)Progressive to15%20% for agriculture, forestry, 30% on rent for urbanproperty; 40% legislation governing mining activities;50% for income from oil is taxed; 65.75% for foreignproduction sharing agreement partners and joint ventures.Exporters exempt from excise tax.Botswana 25 % b Botswana’s investment promotion ischaracterized by a low statutory corporateincome tax rate and a simple incentiveregime.15 % withholdingwith set off against 10% ACT liability.5-10-15-20-25 % Certain manufacturing and companies operating underthe jurisdiction of the International Financial ServicesCenter receive a lower 5% (+10%) tax rate.DR Congo 40 % Incentive code provide 3 to 5 year taxholiday for new companies and 60% ICAfor manufacturing exporting greater 20%of output. Higher corporate and personalincome tax rates.20 % withholding(residents and nonresidents)3-5-10-15-20-25-30-35-40-45-50 %Approved companies exempt from export duties andtaxes.Lesotho 25% Lesotho’s current code does not grant taxholidays. 10% tax rate available formanufacturing and farming and nowithholding on dividends distributed bymanufacturing companies.15 % withholdingresidents; 25 %withholding nonresidents;Nowithholding tax ondividends distributedby manufacturingcompanies toshareholders25-35 % 10% for manufacturing and farming0% on income generated from manufactured goodsoutside SACUMadagascar 24 % Limited information collected.Madagascar offers multiple exportincentives for EPA firms and exportcompanies.No withholding 24 % Multiple export incentives (eg. Refund of VAT forExport Processing Zone firms and professional exportcompanies )Malawi 30 % Malawi’s incentive code provides priorityindustries with options of 5-10 year taxholidays (depending on size of investment)or fixed 15% tax rate. Favorable tax ratesavailable to EPZ firms, manufacturers andfarmers.10 % withholding(residents and nonresidents)10-20-30-40 % Companies in EPZs exempt; 21% insurance businesses;35% branch for foreign companies, 25 % forecclesiastical, charitable or educational institutions ortrustsMauritius 15 % Flat tax rate of 15%. Tax holidaysofficered to small enterprises whichregister for the first time.No withholding 15 % Double deduction of export marketing costs; tax credit15%-40% on export volume such that tax not less than15%

CountryStatutoryCorporateIncome TaxRate aSummary ofInvestment IncentivesTreatment ofDividends ofBusiness AssetsPersonalIncome TaxMarginalRatesFavorable Tax Rates or ExemptionsMozambique 32 % Mozambique’s incentive code does notgrant ax holidays, but all sectors andregions are granted tax credits withpreferable rates for certain sectors andregions of interest. Favorable tax rates andspecial incentives are granted toagriculture, tourism, and other investmentsconsidered a high priority.20% withholding(residents and nonresidents)10% for shares listedon the Maputo stockexchangeProgressive to32 %10% rate on agricultural activities until 12/31/2010.; 15%for 5 yrs for investing in specialized equipment.10 yrs: 120% deductible expenditure for public utilityprojects in Maputo, 150% for rest of country.80% on income tax for agriculture.“Exceptional incentives” for projects over $500m orinfrastructure or creating 500-1000 jobs in 3 years.Mining: 25% reduction in IRPC for 5 yrs. if $500,000+.Oil: 25% for 8 yrsIFZs 60%, exempt from real property transfer tax.Export incentive 60% tax reduction for 10 years.Namibia 35 % Malawi’s incentive code offers 50%abatement for 5 years for registeredmanufacturers, a 20% ICA on buildingsAnd a 3-year write-off for developmentexpenditure in mining and petroleum.0% withholding forresidents; 10%withholding nonresidentsProgressive to35 %35% mining companies; 55% diamond mining; 35%petroleum mining companies; 37.5 other miningcompanies.EPZ companies exempt from all taxes and duties;additional deduction of 25% to 75% on costs for exportpromotion and marketing80% allowance on taxable income from export ofmanufactured goods (excl. fish and meat)Seychelles 40 % Seychelles incentive code does not offertax holidays but provides 150%-200%special deductions for training. Multipledeductions and allowance granted tomanufacturing, tourism, agriculture,marine resources, professional services.0% for residents; 15%withholding for nonresidentsNone.15% rate for export companies under IPA and companiesin special growth areas; 25% and 35% bracket for smallbusinesses; 15% fisheries, tourism and manufacturingSouth Africa 28 % 6 year tax holiday for IDZs ended in 1999but 0 duty and VAT on inputs still ineffect. Favorable rates granted to smallmanufacturers, and incentives offered forfarm development, mining and qualifyingstrategic projects.0% withholding forresidents and nonresidents(expected tochange to 10% in2009); 12.5%secondary tax chargedon declared dividends;18-25-30-35-38-40 %15% rate for small manufacturers ( taxableincome

CountryStatutoryCorporateIncome TaxRate aSummary ofInvestment IncentivesTreatment ofDividends ofBusiness AssetsPersonalIncome TaxMarginalRatesFavorable Tax Rates or ExemptionsSwaziland 30 % Extensive tax holiday of 5 years for newexport manufacturing industry and 10 yearholiday at 10% tax rate + exemption fromdividend w/holding available underDevelopmental Approval Order.Tanzania 30 % In recent years the government hasattempted to simplify/harmonize itsincentive system. It is noteworthy thatTanzania does not offer tax holidaysoutside of the EPZs.Zambia 35 % Zambia’s tax regime provides favorabletax rates and allowances for agriculture,manufacturing, mining, and tourism withspecial incentives granted through theZambian Development Act to investmentsthat are considered a high priority.10% withholdingresidents; 15%withholding onpayments to nonresidents; 12.5% forSACU basedcompanies10% for residents andnon-residents; 5%withholding forcompanies on stockexchange; 10% foragriculture orcertificate ofinvestment; 0% formineral sector & EPZ15% withholding(residents and nonresidents;exceptionfor mining sector,EPZ5 year exemption forfarmers20-25-30-33 % 10% Development Approval Order;15% tax rate for export companies under IPA; zero tax onoffshore companies operating in international trade zonesFTZ; duty credit certificate scheme for textile andclothing exporters.17.5-20-25-30 % Same corporate tax rate across all sectors.25-30 % 15% farming, fertilizer companies, and non-traditionalexports; 30% for mining companies; 40% bank amountsover ZMK 250 millionEPZ Act implemented 2003 provides for stand aloneEPZ sites; in addition to standard EPZ tax benefits, alsoprovides full exemption from corporate tax, withholdingtax, capital gains and excise dutyZimbabwe 30 % Zimbabwe’s incentive code offers a 5-yearholiday for qualifying investor, EPZcompanies. ICAs also available undercurrent tax code.20% withholding(resident and nonresident);15% forquoted companies20-25-30-35-40-45 %15% for licensed investor (after 5 yr holiday) or newinfrastructure project in growth point area; 25% formining; 20% for export manufacturing or processing andsome tourist facilities; 10% for new manufacturing inngrowth point area.O THER S UB-SAHARAN C OUNTRIESGhana 25 % Ghana offers corporate income taxincentives allocated on a sectoral andlocational basis. Sectors of particularinterest are agriculture/agribusiness,financial services, and hotels. Exports arealso of interest. Industries located outsideof the regional capitals of Accra and Temareceive favorable incentives, and firmslocated in Free Trade Zones receiveextensive incentives.8% withholding(residents and nonresidents)Residentsprogressive to 25%;non-residents 15%Favorable tax rates for Free Zones (8%); favorable ratesfor agribusiness’ that source locally and are located inAccra (20%) and other regional capitals (10%); andcomplete exemptions for agribusiness located outside ofcapitals.

CountryStatutoryCorporateIncome TaxRate aSummary ofInvestment IncentivesTreatment ofDividends ofBusiness AssetsPersonalIncome TaxMarginalRatesFavorable Tax Rates or ExemptionsKenya30 % (Resident)37.5% (Non-Resident)Kenya has a stream lined system whereincentives are primarily provided to theEPZ, and any additional incentives arereserved for targeted priorities. Under thenew (more restrictive) FDI regimeimplemented in 2004, one of the threecriteria for receiving an InvestmentCertificate is that the company contributesto tax revenues or other governmentrevenues. c5% withholdingresidents; 10%withholding nonresidents;0% forcompanies thatcontrol 12.5% ormore of capital10-15-20-25 % 25% tax rate for ten years following the tax holiday forEPZ companies only. Companies that float a minimum of20 – 30% of their capital on the Kenya stock exchangereceive a preferable tax rate of 27 – 25% respectively forfive years from the year of listing.Senegal 33% Senegal’s incentive code does not provideof tax holidays or favorable income taxrates, but rather grants tax credits for newenterprises and extension projects. Theincentive system is relatively simple andstraight forward.16% withholding(residents and nonresidents)Progressive up to 50%CFCE exemption for 5 or 8 yrs. if 200 jobs created or90% of jobs outside Dakar or if 25% increase inproduction capacity or investments over $100m FCFAfor extensions; custom duties & VAT cancelled;exemption on taxes on salaries, property tax, taxes onincome for stocks & sharesUganda 30 % Uganda has undergone significant reformsto its investment incentive policy in recentyears. The new code has replaced taxholidays, with a system of tax allowanceswith the exception of EPZs.Notes15% withholding(residents and nonresidents)30 % None indicated.a Tax rates for Botswana, Ghana, Mozambique, Tanzania, and Uganda are from World Development Indicators 2006 figures for highest marginal corporate tax rate. Figures for Gambiaand Zambia are taken from their investment promotion agencies. Kenya’s rate is from the East African Tax Guide 2008 of Price Waterhouse Coopers; Rwanda (2006) and Senegal’s(2007) rates are from the Federation of International Trade Associations (FITA).b Botswana has a special case of a 15% corporate income tax plus a 10% additional tax.c UNCTAD, Investment Policy Review Kenya.

Table C-1Overview of Incentives (Part 2 )CountryTax Holidays(Full/partial, duration)Special Deductions forEmployment or TrainingInvestment TaxCredit Or TaxRebateInitial Capital Allowance orAccelerated DepreciationAngolaProjects of national interest or projects located in specialdevelopment zones – total exemption from corporateincome tax from three up to five years. Also reduction of50% of corporate income tax for up to ten years. Theincentives are granted by the Minister of Finance.None indicated.None (employmentsubsidy instead).None Indicated.Investments in agriculture, farming, transformativeindustries, transportation, education and health, canbenefit from an eight to 15 year corporate income taxholiday, depending on the investment's geographicallocation.Botswana 5 years typically with development approval order (DAO). Deduction of 200% of the cost oftraining if approved by theCommissioner. In the event thatit’s a manufacturing business,and is approved by the MOFthere is a reduction in corporatetax to 15%, i.e. 5% company tax& 10% additional company tax.None indicated.Annual allowance of 10% - 25% of plant and machinery canbe claimed. An initial allowance of 25% for new or improvedbuildings used for industrial purposes.There is immediate depreciation of mining capitalexpenditure.DR Congo3-5 years exemption for new companies;None indicated. None indicated. 60% ICA for manufacturing exporting > 20% of outputDiscretionary exemptions under contractual regimeLesotho None indicated. 125% for training or tertiaryeducation costs formanufacturing companies.None Indicated.None Indicated.Madagascar None Indicated. None Indicated. None Indicated. None Indicated.MalawiPriority industries have options of 5-10 year tax holiday(depending on size of investment) or fixed 15% tax rate.Additional 50% of training costfor employee to earn degree,diploma or certificateNone Indicated.Full expensing of farm works, industrial buildings, railwayslines, 40% ICA for manufacturers ( additional 15% indesignated areas)Mauritius4 years for small enterprises converted into companies andwhich register for the first time with Income Tax10 years for foreign income of certified regionalheadquarters; tax holiday (or 15% tax rate) for investmentunder ICT schemeNone Indicated.10% on investment bycompanies in certaincategories other than taxincentive companies, suchthat tax payable is not lessthan 15%.10-25% additional ICA on industrial premises, plant andmachinery, computer software, and state of art technology inmanufacturing; for ICT equipment 50% ICA plus 3 year writeoff at 33.3% per year.

CountryTax Holidays(Full/partial, duration)Special Deductions forEmployment or TrainingInvestment TaxCredit Or TaxRebateInitial Capital Allowance orAccelerated DepreciationMozambique None indicated. 5% for 5 yrs. 10% for trainingsfor technologically advancedequipment.5% of total investment,duration 5 years.10% for projects in Gaza,Sofala, Tete & ZambeziaProvinces. 15% in CaboDelgado, Inhambane andNiassa Provinces. +3%for projects in hotel andtourism. RDZs developersget 20% decrease in CFI.Full exemption of special equipment for advancedtechnology, up to max of 15% of taxable income;120-150%(depending on location) for investment in public utilityinfrastructure.2 times normal rate for new or rehabilitated immovableassets, machinery & equipment used in industrial & agroindustrialactivities.Namibia 50% abatement for 5 years, phasing out over following 10years for registered manufacturersManufacturers qualify foradditional deduction on trainingexpenses and 25% additionaldeduction for production linewages.None Indicated.20% ICA on buildings, with 8% per year write-off of balancein manufacturing; full expensing of farm works; 3 year writeofffor dev. Expenditure in mining and petroleum.Seychelles None Indicated. 150%-200% deductions None Indicated. 20% additional ICA on manufacturing plant; Under IPA:45-40-30-25-10% ( total 150%) for capital assets in mfg, tourismand small industry;45-40-20-15-5 ( total 120%) in agriculture,marine resources and professional servicesSouth Africa6 year for export companies in Industrial DevelopmentZones ended in 1999Additional deduction up toR50,000 per employee underapproved leadership programs.None Indicated.Full expensing of capital for farm development andmining;(2) 50-40-30-20% for farm machinery and eqpt;(3)50% to 100% additional allowance for industrial asset inqualifying for strategic projects ( subject to cap)Swaziland5-year holiday new export manufacturing industryDevelopmental Approval Order gives 10 year holiday at10% tax rate + exemption from dividend w/holding. Note:Tax applies to excess income, as per formula; additionalholidays granted at MoF discretion.200% deduction for cost ofapproved training expensesNone indicated.50% additional ICA for plant and machinery inmanufacturing, for infrastructure assets, for hotels;50% ICA for farm buildings and employee housing;Full write off of capital for mining and farm developmentTanzaniaZambia10 -20 year full tax holiday for EPZs followed by 24% taxrate (details depend on location).Special agreements for tourism in Livingstone; 5 yearexemption for some small scale industry ; one –seventhreduction for rural enterprise for 5 years.None Indicated. None Indicated. 50% for investment in lead and priority sectors (reduced from100% in 2002); 20% for industrial building, machinery andfarm works; 100% for agriculture and mineral sectors; 50%for tourism;50 – 12.5% for mining.None Indicated. None Indicated. 10% allowance on low cost housing and 5% for otherbuildings in the manufacturing sector.100% deduction on capital expenditures on buildings,railways, equipment, and shaft sinking for mining; 50% ofplant and machinery for tourism.10% investment allowance plus 10% ICA for industrial

CountryTax Holidays(Full/partial, duration)Special Deductions forEmployment or TrainingInvestment TaxCredit Or TaxRebateInitial Capital Allowance orAccelerated Depreciationbuildings; expensing of farm works; 10% ICA for investmentin certain tree and bush cropsZimbabwe5-yr holiday + 5 yrs at 15% for qualifying investors; 5 yrsfor EPZ companies, followed by 15% rate; 5 yrs each at0%,15% and 20% for BOOT arrangement and tourismfacility in tourist zone; l-yr discount of 2% granted to anewly listed company of the stock exchangeDouble tax deduction on wagesand salaries for additionalemployees in manufacturingNone Indicated.Expensing of certain farm works and mining investment;15% ICA for companies in growth point area; 25% ICA peryear for 4 years on industrial and commercial buildings andmachinery; 50% Special Initial Allow on most capital assetsGhana5-10 year full tax holiday for: Real estate, rural banks,farming and agro-industry, waste processing and freezones.None indicated.25 – 50 percent rebate formanufacturing industrieslocated in alternativeregional capitals.40% for computers and data handling equipment; 30% ofautomobile, trailers, plant and machinery used inmanufacturing and plantation equipment; 80% cost in year ofpurchase with 50% annually there after for transportationequipment, buildings and plant and machinery for mining andpetroleum.5% on machinery and equipment in all sectors exceptbanking, financing, insurance, mining and petroleum.Kenya 10 year full tax holiday for EPZ companies only. None indicated. None indicated. Across the sectors there is straight-line depreciation ofbuildings (2.5%), machinery (37.5%), IT equipment (30%),vehicles (25%), office equipment (12.5%). Mining, andfarming, hotels and manufacturing receive exceptions foraccelerated depreciation.Senegal None Indicated. None Indicated. 40% tax credit on theeligible investment for 5yrs.; new enterprises: 50%taxable profit for newcompanies; extensions:25% taxable profit forextension projectsNone Indicated.Uganda 3-6 year general tax holidays were repealed in the 1997Finance Statue and were replaced a new investmentregime.10 year full tax holiday for companies in EPZs.Investment capital allowance of100% for training.None indicated.40% for computer and data handling equipment. 35% forlight vehicles.30% for heavy vehicles.20% for other depreciable assets and for farm equipment. 5%industrial building allowance, 20% for horticulture, variablerate for intangible assets.SOURCE: Bolnick (2004), updated for most countries with data accessed from the Internet between March 15 and April 14, 2008 from Investment Promotion Centers in Botswana, Ghana,Kenya, Senegal, Tanzania, Uganda, and Zambia; and data accessed from the Internet between July 27 and August 6, 2009 from 2009 Tax Highlights guides produced by Deloitte (forAngola, Botswana, Madagascar, Mozambique, Namibia, South Africa, Tanzania and Zambia) and Tax Guides produced by PKF International (for Angola, Mauritius, South Africa, andUganda); plus for Lesotho, Southern Africa, US Embassy; for Seychelles, Revenue Commission; for Namibia, Ministry of Trade and Industry; for Senegal, Federation of InternationalTrade Associations.

Appendix D. Taxation andBusiness Environment RatingsChapter 3 reviews the scores for Mozambique’s tax system from the World Bank’s annual DoingBusiness reports. This appendix examines tax system scores in two other sources of internationalcomparisons: the World Bank’s Investment Climate Assessments, as tabulated in the AfricanCompetitiveness Report for 2009, and the World Economic Forum’s Global CompetitivenessReport.The World Bank has conducted face-to-face enterprise surveys in more than 110 countries tocapture business perceptions of the major obstacles to enterprise growth, the relative importanceof various constraints to increasing employment and productivity, and the effects of eachcountry’s business environment on its international competitiveness. The Bank publishes theresults in Investment Climate Assessments, covering a broad range of business-environmenttopics for each country, including access to finance, corruption, infrastructure, crime,competition, and performance measures. Selected results for Africa have been compiled in theAfrica Competitiveness Report 2009 (ACR 2009), which is a joint publication of the WorldEconomic Forum, the World Bank, and the African Development Bank.The ACR 2009 reports five indicators relating to the tax and customs environment:1. Average number of visits or required meetings with tax officials.2. Percentage of firms stating that they are expected to give a gift in meetings with taxofficials.3. Percentage of firms expressing that a typical firm reports less than 100% of sales for taxpurposes.4. Average time to clear direct exports through customs (days)5. Average time to claim imports from customs (days)Table D-1 presents the data on these five indicators for the SADC region. The results forMozambique point to the following problems:Tax evasion: 73 percent of firms expressed the view that a typical firm reports less than 100percent of sales for tax purposes. This included 78 percent of the small firms, and 63 percent ofthe large firms. For this indicator, Mozambique has the second worst score in the SADC region.

28 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUECustoms: Time to clear direct exports through customs and time to claim imports from customsboth averaged just over 10 days. Medium-sized firms appear to be most affected by customsdelays. They reported that time to clear direct exports averaged 14 days and time to claim importsaveraged 12 days. Here, too, Mozambique’s scores are amongst the poorest in the region.Corruption: 10 percent of the firms in the survey expected to give gifts in meetings with taxofficials, including 12 percent of small firms, 7.5 percent of medium sized firms and 4 percent oflarge firms. Although 90 percent of the respondents in Mozambique do not report having to givegifts to tax officials, the score on this indicator is still above the median for the region.Table D-1Investment Climate Profile Tax Relevant IndicatorsAvg. No. ofVisits orRequiredMeetings withTax OfficialsFirms Expectedto Give Gifts inMeetings WithTax Officials(%)Firms ExpressingThat a TypicalFirm ReportsLess than 100%of Sale for TaxPurposes, %Avg. Time toClear DirectExportsThroughCustoms(days)Avg. Time toClaimImports fromCustoms,(days)Angola 5.2 14.8 67.8 16.5 28.2Botswana 2.4 4.5 65.3 1.3 3.1DRC 10 64.4 65.4 3.6 13Lesotho 3.2 10.6 . 8 .Madagascar 1.7 6.8 35.6 14.2 19.3Malawi 8.9 15.3 55.3 3.5 6.4Mauritius 3.1 0.3 36.2 10.3 11.7Mozambique 2.7 9.8 73.1 10.1 10.4Namibia 1.6 2.6 45.5 1.5 3.3Seychelles . . . . .South Africa 1.8 3.1 40.3 4.6 5.9Swaziland 1.9 3.3 74.6 4 2.2Tanzania 3.3 14.7 71 5.7 14.3Zambia 2.9 5.4 . 3.1 6.6Zimbabwe . . . . .SADC Median 2.9 6.8 65.3 4.6 8.5SOURCE: World Economic Forum.According to the most recent Investment Climate Profile for Mozambique (2007), high tax ratesare among the top ten most serious constraints to investment as perceived by entrepreneurs. Thiscomplaint is found throughout the SADC region, with the exception of South Africa (see TableD-2). Tax rates are cited as a problem even in Zambia, which has one of the lowest scores in theworld on the Doing Business estimate of Total Tax Rate (but see Exhibit 3.1 in the text for acritique of the methodology for this indicator.) Tanzania, Zambia, and Madagascar also cite taxadministration in their top ten lists.

A PPENDIX D 29Table D-2Taxes in Top 10 Most Serious Constraints to Investment, asPerceived by Local EntrepreneursTaxRatesTaxAdministrationAngolaBotswanaXXDRC . .LesothoXMadagascar X XMalawiMauritiusMozambiqueNamibiaXXXXSeychelles . .South AfricaSwazilandXTanzania X XZambia X XZimbabwe . .SOURCE: World Economic Forum.Similar results were found in the two enterprise surveys conducted in Mozambique, one in 2003and one in 2008, where tax administration was perceived by entrepreneurs to be a majorconstraint to business (see Table D-3). In 2003, it was the 10th most severe obstacle to business;in 2008, it was the 8th most severe obstacle.Another widely cited source of business environment ratings is the World Economic Forum’sGlobal Competitiveness Report. This annual report assesses “the ability of countries to providehigh levels of prosperity to their citizens” 6 based on scores for more than 113 indicators. Most ofthe data come from an annual Executive Opinion Survey, which obtains subjective ratings on abroad range of issues that are difficult to measure using hard data. Tallying the scores, the reportranks country performance in the following areas: institutions; infrastructure; macroeconomicstability; health and primary education; higher education and training; goods market efficiency;labor market efficiency; financial market sophistication; technological readiness; market size;business sophistication; and innovation.On taxation, the Global Competitiveness Report for 2007-2008 contains only two indicators otherthan those taken from the World Bank’s Doing Business reports (discussed in the main text): the“extent and effect of taxation” and the trade-weighted average tariff.6 http://www.weforum.org/en/initiatives/gcp/FAQs/index.htm#network3. Accessed July 6, 2009.

30 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUETable D-3Major or Severe Obstacles to Business2008 2003Practices of informal competition 1 5Access to finance 2 1Crime 3 8Corruption 5 3Electricity 6 2Transport 7 14Tax administration 8 10Workforce education 9 12Licensing & permits 10 13Customs & trade regulations 11 9Access to land 12 15Telecommunications 13 16Political instability 14 .Labor regulation 15 11Courts 16 .SOURCE: Mozambique Enterprise Surveys 2003, 2008.For the first indicator, respondents are asked to rate “the level of taxes in your country” on a scaleof 1 to 7, where 1 = significantly limits the incentives to work or invest, and 7 = has little impacton the incentives to work or invest. Table D-4 shows that the perceived “extent and effect oftaxation” in Mozambique has not exhibited major improvement over the PARPA II period,hovering around a score of 3. Though the validity of cross-country comparisons using perceptionsdata between countries is questionable, the result for Mozambique is in line with median amongSADC countries, though well below the results for the leading countries of South Africa andMauritius.Table D-5 shows that the trade weighted average tariff for Mozambique is relatively low inabsolute terms in line with the SADC medians, though higher than the average tariff in SouthAfrica and Mauritius.Table D-4Extent and Effect of Taxation2005/2006 2006/2007 2007/2008 2008/2009Angola . . . .Botswana 4.9 4.7 4.8 4.9DRC . . . .Lesotho . 3.1 2.9 3.0Madagascar 3.0 3.1 3.3 3.5Malawi 2.1 2.9 . 3.0Mauritius 3.8 4.7 4.8 5.4

A PPENDIX D 312005/2006 2006/2007 2007/2008 2008/2009Mozambique 3.3 2.7 3.0 3.1Namibia 3.7 3.6 3.6 3.7Seychelles . . . .South Africa 3.7 4.2 4.3 4.5Swaziland . . . .Tanzania 3.5 3.4 3.5 3.4Zambia . 2.1 2.5 2.8Zimbabwe 2.6 2.5 2.4 2.2SADC median 3.5 3.1 3.2 3.1SOURCE: Global Competitiveness Report.Table D-5Trade-weighted Tariff2008/2009Angola .Botswana 4.6DRC .Lesotho 4.2Madagascar 8.4Malawi 12.7Mauritius 3.6Mozambique 7.7Namibia 8.5Seychelles .South Africa 6.2Swaziland .Tanzania 7.7Zambia 11.6Zimbabwe 13SADC median 7.7NOTE: The rate is the average rate of duty per imported value unit in 2007, weighted by 2006 import values. Time series data arenot available, as the methodology for calculating the indicator was changed in the 2008/09 report.SOURCE: Global Competitiveness Report.

Appendix E. OperationalEfficiency IndicatorsAs noted in the text, the Annual Reports (ARs) of the AT are filled with tables and figuresproviding valuable data on many facets of revenue collection and tax administration. Yet thereports also lack many types of indicators that would provide management with betterinformation for monitoring operational efficiency (indicadores de desempenho). The purpose ofthis appendix is to clarify this statement.In its Annual Report for 2008 (AT, 2009) the AT presents 39 tables and 43 graphs. Without goinginto full detail, the main types of information are as follows:• Revenues collected, relative to targets, by type of revenue• Revenue foregone from the temporary suspension of tax on petroleum products in 2008• Revenue contribution from mega-projects and financial institutions• Number of audits and inspections, and revenue results, including post-clearance audits bycustoms• Tax disputes by status and region (number and tax amounts involved)• Refund requests received, paid , outstanding, by type of tax• Revenue foregone due to fiscal benefits, by type of tax• New registrations by companies and individuals, relative to targets• Staffing levels, including education levels• Costs of tax administration, budget and actual• Rating of tax units, by realization of revenue targets• New investments in AT infrastructure• Revenue recovered as a result of internal audits• Efficiency of tax service offices, operational cost as % of collectionsTable E-1 summarizes selected indicators of operational performance from the AT AnnualReports for 2007 and 2008, showing time series comparisons where possible.All of this information is important, but only the last-mentioned item on the foregoing list (fromTable 39, p. 81 of the 2008 Annual Report) provides direct information about cost-effectiveness

34 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUEor operational efficiency, as distinct from descriptive data on the level of activity, the outcomes,and characteristics of the organization.What is missing? The latest IMF tax mission report, which is not available to the public (IMF,2009c) provides a full page of suggested performance indicators that are standard elements of awell developed management information system for tax administration. Only few of thesuggested indicators are found in the AT Annual Report, and, judging from interview results, theAT does not yet collect most of the missing information. Examples include:• Survey findings on taxpayer satisfaction• Survey findings on AT personnel satisfaction• Number of taxpayer service requests handled, by function and location• Quality of information provided to taxpayers• Number of declarations processed, by type of tax• Processing time per declaration• Processing time for refund requests• Number of audits per audit staff and type of contributor• Average time per audit• Percent of audits finalized and accepted by taxpayer without contest• Percent of challenged audits settled in favor of the government• Value and number of debts collected, and outstanding• Average time, and stratification by value of outstanding tax debts• Average time for contacting taxpayers about overdue payments, and initiating action• Average time for resolving disputes• Average time for customs inspections• Average amounts collected per post-clearance audit• Percent of customs declarations, by channelAs the tax data base develops, the AT should also be collecting data that will allow managementto target audits, inspections, and verifications more efficiently by allocating AT resources totransactions involving high revenue risk.

Table E-1AT Operational IndicatorsTopic Item Source NotesAuditAuditorias e fiscalizaçõesNumberOther useful audit indicatorsDAFI DAFI/UGC Total Amount due per audit/process2006 500 AR2007, p14 Amount collected per audit/process2007 498 460 958 AR2007, Table 9 Amount collected/due2008 769 AR2008, Table 18 Number of audit staffNumber of audits per audit staffAmount due (10^6 MT)Amount due per audit staffDAFI DAFI/UGC Total Amount collected per audit staff2006 660.3 AR2007, p14 Audit revenue, % GDP2007 780.3 AR2007, Table 102008 352.8 AR2008, Table 14, 18Amounts collected (milhoes MT, excl multas)DAFI DAFI/UGC Total2006 na na2007 124.1 14 138.1 AR2007 Table 12 = 0.4% total receipts: AR2008, table 182008 89.4 AR2008, Table 15, 18 = 0.2% total receipts: AR2008, table 18Processos de contas das empresas analisadas (a/c)No.Add’l tax collected (10^6 MT, excl multas))2006 1637 AR2007 p152007 1336 17.8 AR2007 Table 122008 1478 93.1 AR2008 Table 17Operações de prevenção e combate a fuga ao fiscoNo,Collected2006 na na2007 40 na AR2007 p142008 na naAuditorias Pós-Desembaraço AduaneiroNo. Value expected Collected (10^6 MT)2007 59 12.8 5.04 AR2007 Table 112008 63 89.3 12.0 AR2008 Table 16Registration Registo de contribuintes Other useful registration indicatorsIRPS IRPC Total Total number registered, by type of tax2006 96448 3779 100227 AR2007 Table 15 No. monthly returns / No. registered, by type of tax2007 186368 3651 190019 AR2007 Table 152008 186671 4469 191140 AR2008 Table 30 Regional breakdown availableNumber of Taxpayers2005 295000 2005: IMF (2006) PRGF 4th review2006 391719 2006: IMF (2007) PRGF 6th Review2007 587205 2007: IMF (2008) PSI 2nd Review2008 na

Disputes (contensiosos) Evolução de processos de contencioso fiscal (year-end)No.Value (10^6 MT)2006 8333 1169.6 AR2007 Table 162007 8289 1315.3 AR2007 Table 162008 7606 916.24 AR2008 Table 19of which No. 2007 No. 2008 Value 2007 Value 2008 AR2008 Table 19Instaurados 6.476 4489 484.4 491.4Cobrados 3.638 5998 223.4 171.7Anulados 27 9 7.9 1.9Relaxados 2.855 1224 107.4 218.0Contestados 812 1229 721.3 69.2Recorr. a TA 134 230 45.1 321.5Evolução de processos executivos (??)No. Value (10^6 MT) No ValueSaldo 2005 224916 1127.5 AR2007 Table 17Instaurados 7408 390.5 AR2007 Table 17Cobr + Anul 12887 124 AR2007 Table 17Saldo 2006 219432 1380.0 AR2007 Table 17Instaurados 4062 748.6 AR2007 Table 17Cobr + Anul 3014 63.3 AR2007 Table 176656 26.8Saldo 2007 213824 2036.6 AR2007 Table 17Instaurados 4512 498.9 AR2008 Table 23Cobrados 3390 85.5 AR2008 Table 23Anulados 20833 990.7 AR2008 Table 23Saldo 2008??? 189605 1748.7 AR2008 Table 23Evolução de processos de contencioso aduaneiroNumbers small -- omit AR2007 Table 18Refunds IVA - Pedidos de reembolso tratados e pagos (excl diplomatas) Other useful refund indicatorsNo. Value (10^6 MT) % petitions closed w/in 30 days2006 na na % petitions overdue at year-end2007Received 389 941.4 AR2007 Table 19Paid 385 562.2 AR2007 Table 19 Incl pyts on petitions from prior yrs2008Received 430 1071.9 AR2008 Table 25Paid 487 863.1 AR2008 Table 25 Incl pyts on petitions from prior yrsIRPS - Pedidos de reembolsoNo.Value (10^6 MT)2006 na na2007 3473 21.6 AR2007 Table 20Autorizados 1069 5.6Indeferido 73 1.7Pendentes 2331 14.32008 4142 28.5 AR2008 Table 27Autorizados 2075 12.7Indeferido 189 0.9Pendentes 1872 14.8IRPC - Pedidos de reembolsoNo.Value (10^6 MT)2006 na na2007 35 59 AR2007 Table 20Autorizados 12 0.5Indeferido 1 0.3Pendentes 22 58.22008 31 94.6 AR2008 Table 28Autorizados 10 11.8Indeferido 1 10.4Pendentes 18 72.3

StaffingDistribution of personnelTributaria Aduaneira Regime Geral Total2006 na na2007 1017 1718 2735 AR2007 Table 212008 1324 1757 10 3091 AR2008 Anexo 2Education level Maestrado Lic/Bach Med. Prof Med.Ger BasicGeral InfBasic2006 na2007 na 15.3% 17.9% 40.0% 22.8% 4.0% AR2007 ???2008 0.7% 16.0% 20.6% 38.7% 13.6% 8.3% AR2008 Anexo 2.1Cost of tax admin.Distribuição pelos Centros de custos - Orc. disponivel (10^6 Mt)2006 2007 2008 Other useful cost indicatorsPessoal na 543.7 940.7 AR2007 Table 23 Operation cost as % receipts - DGI, DGABens e Servicos na 208.4 393.9 AR2008 Table 33 Total cost as % receipts - DGA, DGATransf corr. na 2.0 1Other corr. na 103.2 79.3Desp capital na 129.7 143.8Total na 987.0 1558.8Total tax revenue (10^6 MT) 22142.1 27965.1 32315.2 ATM-GPECI - Execução da Receita do EstadoAT total cost % tax revenue 3.53% 4.82% CalculatedAT operating cost % tax rev 3.07% 4.38% CalculatedFiscal benefitsIsenções concedidosDireitos IVA ICE IRPC IRPS Total2006 822.8 1534.3 271.8 517.4 0.2 3146.6 TA Rel CGE2007 p.V-332007 923.0 1857.1 112.8 3967.2 0.9 6861.0 TA Rel CGE2007 p.V-332008 710.0 1291.6 188.1 na na 2191.8 AR2008 Table 29% total tax revenue2006 14.2%2007 24.5%2008 6.8% Excludes IRPC ??Megaprojects Tax-registered megaprojects, end 2008 AR2008 p28-9ActiveNot yet activeMozal, SARL;Projecto de Ferro e Aço de Maputo,Sasol Petroleum Temane;Projecto da Zona Franca Industrial da Beira e de Ferro e Aço da Beira,Sasol Petroleum Moçambique;Complexo Petroquímico da Beira,Projecto Areias Pesadas de Moma;Riversdale Mozambique, Lda,Areias Pesadas de Chibuto;Procana,Hidroeléctrica de Cahora BassaAyrs Logispics (refinaria de petróleo de Nacala).Companhia do Vale do Rio Doce.Contribution of megaproject and financial institution (%) AR2008 Table 112008 % Rec DGI % Rec Tot % PIBMegaprojects 8.4% 5.5% 0.9%Inst Fin 5.1% 3.3% 0.5%Total 13.5% 8.8% 1.4%Contribution of megaproject, by type of tax (10^6 MT) AR2008 Table 122008 IRPS IRPC Imp s/ Prod Taxa Concess Dividendos TotalEnergia 83.5 33.4 0 338.6 0 455.4Petróleo 0 0 0 0 0 0Recursos Minerais 103.4 101.2 96.2 841.1 0 1141.7Outros 132.5 284.9 0 0 129.8 547.6Total 319.3 419.5 96.2 1179.6 129.8 2144.3

Appendix F. Revenue EffortJones (2009) carries out a cross-country analysis for Mozambique by comparing tax-ratios acrosslow and middle-income countries for the period 1990 to 2003 in a panel analysis. He controls fordifferences in economic structure and institutional factors, the implication being that remainingdifferences in the tax-ratio between countries relate to differences in tax-policy andadministration. 7 With average tax-ratio (tax revenue over GDP) as the dependent variable, thefollowing are included as independent variables: real GDP per capita; the share of industry inGDP; exports as a percentage of GDP; and imports as a share of GDP. In addition, Jones (2009)attempts to account for long-run institutional differences by including the share of territory in thetropics, the colonial power, whether or not the country is landlocked, the continent to which thecountry belongs, and whether or not the country is resource-rich. His results lead him to concludethat 13 percent of GDP is a realistic tax-ratio for Mozambique given that the actual tax-ratioappears to faithfully follow the predicted tax-ratio according to the economic structure andinstitutions in place.Davoodi and Grigorian (2006) also carry out a cross-country regression analysis of tax-effort onup to 141 countries over the period 1990 to 2004. 8 Similarly to Jones (2009) they use taxrevenues as dependent variable and include GDP per capita, trade (imports plus exports percapita), and natural resources (oil) as explanatory variables, but also include the share of urbanpopulation, and the share of agriculture in the economy rather than industry, which may providemore information regarding the ease or difficulty of collecting taxes. Other variables includeinflation and an estimated informal sector share using instrumental variables given that theinformal sector share itself is affected by the tax-ratio. 9 Davoodi and Grigorian (2006) alsoattempt to account for institutional quality by employing variables from the International CountryRisk Guide. Their results suggest that many low and low-middle income countries collect revenueabove their predicted revenue shares, according to their economic characteristics. However, this7 Economic structure variables include: GDP per capita, imports as a share of GDP, industry as a share ofGDP, whether or not the country is resource-rich; while institutions are controlled for indirectly byintroducing the share of the country found in the tropics, whether or not the country is land-locked, andwho the colonial power, all variables variously associated with institutions in the cross-country empiricalliterature on growth.8 Davoodi, H.R., Grigorian, G.A., (2007), “Tax Potential vs Tax Effort: A Cross-Country Analysis ofArmenia’s Stubbornly Low Tax Collection”, IMF Working Paper WP/07/106.9 To be an instrument, a variable must be highly correlated with the independent variable to beinstrumented (relevance), but only impact the outcome through that independent variable (exogeneity).

40 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUErelates to the regression methodology which implies that some countries in the sample will havetax-ratios above the estimated regression line, and some below.Bird et al. (2007) carry out a similar exercise, including GDP per capita, the rate of populationgrowth, trade as a share of GDP, the non-agricultural share of GDP, and index figures forvoice/accountability and corruption from the World Bank’s governance indicators. 10 They use across-section of mean tax-ratio values for the period 1990 to 1999 and find that indeed corruptionand voice/accountability play a strong role in determining the tax effort of developing andtransition countries. Since these institutional dummy variables may be endogenously determined,something overlooked by Davoodi and Grigorian (2006), they check for their importance byemploying two-stage least squares, where these are modeled as being determined by legal origin,and an ethnic fractionalization index, leading them to conclude that “a more legitimate andresponsive state is likely an essential precondition for a more adequate level of tax effort indeveloping countries.”, and therefore that institutional factors relating to corruption andgovernment accountability matter. 11 The variables employed in the various studies aresummarized in Table F-1.Table F-1Variables Employed in Tax-Effort StudiesDavoodi &Grigorian(2006)Bird et al.(2007)Jones(2009)GDP per capita x x xAgricultural sharexIndustry shareXNonagricultural sharexTrade shares x x XInstitutions: x x XBureaucratic riskComposite indexxxShare of land in tropicsColonial regimeLandlockedXXx10 Bird, R.M., Martinez-Vasquez, J., Torgler, B., (2007), “Tax Effort: The Impact of Corruption, Voiceand Accountability”, CREMA Working Paper 2007-13, Center for Research in Economics, Managementand the Arts, Basel, Switzerland.11 A considerably earlier study on tax-effort focusing on 43 Sub-Saharan African countries is carried outby Stotsky and WoldeMariam (1997) using panel analysis for the period 1990 to 1995. Their explanatoryvariables include the share of agriculture in GDP, the share of mining, the share of manufacturing, percapita income, and the trade shares of GDP. The focus here is on the determinants of a country’s tax-ratio,their results suggesting that much relies on the share of agriculture in GDP, the share of mining and theshare of exports. They also test for the impact of IMF programs and find no strong effect. See J. Stotskyand A. WoldeMariam., (1997), “Tax Effort in Sub-Saharan Africa”, IMF Working Paper WP/97/107.

A PPENDIX F 41Davoodi &Grigorian(2006)Bird et al.(2007)Jones(2009)Accountability/VoiceCorruptionxxMETHODOLOGY FOR REVENUE-EFFORT ESTIMATIONA choice must be made between analyzing tax-ratios or revenue ratios. While tax-ratios are thesubject of the above-cited studies, developing country data on tax-ratios is less readily availablethan that on total revenues. This need not be a problem and indeed there is some ambiguity abouthow different countries classify particular revenues, with differences arising between what isincluded as tax revenue and what is considered non-tax revenue. As such, total revenue is likelyto be more comparable across countries as long as economic characteristics are also taken intoaccount.In terms of explanatory variables, similar to Bird et al. (2007) this study employs World Bankgovernance indicators on i) government effectiveness, ii) regulatory quality and iii) control ofcorruption. These are defined respectively as i) “perceptions of the quality of public services, thequality of the civil service and the degree of its independence from political pressures, the qualityof policy formulation and implementation, and the credibility of the government's commitment tosuch policies”; ii) “perceptions of the ability of the government to formulate and implementsound policies and regulations that permit and promote private sector development”, includingtaxes; and iii) “perceptions of the extent to which public power is exercised for private gain,including both petty and grand forms of corruption, as well as "capture" of the state by elites andprivate interests” (Kaufman et al., 2009). For all of these, higher scores correspond to betteroutcomes. 12The specification employed here is therefore as follows, with total revenues over GDP as thedependent variable: 13• GDP per capita – measured in constant US$2,000• Inflation rate – consumer prices, annual percentage rate12 For details on how these indices are calculated see D. Kaufmann, A. Kraay and M. Mastruzzi (2009),Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008, World BankPolicy Research Working Paper 4978.13 GDP per capita, inflation, the trade share of GDP and non-agricultural share of GDP are all based ondata from the World Bank’s World Development Indicators (WDI) (WB, 2008). Revenue-ratio data alsocome from WDI except for the following developing economies for which data come from the IMF’sWorld Economic Outlook dataset (IMF, 2009b): Angola, Botswana, Congo, Dem Rep, Ghana, Kenya,Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Senegal, Seychelles, South Africa,Swaziland, Tanzania, Ugandan , Zambia, Zimbabwe, Vietnam.

42 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUE• Trade share of GDP – defined as (exports of goods and services as a share ofGDP)+(imports of goods and services as a share of GDP)• Nonagricultural share of GDP – defined as 100-(Agricultural value-added share of GDP)• Government effectiveness – aggregated index with range of approximately -2.5 to 2.5.• Regulatory control - aggregated index with range of approximately -2.5 to 2.5.• Control of corruption - aggregated index with range of approximately -2.5 to 2.5.The regression equation is for estimated low and middle-income countries over three periods. Theperiods chosen are 1999-2007, 2003-2006, and 2005-2007 given their relevance to the periodunder examination in this report, data availability and in the interests of verifying robustness.As Bolnick (1978) 14 points out, tax effort calculations are a better measure for internationalcomparisons than simple tax-ratios, but there are clear limitations, the principal one beingsimultaneity. Factors considered to impact on tax capacity, such as demand factors, arethemselves to some degree dependent on tax policy and therefore related to tax-ratios: revenuesupply and demand are potentially determined simultaneously. Estimation in linear form is afurther limitation given that capacity constraints are found to ease at an accelerating pace asincome grows. This is recognized in a number of studies and dealt with through the use ofinstrumental variables (e.g. Bird et al. (2007) and Davoodi and Grigorian (2006)).Explanatory variables employed in this study, such as those relating to institutions, may also besimultaneously determined along with the tax-ratio, leading to endogeneity and bias in thecoefficient estimates. However, the principal objective of this analysis is to arrive at an estimateof Mozambique’s predicted tax capacity, rather than present point estimates of the impact of theseinstitutional variables so that bias in the coefficient estimates is not considered an importantconstraint.As is common practice in these analyses, to avoid the interference of dynamic effects, averagesare taken of all time-varying variables. This also allows various periods to be used, allowing forrobustness checks for the results obtained. Nonetheless, it is important to note that this analysis isintended to provide further indicative information regarding revenue targets based on a simpleanalysis given the time available. In addition to the caveats above, it should therefore also benoted that using World Development Indicators data, there are a considerable number of countrieswith missing data making the sample under analysis relatively small at only 43 countries.RESULTSThe results of the revenue-effort regressions are shown in Table F-2. The regression coefficientsin the table indicate that the most statistically robust determinant of revenue-ratios in thesesamples is the trade share of GDP, which is positively related to tax-ratios and highly statisticallysignificant across all three periods. This is indicative of the importance of revenues related to14 B. Bolnick, "Tax Effort in Developing Countries: What Do Regression Measures Really Measure?" inJohn Toye (ed.), Taxation and Development, London: Frank Cass, 1978.

A PPENDIX F 43trade, including duties, consumption taxes and VAT, all seen to be important for Mozambique inthe discussion above. Of the institutional variables included, control of corruption emerges asbeing positively related to the revenue-ratio and statistically significant at the ten percent level atleast, with a large effect in increasing the tax-ratio. In contrast, regulatory control is negativelyassociated with revenue-ratios, by a similarly sized coefficient to that on corruption control. Thatwould suggest that the better government is perceived as implementing sound policies and taxesto promote private sector development, the lower the revenue share. These variables are likely tobe collinear, although given the focus on the predicted values rather than estimated coefficients,this not of major concern.Table F-2Tax Effort Regression CoefficientsPeriod 1999-2007(1)2003-2006(2)2005-2007(3)GDPPCINFLTRADENONAGGOVCORRUPTREGULConstant0 0 0[0.002] [0.002] [0.002]0.071 0.224 0.406[0.063] [0.147] [0.308]0.115*** 0.119*** 0.125***[0.032] [0.032] [0.036]0.213 0.207 0.340*[0.160] [0.166] [0.183]0.11 0.095 0.059[0.170] [0.173] [0.144]5.784* 7.128** 8.025**[3.084] [3.436] [3.858]-5.551* -7.570** -8.653***[2.901] [2.943] [3.063]-5.888 -7.323 -17.98[10.817] [11.134] [12.608]Observations 43 43 43R-squared 0.62 0.6 0.59F-test 8.23 7.47 7.15Notes: Standard errors in brackets*significant at 10%** significant at 5%*** significant at 1%

Appendix G. Tax Incentives forInvestment—Pros and ConsThis appendix summarizes the controversy about offering tax incentives to attract or stimulateforeign and domestic investment in developing countries. 15 The case in favor of fiscal incentivesis usually advocated with great vigor by officials responsible for investment promotion andministries responsible for industrial development, often with support from their advisors andconsultants. Not surprisingly, potential investors are also vocal proponents of tax incentives, andfrequently demand them as a condition for committing funds to a country with a weak businessenvironment (even if they would invest anyway). The case against special tax breaks is usuallyput forth by ministries responsible for tax policy and public finance management, with supportfrom their advisors and consultants. Divergent views co-exist, too, within the donor community.Many international experts advise host governments on the importance of fiscal incentives whileothers advise governments to scale back or eliminate them.THE CASE IN FAVOR OF TAX INCENTIVESThe case in favor of tax incentives rests on familiar and plausible arguments:Incentives enhance the return on investment. Investment decisions are driven by expectationsabout prospective risks and returns – specifically the after tax returns. Lowering the tax burdenfor designated investors boosts the expected returns and shifts the balance in favor ofimplementing investments.Incentives send a signal to investors. Tax incentives are a marketing device that can get investorsto look seriously at business opportunities in the host country. Getting them in the door is animportant first step in investment promotion.Incentives are essential due to tax competition. Foreign direct investment operates on a globalstage. Each developing country has to compete with other destination countries for investmentsthat will stimulate growth and job creation, including countries that offer attractive incentives. 1615 The discussion here draws heavily on Bolnick (2009a).16 Klemm (2009) contends that tax competition is likely to be a major driving force.

46 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUEIncentives correct for externalities. Economic theory justifies interventions that alter marketsignals in order to stimulate investments that generate significant positive externalities. Theseexternalities would otherwise lead to under-investment in activities such technology transfer andtraining, where returns to the economy generally exceed the returns faced by private investorsthemselves. Tax incentives are a practical tool for influencing decisions in favor of suchinvestments.Incentives are needed to compensate for other deficiencies in the investment climate. Taxincentives help to offset the costs and risks faced by investors in low-income countries, which arecharacterized by serious structural and institutional constraints such as poor infrastructure, a weaklegal/judicial system, and low labor productivity due to poor education, health, and nutrition.Incentives can work! Tax incentives have been an effective instrument for attracting foreigninvestment to many countries. Malaysia is a widely cited prototype, where generous incentiveshelped trigger the transition from a poor resource-based economy to a rapidly industrializing“tiger.” Countries as diverse as Mauritius, Ireland and China followed similar strategies withsimilar results.THE CASE AGAINST TAX INCENTIVESSome arguments on the other side of the debate involve technicalities that are less familiar tononspecialists, and therefore merit a bit more explanation for the sake of clarity.Incentives have limited effects. Tax incentives will not affect investments for which the expectedprofit rate, before tax, falls short of the investor’s risk-adjusted target rate of return– in otherwords, investments that are not fundamentally viable due to the underlying risks and costs ofdoing business in low-income countries. Many possible investments will be immune on this countto the influence of tax incentives.Among projects that are fundamentally viable, given the local business environment, incentiveswill only affect the investment decision when tax considerations flip the expected return frombelow to above the target rate. For investments with marginally inadequate returns, incentives canindeed be a critical factor. Projects with solid fundamentals, however, would achieve the targetrate of return with or without incentives. In such cases incentives are “redundant,” in that they arenot a determining factor driving the investment decision. 17 To be sure, the incentives stillimprove the recipient’s cash flow and bottom line (at the expense of the Treasury). Hence,potential investors will always seek incentives and argue for their importance. This is noindication, however, that the tax breaks are required.An important case where incentives can be decisive is in attracting internationally mobile(“footloose”) export-oriented investments, which could just as well locate in another country. If17 Tax incentives are also redundant when granted to a U.S.-based company that repatriates profits; this isbecause the host-country tax break is offset by loss of a tax credit at home. Tax incentives may also beineffective if the procedures entail costs or delays that outweigh the benefits.

A PPENDIX G 47alternative venues offer distinctly more favorable conditions, then even attractive incentiveswould be ineffectual. Also, offering generous tax holidays to lure this type of investment maylead only to short-term gains, as there is a tendency for beneficiaries to leave when the tax breaksend, or restructure to qualify again for incentives as a new entity.Incentives are costly. Some contend that the revenue effect of fiscal incentives may be nil or evenpositive because in the absence of incentives there would be no income to tax from thebeneficiary projects. As a generalization, this is totally invalid. Revenue losses are likely, andlikely to be large. To the extent that incentives are redundant (which is difficult to measure), thereis a direct revenue loss to the full extent of the tax break. Even where incentives do stimulate newinvestment, there is still a revenue loss to the extent that a smaller benefit would have done thetrick (which is also hard to measure).Another revenue cost arises from the fact that preferences create loopholes. Tax lawyers andaccountants are in the business of structuring corporate transactions to shift income from fullytaxed affiliates to tax-favored affiliates, at potentially great expense to the Treasury. A thirdsource of revenue loss occurs indirectly, when tax-favored investors pull business away fromfully taxed competitors.Incentives create economic distortions. Taxes distort economic decisions and reduce theefficiency of resource allocation. Fiscal incentives (when they work) add to the distortions bydrawing resources into tax-favored activities at the expense of others. For example, a generoustax benefit for agriculture may stimulate investment in an agriculture project with a 15 percentrate of return, instead of an alternative investment with a 25 percent rate of return. Promotinginvestment at the expense of productivity is not good formula for sustained growth. In addition,incentives linked to capital tend to favor capital intensity over job creation. Insofar as fiscalincentives cause a revenue loss, additional efficiency costs arise from the need to either maintainhigher taxes on non-beneficiaries, or reduce government expenditures that could be used fordevelopment purposes.Where tax incentives are well designed to foster activities generating positive externalities, thenthe “distortions” can be efficiency enhancing. The problem is that incentives are often driven bypolitical considerations or special interest pressures rather than careful economic analysis. Inaddition, where incentives are ad hoc and discretionary, they invite rent-seeking and corruption,which can derail even the best-intentions programs (and add to the revenue risk).Incentives create costly precedents. When incentives are given to certain investors, the precedentleads other groups to press for similar treatment. International experience suggests that it isdifficult to avoid this political “slippery slope,” which leads to a proliferation of incentives,shrinkage of the tax base, and an intensification of other adverse effects.Incentives often don’t work! Just as proponents cite selective cases where incentives have clearlyworked, one can find many cases demonstrating the opposite. Thus, a study of the issue in 2004by McKinsey Global Institute concluded that: “Governments around the world woo foreign direct

48 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUEinvestment by offering costly tax breaks, import duty exemptions, land and power subsidies, andother enticements. Yet our evidence suggests that they are largely ineffective.” 18 A NathanAssociates study of tax incentives in the SADC region similarly found that “generous taxincentives rarely stimulate a substantial investment response where the basic climate for doingbusiness is seriously deficient.” 19 This study also cited instances in Uganda and Indonesia wheretax incentives were eliminated in favor of broader tax reforms, with no adverse effect oninvestment trends.In general, the effectiveness of incentives varies by country and by type of investment. As notedabove, “footloose” export industries are highly responsive to tax competition among potentialhost countries offering otherwise adequate business conditions. In contrast, tax competition is farless important for investments anchored by geography, including activities targeting the domesticmarket or projects involving access to natural resources. For resource-based investments, hostcountries should seek to maximize their share of value added, while still allowing the investor toearn a reasonable rate of return.18 McKinsey Global Institute, New Horizons: Multinational Company Investment in DevelopingCountries, San Francisco, October 2003, p. 29.19 B. Bolnick, Tax Reform and the Business Environment in Mozambique, Nathan Associates, 2004. p.7-1.

Appendix H. Interview Results—Main Concerns and IssuesGOVERNMENT1. Appropriate target tax ratio: 20% target? Converge to regional average of 22-24%?Unrealistic revenue targets lead AT to punitive treatment of taxpayers.2. Trade-offs from lower tax rates: revenue versus growth? Offer scenarios, long-run vs. shortrunimpacts; impact on private sector and competitiveness.3. E-taxation, including e-declarations, payment through banks, single window for customs, andunified IT systems within the AT.4. Contention that large projects are not contributing enough. What is the international bestpractice for countries like Mozambique?5. Need simpler, more practical system, less complicated tax forms (especially M10 for IRPS).Administrative complications from handling reconciliation of returns and refund claims. Taxadministration too arbitrary.6. Country needs more training of accountants.DONORS1. Need for pro-growth tax system, not just pro-revenue. Short-run/long-run trade offs, need forcompetitive tax environment to stimulate investment. Government focusing narrowly onrevenue targets (0.5% per year increase in Rev/Y, up to 20% or 22%), to the detriment ofcustomer service. Heavy pressure to increase receipts to reduce dependence on donors. Whatare the options?2. Coherence between revenue system and objectives to promote investment and SMEdevelopment. Trade off between industrial policy and revenue needs. How does tax systemaffect competitiveness?3. Major issue should be improving taxpayer service and enforcement. Both needed to expandrevenue base.4. Tax system favors large and small businesses, unfair to middle-size local enterprises. Systemof fiscal benefits skewed to large business, creating serious equity problems.5. Integration of AT so that customs and income tax departments provide a single face totaxpayers, with unified taxpayer database and systems for IT, audit, debt collection, riskassessment, dispute settlement, etc.6. New IT systems vital for improving tax administration, but must be a catalyst forrestructuring AT business processes (“leap forward”), not just automation of traditional

50 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUEsystems. But also serious risks involved in IT modernization, if the process is not wellplanned, well managed and well funded, with adequate technical support.7. AT staff qualifications: training needs; capacity building. Including, especially, audit of largetaxpayers, customer service, especially in the provinces.8. Expansion of physical presence of AT to make it easier for small businesses to pay tax: newinfrastructure; mobile brigades, or intermediary tax collectors (such as water utility).Decentralization of AT operations.9. Need simplification to make people’s lives easier, improve compliance.10. Important to develop risk-selection system to allocate AT staff efforts more productively: forverification, inspection, audit. Green channel, gold card – reward the good taxpayers.Existing systems rudimentary. “Enormous room for improvement” and revenue gains throughmodern risk-management systems.11. AT needs to develop internal MIS indicators to monitor and assess operational efficiency.12. VAT refund process still far too complicated for compliance, especially by small businesses,making it impossible for them to export.13. Donor coordination. The Common Fund is an important approach, but several donors will beproviding support on tax and customs issues outside that framework. Need one uniformapproach.14. Need to broaden tax base by bringing in the informal sector via ISPC, to lower tax burden onthe formal sector. The big challenge is implementation.15. Trade facilitation. Green channel, post-clearance audit integrated with DGI audit functions.16. Need better MIS system for monitoring operational indicators, including provincial offices.PRIVATE SECTOR1. Complexity of the system. Moz does not have competency in the private sector or the AT toimplement the present laws effectively. Need simplification: fewer types of tax, includingmultiple municipal taxes. Problem: simplification of VAT, income tax difficult withoutopening the door to widespread abuse.2. E-payment and single window to reduce compliance costs for taxpayers, control evasion, andreduce opportunities for corruption. As much as 30-35% increase in customs collectionsexpected from catching unrecorded imports via single window system.3. Training and education – for both the ATM and the private sector4. Train more accountants! Need for better quality a/c education. Current programs turn outaccountants who are incapable.5. Tax rates too high for VAT and IRPC/IRPS, inhibiting business development. Effectiveincome tax can be even higher due to disallowance of expenses on the basis of technicalerrors in the invoices or receipts. Need for exact completion of AT-approved receipts makesit difficult to develop linkages to small businesses.6. ISPC – implementation is the key question. Will the simplified tax succeed in broadening thetax base by bringing informal enterprises into the tax net? Concern that the tax is still too highfor many micro and small enterprises that operate on low margins; anyone without adequatesales records faces full 75.000 MT.7. Rampant and blatant tax evasion. Need to catch tax evaders with assessments based on signsof wealth and third party data such as automobile registrations. Equally, need to change the

A PPENDIX H 51culture of paying tax. Nothing will work well without a change in attitudes – pride in payingtaxes. Taxpayers must see the advantage.8. Need modern system of risk management, including green channel for taxpayers with provenrecord of compliance (subject to audit).9. Customs scanners: 100% scanning at $100 per container (plus 17% VAT). Private sector notagainst the concept, but it should be applied in line with international standards, implyingselective approach, low fee.10. VAT refunds much improved but still far too complicated. Payments still centralized inMaputo, and require paper documentation rather than electronic filing. Local officials whonow do initial verification not well qualified. Refunds for IRPC and IRPS also functioningpoorly.11. 20% withholding punitive for many types of transactions, including payments to smallfarmers! Withholding tax on payments to foreign contractors simply causes them to increaseinvoice price by 25% to break even net of tax.12. Both importers and exporters failing to benefit from SADC free trade area due to complexityin complying with documentation requirements for rules of origin. In Mozambique, only twoofficials – in Maputo – are authorized to sign ROO documents.13. Multiplicity of taxes, taking into account the many municipal levies. Has anyone added upthe tax cost and compliance cost?SMALL BUSINESSES1. Tax system too complex; it requires a tremendous amount of time to comply with alldocumentation, and reconcile at year-end tax paid with tax due; requirements not simpleenough for an ordinary person to understand; further simplification needed to encouragepeople to comply with tax laws.2. The bureaucracy dealing with tax documentation gives rise to corruption and bribery.3. There is skepticism over the success of the ISPC.4. More training and education needed on tax issues; public education on tax obligations insteadof heavy tax penalties.5. The culture of complying with tax laws is weak. People in general don’t see the real benefitsarising from paying taxes promptly.6. The VAT reimbursement system is cumbersome and subject to long delays that affect thecash flow of SMEs; VAT reimbursement is centralized in Maputo, which adds to the delays;at times documentation returned without proper explanation.7. Many tax officials and accountants working in private sector are not well trained to deal withcomplicated tax issues.8. Very few small companies can afford to hire professional tax advisory or accounting firms soas to comply with the tax laws; there are very few accountants in remote areas or provincessuch as Niassa; this situation increases the cost of doing business since small enterprise areheavily penalized for not presenting accounts signed by designated professional accountants.9. The tax rates are relatively high compared to other countries in the region; Mozambiqueshould learn from South Africa’s system in terms of providing tax relief for emergent SMEs.10. There is a tremendous tax evasion and a lot of bribery; influential people have ways to alwaysavoid the taxes; some tax official facilitate people to evade taxes.

52 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUE11. Tax payments should be done through private banks or online payment services to reduce theamount time needed to wait in queues to deal with tax documentations.

Appendix I. Persons InterviewedIN MOZAMBIQUEGovernmentAntonio Cruz MPD/DNEAP DirectorBrendan Kelly MPD/DNEAP AdvisorFausto Mafambissa MPD/DNEAP Head of CFMM unitAugusto Sumburana MOF/GEST DirectorHerminio Sueia AT/DNEP National DirectorAli Algy AT/DNEP Department HeadTapu Mamane AT/DSPE DirectorArlindo Jose Antonio da Graca AT/GPECIRevenue AdvisorMaria Otilia Santos AT/DGI General DirectorIlidio Rafael Guibalo AT/DGI Deputy General DirectorMoises Patricio Marrime AT/DGI General CoordinatorDanielo Nala MPD/GANEZA General DirectorJulieta Domingas Muchine MIC/GASP DirectorHoracio Dombo CPI Chief, Special ProjectsDonors and Donor ProgramsNelson Guilaze USAID Senior Policy AnalystEric Johnson USAID Agriculture and Business AdviserEmmy Bosten IMF Technical Assistance CoordinatorAntonio Nucifora World Bank Senior EconomistTelma LoForte SDC Senior EconomistRalf Orlik KfW DirectorAndrew Clark DFID Economic AdvisorCarlos Mate Norwegian Embassy Program OfficerRosario Marapusse Italian Cooperation EconomistAlberto Musatti Italian Cooperation EconomistBusiness RepresentativesKekobad Patel CTA Executive DirectorCarie Davies ACIS Executive DirectorGraeme White ACIS President, Management CommitteeJoao Martins PWC Partner, Tax and Legal ServicesPaula Ferreira Deloitte Managing PartnerMaria Basto Deloitte Senior Manager, ConsultingAvelar da Silva Intertek General ManagerFilipe Franco AFIM Executive DirectorMatola CargoManaging Director

54 PARPA II R EVIEW—THE T AX S YSTEM IN M OZAMBIQUESevi George AFIM Mozambique Director:HoldingsGerry MarketosCIMPOGESTKenneth GunnCIMPOGESTNolifer Lakhani SGL Executive DirectorZenalda Carlota Matsinhe SGL Director, MarketingNatividade Bule Ass. dos Empreendedores PresidentSimeão Sevene Machava Ass. dos Jovens PresidentAgricultoresSudecar Novela Ass. dos Mukherista PresidentAlbino MacieFederação Moçambicanados Empreiteiros Executive DirectorMário FerroAss. Moçambicana de Empresas de MarketingPublicidade e Relações PúblicasIN WASHINGTON D.C.Andrea Lemgruber IMF Fiscal Affairs DepartmentJose Sulemane IMF Advisor to Exec Director for Moz.Larry Westfall US Treasury Team Leader, UST supportto the ATSebastian James FIAS/IFC EconomistJim LaFleur CTA Economic Advisor