Cameroon - A Tax Reform Strategy (Vol. 2 of 2)

OFFICIAL DOCUMENT CONFIDENTIAL Report No. 10036-CM A TAX REFORM STRATEGY FOR CAMEROON DECEMBER 16, 1991 Country Operations Division Occidental and Central Africa Department Tamar Manuelyan Atine and Helen Sutch were in charge of the overall management and direction of this report. Two missions and many months spent on becoming familiar with the current tax literature and the Cameroonian tax legislation have provided the input for its contents. The missions (March and June 1990) included Kenan Bulutoglu (PRE), Patrick Clawson and Michael McKee (consultants). Ms. Manuelyan Atinc is responsible for the bulk of the work that went into preparing the report. Ms. Sutch is responsible for the more innovative sections on resource taxation, an area which is often neglected in traditional Bank work on taxation issues. Rajiv Lail's work on the UDEAC regional reform program provided the framework for the recommendations on trade and indirect taxes while the discussion on petroleum taxation benefitted from input from James Bond and his colleagues. Vijaya Ramachandran contributed to the data work, Tatyana Ringland ensured overall coordination and Beatriz Ostria-Calvo provided secretarial support. CAMEROON A TAX REFORM STRATEGY Table of Contents Summary and Recommendations ....................... CHAPTER I. OBJECTIVE OF THE STUDY ............. A. Introduction ....................... B. Aim ofthetReport ................... C. Next Steps ....................... 2 CHAPTER II. MACROECONOMIC FRAMEWORK ......... 4 A. Background ....................... 4 . ta'bilization and Structural Adjustment ...... 6 C. Medium-term prospects ................ 7 CHAPTER III. OVERVIEW OF TAX REGIME AND PRIORITIES FOR REFORM ....................... 11 A. Tax effort and structure of taxes .f.o........ B. Failings of the Tax System .............. 15 C. Priorities for reform .................. 16 CHAPTER IV. TAXES ON INCOME AND PROFITS ......... 18 A. Corporate taxation ................... 18 i. Current System ................. 18 ii. Issues and Recommendations ........ 22 iii.Impact of Proposed Reforms ......... 30 B. Personal income tax .................. 30 i. Current System ................. 30 ii. Issues ....................... 36 iii.Recommendations for Global Reform ... 38 iv. Impact of Proposed Reforms ........ 41 CHAPTER V. TAXES ON WEALTH AND PROPERTY ...... 45 i. Current System ................. 45 ii. Issues ....................... 46 iii.Recommendations ............... 47 iv. Impact of Proposed Reforms ........ 48 CHAPTER VI. TAXES ON GOODS AND SERVICES AND INTERNATIONAL TRADE ............... 49 i. Current System ....... ......... 49 ii. Issues ....................... 54 iii.Recommendations ............... 58 iv. Impact of Proposed Reforms ........ 66 CHAPTER VII. RESOURCE TAXATION ................. 70 A. Forest Resources .................... 70 i. Current System ................. 72 ii.Issues ....................... 75 iii.Recommendations ............... 77 iv. Impact of Proposed Reforms ........ 79 B. Agricultural Taxation ................. 80 i. Current System ................. 80 ii. Issues ....................... 81 iii.Recommendations ............... 82 iv. Impact of Proposed Reforms ........ 83 C. Urban Taxation ..................... 83 i. Current System ................. 83 ii. Issues ....................... 85 iii.Recommendations ............... 87 iv. Impact of Proposed Reforms ........ 89 D. Petroleum related resource mobilization ...... 89 1. The Upstream: Petroleum exploration and production ......... 90 i. Current System ................. 90 ii. Issues ....................... 95 iii.Recommendations ............... 99 2. The Downstream: Petroleum refining, storage, distribution ..... 100 i. Current System ................. 100 ii. Issues ....................... 104 iii.Recommendations ............... 107 iv. Impact of Proposed Reforms ........ 108 CHAPTER VIII. ADMINISTRATION AND IMPLEMENTATION 109 i. Current Problems and Recommended Actions ..................... 109 ii. Implications of Reform ............ 114 CHAPTER IX. OVERVIEW OF IMPLEMENTATION SCHEDULE 118 Appendices CHAPTER I - OBJECTIVE OF THE STUDY A. INTRODUCTION 1. Cameroon is an economy under pressure. GDP has fallen for five years in succession after severe external shocks, the currency is over-valued, economic activity is weak, modern financial institutions are tottering, the public enterprise sector is paralysed by debt, the balance of payments continues in deficit, capital flight persists, and the budget deficit cannot be controlled. At such a time, reflection on a medium-term fiscal reform strategy may appear a luxury the country caniot afford. 2. This report seeks to show why, to the contrary, Cameroon cannot afford to ignore the tax system in its efforts to recover from the crisis. Fiscal strategy is central to the attainment of financial stabilization and also of sustainable growth. 3. This study is bing conducted under the structural adjustment program in recognition of the fact that successful adjustment requires an overhaul of the tax system. The current stabilization crisis only reinforces that conclusion. Expenditure cuts have been chasing falling revenues for the last three years. A series of tax measures which started under an IMF Stand- by in 1988 have not succeeded in narrowing the financing gap and the latest measures adopted this year show no sign of stemming the tide of arrears. 4. Why have normal stabilization measures failed? One part of the answer is the misalignment in relative prices, which directly depresses and distorts the tax base. Another part is the slack economy. However, revenues are inadequate in large measure because the current system provides so many arbitrary exonerations, perverse incentives and inequities that its operation damages the Cameroonian economy. Raising rates simply aggravates these shortcomings. Some recently adopted measures have sought to broaden the base in an dhoc way but their impact is marginal in the context of a dysfunctional system. 5. More generally, the current system violates all of the principles known to be associated with a good tax system: equity, efficiency, simplicity and administrative feasibility. And because it does so, the nation's fiscal situation continues to deteriorate markedly, with no sign that continuation of the current tax system can do other than reinforce the slide. Currently, non-oil revenues are less than ten percent of non-oil GDP and falling, whereas a reasonable medium-term target would set this ratio at closer to 15 percent, the level attained before the crisis of the mid-80s. Government expenditures, which are currently running at about 20 percent of GDP, should be compared with an overall tax effort which stands at only 14 percent of GDP. As a result total revenues in 1989/90 were barely sufficient to cover non-interest current expenditures, all investment outlays and interest payments having to be financed from borrowed resources. Thus, the revenue gap is not merely large (and threatening to get larger with the depletion of oil reserves), but so large as to frustrate any attempt to raise adequate revenues using the current structure. 6. This report places itself in the mainstream of Bank thinking on tax reform, as spelt out in the 1988 World Development Report and most recently in "Lessons of Tax Reform," PRE, April 1991. It also seeks to widen that perspective by examining the significance of the tax structure for the wise management of natural resources and for the sectors of the economy which are crucial to Cameroon's future: that is, by asking what contribution the tax system can make to sustainable development. The questions thus raised concern not only economic efficiency narrowly conceived but also environmental protection and inter-generational equity; the rural-urban terms of trade and the pace of internal migration; and, in general, the role of -2- the tax system in helping to shape the economic and social choices which will determine the nature of Cameroon's adjustment in the next ten years and more. The report thus examines taxatio-i arrangements in the forestry, agriculture, urban and petroleum sectors with a view to deteri.ining how the fiscal regime can more adequately serve the nation's needs. 7. The report recognizes that Cameroon's ability to alter trade policy and to reform Its system of indirect taxation is severely constrained by its membership in the Customs and Economic Union of Central Africa (UDEAC). Since comprehensive reform in these areas requires regional consensus, the report's recommendations are placed in the framework of the broad program of reform developed for the UDEAC zone. B. AIM OF THE REPORT 8. The report's main aim is to construct a blueprint which indicates where the tax system should move in the longer-term and which provides guidelines for shaping immediate actions. It looks ahea4 to a future in which economic and financial markets will become more sophisticated, and in which inflation may become a problem. It includes measures which seek to address some of the inequalities in the distribution of income and wealth. 9. The report provides the overview necessary to take into account the repercussions of reforms in one area on revenue or incentive effects in another, and the importance of sequencing reforms so that, as a minimum, revenue neutrality overall is preserved. The aim is to design a staged program which takes into account the urgent need to raise revenue while moving the overall system toward greater efficiency and a fairer post-tax income and wealth distribution, as well as addressing the resource and sustainability issues mentioned above. 10. Direct and indirect taxation is thoroughly examined and specific proposals are developed. Work on a number of sectors and areas of resource use is still in progress and it has not been possible to define detailed programs u. reform in all sectors, though feasible and desirable measures for immediate implementation are indicated where possible. Some sector reform proposals are more advanced than others; or are the subject of separate Bank studies under sector projects (eg forestry, urban). The recently completed diagnostic study on the petroleum sector public enterprises has now made available a wealth of information on the sector. While this report draws upon it to evaluate taxation arrangements in the sector, the bulk of the analysis on institutional and management issues will need to be exploited in a second phase. Finally, while recognizing the importance of tax administration, the report focuses principally on the design of a tax policy reform; additional work will be required in identifying the implications of the proposed reforms for tax administration. C. NEXT STEPS 11. The proposed tax reform strategy and the phased calendar of implementation included in the last chapter of the report be discussed with the Government. Subsequently, the plan is to incorporate the staged reform agenda into Cameroon SAL II as well as into sector or project operations where relevant. Any additional studies required to develop the implementation schedule can be undertaken in the interim. A four to five year horizon is envisaged for reform in most areas of taxation. 12. The definition of stages of reform will take into account issues of implementation and administration including training needs for staff, introduction of a unique taxpayer number -3- and the need for codification of the system. The French Government has a sizeable technical assistance operation in the Ministry of Finance, including in the tax and customs departments while other donors have also expressed interest in participating in the implementation of the proposed tax reform strategy. A coordination effort will need to be mounted to ensure that donor interest and assistance are effectively exploited. -4- CHAPTER II - MACROECONOMIC FRAMEWORK A. BACKGROUND 1. With a per capita GDP of US$950 and 11.8 million inhabitants in 1990, Cameroon is one of Africa's most diverse countries in terms of human resources and natural geography. The scope for expanding agricultural production of a wide range of products is significant given the favorable land/population ratio and below-potential yields. The mineral resource base is also diversified with reserves of oil, bauxite, iron ore and natural gas. The exploitation of hydroelectric and mineral resources, the processing of agricultural, agro- forestry and mineral products for export, plus selected forms of manufacturing primarily for the regional common market could significantly contribute to the economy's future growth. 2. The Boom. 1970-1985. Economic growth was high (about 8 percent per annum in real terms) through the 1970s and until 1985. In the period after independence, Cameroon relied heavily on agriculture, which still remains the key economic sector, employing about two thirds of the population. However, oil became a major source of growth after 1979 when production commenced in Cameroon. By 1984/85 oil production accounted for more than 15 percent of GDP, nearly 45 percent of Government revenues and almost two thirds of total merchandise exports. Oil production reachod a peak of 8.9 million metric tons in 1985/86. Since then, production has been declining (7 million tons in 1990/91) and, barring new discoveries, the remaining reserves will be depleted by the mid-1990s. Exploration activities have decreased over the past several years and recent attempts at modifying the incentive structure may not be sufficient to attract new investment in the sector. 3. Oil revenues boosted public and private spending, enabling gross fixed investment to grow at an average rate of 7 percent in real terms during the first half of the 1980s, reaching 20 percent of GDP in 1984/85. Public investment increased much faster than private investment and the share of central government in total investment increased from one fifth in 1979/80 to one third by 1984/85, or 6.7 percent of GDP. In addition, the expanding public enterprise sector accounted for 12.5 percent of gross fixed capital formation in 1984/85, or 2.5 percent of GDP. 4. Despite the considerable expansion in public expenditure, the Government maintained a balanced budget until the mid-1980s while simultaneously keeping significant portions of oil income abroad in extrabudgetary accounts. Foreign borrowing amounted to less than CFAF 40 billion a year, or around 6 percent of expenditures, until 1984/85. Cameroon's total public and publicly guaranteed debt outstanding and disbursed amounted to US$2.5 billion in 1985/86, or only 23.5 percent of GDP; the debt service ratio to exports was 10.7 percent. 5. The Crisis since 1986. The fall in the US$-denominated prices of Cameroon's major export commodities (oil, coffee and cocoa) and the depreciation of the US dollar have exposed major structural weaknesses in the economy and have plunged it into a deep recession. Between 1985 and 1987, Cameroon's export price index in CFAF terms fell by 65 percent for oil, 24 percent for cocoa, 11 percent for coffee, and 20 percent for rubber, causing a 47 percent deterioration in the terms of trade. The balance of payments registered a deficit of CFAF 190 billion in 1986/87 (4.8 percent of GDP) compared to a surplus the year before equivalent to 1.7 percent of GDP. -5- 6. In 1986/87, Government revenues fell by CFAF 157 billion (3.8 percent of C-DP). Unfortunately, the Government continued to expand its spending as it had during th- ooom years and the budgetary deficit reached 12.8 percent of GDP in 1986/87 compared with 1.7 percent the year before. The deficit was financed through heavy foreign borrowing and an accumulation of domestic arrears, which hampered private sector activity and, in conjunction with the decline in government deposits, contributed to the severe liquidity crisis experienced by the domestic banking system. 7. Exogenous factors which undermined Cameroon's financial and economic viaMlity, combined with inappropriate domestic policies, brought economic growth to a halt. The economy stalled in 1985/86 and has entered into a recession since 1986/87, with real GDP having declined by about 13 percent from 1986/87 to 1989/90. 8. The effect of the income loss on savings has been devastating. Domestic savings were 33.6 percent of GDP in 1984/85 but they plummeted to 19.6 percent in 1986/87 and have not risen greatly since. National savings followed a similar path, from 26.8 percent of GDP to 14.8 percent. The shortfall in savings was made up in large part through heavier borrowing from overseas, partly needed to service a growing part of the external debt burden. The current account balance went from a surplus equal to 4.0 percent of GDP in 1984/85 to a deficit of 9.8 percent in 1986/87, recovering to a deficit of 2.5 percent in 1989/90. 9. The dramatically lower savings rate had its effect on domestic investment, which fell from 19.5 percent of GDP in 1984/85 to a low of 10.4 percent in 1989/90. The drop in investment was in both the government and the non-government (i.e. public enterprises and private firms) sectors. Government investment fell from 7.5 percent of GDP in 1984/85 to 4.2 percent in 199/90; this level is likely to decrease further due to the increasing constraints on the government budget. Non-government investment fell from 11.7 percent of GDP in 1984/85 to 6.2 percent in 1989/90, led at first by lower public enterprise investment but compounded more recently by depressed activity levels in the private sector. Private investment will continue to be low given the lack of growth in aggregate demand; this brings out the vital importance of restoring external competitiveness and reorienting the economy towards export markets if growth is to resume. 10. The crisis brought to light the inefficiency of the highly protected industrial and commercial sectors, a large share of which is under public ownership. A complicated and long-standing regulatory framework has distorted relative factor prices, resulting in the creation of large rents to support a highly inefficient manufacturing sector. In addition, an extensive system of price controls and administered trade margins, together with restrictions on entry into domestic trade, has led to cost-plus pricing practices, preventing competition and yielding high prices for most goods and services. The tariff and exchange rate regimes and the Investment Code have all favored imported inputs and capital goods. The Labor Code tends to extend the high level of public sector wages to the private sector and stipulates cumbersome administrative procedures and high indemnities for laying off workers. The cost structure in the agricultural marketing system has been rigid and high, with its fixed producer prices and intermediation margins. 11. All these factors have led to many rigidities in the functioning of domestic markets, resulting in the creation of a very high cost economy. In the face of downward rigidities in domestic prices and a fixed exchange rate, the terms of trade losses have resulted in a severe misalignment of relative prices, undermining international competitiveness; the real effective -6- exchange rate appreciated by 20 percent from 1985 to 1988. (This also reflects the appreciation of the French franc vis-a-vis the US dollar.) Meanwhile, the persistent balance of payments deficits have led to the depletion of foreign reserves and the accumulation of a heavy external debt burden. The appropriate policy response to these external shocks would have been a depreciation of the real exchange rate to boost domestic competitiveness and to limit the balance of payments deficit to a level consistent with realistic capital inflows and a manageable debt burden. B. STABILIZATION AND STRUCTURAL ADJUSTMENT, 1987/88-1990/91 12. Stabilization. The first step in the austerity program was the 1987/88 budget. The overall budgetary deficit was reduced to 5.8 percent that year, compared to 12.8 percent in 1986/87. Public expenditures were reduced by 34 percent or some CFAF 416 billion over the previous year. At the same time, however, revenues fell to about 83 percent of their 1986/87 level. The largest expenditure cuts were achieved through the curtailment of extrabudgetary spending and the reduction of capital expenditures. 13. While the Government initiated its stabilization program without any external help, it soon became clear that the magnitude of the crisis would require the assistance of the donor community. The second year of the stabilization program was thus supported by an 18 month Stand-by Arrangement approved by the IMF in September 1988. 14. Performance under the Fund program (SDR 69.525 million) was unsatisfactory, in particular on the fiscal front. The single most important problem in meeting program targets was the short-fall in non-petroleum revenues. In 1988/89, non-oil revenues fell almost CFAF 100 billion short of the optimistic program targets. The problems experienced in meeting program tarpets in 1988/89 persisted in 1989/90 reflecting the continued poor performance of nn-oil revenues. The success of any new stabilization program depends critically on measures to increase revenues and to limit overall expenditures to levels consistent with sustainable debt and creditworthiness considerations. 15. Structural Adjustment. The structural adjustment program is supported by a US$ 150 million loan from the World Bank, which was approved in June 1989, and a UC 100 million (equivalent to US$ 130 million) loan from the AfDB. The French, American, German and Italian Governments and the EEC have also provided non-project financial assistance in support of the program. 16. Given Cameroon's membership in the CFA zone and its inability to change the parity of its currency without the agreement of the other members of the zone, the real depreciation needed to improve the international competitiveness of the economy can only be attained through improved factor productivity and/or reductions in nominal wages and prices, especially the prices of non-tradeables. The adjustment program incorporates measures to eliminate rents and diminish inefficiency in a highly protected and controlled environment and reduce labor costs in both the public and private sectors. 17. Performance so far under the structural adjustment program has been mixed. Substantial progress has been made toward rationalizing the incentive framework for economic activity and restructuring the banking sector while efforts to address the problems of the public enterprise sector have been inadequate and the civil service reform program is at a virtual standstill. The major risk in the program, however, continues to be the Government's -7- inability to reduce the budgetary deficit. Given limited access to Central Bank resources under the arrangements of the Franc zone, this would result in a very rapid increase in external indebtedness and domestic arrears. Cameroon's poor performance to date on the public finance front is alarming as a result and may undermine the entire adjustment effort. 18. Some progress has been made in reducing government expenditures; this was reinforced by the recent measures announced to reduce the wage bill through elimination or pruning of certain entitlements. Between 1986/87 and 1989/90, the wage bill was reduced by some 10 percent in nominal terms; this was achieved through cleaning up the payroll, strict enforcement of the retirement age, limitations on new hiring and withholding salary increases for promotions. The measures adopted with the 1991/92 Budget Law severely limit access to free housing, reduce ministerial salaries by 10 percent and cut in half certain salary supplements available to high ranking civil servants. In addition, the proportional tax on salaries has been increased from 3 to 6 percent and contributions to the pension plan from 6 to 10 percent. These new measures are expected to yield approximately CFAF 40 billion (15 percent of the wage bill) in expenditure reductions and revenue increases. 19. While recent efforts to reduce expenditures on civil service remuneration are laudable, they are insufficient to address the public finance problem and more generally the competitiveness issue. In addition, the bias in government expenditures in favor of salaries and against investment and recurrent expenditures persists. In fact, budgetary outlays for some key expenditures are so low as to threaten the maintenance of the capitl base and to preclude resumption of growth. Notwithstanding the possibilities for reducing flrther certain expenditures, the government's ability to arrest the deterioration of public finances and to maintain a minimum of level of high priority expenditures is critically dependent on a substantial increase in resource mobilization. 20. Despite a number of ad hoc measures to increase the tax effort, the Government has been unable to arrest the decline in non-oil revenues. The expected decline in revenues at a time of economic crisis notwithstanding, the overall tax effort in Cameroon remains very low, and compares unfavorably wita other countries in the region (see Chapter III). Non- petroleum revenues represented only just over 10 percent of non-petroleum GDP in 1989/90 and were estimated at 9.5 percent in 1990/91. The principal problems of the current fiscal regime are the complexity of the system and the combination of high nominal tax rates and excessive exemptions. The medium term objective, thorefore, is to simplify the tax system and to enlarge the tax base while simultaneously reducing tax rates. In the short term, however, the scope for action is limited and any substantial increase in revenues is more likely to come from improved collection of existing taxes than the creation of new ones. C. MEDIUM-TERM PROSPECTS 21. National income prospects were last forecast by the Bank in March 1991, based on data from the late 1991. The projected real GDP growth rate averaged 0.2 percent per annum in the period 1990-95 and 0.8 percent in 1995-2000, or below the 2.9 percent population growth rat. At the turn of the century, per capita real income was projected at 58 percent of the 1985/86 peak. 22. The private investment outlook is grim. Private investment in the year 1999/2000 is projected at 12.8 percent of GDP. Foreign indebtedness therefore continues to increase in order to finance investment, forecast at 21 percent of GDP. The ratio of public and publicly- -8- guaranteed debt to GDP is projected to rise from 42 percent in 1989/90 to 63 percent in 1999/2000 while the interest burden increases from 17.3 percent of government revenues in 1989/90 (before rescheduling) to 27.5 percent in 1999/2000. The debt service in 1999/2000 was forecast at 32.5 percent of GNFS exports while ratio for the debt service to the Bank and IDA would be 7.3 percent (compared to 4.8 percent in 1989/90). 23. Qovermen0tfances will remain extremely tight over the medium term. Total Government revenues barely covered current expenditures in 1989/90; put another way, public savings were appro:. nately zero. This situation is not likely to be reversed over the medium term, unless there , sharp changes from current policy. 24. Consequently, the entirety of the public investment program, the costs of public enterprise and banking sector restructuring, the repayment of arrears, and -- quite possibly last and least - principal repayments will have to be undertaken through borrowed resources. In the light of this situation, Cameroon will continue to need non-project financing on a substantial scale, and will not be able to service its debt without rescheduling during the foreseeable future. 25. The implications of this situation for foreign borrowing in the medium-term are alarming. The ratio of debt service to revenue is certain to rise for the foreseeable future from the present k - Al of 41 percent. Indeed, in the government's latest forecasts, just the interest on the debt (domestic and foreign) will exceed government investment from 1991/92 onwards. This is particularly troubling in the light of the fact that Cameroon is not in a position to benefit from existing debt reduction initiatives due to: i) its middle income status which excludes it from SPA and Toronto terms and ii) the limited size of its commercial debt which would be eligible for Brady Plan arrangements. Yet new debt relief measures must be part of the future work-out. 26. The avoidance of a downward economic spiral will require accelerated steps to improve resource mobilization. This report is presented in the hope of contributing to that objective. -9- CAMEROON CAMEROON CAMEROON - ECONOMIC INDICATORS ..******.-------.-**.-...----. Mid-1990 Population (mits.) 11.9 1990 Per Capita GNP in US$: 940 A. Shares of Gross Domestic Product 8. Growth Rates(% per arnun) (fran current price data) (fran constant price date) 1965 1973 1960 1988 1989 1990 1965-73 1973-80 1980-90 1969 1990 Gross Domestic Product m.p. 100.0 100.0 100.0 100.0 100.0 100.0 2.2 8.9 2.3 -3.4 -2.5 Net Indirect Taxes 9.2 11.1 7.5 4.5 4.4 5.5 . Agriculture 32.7 30.8 27.9 25.8 26.9 26.6 4.6 4.5 1.6 -2.0 2.0 Industry 20.3 18.6 25.9 28.6 27.0 27.8 4.7 16.0 3.1 19.7 *5.4 (of iich Manufacturing) 9.5 10.2 7.9 13.5 13.1 .. 7.4 9.0 10.2 Services 47.0 50.6 46.3 45.6 46.1 45.6 0.2 9.0 2.1 -18.6 -2.8 Resource Balance -0.5 -3.3 -3.1 -2.8 1.8 i.1 .. 3.0 .. .. 10.4 Exports of GNFS 23.8 20.7 24.1 16.5 19.6 21.2 4.4 9.4 -1.9 15.0 5.1 Inports of GNFS 24.3 24.0 27.2 19.3 17.9 19.1 5.3 8.7 -2.0 -10.6 4.5 Total Expenditures 100.5 103.3 103.1 102.8 98.2 97.9 2.6 8.7 2.2 -7.7 -2.7 Total Conswption 88.0 83.4 84.3 87.1 79.7 81.4 1.8 7.6 3.3 -4.2 -1.2 Private Consuwption 74.9 71.8 75.5 75.8 67.9 69.7 1.5 8.1 2.8 -7.2 -1.4 General Governent 13.0 11.6 8.7 11.3 11.8 11.7 4.6 3.7 6.9 15.3 -0.3 Gross Domestic Investment 12.5 19.9 18.9 15.7 18.5 16.5 8.6 14.4 -3.5 -26.8 -13.3 Fixed Investment .. .. 18.0 .. .. .. .. .. Changes in Stocks .. .. 0.9 .. .. .. .. .. Gross Damstic Saving 12.0 16.6 15.7 12.9 20.3 18.6 5.3 11.2 -2.6 2.0 -9.8 Net Factor Income -6.7 -7.8 -9.0 -3.4 -2.9 -4.8 .. .. Net Current Transfers 0.0 -1.3 0.0 -1.2 -0.8 -0.7 .. .. Gross National Saving 5.3 7.5 6.8 8.3 16.6 13.1 .. 21.8 -0.6 9.2 -18.9 In billions of LCis 1965 1973 1980 1988 1989 1990 (at constant 1987 prices) ---- ---- **** ---- .*** ---- Gross Domestic Product 1247 1478 2762 3662 3538 3451 2.2 8.9 2.3 -3.4 -2.5 Capacity to Inport 324 374 665 606 694 732 3.8 6.3 -1.9 14.7 5.4 Terms of Trade Adjustment 81 49 0 0 -2 0 .. .. Gross Domestic Income 1328 1527 2762 3662 3536 3452 2.2 8.1 2.3 -3.4 -2.4 Gross National Product 1180 1359 2513 3536 3415 3309 1.8 8.9 2.9 -3.4 -3.1 Gross National Income 1260 1408 2513 3536 3413 3309 1.8 8.1 2.9 -3.5 -3.0 ***-----*** (1987 = 100)--***********-- ----**--Inflation Rates(% p.a.)-------- C. Price Indices 1980 1985 1986 1988 1969 1990 1965-73 1973-80 1980-90 1989 1990 Consuner Prices (IFS 64) 53.1 87.6 94.4 108.6 108.6 .. 5.5 11.9 8.4 0.0 Wholesale Prices (IFS 63) .. .. .. .. .. .. .. .. .. . Inpticit GDP Deflator 56.8 97.7 98.1 100.9 98.8 96.9 7.7 10.4 5.6 -2.1 -1.9 lplicit Expenditures Deft. 56.8 97.7 98.1 100.9 98.8 %.9 7.6 11.2 5.6 -2.0 -1.9 0. Other Indicators: 1965-73 1973-jn 198-90 Growth Rates(X p.e.): Population 2.4 3.1 3.2 Labor Force 1.7 1.6 1.9 Gross Natt. Income p.c. -0.6 4.8 -0.3 Private Consurption p.c. -0.9 4.9 -0.4 Inport Elasticity: Inports (GNFS) / GP(rp) 2.4 1.0 -0.9 Marginal Savings Rates: Gross National Saving 23.5 6.5 34.5 Gross Domestic Saving 43.4 14.7 30.1 ICOR (period averages): Share of Total 1965 1973 1980 1989 1990 Labor Force in: .--- ***. .-.- *.** ---- Agriculture 86.3 79.2 69.9 Industry 4.4 6.1 8.3 Services 9.2 14.7 21.9 Total 100.0 100.0 100.0 100.0 100 IEC 11/26/91 -10- CAMEROON CAMEROON CAMEROON - ECONOMIC INDICATORS Votune Index Value at Current Prices (millions USS) E. Merchandise Exports 1980 1985 1987 1988 1989 1990 1980 1985 1987 1988 1989 1990 X.FUEL 28.0 105.1 100.0 91.2 91.6 83.3 398 1533 842 792 690 919 X.BEV.COFFEE 113.8 106.8 100.0 126.2 156.3 150.0 326 234 273 205 216 193 X.BEV.COCOA 66.8 97.8 100.0 71.4 102.5 111.8 277 226 289 195 207 215 X.TIM 69.7 92.6 100.0 118.6 174.8 169.4 158 77 60 67 107 122 Manufactures .. 67.4 100.0 91.2 148.4 146.9 119 126 160 195 188 233 Residual .. 65.6 100.0 99.1 142.3 140.8 140 141 203 191 326 403 Total Exports FOB .. 111.5 100.0 91.7 114.9 114.7 1418 2337 1827 1645 1734 2085 F. Merchandise laports Food 33.4 45.7 100.0 96.5 75.6 74.1 80 92 184 171 132 175 Fuel and energy 1754.4 43.9 100.0 56.1 52.6 53.2 184 8 9 6 5 5 Oth. consuer go _ 71.9 82.1 100.0 84.3 65.0 64.7 158 149 274 254 184 258 Other intennd goods .. .. .. .. .. .. 649 456 778 617 545 769 Capital goods 98.5 117.7 100.0 81.4 57.7 60.9 382 382 489 436 291 430 Total Inports CIF 95.3 87.5 100.0 80.1 65.8 66.3 1452 1088 1734 1484 1156 1637 G. Merchandise Terms of Trade 1980 1985 1987 1988 1989 1990 .****.-.---.--.-..-.-.-.-*----- .-. - - ---..-- -.---.- .*.**** -----.- ------. Merch. Exports Price Index .. .. .. Merch. Inports Price Index 87.9 71.7 100.0 106.8 101.3 142.4 Nerch. Terns of Trade .. .. .. US$ millions (at current prices): H. Balance of Payments 1980 1985 1987 1988 1989 1990 Exports of Goods & NFS 1807 2798 2216 2051 2181 2359 Merchandise (FOB) 1418 2337 1827 1645 1807 1909 Non-Factor Services 389 461 389 406 374 450 Inports of Goods & NFS 2042 1898 2806 2394 1979 2130 Merchandise (FOB) 1452 1088 1734 1484 1275 1372 Non-Factor Services 589 810 1072 910 704 758 Resource Balance *235 900 -590 -343 202 229 Net Factor Income -164 -539 -502 -426 .323 *423 (interest per ORS) 149 171 244 267 178 244 Net Current Transfers 3 -33 -133 -144 -83 -84 (workers remittences) 11 1 3 3 3 3 Curr A/C Ba Before Off. Grants -478 328 -1225 -913 -204 -278 Net Official Transfers 83 0 0 0 0 0 Curr A/C Ba After Of f. Grants -395 328 -1225 -913 -204 -278 Lohg-Tern Capital Inflow 615 -158 92 287 522 598 Direct Irwestment 105 21 31 34 32 33 Net LT Loans (DRS data) 498 -158 92 288 581 560 Other LT Inflow (Net) 12 -21 -31 -34 -37 230 Total Other Itens (net) -75 -132 587 579 -436 -244 Net Short Term Capital -230 -315 118 639 .. . Capital Flows N.E.I. 0 0 0 0 0 0 Errors and Omissions 155 183 469 -60 Changes In Net Reserves -145 -39 547 47 117 -77 Net Credit fran the IMF -17 0 0 0 0 0 Other Reserves Changes -128 -39 547 47 117 77 As Share of GP: Resource Balance -3.1 11.0 -4.7 -2.7 1.8 2,1 Interest Paynents 2.0 2.1 2.0 2.1 1.6 2.2 Current Account Balance -6.4 4.0 -9.8 -7.2 -1.8 -2.5 Menrancin Items: eserves excL. Gold (mil. USS) 189 132 64 150 80 .rves inct. Gold (mil. USS) 206 142 78 163 92 ficial X-Rate (LCUs/USS) 211.28 449.26 300.54 297.85 319.01 272.26 t,.: Rest Eff. X-R Base 198 100.00 9-V 122.88 118.45 109.59 113.64 P (millions of current USS) 7499 8148 12455 12667 11083 11129 -*******----********---*******------****----- -*****----------------------------***------------------------***----. -------..... IEC 11/26/91 - 10a - CAMEROON CAMEROON CAMEROON * ECONOMIC INDICATORS Share of GDP (%) Growth Rates Governent Finance 1980 1986 1987 1988 1989 1990 1980-86 1987 1988 1989 1990 Current Receipts .. 18.2 16.2 16.1 13.7 .. .. 16.9 -6.0 -18.7 Current Expenditures .. .. 13.5 14.3 15.9 16.2 .. .. *0.7 4.5 -2.2 Current Budget Balance .. .. 4.7 1.9 0.3 -2.5 .. .. Capital Receipts .. .. .. .. .. .. ., .. Capital Expenditures .. . 17.5 7.7 4.6 5.3 .. .. -59.3 -43.5 10.6 Overall Deficit .. ., .. .. .. .. .. .. .. Official Capital Grants .. .. .. 3.4 9.0 7.7 .. .. .. 154.0 -18.7 External Borrowing (net) .. .. 4.0 5.2 6.9 9.3 .. .. Domestic Non-Bank Borrowing .. .. 3.7 -0.8 3.0 .. .. .. Domestic Bank Financing .. .. -0.1 -0.2 1.5 1.1 .. .. .. .. -30.8 Net DisbursemBnts (USS millions) Debt Outstanding & Disbursed (US$ millions) J. External Capital flow, Debt ............. .......... ........ ............... and Debt Burden Ratios 1980 1985 1987 1988 1989 1990 1980 1985 1987 1988 1989 1990 Public & Publicly Guar. LT 480 52 76 400 630 637 2005. 2003 2781 2935 3748 4784 Official Creditors 219 94 143 143 313 478 1181 1571 2272 2224 2963 3787 Multilateral 60 56 81 26 66 102 422 691 1096 1048 1113 1297 of which IBRD 24 31 47 12 72 33 152 287 545 508 572 651 of which IDA 19 3 5 3 -1 -3 146 227 239 240 239 238 Bilateral 159 38 61 117 247 376 759 880 1176 1176 1870 2490 Private Creditors 261 -42 *67 257 317 160 825 432 509 711 766 998 Suppliers -7 *2 -4 -1 0 0 141 102 151 134 4 4 Financial Markets 267 -40 -63 258 317 160 684 330 358 576 762 994 Private Non-guranteed 18 -210 16 -112 -49 -77 178 381 520 427 378 230 Total LT 498 -158 92 288 581 560 2183 2384 3301 3362 4126 5014 IMF Credit .5 -6 -9 85 15 -1 59 27 16 100 113 121 Net Short-Tern Capital -230 -315 118 639 .. .. 271 529 722 766 547 888 Total incL. IMF & Net ST 263 -478 200 1012 . .. 2513 2940 4039 4228 4786 6023 Bank and IDA Ratios 1980 1985 1987 1988 1989 1990 Share of Total Long-Term DOW Notes: 1. IBRD as X of Total 6.97 12.04 16.51 15.12 13.87 12.99 2. IDA as X of Total 6.68 9.50 7.23 7.14 5.79 4.75 Data on Economic Indicators tables 3. IBRD+IDA as X of Total 13.65 21.55 23.74 22.26 19.65 17.74 should foLLow the definitions and the concepts of the Standard Tables and Share of LT Debt Service Standard Attachments. The indicators 1. IBRD as % of Total 7.12 5.81 12.10 14.41 26.57 20.31 should include data through the most 2. IDA as % of Total 0.69 0.45 0.50 0.63 1.26 0.94 recently coapleted calender year (or 3. IBRDIDA as X of Total 7.80 6.26 12.60 15.04 27.83 21.25 fiscal year in the case of fiscal year countries). Staff estimates may be used DODto-Exports Ratios if final or preliminary actuals are not ..................... yet available. The use of estimates and 1. Long-Tern Debt/Exports 118.75 84.53 146.15 160.04 190.18 214.43 preliminary figures should be indicated 2. IMF Credit/Exports 3.20 0.97 0.71 4.78 5.22 5.18 by: 3. Short-Term Debt/Exports 14.71 18.75 31.98 36.45 25.19 37.97 4. LT+IMF+ST DOD/Exports 136.66 104.25 178.85 201.27 220.59 257.58 e = estimated data p = preliminary data DOD-to-GDP Ratios . Long-Tenn Debt/GDP 29.12 29.25 26.50 26.54 37.23 45.06 IMF Credit/GDP 0.78 0.34 0.13 0.79 1.02 1.09 Short-Tenn Debt/DP 3.61 6.49 5.80 6.04 4.93 7.98 . LT+IMF+ST DOD/GDP 33.51 36.08 32.43 33.38 43.18 54.12 ebt Service /Exports . Ptblic & Guranteed LT 10.12 8.46 14.83 11.81 6.11 12.85 . Private Non-guranteed LT 2.57 12.84 10.64 15.19 7.80 6.27 . Total Long-Term Debt Service 12.68 21.29 25.47 26.99 13.91 19.12 IMF Repurchases+Serv. Ch9s. 1.01 0.21 0.40 0.43 0.58 0.54 . Interest only on ST Debt 1.52 1.24 2.88 3.52 2.61 1.82 . Total (LT+INF+ST Int.) 15.21 22.74 28.75 30.95 17.10 21.48 ..***** ..***** .* .** ***** .***..*...***.*************----- .---...---.--. -. ---. ----.--.---.. -------. ---. ------. ***-----. -----. ----. IEC 11/26/91 - 11 - CHAPTER III - OVERVIEW OF TAX REGIME AND PRIORITIES FOR REFORM 1. The Cameroonian fiscal regime, which retains to a large extent the characteristics of the system introduced during the colonial period, is ill-adapted to the current needs of the economy. The system displays severe shortcomings when evaluated against the traditional public finance criteria of revenue adequacy, efficiency, equity and enforceability. 2. Efficiency concerns in tax policy generally relate to the objective of "minimizing the effect of taxes on economic behavior, including savings, investment, production and individual work," I/ thereby the reducing the gap between the amount of revenue raised by government and that by which real income of society is reduced; where markets are not competitive or externalities are present, however, tax policy may actually serve to enhance efficiency. The concept of equity generally has two dimensions in tax policy: horizontal equity refers to the equal treatment of taxpayers with the same amount of income regardless of its source while vertical equity relates to the differential treatment of taxpayers as a function of their ability to pay. Both concepts are used in the report and a third one - inter- generational equity -- is introduced in the discussion on taxation of natural resources; the proper valuation of the welfare of future generations in today's consumption and production decisions is an important issue for the design of tax policy. Enforceability refers both to the ability of the tax authorities to administer the tax regime and the ability and willingness of taxpayers to comply. Finally, while this report is about tax policy, it is impossible to abstract from the government's expenditure policy when defining the concept of revenu adequacy; the level of tax effort required is necessarily a function of societal choices about the role of government. Notwithstanding, revenue adequacy for the purposes of this report is defined with respect to the government's ability to safeguard existing capital and to deliver the minimum services required in the areas of public administration, infrastructure and human resources. 3. The main problem of the Cameroonian tax system stems from the application of high rates of taxation on a narrow tax base which has increasingly been eroded due to the prevalence of exemptions and exonerations on the principal taxes. This has resulted in sizeable foregone revenues for the government, a highly distortionary incentive environment, substantial inequity in the distribution of fiscal burden and a needlessly complex system with adverse effects on compliance by taxpayers and enforceability by tax administrators. Adlo attempts to address the revenue shortfall have only exacerbated the failings of the current system without yielding any significant revenue. This chapter examines the level of the tax effort and the structure of taxes before discussing some of the central failings of the current system. A. TAX EFFORT AND STRUCTURE OF TAXES 4. Table 2 shows central government revenues as a share of GDP in the period from 1981/82 to 1989/90. The year 1976/77 is also included to show the impact of oil on the level and structure of the tax effort. Cameroon's total tax ratio declined substantially from about 20 percent in the mid-80s to about 15 percent in the last three years. The decline in non-oil revenues as a share of non-oil GDP, however, gives even greater cause for concern as it I/ Cheryl W. Gray, Issues in Income Tax Reform in Developing Countries, Working Paper Series, August 1989 - 12 - indicates a deterioration in the traditional instruments of resource mobilization. This ratio registered a continuous decline since 1983/84 from 14.7 percent, close to its level in 1976/77 before the advent of oil, to 10.8 percent in 1989/90 and to under 10 percent today. Cameroon's current tax system fails dismally in meeting the revenue adequacy criterion of a good tax regime. As discussed in the previous chapter, the current level of public revenues is sufficiently low to threaten the Government's ability to maintain even the highest priority public expenditures. In addition, the level of the budget deficit is inconsistent with macroeconomic stability and a sustainable debt burden. Table 2 Central Government Revenues 1976/7 1981/2 1982/3 1983/4 1984/5 1985/6 1986/7 1987/8 1988/9 1989/90 (as percent of GDP) Total Revenues 15.3 15.8 17.8 20.9 20.0 20.9 17.8 15.8 16.1 14.3 Oilrevenues 0.0 3.4 3.7 8.5 8.9 9.2 6.3 5.6 5.5 4.3 Non-oil tax revenues 13.2 11.2 13.0 11.7 9.6 9.3 9.6 9.3 9.0 9.1 Non-Tax Revenues 2.1 1.2 1.0 0.7 1.5 2.4 1.8 0.9 1.6 0.9 (as percent of non-oil GDP) Non-oil revenues 15.3 10.7 13.9 14.7 13.8 13.1 12.2 10.9 11.4 10.8 Non-oil tax revenues 13.2 9.7 12.9 13.9 12.0 10.4 10.3 9.9 9.6 9.8 Taxes on Income and Profits 2.1 3.0 5.2 5.1 4.1 2.9 3.0 3.5 2.7 3.3 Taxes on Property 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Taxes on Goods and Services 3.3 2.4 3.1 3.2 2.9 2.9 2.9 2.6 3.7 3.6 Taxes on International Trade 7.1 3.6 4.1 4.9 4.2 3.9 3.7 3.4 2.6 2.4 Other 0.5 0.5 0.4 0.4 0.5 0.4 0,5 04 0.5 0.5 Non-Tax Revenues 2.1 1.1 1.0 0.8 1.8 2.7 1.9 09 1.8 0.9 Memorandum (in CFAF billions) Gross Domestic Product 789 2214 2629 3117 3923 4166 3969 3695 3495 3346 Non-oil GDP 789 2574 2658 2617 3155 3727 3719 3462 3277 3093 Source: Projections Department, Ministry of Economy and Finance 5. It is instructive to note that Cameroon's tax ratio is among the lowest in the region (Table 3). This suggests substantial room for increasing the tax effort, which should be an essential feature of any medium-term policy toward addressing the fiscal imbalance in the Government's accounts. Such an increase, however, cannot be effective in the absence of an overhaul of the entire tax regime. Piecemeal changes or increases in tax rates will yield little revenue and only at the risk of introducing greater distortions which would threaten sustainability of revenue in the longer term. - 13 - Table 3 A Comparison of Government Revenues, 1989 Cameroon Senegal Togo Ghana Indonesia CAR RCI As a percentage of GDP: Government revenues 16.1 25.6 22.8 20.5 25.1 12.3 19.4 Oil revenues 5.5 10.4 Non-oil revenues as 11.4 17.2 % non-oil GDP As percentage of total revenues: Taxes on income and profit 15.7 24.2 35.1 18.1 58.2 25.9 20.1 Taxes on goods and services 21.6 23.1 8.3 32.1 20.0 - 38.4 u Taxes on international trade 14.9 35.8 56.6 43.2 6.1 40.2 34.4 o"ure: World Bank statt' estunates 6. While all major categories of taxes registered declines since the onset of the economic crisis in the mid-80s, reductions were more pronounced for some categories of taxes. Between 1982/83 and 1989/90, non-oil tax revenues declined by 1.7 percent per annum with taxes on income and profits and taxes on international trade registering annual reductions of 4.4 percent and 5.3 respectively. Taxes on goods and services proved to be more resilient in general and actually registered an increase with the introduction and subsequent increase in the tax on petroleum products. 7. Tables 4 and 5 show the structure of the Cameroonian tax system by major categories of taxes. Following their peak in the middle of the 80s, when they accounted for 45 percent of total central government revenues, revenues from the petroleum sector (including royalties and the tax on company profits) have represented about one-third of total revenues in the last four years. This share has remained relatively stable despite declining petroleum production levels largely due to commensurate declines in non-oil revenues. 8. Table 5 shows that the structure of the Cameroon tax system remained relatively stable throughout the 1980s, with taxes on income and profits and taxes on international trade each accounting for one-third of non-oil taxes, and taxes on goods and services for approximately one-fourth. This structure represents a clear evolution from that prevailing in the 1970s when taxes on international trade represented more than one-half of all revenues with taxes on income and profits accounting for only 16 percent. The relative decline in taxes on international trade is due in part to the increasing use of special production regimes, which replace all import and domestic taxes with a single tax on turnover. Despite this reduced . reliance on trade taxes, the Cameroonian tax system displays characteristics common to tax regimes in developing countries in general and to countries in the region in particular. These include the relatively small share of direct taxes, and of wealth taxes in particular, and the predominance of commodity taxes. Tables I - 10 in Appendix I provide a detailed breakdown of the structure of taxes in Cameroon from 1976/77 to 1989/90. - 14 - Table 4 Central Government Revenues (in CFAF 'O0s) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 TOTAL REVENUES 120.8 350.2 467.4 650.3 785.5 870.4 705.1 582.7 563.0 477.7 Oil revenues 0.0 74.2 97.8 266.2 350.0 382.0 252.0 207.0 190.9 145.0 Non-oil tax revenues 104.2 249.0 342.4 363.5 377.5 386.8 383.0 343.3 314.6 303.5 Taxes on Income and Profits 16.5 77.0 137.9 133.2 130.6 109.6 111.2 120.1 88.4 100.6 Taxes on Property 1.9 4.8 4.9 4.7 6.5 7.0 7.1 5.2 5.3 5.1 Taxes on Goods and Services 26.1 61.5 81.2 85.0 91.5 109.3 108.6 89.2 121.4 10.9 Taxes on International Trade 55.8 93.8 108.3 129.4 133.4 144.7 136.4 116.3 83.9 73.9 Other 3.9 11.8 10.1 11.2 15.6 16.1 19.7 12.5 15.4 14.0 Non-Tax Revenues 16.6 27.1 27.2 20.6 57.9 101.7 70.1 32.4 57.5 29.2 Table 5 Central Goverment Revenues 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 (as a percentage of total revenues) TOTAL REVENUES 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Oil revenues 0.0 21.2 20.9 40.9 44.6 43.9 35.7 35.5 33.9 30.4 Non-oil tax revenues 86.3 71.1 73.3 55.9 48.1 44.4 54.3 58.9 55.9 63.5 Taxes on Income and Profits 13.6 22.0 29.5 20.5 16.6 12.6 15.8 20.6 15.7 21.1 Taxes on Property 1.6 1.4 1.0 0.7 0.8 0.8 1.0 0.9 0.9 1.1 Taxes on Goods and Services 21.6 17.6 17.4 13.1 11.7 12.6 15.4 15.3 21.6 23.0 Taxes on International Trade 46.2 26.8 23.2 19.9 17.0 16.6 19.3 20.0 14.9 15.5 Other 3.2 3.4 2.2 1.7 2.0 1.9 2.8 2.1 2.7 2.9 Non-Tax Revenues 13.7 7.7 5.8 3.2 7.4 11.7 9.9 5.6 10.2 6.1 (as a percentage of non-oil revenues) Non-oil tax revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Taxes on Income and Profits 15.8 30.9 40.3 36.6 34.6 28.3 29.0 35.0 28.1 33.1 Taxes on Property 1.8 1.9 1.4 1.3 1.7 1.8 1.9 1.5 1.7 1.7 Taxes on Goods and Services 25.1 24.7 23.7 23.4 24.2 28.3 28.3 26.0 38.7 36.2 Taxes on International Trade 53.5 37.7 31.6 35.6 35.3 37.4 35.6 33.9 26.7 24.4 Other 3.8 4.8 3.0 3.1 4.1 4.2 5.2 3.6 4.9 4.6 I Surce: Prqjections Department, Miustry of Economy and F,iance - 15 - B. FAILINGS OF THE TAX SYSTEM 9. In addition to its inability to generate adequate resources for public expenditures, the Cameroonian tax regime has a highly distortionary impact on production decisions, is very complex and rates poorly with respect to both horizontal and vertical equity. In general, the tax base is narrow, rates are high and exonerations and special exemptions are widespread. These features are clearly interlinked as the narrow tax base necessitates high rates to generate sufficient revenue which in turn creates incentives for tax evasion and pressures for the granting of exemptions thus further narrowing the tax base. The following provides a summary discussion of the failings of the main categories of taxes in meeting the efficiency, equity and administrative enforceability criteria. Customs regime. The common UDEAC regime of tariffs, which severely constrains national attempts at tax reform, is characterized by excessively high rates, in particular on final goods. Protection rates are thus generally high and dispersed resulting in inefficient production. In addition, the system has led to the proliferation of special regimes granted under the UDEAC treaty, the Investment Code or national production regimes mirroring UDEAC provisions. Tax treatment thus varies by activity and sometimes by firm for the same activity creating horizontal inequities and distortions in investment and production decisions. Indirect Taxes. Efficiency is compromised as the domestic turnover tax has a cascading structure and is not coordinated with taxes on competing imports. Corporate Taxation. Rules regarding the computation of taxable income are excessively complex undermining administrative enforceability and compliance. Certain forms of capital income, including some interest income and capital gains, are poorly taxed while dividends are subject to double taxation creating distortions in corporate finance decisions. An additional set of issues relates to the treatment of reserves, the relative merits of the minimum tax, the determination of deductible expenses, and the timing of tax payment with implications for efficiency and equity. Personal Income Tax, The differential treatment of personal income depending on its source and the legal form of economic activity has little economic justification, generates horizontal inequity in the treatment of taxpayers and is a source of considerable tax evasion. In addition, despite the highly progressive rate structure of the surtax, personal income taxation fares poorly with respect to the equity criterion. The prevalence of proportional taxes with excessive reliance on presumptive taxes reduces the dynamism of the tax system and attenuates the link between taxation and ability to pay. The system of "family splits" further erodes the progressivity of the system while introducing a pro-natal bias. Wealth Taxation. The virtual absence of wealth taxation deprives the government of an important source of revenue and a valuable instrument for income distribution. - 16- Resource Taxation. The potential for cost recovery and sector taxation is not fully utilized, nor does sectoral taxation reflect a systematic and rational attempt to weigh social costs and benefits. Insufficient consideration is given to the sustainability of natural resource exploitation and to the rights of future generations. 10. Given the extent to which the current Cameroonian tax system violates the tenets of a good tax system, there is considerable room for improvement along all four criteria before trade-offs would become necessary. Efficency and equity can both be enhanced by broadening the tax base through extension of the tax net to all economic activities and elimination of exemptions, by reducing tax rates, coordinating personal and corporate income taxation, eliminating special fees which are cumulative with general taxes, making greater use of user charges and by decentralizing taxation and spending decisions. This can be achieved while increasing revenue collection and simplifing considerably the tax system in the process. The result would be reduced administrative burden and potentially greater compliance with a fairer and simpler system, both reinforcing the revenue objectives. C. PRIORITIES FOR REFORM 11. The agenda for tax reform in Cameroon is daunting as no less than a complete overhaul of the general tax system is required. In addition, taxation arrangements need to be revamped in a number of resources/sectors with significant revenue potential and of great importance to the welfare of current and future populations. Priorities will therefore need to be established for the implementation of these reform proposals taking into account the country's limited administrative capacity. The order of priorities is one aspect of the design of the stages of reform. Another aspect which is essential to a successful tax reform strategy is the issue of sequencing which takes into account the country's revenue needs and the implication of changes in one set of taxes on the structure of another. The complexity of the Cameroonian tax system stems in part from a desire to make up through special arrangements for the failings of the general tax regime; eliminating the former before the latter have been corrected would lead to serious economic difficulties. 12. Priorities for reform include the revamping of the system of trade and indirect taxes which has been the source of numerous inefficiencies and considerable tax evasion. While it is essential to implement reforms in indirect taxes and the customs tariff in tandem in order to create a rational incentive framework, the stages of reform for both set of taxes will have to take into account the evolution of relative prices in the Cameroonian economy. The introduction and the phasing-in of the value-added tax, on the other hand, will be a function of revenue requirements in the short term as well as the administrative capacity to prepare and implement this reform. 13. The overhaul of the system of personal taxation is important both from the equity and the efficiency perspective. While this reform, including its integration with the corporate tax, should be initiated as soon as possible, its implementation can and should be phased-in over 3- 5 years. Most proposals for changes in the corporate income tax can be undertaken without much disruption or administrative cost. In this context, the change to tax payment based on current year's estimated profits has no real urgency and can be postponed until the cashflow situation of companies has improved somewhat. Similarly, the introduction of a generalized capital gains tax can be put off even while ensuring adequate taxation of such gains from real property holdings, important to increase the relative attraction of productive investments. - 17 - Finally, arguments in favor of elimination of double taxation of dividends and the minimum income tax for companies can, for the moment, be subordinated to revenue needs. 14. Sequencing issues also arise with regard to tax expenditures (through the Investment Code or other legal/contractual arrangements) which should be eliminated once the general tax regime has been reformed. Similarly, while the reform of registration taxes and duties would alleviate administrative burden, this is neither a top priority nor should it be undertaken before the indirect tax system has been reformed with rates pitched to make up for revenue shortfalls. 15. Forsty tax reform is urgent if this important resource is to be preserved and government rent maximized. It also needs to be coordinated with the legal and institutional reforms currently underway. The implementation of proposed reforms would be assisted by a World Bank project in the forestry sector which is under preparation. Certain aspects of taxation/pricing in the petroleum sector need to be modified urgently to encourage investment in exploration and increased efficiency at the refining stage. A revamping of urban taxation with the objective of decentralization can only be undertaken once a functional system of property taxation has been established; the Bank's urban project will in the meantime continue in assisting the Government with preparations to this end. Agriculture sector taxation is a thorny and important issue but not a top priority in the first phase, especially since the sector continues to be subject to implicit taxation on account of the current relative price misalignment. 16. The following chapters address these issues in some detail; chapter IV focuses on taxes on income and profits, chapter V on wealth taxation and chapter VI on indirect and trade taxes. Chapter VII introduces the topic of resource taxation and discusses taxation arrangements in the forestry, agriculture, urban and petroleum sectors. In each of these chapters, a description of the current system is followed by an analysis of shortcomings and proposals for reform. An assessment of the impact of reform proposals on revenue and income distribution is included where feasible. Chapter VIII includes a discussion of issues related to tax administration and the final chapter presents a possible implementation schedule which will be refined during discussions with the Government. - 18 - CHAPTER IV - TAXES ON INCOME AND PROFITS 1. Taxes on income and profits comprise the corporate profits tax, the personal income tax and the minimum income tax (impOt forfaitaire sur le revenu des personnes physiques). These taxes account for approximately one-third of non-oil tax revenues (see tables 3 and 4 in Appendix I). The personal income tax represents about one-half of total taxes on income and profits with an approximately even split between the proportional tax and the progressive surtax. Despite sharp declines since 1985/86, the oil sector still accounts for about 40 percent of taxes collected on corporate profits. Corporate taxes from other companies represented about 10 percent of non-oil revenues or about 1 percent of non-oil GDP in 1989/90. A. CORPORATE TAXATION i. Cirrent System 2. Corporations operating in Cameroon are subject to the minimum presumptive tax (imp6t minimum forfaitaire) and the corporate profits tax, which is assessed on realized profits. In addition, corporations withhold at the source the proportional tax on income from securities (taxe sur les revenus des capitaux mobiliers) and the tax on royalty and other payments made abroad (taxe sp6ciale sur les revenus). The corporate income tax accounted in 1989/90 for one-third of revenues from taxes on income and profits; taxes on royalties and the tax on income from securities represented additional 4 percent and 10 percent, respectively. It is widely recognized that the corporation is a potentially useful entity for the collection of a number of taxes which can be withheld at the source. This potential is utilized in Cameroon through the withholding taxes on dividends and royalties mentioned above as well through withholding of the proportional tax on salaries, the progressive surtax and more recently the proportional tax on rental income. 3. The corporation tax is levied on profits derived from business or activities carried on in Cameroon by local entities engaged in profit making activities or by permanent establishments of foreign companies. Taxable profits of corporations are determined on an actual basis, the fofal system being limited to individuals. The determination of taxable profits follows standard procedures which allow the deduction of the necessary costs of earning income. However, the Cameroonian tax provisions place limits on certain deductible expenses. The most important features of deductions allowed for the computation of taxable income are summarized below: - depreciation is computed on a straight line basis on the historical cost of assets and in accordance with rates fixed in the Tax Code; - the overall amount of remuneration paid to the members of a company and their spouses for employment within the company is deductible for tax purposes up to only 25% of taxable profits; - the overall amount of headquarter expenses, remuneration for training as well as for administrative, technical, financial and accounting assistance to be paid to non-residents are deductible only up to 10% of taxable profits; - 19 - - royalties are not deductible if paid to persons or companies: (i) not established in one of the UDEAC member countries and (ii) participating in the capital or the management of the Cameroonian company; - expenditures on rental of premises are deductible provided that they are in line with rentals usually paid for similar premises while other rental expenditures (e.g. equipment) are not deductible when paid to a member of the company holding at least 10% of stock or shares; - interest paid to members on funds provided by them to the company in excess of their capital holding are deductible up to the limit of two points above the lending rate of the Central Bank. In joint stock or limited liability companies, deduction of interest is allowed in respect of sums paid by members or shareholders only so far as such sums do not exceed one half of the paid in capital of the company; - all taxes charged to the corporation, with the exception of the corporate profits tax itself, are deductible; - reserves to meet clearly specified losses or charges are deductible; - non-deductible expenses are treated as distributed dividends and therefore subject to the tax on income from securities; - losses made in a given tax period may be carried forward on the following tax periods up to the third period following the tax period of the initial loss. 4. The rate of the corporation tax is 35%, plus 10% earmarked for local government, yielding a total tax rate of 38.5%. This rate compares favorably with rates practiced in the region and elsewhere. 5. The minimum.tax is paid at the beginning of a fiscal year by all corporations regardless of level of profits at the rate of CFAF 600,000.2/ Final tax liability is computed as the normal profits tax, or 1 percent of turnover, or the initial minimum flat payment, whichever is higher. The initial payment is credited against this liability. This tax was introduced mainly as a response to tax avoidance practices of large companies through skillful manipulation of their accounts. 6. Information obtained from the Tax Department on tax liabilities of companies in Yaounde in 1988/89 yields some interesting results which are summarized in Tables 6 and 7. Out of a total of 248 companies for which data were reported, 8 (or 3.2% of the sample) accounted for 84.7 percent of taxes due while 15 (or 5% of the sample) accounted for 91 percent of the same. While high concentration levels are not unusual for profit taxes, this 2/ The 1990/91 Budget Law introduced an exemption for new companies during their first two years of operation and a reduction to CFAF 300,000 for years three and four. - 20 - feature appears to have been reinforced by the onset of the economic crisis. 2/ In addition, 165 (67%) of the enterprises in the sample reported losses. A total of 103 companies were liable for no more than the minimum tax while profits tax liabilities for an additional 100 enterprises were assessed at I % of turnover. Only 45 companies, therefore, paid the normal rate of 35%. Table 7 shows effective tax rates for the top 15 companies which account for the bulk of corporate taxes in Yaounde. Out of this sample, only 7 companies were assessed at the 35% rate with the remaining 8 being subject to the I % turnover tax. The effective tax rate for the 15 enterprises included in the table was 49.8% -- substantially higher than the normal statutory rate. This is due to the sizeable ratio of loss-reporting enterprises in the sample (6 out of 15). Table 6 Corporate Income Tax Distribution of Tax Liability, 1988/89 Taxes due Number of as % of Total taxes as % of (in CFAF millions) companies total (CFAF million) total < 1 131 52.8 84.1 1.1 1 - 10 86 34.7 265.7 3.6 10 - 50 16 6.5 318.7 4.4 50 - 100 7 2.8 453.2 6.2 > 100 8 3.2 6194.5 84.7 Total 248 100.0 7316.1 100.0 Niourc : Tax Department, based on te TKINITE i system. I/ The 1980 IMF report on Taxes and Tax Reform in Cameroon reports that in 1917/78, 12 percent of corporations with taxable profits contributed about 75% of the tax. - 21 - Table 7 Corporate Income Tax Effective Tax Rates for the top 15 companies in Yaounde, 1988/89 Company Profits tax Profits (CPAF Turnover (CPAF Taxes as % Taxes as % (CFAF million) million) million) of profits of turnover # 1 4206 12022 17183 35.0 24.5 # 2 704 2011 5346 35.0 13.2 # 3 284 -510 28432 1.0 # 4 277 792 3562 35.0 7.8 # 5 224 0 22393 1.0 # 6 209 -51 20928 1.0 # 7 167 477 1561 35.0 10.7 # 8 121 281 12146 43.2 1.0 Total, top-8 6194 15022 111549 41.2 5.6 # 9 64 183 6227 35.0 1.0 #10 45 129 4102 35.0 1.1 #11 68 -1762 6840 1.0 #12 73 0 7334 1.0 #13 62 -536 12382 0.5 #14 67 191 4740 35.0 1.4 #15 57 90 5700 63.3 1.0 Total 6631 13317 158874 49.8 4.2 So: Tax Department, TINMIT 7. Di _idend distributions are subject to the proportional tax on income from securities and are aggregated into the recipient's total personal income for the purposes of the progressive surtax on total personal income. The proportional tax rate is 15 percent (plus centimes additionnels) and is withheld at the source by the company. 4/ The definition of A/ The tax on income from securities applies also to net profits realized by permanent establishments of foreign companies in Cameroon at the rate of 25%, except otherwise provided for by an International Tax Treaty. The tax does not apply to dividends distributed to a parent company which: (i) is a joint stock or a limited liability company; (ii) has its head office in a UDEAC member state; (iii) holds at least 25% of the subsidiary's capital and undertakes to keep its capital shares for at least two years. Dividends distributed from such a subsidiary to its parent company in Cameroon are subject to corporation tax only on 10% of their amount. - 22 - corporate distributions is ' :oad, including corporate profits that are not incorporated into the capital of the company or set aside in reserves. 8. Interest income is subject to the same proportional tax with varying rates depending on the savings instrument. Thus, earnings on "bons de caisse" 5/ are tax-exempt while interest income from bonds pay 10 percent, except for earnings from mutual funds (SICAV) which are subject to the proportional tax on income from securities at 20 percent after deduction of CFAF 500,000. Postal savings below CFAF 5 million are exempt while those above CFAF 5 million and term deposits and checkbook savings are subject to an 18 percent tax. Interest due on Government and public enterprise borrowings are exempt from taxation altogether. The 10 percent surtax for local governments is applied on all taxes on income from securities. 9. Royalties and other payments made abroad are subject to the special tax on revenues. Taxable remunerations include copyright royalties, income from the sale or granting of licenses to use patents and trade marks and payments made for technical, financial or accounting assistance. The tax which is withheld at the source is applied at a rate of 15% on the gross amount of remuneration. When the remuneration in question is not deductible, it is deemed to be distributed income and as such liable to the corporation tax ard to the proportional tax on income from securities; the tax on royalties withheld at the time of payment can then be credited against the corporation tax. ii. Issues and Recommendations 10. While the central features of the corporate profits tax compare favorably with current best practice, there are unnecessary complications in the rules regarding the calculation of taxable profits, stemming from the lack of coherence and integration between business and personal taxation. Other issues discussed in the following sections include the treatment of capital income, depreciation and in-kind benefits, the relative merits of the minimum income tax and business license taxes (patent,-s) and the timing of tax payment. In addition, issues relating to the impact of inflation on calculating taxable income are flagged and some recommendations are included regarding filing requirements. Finally, the provisions of the new Investment Code and its relevance in the context of a revamped tax system are separately discussed. 11. NotwiLqstanding the specific reform proposals made to address some of these issues, it is recommended that the current corporation tax be retained in its general form, with a tax rate of 35 percent on profits (see urban taxation for recommendations regarding the system of centimes additionnels). It is further recommended that the tax on royalties be maintained in its current form as it is one of the few ways in which fore;gn companies are taxed on income earned in Cameroon. The limits on deductibility for such remuneration should also be maintained given the differential rates of taxation as between the tax on royalties and the corporate plus dividend taxes. 5/ "Bons de caisse" are negotiable savings instruments offerred most commonly by banks and redeemable at any time; as a result interest rates on bons de caisse are lower than on instruments with a fixed maturity. - 23 - Business versus personal taxation 12. The Cameroonian tax system taxes corporate profits at 35 percent (plus centimes additionnelles) while profits from unincorporated commercial and industrial activities (BIC) are subject to a proportional income tax of 22 percent (plus centimes additionnels) plus the progressive surtax. While income from other activities are subject to varying rates of taxation, wages are taxed at only 6 percent (plus centimes additionnels) - up only very recently from 3 percent - plus the progressive surtax. The system attempts to deal with the potential for tax avoidance created by these disparities in tax rates through rather arbitrary regulations governing payments to "associates" of businesses, essentially partners or owners of closely held corporations (see para ... for limits on deductibility for certain business expenses). As is to be expected, such rate disparities and ad-hoc regulatory solutions create sheltered niches while complicating the tax system unnecessarily. 13. At the heart of the problem is the lack of coherence and integration between business and personal taxation. It is recommended that this should be addressed through broad-based reform that would set the corporate tax rate equal to the top rate in a unitary progressive individual income tax. This would imply (for high-income individuals at least) that wages, capital gains, dividends, and any other form of business income paid out to individuals would be accorded the same tax treatment as earnings retained in the firm whatever the legal form of organization enjoyed by the firm. Taxation of capital income: interest. dividends, capital gains. reserves 14. The differential treatment of capital income, which is in large part due to the non- integiation of business and personal taxes, biases corporate finance choices and creates incentives to shelter income in more lightly taxed categories. While interest expenses are deductile (within the limits indicated on page ...), interest income is taxed at varying rates under the proportional tax system depending on the nature of the instrument and the borrowing entity. Dividends, on the other hand, are subject to double (or even triple) taxation; they are taxed as corporate profits at the level of the company and as income from securities at the level of the individual before being aggregated into total personal income for the purposes of the progressive surtax. The tax system as such generates a bias in favor of debt over equity financing and in favor of certain forms of debt and equity over others. 15. The treatment of interest income remains one of the more controversial issues in income taxation. §I Where capital controls are limited and financial markets integrated with those of developed countries, as is the case with Cameroon, taxation of interest income will either result in increases in lending rates or capital flight, if rates are fixed. On the other hand, exemption of interest income from taxes would put stocks (especially when dividends are subject to double taxation) and other nonexempt savings instruments at a disadvantage and inhibit the development of a mature and diversified financial system while creating overly leveraged companies. Also, exemption of interest income when interest payments are considered a deductible expense creates a large loophole for tax evasion as a taxpayer can reduce tax liability by depositing funds in a bank account (with tax free proceeds) with arrangements to borrow against it (with deductible finance charges). Finally, since interest fi/ See Cheryl W. Gray, August 1989 and Wayne Thirsk, Lessons from Tax Reform: An Q_vervew, Working Paper Series, January 1991 for a thorough discussion of these issues. - 24 - income is earned disproportionately by higher income taxpayers, exemption of interest would have a regressive impact on the distribution of income. 16. The exemption of "bons de caisse" from taxes appears to have been motivated by a desire to capture savings, in particular those held abroad, into the domestic banking system by offering the possibility of holding an anonymous savings instrument. However, this creates distortions among the various instruments of savings. While currently this instrument is being offered only by commercial banks, a potentially large loophole exists should companies avail themselves of the provisions by issuing commercial paper. An entrepreneur can finance his operations (and reduce tax liability) by issuing bons de caisse to friends at relatively high interest rates since the costs of the commercial paper would be tax deductible while its proceeds are tax-exempt. Finally, in addition to biasing the investors' decisions on the choice of savings instruments, the exemption of public sector bonds distorts the relative cost of borrowing between the private and public sectors, leading to less stringent requirements for expenditure decisions on the part of the latter. 17. It is therefore recommended that deductibility of interest payments be maintained while all interest earnings are taxed as personal income. It is further recommended that the current system of withholding be maintained but at the rate of 35%; taxes withheld would then be credited against total personal income tax liability. Finally, in order to avoid a possible increase in lending rates with the proposed widening of the base and the increase in the tax rate, it is recommended that the tax on the distribution of credit (TDC) be eliminated. This tax is levied on all bank loans at a rate of 1 percent and is earmarked for a public enterprise of dubious utility in charge of providing loan guarantees (FOGAPE). Financial transactions are also subject to the domestic turnover tax (ICAI) which adds 1.5 - 2 percentage points to final lending rates. Indirect taxes, including on services, are discussed in detail in Chapter VI. It is recommended here that banking services be subject to the normal range of economy-wide taxes, in particular since reserve requirements, which are an implicit tax, are absent in Cameroon. 18. As indicated above, diviends are subject to double taxation resulting in discrimination against equity and complex limitations on deductibility of certain expenses which constitute "disguised dividends". The elimination of double taxation is recommended in the longer term once the revenue constraint has been relaxed. This can be done by allowing deductibility of dividends at the corporate level, by exempting dividends from personal income taxes or by crediting the individual for the dividend tax paid at the corporate level. The first and third choices result in dividends being taxed at the marginal tax rate of the individual while the second option subjects dividends to the corporate profits tax. For the purposes of administrative simplicity, distribution of dividends, which constitutes a non- deductible business expense, should be exempt from taxation at the hands of the recipient. 2/ In the short-term, however, given the acuity of the government revenue constraint, it is 2/ In case the third option is selected, a brief description and illustrative example are provided of how the scheme would function in practice. The 35 percent income tax would be considered an advance payment (withholding at source) of income tax on payments of nondeductible dividends or other nondeductible nonwage payments of profits to associates. Recipients of this income would thereby be receiving "after tax" income, and would claim the advance payment as a credit against their tax liability owed under the personal income. For example, with a 35 percent corporate marginal rate, if a firm had revenue of 100 and paid 30 in wages, also taxed - 25 - recommended that double taxation of dividends be maintained; to this end, dividend income would continue to be subject to the current system of withholding at the now preferential rate of 15 percent and would be incorporated in personal income for the purposes of the proposed individual income tax. Assuming that dividend income earners are generally high income individuals, this would improve income distribution while prudence on the part of the newly restructured banking system may prevent over-indebtedness of companies for the time being. It is also recommended that taxation of dividends earned by foreign companies be maintained in both the short and longer term at its current rate of 25 percent. 19. Taxation of gpigtgain will be discussd in greater detail in Chapter VI which treats wealth taxation. It will be noted, here, however, that the current system extends the company profits tax to certain categories of capital gains to the extent that capital gains realized from the sale of assets that are part of the balance sheet are assimilated into taxable profits. Nonetheless, only partial taxation of capital gains creates biases within equity finance, likely to become more pronounced as capital markets develop. Among other reasons (see Chapter VI), in order to treat new shares and retained earnings symmetrically, it is recommended to tax all forms of capital gains under the personal income tax. 20. Retained earnings which are set aside in reserves or incorporated into the capital of the company are exempt from profits taxation without safeguards against tax evasion through unreasonable levels of reserve accumulation. Corporations can also avoid payment of the tax on dividends by building reserves and/or increasing their capital through retained profits. This bias in favor of internal financing compensates in part for the partial taxation of interest income and may seem to be advantageous in an economy such as Cameroon's with the banking system in crisis. However, over the longer term this design discourages the establishment and elaboration of more fully articulated capital markets and removes the firm's investments from more stringent market tests. For this reason, it is recommended that the allocation of reserves from pretax profits should be permitted only under the adoption of an "all events test"; that is, pretax reserves should be permitted only when all events have occuried that establish with certainty the existence and amount of an otherwise deductible liability for which the reserve is to be accrued. DeRMgiation 21. The current tax system provides for linear depreciation only, in accordance with schedules incorporated in the Tax Code. More rapid schedules - declining balance and sum- of-years-digits - are widely accepted in other countries and considerable sentiment exists in Cameroon's business community in favor of such formulations. The various systems of accelerated depreciation, though they have certain advantages, add needless complexity to a part of the tax system that appears otherwise to work reasonably well, and potentially add opportunities for rent extraction by the tax administration. It is recommended therefore that the current system of depreciation be maintained, with specific incentives for new investment at 35 percent at the margin, the firm would pay 24.5 in taxes and keep 45.5, while the individual wage earner would pay 10.5 and keep 19.5. Contemplating a nondeductible dividend or other nondeductible payment to an associate, the firm would pay 35 in tax and have 65 left in income from which to pay the dividend. It could then pay a dividend of 19.5, on which tax of 10.5 would be deemed paid by the firm's tax. The firm, the "associate", and the fisc would be indifferent between the two schemes. - 26 - being provided for the time being through the recently revised Investment Code (see discussion in paras ...). However, we would recommend a specific study to assess the feasibility of immediate (or partial) expending of all capital items. Treatment of in-kind benefits 22. In-kind benefits provided to wage earners are a deductible expense for the corporation and represent taxable income for the recipient. These benefits are taxed on a presumptive basis and appear to be underestimated under the current system. Free housing, for example, is evaluated at 5% of wages and salaries when its marke! value is probably closer to 20-25%. B/ There is also an overall ceiling (CFA 50,000/mo per person) on in-kind income o_.,milated into taxable income which is too low by all accounts. In view of the difficulties of assessing the market value of in-kind benefits, it is recommended to disallow the deductibility of these expenses for the company and exempt such income from taxation at the hand of the recipient. To the extent that the company opts to maintain fringe benefits under the proposed system, such income would be taxed at the corporate rate rather than at the marginal personal income rate. In addition to avoiding cumbersome administrative evaluation procedures, this recommendation closes a potential tax loophole and to the extent that such benefits are understated and go disproportionately to the better-off, it also moves in the right direction on the equity front. Business license fees (patentes) 23. The license fee (contribution des patentes) is paid by all business entities to earn the right to exercise a business activity. The tax is paid annually at the beginning of the fiscal year and its proceeds are earmarked for local governments. The patente system is designed to calibrate tax rates with easily measured indicators of business profitability. As such, it can arguably be considered an income tax rather than a tax on goods and services. Tho tax is levied according to two tables in which business activities are listed: (i) activities in Table A (about 15) are subject to a fixed duty which varies from CFAF 5000 to CFAF 1,000,000; (ii) activities in Table B (about 30) are subject to a fixed duty and variable rate based on turnover or indicators of turnover (such as number of employees, machines). The rates also vary according to the place where the enterprise is located; for the purposes of this tax Cameroon is divided into three zones. 24. Given its income tax mimicking feature, the patente is an ideal instrument for the presumptive taxation of hard to tax groups such as the bulk of the informal sector. In fact, the patente constitutes the base for the calculation of presumptive taxes for most business activities subject to the proportional income tax. 25. Against its inconvenience as a possible duplicator of income taxation, the patente has a number of very positive features. It is generally well accepted by the population, it is particularly well-suited to informal sector taxation, it is administratively simple, compliance levels are generally high given the ease of control and it is a substantial source of revenue for local governments. It is therefore recommended that the patente be maintained. It is further recommended that activity categories and rates be updated (some minor modifications were I/ In fact, housing allowances granted to civil servants represent 20% of their base salaries. - 27 - introduced in the 1991/92 Budget Law) and that the two tables mentioned above be merged into one. The minimum company tax 26. Given the structure of this tax, it is in essence randomly a license fee, a sales tax, or an income tax, depending on the company's outturn. Thus, the impact is unpredictable, as is its relation to company performance. This is clearly borne out by the variation in the effective rates of taxation calculated in Table 7. The flat minimum penalizes small companies, the turnover tax penalizes companies with high turnover but low profit margins, and in each case only after the fact. All of these adverse impacts are worsened in a time of economic crisis. 27. Tt is rcommended that the sales tax aspect of the minimum tax be eliminated with any consequent revenue shortfall made up in the choice of rates for the proposed general turnover/value-added tax. It is further recommended that the minimum flat tax be subsumed in the patente system with a revised rate structure. 28. As indicated above, the importance of this tax as a source of revenue has increased considerably with the recent increase in the number of loss-making enterprises. Careful consideration will have to be given therefore to the evaluation of the revenue implications of the above recommendations. Timing of tax payment 29. Corporate income tax in Cameroon is paid three times a year on the previous year's actual profits. During inflationary periods this has a negative impact on the Treasury, while it may induce additional burden on companies during periods of declining growth. It is, therefore, recommended that payment be done on an installment basis (quarterly) during the current year based on estimated profits. This switch is likely to be difficult in the short term as it requires taxing enterprises twice (for current estimated and previous year's declared profits) during the year the change is introduced. Information about accounting methods generally followed in Cameroon would help determine the required transition period. If companies now set up current reserves for tax liabilities to be paid in the future on current income, a short phase-in (2-3 years) to the new system should be manageable without dislocation. On the other hand, if tax reserves are not currently accrued, a longer phase-in period (4-5 years) would be desirable. Either method may involve some disruptions of expected cash flow for companies, and this will need to be recognized in deciding when to initiate the change as well in settling on a final schedule for phase-in. Inflation 30. High levels of inflation can lead to significant distortions in the calculation of taxable income if no provisions are made for indexation. Inflation leads to the understatement of investment costs when depreciation is calculated on historic costs, and to the overstatement of the costs of capital if full deduction of nominal interest payments is allowed. 31. Inflation levels in Cameroon have historically been moderate or low and are likely to remain so as long as the monetary arrangements of the Franc zone are maintained in their current form. However, any sharp movement in the exchange rate of the French Franc could - 28 - lead to a disturbance in the price level in Cameroon even if medium-term inflation rates could be expected to be moderate once the adjustment of the economy to the new price level is completed. Consequently, it is recommended that the introduction of indexation be considered if inflation levels reach a sustained level in excess of 20%. Such indexation of the tax base would typically extend to depreciation, interest, inventories and capital gains. Filing Requirements 32. It is recommended that the forms required for tax filing be radically simplified. The current tax filing is a document that encompasses endless detail on the company's operation, much of it for statistical purposes. These statistical purposes would be better served by a separate statistical undertaking. Linked with a simplification of the filing, which should rely as much as possible on standard financial statements of corporate taxpayers, there should be a further level of simplification available to smaller incorporated businesses, those with less than, say (5) million FCFA in annual turnover. 2/ This extra-simplified filing should accompany less stringent accounting standards so as to encourage nascent formalization of growing businesses. 33. It is also recommended that the minimum threshold for formalization be linked with the payment of a "minimum" tax accrual. Thus, assuming (5) million CFAF in sales to be a reasonable threshold for entry into the formal sector, and assuming a profit rate of 30 percent to be a high norm would lead to a minimum corporation tax prepayment of FCFA 525,000 (.35 X .30 X 5) for all incorporated businesses. However, the prepayment would be credited against the ensuing actual liability and be refundable, providing an incentive for companies to provide accounting to obtain their refunds. One quarter of the minimum "prepayment", would be due each quarter, rather than the whole amount being due at the beginning of the fiscal year. The prepayment would be unrelated to the patente. Investment Code 34. In the context of its structural adjustment program, the Government promulgated a revised Investment Code on November 8, 1990 with effect from July 1, 1991. A schematic presentation of the provisions of the new Investment Code is included in Appendix II; its salient characteristics are discussed here. The new Code is based on the following four guiding principles: (i) transparency. clarity in the objectives of the Code and the Government's priorities for investment; (ii) automaticity. eligibility criteria which reflect the priorities retained by the Government for investment and which are not open to interpretation thereby conferring quasi-automatic access to the relevant regimes; (iii) performance-based benefits. the granting of benefits which are linked to the objectives being promoted and which, to the extent possible, are based on performance and not on declarations about intentions; 9/ The amount would be set to be consistent with the level of turnover below which businesses are subject to presumptive taxation rather than to the personal income tax. - 29 - (iv) simplicity. the simplification as much as possible of administrative procedures required to benefit from the provisions of the Code; 35. Priority objectives retained for new investments are the promotion of exports, employment and processing of natural resources. Consequently, elivibility to the Code is a function of the extent to which the proposed investment meets these three objectives. More concretely, an enterprise is eligible for the benefits of the Code if it meets the criteria regarding minimum employment creation or the share of exports and value added in total output. The existence of quantitative criteria reduces the possibilities for administrative discretion in the selection and introduces an element of automaticity. 36. Regarding the nature of benefits accorded under the Code, considerable effort was made to link the benefits offered to the objectives sought. That is to say, the more export- oriented an enterprise is, the greater tax reduction it receives as the benefits conferred are directly proportional to the share of exports in total output. The benefits related to employment-intensity are similar - the greater the number of Cameroonians employed by the enterprise, the greater the tax benefits it receives. Some exceptions to this principle are made, however, given the high level of import duties on capital equipment which increase substantially initial investment costs. However, taking into account concerns regarding loss of revenues and inefficiency resulting from excessive protection, these exceptions were kept to a minimum. Consequently, no exonerations are accorded on import duties; instead, a reduction to 15% is granted on imports of clearly specified capital goods during the initial period of investment. Additionally, the reduction of duties under the Code is accompanied by the introduction of a bank guarantee, equivalent to the amount of foregone revenues (i.e. the difference between normal and reduced duties). 37. The desire to limit up front (that is non performance-based) benefits led the Authorities to distinguish between the installation and operational phases of new investments, with separate benefits applicable at each phase. During the installation period, the enterprise benefits from reduced customs duties on imported capital goods as mentioned above and is exonerated from the domestic turnover tax on certain locally produced goods and services. In addition, during these first three years, the investor is exempted from paying various registration taxes (e.g. on insurance contracts and property transfer), the minimum company tax and the special tax on corporate assets. During the operational phase, the enterprise continues to be exempt from the minimum company tax and the special tax on corporate assets and in addition benefits from a 50% reduction in the corporate tax, and the proportional taxes on industrial and commercial profits and on income from securities. 38. Finally, with a view to simplifying administrative approval procedures, the new Code creates a one-stop investment agency. This is designed to facilitate the realization of an investment benefitting from the provisions of the Code. The centralization of all administrative procedures in one unit should simplify matters considerably for all new investors and reduce the long lapse of time currently required before an investment is actually undertaken. 39. While the new Investment Code represents a clear improvement over the previous one both on efficiency and revenue grounds, it still incorporates certain questionable features such as tax benefits designed to encourage enterprises to locate outside the main urban centers. More important than the specific provisions of the Code, however, is whether special investment incentives are needed at all. For various reasons, the current literature on tax - 30 - policy is uniformly critical of tax incentive schemes to attract new investment. These incentives add to the complexity of the tax system, can be very costly in terms of revenues foregone, are usually ineffective in generating additional investment given the importance of other considerations (political stability, market size etc) on the decision to invest and finally to the extent that the Government favors certain sectors or industries, they introduce distortions in investment decisions by altering the relative post-tax rates of return of different projects. A clearly preferable approach would be to improve the general policy environment and the design of the tax system with a reasonable trade-off between the desire on the one hand to capture rents from established operations and on the other to provide sufficient incentives to motivate new investments. 40. It is regoMMended in this report that the Investment Code be viewed as a transitional instrument. In an interim period when measures are underway to address macroeconomic imbalances, to correct the distorted incentive environment and to streamline administrative procedures, the Investment Code can, to some extent, isolate new investors from the currently unfavorable policy environment. As such, the benefits accorded to export and employment- intensive industries compensate in part for the anti-export bias and uneconomic labor costs resulting from the current misalignment of relative prices. Reductions in high import tariffs lower investment costs without having to wait for the reform of the customs regime. Similarly, certain uneconomic taxes (such as registration taxes and the minimum company tax) are eliminated and a one-stop investment shop is created to circumvent cumbersome administrative procedures. Once the Government has adopted a strategy for fiscal reform, however, and an improved policy environment is effective, the continued existence of derogations from tax and customs regimes would become superfluous and counterproductive. It is recommended therefore that the Investment Code be maintained only until such time as the proposed reforms are effectively implemented. However, it will be necessary in the interim period to review the provisions of the Code to ensure conformity with the reform measures and the phased calendar of implementation adopted by the Government. iii. Impact of Proposed Reforms 41. It is difficult to evaluate the impact of the proposed reforms on Government revenues. However, most of the recommendations are designed to enlarge the tax base by reducing deductions and closing loopholes for tax evasion. Such proposals include: the incorporation of all capital gains and all interest earnings in the calculation of taxable income, the integration of personal and business taxes so as to prevent entrepreneurs from sheltering profits in lesser taxed income categories, the limitations on reserve accrual and the elimination of in-kind benefits as a deductible expense. The potential gains from these measures need to be weighed against the revenue loss which would ensue from the elimination of double taxation of dividends. In order to preserve its revenue neutrality, the proposal to eliminate the minimum company tax is coupled with a recommendation to make-up for any short-fall through the indirect tax system and the revision of patente rates. B. PERSONAL INCOME TAX i. CUrrent System 42. The individual income tax system is based on the conceptual principles of schedular income taxation and is characterized by different partial taxes on different sources of income and a global general complementary tax at progressive rates. In a first step, individual - 31 - income is subject to an array of proportional taxes, which comprise taxes each with unique schedules based on the functional type of income -- wages, rents, business profits, dividends, and so on. In a second step, the various sources of income are added together and subjected to a global general tax (surtaxe progressive) after various deductions, including the proportional taxes already paid. Unlike the proportional tax, the global general tax takes into account the taxpayer's family situation and has a progressive rate structure. 43. The Cameroonian tax system also levies a minimum income tax on individuals (imp8t forfaitaire sur le revenu des personnes physiques). The minimum tax rate is fixed and, in principle, is levied on all males over 18 and on females with independent means. J/ Rates vary by region to reflect their relative prosperity as an indicator for ability to pay. The proceeds of the minimum tax are allocated to the budgets of local governments. 44. Tables 3 and 4 in Appendix I show the revenue yield from the different forms of personal income taxation and their evolution over time. Taxes on personal income represent approximately 50% of taxes on income and profits, about 16% of non-oil revenues and 1.7% of non-oil GDP. The progressive surtax and the proportional taxes account each for one-half of personal income taxes. Taxes on salaries constitute the bulk (50%) of proportional income taxes due no doubt to the practice of withholding. Income from securities constitutes the second most important revenue generating category of personal income and this tax is also subject to withholding at the source. Taxes on commercial and industrial activities accounted in 1989/90 for almost one-fifth of revenues from proportional taxes while taxes on rental income and non-commercial profits contributed less than 3% and revenues from the tax on agriculture (including forestry) profits were minimal. Schedular Proportional taxes 45. Schedular proportional taxes are levied on: (i) wages and salaries (including pensions) exceeding CFAF 25,000/mo at a rate of 6% (TPS); (ii) profits realized from unincorporated commercial and industrial activities (BIC) at a rate of 22%; (iii) profits realized from agricultural and forestry activities (IBAF) at a rate of 15%; (iv) profits realized from non- commercial activities (BNC), which comprise mainly the liberal professions, at a rate of 22%; (v) profits realized from artisanal activities (IBPA) at a rate of 11 %; (vi) income received from investments in securities (IRCM) 15%; and (vii) rental income (IRF) at a rate of 20%. 46. Taxes on wages and on commercial and industrial profits are subject to the centimes additionnels for the benefit of local governments. As in the case of corporations, taxpayers earning profits are subject to a minimum income tax equivalent to 1% of turnover. Taxes on wages and salaries and on income from securities are subject to withholding at the source. Since 1990/91 this provision is extended to the tax on rental income. 47. For the purposes of the tax on wages and salaries, in-kind income is included in the tax base but on a presumptive basis (see discussion on corporate taxation). Family allowances and other non-wage indemnities of civil servants and scholarships accorded to students, on the other hand, are not incorporated in the tax base. A standard deduction of 20% of gross wages and salaries applies to the calculation of taxable income. JO/ Those who have paid the minimum amount (CFAF 3000) under the progressive surtax are exempt. - 32 - 48. The calculation of taxable income for the purposes of the taUnonmercial and industrial profis is done on the same basis as the tax on corporate profits. Presumptive taxes are applied for small enterprises, as described below. 49. Individuals cultivating agricultural land of less than 5 hectares for production of foodstuffs are exempt from the tax on profits on agricultural and forestry activities. 50. The tax on rental income Is applied on rent actually received. Presumptive rent from owner.occupied buildings is excluded. This exclusion is extended to buildings occupied by the parents or children of the property owner. Also newly constructed buildings (including extensions) are exempted from income tax for a period of fifteen years. A standard deduction of 35% percent can be applied on gross rent for the calculation of taxable income, thus lowering the effective rate on gross income to only 13%. 51. The tax on income from securities has been discussed in the chapter on corporate taxation. 52. Wide use is made of presumptive taxation of profit generating activities. The threshold for formalization is defined with respect to turnover and varies by type of business; for commercial and industrial activities the level of turnover below which presumptive taxation applies is fixed at CFAF 60 million while the corresponding figure for other businesses is CFAF 20 million. These levels reflect the tripling of thresholds adopted in 1983/84 and while no figures could be obtained to support the claim, it is widely believed that they result in the application of presumptive taxation to the large majority of enterprises. Taxes for these enterprises are calculated on the basis of presumed levels of taxable income by activity and not on the basis of actual company accounts. In addition, the 1991/92 Budget provides for the imposition of a fixed tax on the same enterprises which is some multiple of the patente relevant to the type of activity and which is collected at the same time as the patente, that is at the beginning of the year. This amount is deductible from the final liabilities of the enterprise, calculated on the basis of the presumptive tax described above; the lump sum is in effect a minimum income tax as the law does not provide for a refund. Progressive surtax 53. The progressive surtax is levied on top of proportional tax with a view to enhancing the progressivity of the overall system and taking into account the specificities of the individual taxpayer as regards to family circumstances. The rates range from 0 to 60 percent, with annual income less than CPAF 500,000 exempt. (see schedule below) - 33 - Personal Income Tax Progressive Surtax Schedule Taxable Revenues Maximum Taxes CFAF Rate due CFAF 0 - 500,000 0% 3,000 1/ 501,000 - 700,000 10% 20,000 701,000 - 1,000,000 15% 65,000 1,001,000 - 1,500,000 20% 165,000 1,501,000 - 2,000,000 25% 290,000 2,001,000 - 2,750,000 30% 515,000 2,751,000 - 3,500,000 35% 777,500 3,501,000 - 4,500,000 40% 1,177,500 4,501,000 - 5,500,000 45% 1,627,500 5,501,000 - 6,500,000 50% 2,127,500 6,501,000 - 7,500,000 55% 2,677,500 7,500,000+ 60% 1/ Minimum income tax Sgure : Loi de Finances 1984/85 54. The nominal progressivity of the surtax is greatly reduced due to the imposition of a minimum income tax and the system of income splits. Individuals whose liability under the surtax is less than CFAF 3000 are subject to a minimum fixed tax of CFAF 3000 (plus centimes additionnels) which is retained at the source. Under the system of income splits, the net taxable income is divided by the number of splits appropriate to the individual's family circumstances (maximum of five splits) and the progressive rate is applied on each split (see chart below for translation of family size into income splits). Personal Income Tax System of Income Splits Number of Children 0 1 2 3 4 5 6 7 Single or divorced 1.0 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Widowed 1.0 2.5 3.0 3.5 4.0 4.5 5.0 5.0 Married 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.0 55. The sum of partial bases of the proportional tax constitutes the gross income subject to the progressive tax. Certain forms of capital gains 11/ which are assimilated into taxable income for the purposes of the proportional taxes (BIC etc.) or which accrue to corporate directors are also added to the tax base for the purposes of the progressive surtax (see Chapter V for a complete discussion on capital gains taxation). Deductible charges include all direct .11 As for corporations, these are gains from the sale of assets which are part of the enterprise balance sheet. - 34 - taxes and interest on debts and loans, including those contracted for owner-occupied buildirgs which are exempt from the tax on rental income. Results from a sample of Yaounde households 56. The Tax Department furnished valuable information on taxable income and assessed taxes (broken down into schedular and progressive taxes) in 1988/89 for a sample of 9000 households from Yaounde. It was indicated that this sample covers approximately 10% of taxpayers in Yaounde. Total assessed taxes represent about 3.8 percent of personal income taxes actually collected in the same year while the relative shares of schedular and progressive taxes in the sample do not differ substantially from the results for the country as a whole. The progressive tax is somewhat overrepresented as it represents 57% of taxes assessed in the sample while accounting for 45% of taxes collected in 1988/89. It was not possible to obtain any other indications of the representativeness of this sample which is used to simulate the impact of the proposed reforms on government revenues and on income distribution. 57. Appendix III includes a set of tables (tables 1 to 12) which presents the information obtained. The tables provide indications of the structure of income by family size and the fiscal burden by income and family size. Table 2 shows, for instance, that wealthier families are more likely to have a larger number of children as only 15% of households which have taxable income in the CFAF 500-700,000 range qualify for 4 or more splits, while the corresponding figure for households earning more than 7.5 million is 55.7%. Table 3 shows that 40% of households account for 9% of taxable income while less than 5% of households represent 25% of the same. Table 8 shows that households with more than CFAF 7.5 million of taxable income represent 21% of total income in the sample while accounting for 45% of taxes assessed. Tables 9 and 10 calculate effective tax rates by income bracket and household size both for schedular taxes and the progressive surtax. The lotter information is summarized in the table below. - 35 - Table 8 PERSONAL INCOME TAX Effective Tax Rates by Income Bracket and Household Size, 1988/89 (in percent) Income Brackets 1 part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total ('000s) I I I I I I L 0 -500 10.5 16.8 12.2 14.2 13.4 5.2 18.2 22.7 13.7 501 -700 4.4 7.0 3.5 5.4 6.2 10.7 7.5 13.9 6.1 701 -1000 5.4 6.4 3.7 4.7 4.4 5.7 7.6 7.6 5.6 1001 -1500 7.2 4.7 3.0 3.4 3.5 8.3 7.9 5.6 5.8 1501 -2000 9.0 5.2 3.2 2.6 3.2 3.2 3.0 3.9 5.3 2001 -2750 11.8 5.8 4.4 3.7 3.2 4.3 3.0 3.9 5.6 2751-3500 13.8 8.9 7.2 5.1 4.5 4.8 3.0 3.8 6.4 3501-4500 15.0 9.4 7.9 7.1 7.1 4.4 6.2 3.8 6.8 4501-5500 17.3 13.5 9.1 11.0 6.8 9.2 4.9 6.4 8.8 5501-6500 20.3 9.2 10.7 11.0 7.9 9.1 7.9 5.7 8.9 6501-7500 19.8 15.4 12.8 11.4 10.5 10.1 9.9 10.1 11.1 7501 + 43.2 25.4 24.7 28.2 18.6 17.6 15.8 16.9 20.7 Total 10.2 9.2 9.2 12.8 9.5 9.6 8.6 8.9 9.8 S.urc: Tax Department 58. The table shows that the effective rate of taxation in the sample is less than 10% - substantially lower than statutory rates. 12/ It also reveals certain anomalies in the personal income tax system. The effective rate of taxation in the middle brackets is systematically and often substantially less than 10% while the lowest income bracket is taxed at a rate of 14%. 59. Table 10 in Appendix M shows that income distribution objectives are thwarted in particular by the system of schedular taxation, which is actually regressive for a sizeable portion of the income scale. With effective tax rates ranging from 1.1% for the lowest 12/ The information provided by the Tax Department includes 8912 households in the sample used for reporting taxable income while 9417 households are covered in the sample reporting tax assessmenis. Tables 9 and 10 in Appendix M calculate effective tax rates without making any adjustments while table 8 calculates the same rates after adjusting taxable incomes for each bracket and income split on the basis of the household distribution revealed in tax reporting. The differences are not substantial, in pprticular as far as aggregates and dispersion are concerned. For example, the effective rate of taxation is 9.8% when the sample is adjusted (see above) and 10% when it is not (see table 9, Appendix III). Simulations were conducted on the basis of the adjusted sample. - 36 - income group to 15.4% to the highest, the progressive surtax imparts some progressivity which is however insufficient to modify the profile of taxation in any meaningful way. ii. ssue 60. The principal issues are the rates of taxation which vary according to the source of income, the different tax rates levied on corporate versus personal profits, the pervasive resort to forfaits rather than taxation based on actual income and the system of family spl-ts which erodes the intended progressivity of the surtax. In addition, the system is conceptually highly complex and its enforceability compromised by the obligation to file different forms according to a taxpayer's functional income group. A secondary set of issues relates to the calculation of taxable income in certain categories of taxes - notably the treatment of in-kind benefits, exemptions from the tax on rental income and the deductibility of all interest expenses. 61. The distortions generated by the lack of integration of corporate and personal taxes has already been discussed in detail in the section on corporate taxation (see pages ...). In addition to creating strong incentives for tax avoidance through sheltering income in more lightly taxed categories of income, the current system of schedular taxation which varies the tax burden depending on the nature of the activity has no economic justification. The combination of tax rates and the calculation of taxable income appears to favor earned income over other types of income, artisanal and agricultural production over other economic activities and investments in real estate over productive investments. 62. While the system of presumptive taxes has a lot of merit, the thresholds set for its application appear too high. li/ As a result, the bulk of businesses is taxed presumptively rather than on the basis of actual earnings. This reduces the dynamism of the tax system to the extent that the rates and bases for presumptive taxation are not frequently revised and attenuates the link between taxation and ability to pay. 63. As already mentioned, the income distribution objectives of the progressive surtax are compromised by the system of family splits. Not only does this system have a pronatality bias (albeit on a declining basis for each additional child), which is a questionable feature in and of itself, but in addition, given that wealthier households are more likely t3 have a larger number of children in Cameroon (as indicated above), it benefits wealthier households disproportionately. This feature is accentuated further as income splitting not only favors large families in general but for the same size family it confers greater benefits on higher than lower income ones due to the increasing value of the split as income goes up. The Table 9 below calculates the tax reduction obtained per child by income level. It shows that while a household with CFAF 1 million of taxable income sees its taxes reduced by CFAF 62,000 on account if its lone child, a household earning CFAF 7 million receives a corresponding reduction of CFAF 847,500. 13/ It is instructive that the thresholds for presumptive taxation in France are less than one-half the levels practiced in Cameroon. - 37 - Table 9 Personal Income Tax Progressive Surtax by Household Size and Income (in CFAF) # of children 0 1 2 3 4 5 6 7 Revenuse Single or divorced 1,000,000 65,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 2,000,000 290,000 130,000 87,500 59,000 35,500 12,000 3,000 3,000 3,000,000 602,500 330,000 262,500 195,000 152,500 110,000 88,500 65,000 4,000,000 977,500 580,000 475,000 395,000 327,500 260,000 217,500 175,000 5,000,000 1,402,500 880,000 725,000 620,000 527,500 460,000 392,500 325,000 6,000,000 1,877,500 1,205,000 1,025,000 870,000 765,000 660,000 592,500 525,000 7,000,000 2,402,500 1,555,000 1,331,250 1,170,000 1,015,000 910,000 805,000 725,000 Widowed or Married 1,000,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 2,000,000 130,000 87,500 59,000 35,500 12,000 3,000 3,000 3,000 3,00,000 330,000 262,500 195,000 152,500 110,000 88,500 65,000 65,000 4,000,000 580,000 475,000 395,000 327,500 260,000 217,500 175,000 175,000 5,000,000 880,000 725,000 620,000 527,500 460,000 392,500 325,000 325,000 6,000,000 1,205,000 1,025,000 870,000 765,000 660,000 592,500 525,000 525,000 7,000,000 1,555,000 1,331,250 1,170,000 1,015,000 910,000 805,000 725,000 725,000 Reduction in taxes per child and by income Single or divorced 1,000,000 62,000 0 0 0 0 0 0 2,000.000 160,000 42,500 28,500 23.500 23,500 9,000 0 3,000,000 272,500 67,500 67,500 42,500 42,500 21,500 23,500 4,000,000 397,500 105,000 80,000 67,500 67,500 42,500 42,500 5,000,000 522,500 155,000 105,000 92,500 67,500 67,500 67,500 6,000,000 672,500 180,000 155,000 105,000 105,000 67,500 67,500 7,000,000 847,500 223,750 161,250 155,000 105,000 105,000 80,000 64. The principal issues discussed above can be adequately addressed only in the context of an overhaul of the system of personal income taxation. The recommendations for a global reform are detailed in the next section. Notwithstanding, issues specific to the different proportional taxes will be discussed briefly not only because they are relevant for the design - 38 - of the reformed system but also because measures to address them could constitute the first (and partial) steps in a staged program of implementation. 65. The treatment of in-kind income has already been discussed in the section on corporate taxes. The recommendation made in that section, which was to disallow the deductibility of in-kind benefits at the same time as they are exempted from taxation at the hands of the wage earner, is extended also to unincorporated business. However, this does not address the problems specific to the provision of such benefits by the State. It is recommended that family allowances and indemnities be included in the tax base of civil servant's income; in-kind income should also be incorporated into taxable income, with no overall limit and on the basis of updated presumptive rates which reflect the market value of such remuneration. It is expected, however, that in-kind remuneration will be greatly reduced if not eliminated as a result of the reforms undertaken in the context of the structural adjustment program. 66. Deductions allowed against rental income are particularly generous. The standard deduction of 35% and the exemption accorded to newly constructed buildings (including extensions) for a period of fifteen years appear excessive. In addition, the exemption of buildings occupied by the parents' or children of the property owner provides a tax evasion loophole. It is recommended that deductions against rental income be subject to documentary evidence and the exemption from taxation indicated above be eliminated. 67. The deductibility of interest charges on personal loans from the progressive surtax represents in fact a subsidy to the taxpayer in question. It is recommended that the deductibility of such interest payments be abrogated. iii. Recommendatons for Global Reform 68. The income tax system recommended in this report would consist of a single tax on incorporated businesses at a flat rate as is currently the case and a unitary progressive personal income tax with few rates on taxable income, defined to exclude annual income below a reasonable threshold, and . credit for each dependent family member. In the context of this comprehensive reform, all schedular taxation would be eliminated and income splitting would be replaced by a system of credits for each dependent. 14/ As already discussed, the personal and corporate taxes would be integrated by setting the highest marginal rate of the progressive income tax equal to the corporate profits tax rate (35%), and by eliminating "double taxation" of dividends. This would equalize taxes on alternative means of organizing business and remunerating its owners. Finally, the system would be administered primarily through a comprehensive system of withholding at source, and entail a radical simplification of current tax filing requirements. 1I A system of tax deductions would also be less biased than income splitting but to the extent that tax rates are progressive, it still offers greater benefits for wealthier taxpayer. A system of tax credits would be more neutral. - 39 - 69. The proposed unitary personal income tax would be restructured in the following way: - Seven marginal rates would apply: J/ PROPOSED PERSONAL INCOME TAX SCHEDULE Taxable Income (CFAF) Mareinal Rate (%) 0- 500,000 0 501,000 - 1,000,000 10 1,000,001 - 2,000,000 15 2,000,001 - 3,500,000 20 3,500,001 - 5,500,000 25 5,500,001 - 7,500,000 30 7,500,001 + 35 - Taxable income would consist of gross income from all sources, described further below, reduced only by ordinary and customary expenses of earning income for which documentary evidence exists. Thus, all deductions, presumed deductions and presumed costs of earning income would be eliminated. Moreover, all other exclusions, such as for rental income from related persons, are eliminated. - The tax unit becomes the individual, with a credit of 30,000 FCFA for each dependent family member (to a maximum of five) allowed against tax liability. This, together with the schedule of rates, implies that actual tax liability commences at the following annual taxable income levels: Number of Family Members Threshold Taxable Income 1 500,000 2 600,000 3 900,000 4 1,200,000 5 1,500,000 70. Gross income would include all receipts of income, from whatever source, including all of those now taxed under separate schedular taxes. In addition, realized capital gains on all appreciated property would be taxed as ordinary income, with special provisions for long- term capital gains to address the problem of "bunching." J_/ Realized losses on the other IS/ Different scenarios with even fewer tax rates can also be envisaged. Scenario 4 in Appendix M (tables 19-21) incorporate simulations based on a tax schedule with only four rates (0, 15, 25, 35). 16/ The more progressive the tax schedule, the more important the effects on tax liability of being pushed into a higher income tax bracket due to the realization of capital gains over a long period. One approach to alleviate this problem would be to break up the gain in question into - 40 - hand would be mandatorily subtracted up to the limit of taxable income. Excess capital losses would be carried forward to the next year. 71. The proposed system is intended to eliminate much of the population from the income tax so as to promote equity and to minimize administrative burden. In this context, the system of withholding at source on wage income (discussed below) would not require , withholding for income levels below these thresholds; rather, it would merely require a certification that these income thresholds were not exceeded for the affected workers. . 72. The proposed system eliminates the minimum aspect of the personal income tax (see discussion on progressive surtax). However, it is recommended that the minimum income tax, or poll tax, be maintained. The payment of this tax would provide the authorities with the occasion to identify actual and potential taxpayers. 73. As indicated, it is recommended that income should be withheld at source wherever possible. For wages, this would entail no basic change. A schedule of withholding would be provided to employers. Each individual would need to file with the employer a statement attesting to family status and expected non-wage income. The employer would then withhold at the appropriate rate for the employee based on the employee's extrapolated annual income. 17/ Under this proposal, if both spouses were income earners they could both fraudulently claim the family dependents. A system of checks could, however, be put in place by requiring each employee to report the taxpayer identification number of his or her spouse. 74. Deductible payments of rent or interest by businesses to any party should be subject to withholding at 35 percent. In parallel, nondeductible distributions of profits would, as discussed earlier, be deemed to be paid net of the 35 percent corporate tax, which thereby serves as withholding at source. 75. Accompanying withholding measures, individuals would be expected to file their final tax returns within (3 months) after the end of the fiscal year. Interim payments on income not subject to withholding would be due quarterly at the same time as (or staggered with) business tax payments. Final payments for which (90) percent of the tax liability had not been paid in advance or through withholding would incur interest and penalty charges. 76. Some modifications are proposed in the system of presumptive taxation of businesses while building on its strengths. The system of "prepayment" introduced in the 1991/92 Budget is good and should be extended to all private businesses, including those subject to taxation based on actual earnings, with a provision for refundability when the prepayment exceeds tax liability calculated on the basis of company accounts. This recommendation is analogous to the one made for the corporate tax. In addition, it is recommended that the thresholds for the application of presumptive business taxation be reduced to CFAF 5 billion annual increments and applying an average effective rate to each increment. See Cheryl W. Gray, August 1989. 17/ The extrapolation would consist of multiplying the employee's monthly wage by 12, adding the employee's estimate of other income not subject to withholding, and multiplying by (1.1) to adjust for understatement. - 41 - in conjunction with the introduction of simplified filing forms for those with turnover below CFAF 20 billion. iv. Impact of Proposed Reforms 77. All of the above recommendations were conceived to improve the efficiency and reduce the complexity of the system of income taxation, improve the incentive structure by removing biases in favor of certain types or forms of income, ensure that taxpayers with the same amount of income receive equal tax treatment, except for differing family circumstances and ease the administrative burden through simplified filing, exemption of taxpayers with less than twice per capita income from the tax net and continued use of presumptive and withholding taxes. In addition, an effort was made to improve the progressivity of the system and care was taken to close tax loopholes to the extent possible by integrating corporate and personal income, adopting as comprehensive a definition of gross income as possible and eliminating deductions which are not necessary business expenses. All of these measures should improve the revenue yield of the reformed tax system. 78. Simulations were done to evaluate the impact of the proposed system on government revenues and income distribution on the basis of the sample described above. Additional ones based on real cases should be carried out to confirm the results described below. It should be also noted that the simulations only address the impact of the proposed rate structure and dependency system on taxable income as reported in the sample. The impact of the proposed changes on taxable income could not be evaluated. While the elimination of double taxation would reduce government revenues, the incorporation of all capital gains and interest income in the tax net and the elimination of unnecessary deductions should improve the revenue yield of the reformed tax system. The results of the simulations for the system of 7 marginal rates and CFAF 30,000 of credit per dependent (up to a maximum of five) are summarized in tables 10, 11 and 12. Appendix III includes additional scenarios: with the same rate structure, Scenario 2 is based on a deduction per dependent of CFAF 30,000 rather than a credit while Scenario 3 increases the tax credit to CFAF 60,000 per dependent; finally Scenario 4 simulates the results of the proposed reforms using a more simplified rate structure - 0, 15, 25 and 35 percent. 79. The results show that total revenues with the proposed reforms are higher by 27% compared to the current system. This implies an average effective rate of taxation under the new system of 12.4% compared to 9.8% currently. Also the proposed system corrects for the anomalies on the income distribution front with rates of taxation ranging from 0% for the lowest income bracket to 25.8% to the highest (instead of the current 13.7% to 20.7%, after going down to 5.3%). At the highest end, the rate is higher by 25%, and at the lowest end, it is drastically reduced. The middle income brackets experience an increased tax burden which nonetheless remains moderate. - 42 - Table 10 Personal Income Tax Current Income Tax Schedule Proposed Income Tax Schedule Taxable Revenues 1/ Marginal Maximum Marginal Tax Maximi-w. Taxes (000s) Tax rate Taxes Due rate Due (000s) (000s) 0 - 500 501-700 0% 3 0% 0 701 -1000 10% 20 10% 20 1001-1500 15% 65 10% 50 1501 -2000 20% 165 15% 125 2001 -2750 25% 290 15% 200 2751 -3500 30% 515 20% 350 3501 -4500 35% 777.5 20% 500 4501 -5500 40% 1177.5 25% 750 5501 -6500 45% 1627.5 25% 1000 6501 -7500 50% 2127.5 30% 1300 7501 + 55% 2677.5 30% 1600 60% 35% 1/ System of income splits with maximum of 5 splits Credit per dependent 30 2/ Minimum presumptive tax with maximum 5 Table Il Personal Income Tax Revenue and Distributional Impact of Proposed Reforms Income Taxes Due (in millions) 0 dependents 1 depedent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Brackets Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Curwt Proposnd system system system system system system system system system system system system system system 0-500 24 0 14 0 2 0 4 0 3 0 16 0 3 .0 501-700 13 5 7 0 1 0 2 0 2 0 11 0 37 5 701-1000 33 26 11 1 3 0 4 0 3 0 15 0 69 27 1001-1500 55 51 13 12 5 4 6 0 5 0 33 0 117 67 1501-2000 51 52 12 17 6 11 5 7 5 4 16 3 96 95 2001-2750 50 49 19 33 12 24 9 20 9 18 28 37 126 181 2751-3500 33 32 18 25 14 22 12 25 9 19 30 66 115 189 3501-4500 21 22 19 30 15 26 13 24 21 37 40 105 129 243 4501-5500 l8 17 13 16 17 30 21 29 12 26 47 100 126 218 5501-6500 7 7 2 4 11 18 14 21 9 19 46 99 88 168 6501 -750 7 7 5 7 7 11 9 15 11 19 46 85 86 14$ 7501+ 52 32 42 44 71 77 191 191 126 176 363 549 845 1070 364 299 17$ 190 164 224 289 333 21$ 318 1044 1897 2409 Table 12 Personal Income Tax Revenue and Distributional Impact of Proposed Reforms Comparison of Effective Rates of Taxation 0 dependents I dependent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Brackets system system system system system system system system system system system system system system ('000s) 0- 500 10.5 0.0 16.8 0.0 12.2 0.0 14.2 0.0 13.4 0.0 19.5 0.0 13.7 0.0 501-700 4.4 1.6 7.0 0.0 3.5 0.0 5.4 0.0 6.2 0.0 11.6 0.0 4.1 0.8 701 -1000 5.4 4.1 6.4 0.5 3.7 0.0 4.7 0.0 4.4 0.0 7.0 0.0 $.6 2.1 1001 -1500 7.2 6.7 4.7 4.4 3.0 2.1 3.4 0.0 3.5 0.0 6.9 0.0 S.8 3.4 1501 -2000 9.0 9.2 5.2 7.5 3.2 5.8 2.6 4.0 3.2 2.3 3.5 0.6 5.3 5.3 2001 -2750 11.8 11.4 5.8 10.3 4.4 9.0 3.7 7.9 3.2 6.5 3.8 5.1 5.6 8.0 2751 -3500 13.8 13.5 8.9 12.4 7.2 11.6 5.1 10.7 4.5 9.8 4.0 8.8 6.4 10.5 3501 -4500 15.0 15.6 9.4 14.7 7.9 14.0 7.1 13.1 7.1 12.4 4.5 11.7 6.8 12.7 4501 -5500 17.3 17.2 13.5 17.0 9.1 16.3 11.0 15.5 6.8 15.0 6.7 14.3 8.8 15.2 5501 -6500 20.3 18.9 9.2 18.7 10.7 18.0 11.0 17.3 7.9 16.9 7.7 16.6 8.9 17.0 6501 -7500 19.8 20.3 15.4 20.3 12.8 20.0 11.4 19.0 10.5 18.8 10.0 18.4 11.1 18.8 7501 + 43.2 26.5 25.4 26.7 24.7 27.0 28.2 28.2 18.6 25.9 16.9 25.5 20.7 26.2 Total 10.2 8.4 9.2 10.0 9.2 12.5 12.8 14.8 9.5 14.0 9.1 13.7 9.8 12.4 - 45 - CHAPTER V - TAXES ON WEALTH AND PROPERTY i. !CUent Sygem 1. The tax burden on wealth and property in Cameroon is very low due in large part to the absence until very recently of a tax on real property (taxe foncire). Aside from the real property tax introduced only in 1988/89, annual taxes on wealth comprise the cattle tax and the tax on corporate assets (taxe spdciale sur les socidt6s). Other taxes bearing on property include the income tax on some forms of realized capital gains and the registry taxes on inheritance and other property transfers. These taxes represent no more than 0.2% of non-oil GDP and account for lesb than 2% of non-oil revenues, largely due to the inconsequential yield of the tax on real property which represented in 1989/90 less than 3% of revenue in this category of taxes. The tax on corporate assets accounts for more than one-half of total property taxes with the tax on transfers of real property accounting for an additional quarter. (See Tables 5 and 6 in Appendix 1). 2. Tax on real property. The 1988/89 budget introduced the first real property tax in Cameroon. The new tax applies only to properties for which an ownership title is registered. It is administered by the Registry Department. Tax rates are low (an additional 25% is assessed for the benefit of municipalities) and do not take real property value into account. Instead, the tax is levied on the surface area of the property according to the following schedule: REAL PROPERTY TAX Surface area (m2) Tax (CFAF) - below 400 2,500 - between 402 and 1,000 5,000 - between 1001 and 3000 7,500 - between 3001 and 5000 12,000 - above 5000 12,000 plus CFAF 5 per additional m2 to a maximum of CFAF 50,000 3. Tax on capital gains. Capital gains realized by a corporation or a business on the sale of fixed assets are assimilated into regular business income and taxed accordingly. Such capital gains may be exempted from the corporate or proportional income tax if the company undertakes to invest in new fixed assets within a period of three years. Capital gains realized by individuals on the other hand are generally not taxable. The only exceptions are provided by capital gains: i) incorporated into ordinary income for personal businesses, as mentioned above and ii) accruing to company directors. Consequently, an individual may sell shares in a corporation or a real property without including the profit in his taxable income. All forms of taxable capital gains are incorporated into gross income for the purposes of the progressive surtax. 4. The exemption of individuals from capital gains taxation is compensated in part by the registration tax applied on transfers of real property, which accounts for one-fourth of revenues generated from wealth taxation. This tax is applied at a rate of 15% on the value of - 46 - the transaction being registered, with provisions for reduced rates when the sale of the property takes place within three years of construction or major renovation. 5. Tax on corporate assets. Companies are subject to the tax on corporate assets on the total amount of authorized capital plus reserves (except the legal reserve which amounts to 10% of the authorized capital) as well as on bond issuances. The following degressive schedule applies: Base (in lAl ) Rte 0 to 1 billion 1.5% 1 to 3 billion 1.0% over 3 billion 0.5% This tax is administered by the Registry Department. 6. Inheritance and Gift Taxes. Inheritance taxes are calculated on the total value of the inheritance after deduction for any legal obligations contracted by the deceased. The tax rates are progressive ranging from 2 to 10%. Heirs are liable based on their respective shares. Surviving spouses (plural) and direct line heirs benefit from a 75% reduction in their tax liability. Taxes on gifts are assessed on their declared value with tax rates ranging from 5% for direct ascendants/descendants to 10% for siblings to 15% for unrelated individuals. The revenue yield from these taxes which are assessed by the Registry Department, is insignificant; since 1987, the gift tax is a local tax. 7. Other Taxes on Wealth. Most other taxes are levied at the moment the capital is transferred or when income on the transfer is realized. These include registry taxes due on the transfer of property, including real estate and business assets. In addition, legal transactions are often subject to registration duties or stamp taxes. Among such duties is the one applied at the time of company formation or capital increase. The duty is applied on the amount of initial capital or capital increase and has a degressive rate structure with five rates ranging from 2% on the slice between 0 and CFAF 750 million to 0.25% on the slice above CFAF 5 billion. ii. issues 8. Effective taxation of wealth is often difficult and administratively costly. However, taxes on wealth are generally economically efficient and can contribute substantially to the achievement of vertical equity. Additionally, the taxation of a particular form of wealth - capital gains - serves to close certain tax loopholes which might be costly in their absence. The main issues for Cameroon are the low yields of the taxes and the measures which need to be taken to improve them. 9. The partial taxation of capital gains creates potential loopholes for tax evasion. In particular, ordinary income can be converted into capital gains thereby benefitting from tax exemption at the hands of the individual. Such methods of tax avoidance could have significant revenue and equity implications as capital markets mature. 10. The tax on real property which has recently been added to the arsenal of taxes in Cameroon has a great deal of merit (see also discussion on urban taxation). It is an important - 47 - instrument for imposing on urban dwellers some of the real costs of urbanization which are currently understated in particular due to the internal terms of trade. It is one of the few taxes on wealth which is relatively easy to collect and therefore has the potential of imparting a progressive character on the tax system. Finally, if it is successful in attaining the above two objectives, it also generates resources which can be used to develop and maintain urban infrastructure. As such, it is conceptually closer to a user's fee with the charges reflecting social rather than private costs. As a result, it is traditionally a local tax in most countries. Bg/ In Cameroon, the tax is assessed and collected by the central administration while 25% of the yield is earmarked for local budgets. 11. The success of a tax on real property depends critically on the existence of a cadastral survey on property titles and borders. In Cameroon, in the absence of a real cadastral survey, the register of landed property (sommier immobilier) is used to identify potential taxpayers. This register is based on transactions subject to registration, taxes, including rental contracts and transfer of real property. The register is far from being a comprehensive log of potential taxpayers not only because its coverage is inherently limited to real property which has been the object of a transaction but also because of poor enforcement of the registry taxes in question. In particular, given that the tax on rental contracts is very high (5% on private transactions and 10% on commercial ones), very few are actually registered. 12. On the basis of landed property registers of the Direction de l'Enregistrement, it was estimated that the real property tax would yield CFAF 3.5 billion annually. However, only CFAF 120 million was actually collected in 1989/90. Although the Department has 90,000 property titles registered as owners or tenants, only 10,000 owners actually paid the property tax. 13. Besides the Registry Department, the Department of Conservation of Property Titles of the Ministry of Housing and Urbanism has a register of landed property which was established by the German administration. The information has recently been computerized. However, there are no any institutionalized provisions for interface. 14. With a view to improving the real property tax yield, the Bank has agreed in the framework of the Second Urban Project to finance a cadastral survey which would not be sufficiently detailed for the purposes of property titles but would serve resource mobilization purposes. This instrument should improve revenue yields substantially. However, indications are that at least 2-3 years are necessary before a fiscal cadastre could be operational in Yaounde and Douala. iii. Recommendations 15. The government has already identified the need for a fiscal cadastre to improve the yield of the tax on urban real property. Measures to accelerate the availability of this instrument essential for taxpayer identification and assessment are encouraged. The cadastral survey would be utilized in conjunction with a system to monitor property market values for the purposes of the application of an ad valorem tax. 181 Also because tax collection is easier at the local level. - 48 - 16. It is worth noting that the cadastral survey would also assist in the evaluation of taxes due on rental income as well as registration taxes payable upon transfer of real estate. Also, taxation of capital gains realized from the sale of real property would benefit fre-n the more effective implementation of this tax. Finally, consideration should be given to extending the real property tax to large agricultural estates and agricultural public enterprises (see discussion on agriculture taxation). 17. In the short term, the administration and yield of the tax on real property would benefit from: i) improved cooperation between the Registry Department and the Ministry of Housing and Urbanism; and ii) rate differentiation based on improvements and location. 18. All cpigtal gains accruing to individuals outside the ordinary course of business should be included in taxable income for the purposes of the unitary income tax proposed in Chapter IV. 19. No changes are recommended for the tax on corporate assets which can also be conceptualized as a fee for services rendered or benefits conferred upon enterprises by virtue of their incorporation. It is recommended that gift and inheritance taxes be maintained in their current form except for setting a threshhold of exemption so as to ease the administrative burden. The registration tax on the transfer of property should be slated for elimination once capital gains taxation is effective. A specific study of the system of registration duties, stamp duties and taxes is recommended with a view to determining whether or not there is economic justification for their maintenance in particular as fees for services rendered by the state. Where no such justification exists, these taxes should be eliminated and any consequent revenue losses taken into consideration in the design of the system of indirect taxation. iv. Impact of Proposed Reforms 20. The proposed reforms will increase Government revenues from wealth taxes and improve overall income distribution in the country by adding to the tax burden of the richer segments of society. The impact is difficult to quantify and will become noticeable only in the medium term, however, when the groundwork would have been laid for an effective system of property and capital gains taxation. - 49 - CIAPIER VI - TAXES ON GOODS AND SERVICES AND INTERNATIONAL TRADE 1. The structure and evolution of indirect and trade taxes are heavily influenced by the UDEAC treaty. The margin for manoeuvre for national governments is therefore limited and partial reform is likely to have little influence on the pervasive distortions. As a result, analysis in this section will build on the framework developed for UDEAC level comprehensive fiscal reform, applying the general recommendations in a country-specific context. The minimum platform of the regional reform agenda, including the modifications it implies for the Union treaty, have already been adopted by the six member countries. i. Current System 2. This category of taxes includes primarily taxes linked directly or indirectly to the UDEAC regime, levies on international trade or on sales revenues (chiffres d'affaires) and certain excise taxes, the most important one on petroleum products. 3. Taxes on goods and services and on international trade currently account for about 60% of non-oil revenues and represent 6% of non-oil GDP down from 8% in 1983/84. As indicated earlier, the decline in revenues from international trade has been particularly pronounced. In nominal terms, revenues from these taxes were halved between 1985/86 and 1989/90 (tables 9 and 10 in Appendix I); their share in non-oil revenues declined from 37% to 24% in the same period. While the elimination of export taxes on cocoa and coffee contributed, taxes on imports accounted for a disproportionate share of this decline. 4. A recent IMF study AI offers some insights into the causes of this decline. Much of the explanation is a drop in imports. In addition, revenues are lower due to the strength of the local currency which depresses unit values of imports in CFAF terms without a compensating increase in the volume of imports given the fall-off in economic activity. While a decline in unit values could have been generated by a shift in consumption behavior away from luxury goods toward more lightly taxed basic necessities, an analysis of the composition of imports does not support this hypothesis. On the other hand, there is sufficient evidence to indicate that part of the decline in import volumes was due to the increase in fraudulent imports (in particular from Nigeria and Equatorial Guinea) which fall completely outside the customs network. There is, however, an additional factor which explains the reduction in the effective tariff rate from 25% in 1985/86 to 17% in 1989/90. This is the increase in the volume of imports which enter the country free of duty. The IMF study estimates that increases in exemptions explain as much as one-third of the decline in revenues from imports during this period. 5. While the share of revenues from taxes on goods and services increased in the last two years, this was due strictly to the sharp increase in the excise tax on petroleum products which now accounts for over 11% of non-oil revenues. In fact, revenues from the turnover tax on domestic sales (ICAI) were more than halved in nominal terms between 1985/86 and 1989/90 while a similar decline was registered in their share in non-oil revenues (see tables ? and 8 in Appendix I). .8l Non-oil revenues in Cameroon: Analysis and possibilities for reform, November 1990. -50 - f. The analysis in this chapter will focus primarily on taxes on imports and on indirect taxes. The excise tax on petroleum products and the tax on exports of logs are discussed in the next chapter. Fees and charges, some of which are in effect sales taxes since the amounts due vary in direct proportion to sales are also excluded from the purview of this chapter. 1. Indirect Taxes 7. In theory, all goods are subject to a turnover tax in Cameroon; for imports, the TCAI (taxe sur le chiffre d'affaires A l'importation) discussed below, and for domestic goods and services, the ICAI (imp8t sur le chiffre d'affaires intdrieur). The ICAI has four rates besides zero: 9% for most activities; 4.5% for transport, artisans, and some loans; 11% for movie houses; and 2.25% for bakeries, lease of commercial real estate, and some equipment leases. Exemptions include: i) the sale of imports without transformation; ii) inputs and outputs of taxe unique (TU) and taxe intdrieure A la production (TIP) enterprises; and iii) the sale of agricultural products without processing. The ICAI is subject to the centimes additionnels and its tax base includes all costs and duties, including the tax itself. Hence the standard rate of 9% is 10.99% on a tax inclusive basis. The ICAI is due on sales at each stage in the processing of a product. No deduction is made on the tax due except for construction work; in this case the main contractor may deduct from the tax due on the main contract the tax for which he has been invoiced by subcontractors. 8. Little is known about how the ICAI works in practice. The Tax Department was unable to provide any details on who pays the ICAI. Many firms appear to be exempt. I2/ It is estimated (very crudely) that more than 80% of ICAI receipts represents taxes on service transactions. Additional information about who pays the ICAI is essential for estimating the impact of indirect tax reform on revenues. 9. Until recently, Cameroon did not have a system of excise taxes. The special tax on petroleum products was introduced in 1984/85 but started yielding sizeable revenues only in 1988/89 when the rate was increased sharply. Excise taxes on other products which are usual candidates for such taxation either because they fall in the category of "luxury" or "sin" were introduced only in February 1991. Henceforth, a 15 percent tax is applied on the consumption of beer, soft drinks, cigarettes, certain electrical applicances and light vehicles. The expected revenue yield from this measure is CFAF 15 billion annually. Prior to the introduction of this measure, the domestic brewing and soda-bottling industry was paying taxes at an effective rate of 12 percent of sales (CFAF 20 billion on sales of CFAF 170 billion) while effective taxation on cigarettes was only 17 percent (CFAF 5 billion on sales of CFAF 30 billion). J_/ Examination of tax reports by 200 firms turned up few firms which paid more than a token amount of ICA. It would appear that banks pay a significant sum, since the taxable base for the ICAT includes interest and commissions and foes received by banks. However, while ICAI receipts were CFAF 43.4 billion in 1988/89, the total tax of all sorts paid by banks in 1988/89 appears to have been CFAF 7.0 billion, according to Socidt6 d'Ingnierie bancaire internationale (SIBI), Analyse du systhme bancaire camerounais. - 51 - 2. Customs Duties 10. Cameroon has a strikingly complex system for taxing imports. Much of the tariff system is fixed by the six members of the Customs and Economic Union of Central Africa (UDEAC, Union douanire et 6conomique de I'Afrique centrale), whose members are Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea and Gabon. The same countries have a common central bank (BEAC) and currency. UDEAC was founded by the 1964 Treaty of Brazzaville, but it has functioned poorly since the 1972 collapse of the system of common customs duty collection and the 1974 treaty modifications that permitted restrictive practices in line with the member governments' turn towLrds inward-looking strategies. 20/ Intra-regional trade is no more than 8 percent of the total for the six members, up from 2 percent in 1983. 11. Customs duties are composed of four separate main taxes, in addition to a host of smaller taxes. 1/ Each tax has its complexities, with some products being subject to low rates under one tax but high rates under another. The interaction of the four taxes produces rates that vary from 0 to 222 percent, with scores of intermediate rates and with an unweighted mean of 54 percent - not including specific taxes applied on certain categories of imports. The four taxes, of which the first three comprise the common external tariff of the UDEAC and the fourth the Cameroonian national tax, are: (a) the customs tariff, as set by UDEAC, which was to be the sole instrument for domestic protection. Revenue from the customs tariff was CFAF 11.5 billion in 1989/90. (b) the entry duty, which is also product-specific and is also set by UDEAC. The purpose of this tax was never particularly clear. Revenue from the entry duty was CFAF 26.7 billion in 1989/90. (c) the import turnover tax (TCAI - taxe sur le chiffre d'affaires A l'importation), which is a flat 10 percent, on the cif price inclusive of the customs tariff and entry duty. It is levied on all imports subject to duty. Revenue from the TCAI was CFAF 15.4 billion in 1989/90. (d) the complementary tax (TCI - taxe complimentaire A I'importation), which is set by Cameroon rather than by UDEAC. The TCI was originally meant to be a transitory measure to help individual countries overcome the fiscal impact of applying the common external tariff. In fact, the TCI has persisted and is used to provide additional protection. Revenue from the TCI was CFAF 11.5 billion in 1989/90. 2/ Since 1974, free intra-Union trade has applied only to raw materials and unprocessed agricultural produce. From 1974 through 1984, trade in all other goods was banned unless the goods were produced by a firm with a Mxr.uniqu status granted by the Union. Since 1984, the ban was made optional at the members' discretion, with any permitted imports being subject to the same duties as products of non-Union origin. ?Jl Customs data list eight such smaller taxes with total 1988/89 receipts of CFAF 5.0 billion, of which CFAF 3.0 billion is from the unloading tax. Some of these taxes fall on only one commodity. - 52 - 12. Tariffs are assessed on the "tax value" of a product, which is generally either the c.i.f. value or a schedular value (valeur mercuriale). On aggregate, the tax value is 10% above the c.i.f. value of imports. However, the differences are by no means spread evenly among products, with some such as textiles benefitting from substantial additional protection as a result. In the 9,000 observations from 1987/88, only in less than a half dozen cases was the tax value below the c.i.f. value. 3. Special PrMdUction Rggi=e 13. To add to the complexity of the system, many industrial firms benefit from special production regimes which include the UDEAC taxe unique (TU) system and its Cameroonian relative in the form of the taxe intgrieure A la production (TIP). TU status is negotiated with the UDEAC secretariat in Bangui, Central African Republic and applies to sales throughout UDEAC while TIP status is accorded by the Cameroonian authorities and applies only to sales in Cameroon. 14. The jg&Anique regime was designed as an instrument for promoting manufacturing activity to supply the regional marketplace. TU status is granted to firms exporting or likely to gxpo manufactured goods to other UDEAC countries. For a firm with this status the tax tiAque replaces all border taxes and indirect taxes on inputs and outputs, with the exception of the new excise tax discussed earlier. The TU is not collected on sales to other firms with the same status. 15. The taxe unique applies to all of a firm's sales of an eligible product, whether in the home market or elsewhere in the UDEAC zone. On that part of the company's product sold within the country of origin, the firm pays only a single tax, a taxeunigue, levied as an gl v.alrem or specific rate on its output. This tax is collected at the factory gate by the customs department of the country of origin and is the conceptual equivalent of a turnover tax. On the part of the firm's output that is exported to other UDEAC countries, the firm pays no domestic indirect taxes, but a ta4xunique is levied by the importing country at the border. 16. TU status benefits the firm in two ways. First, in the country of its location, the firm faces a significantly lower indirect tax burden than other firms because it pays the TU on local sales of goods instead of the normal domestic turnover tax, the ICA, and customs duties on imported raw materials. TU rates for Cameroonian firms are 14 percent of domestic turnover, on the average, while equivalent rates for common law firms would be in the order of 30-35 percent. 22/ Second, TU status confers preferential access for exports to other UDEAC countries because the taxe uniaue levied by the importing country is substantially lower than the normal entry duties. On average, the TU rate applied by importing countries is only 22 percent compared to an average cumulative import duty of 54 percent on similar products of non-UDEAC origin. 17. Taxe uniqu rates are negotiated on a firm-specific basis. Different firms may pay different rates for the same product. For the same firm, different rates are applied to a product depending upon the country in which the product is consumed. And, of course, any given firm may pay different rates for its various products. 2/ Assuming the ICAI et 9% and an average rate of 50% on imported raw materials which account for an estimated 40-45% of turnover. - 53 - 18. The structure and economic effects of the TIP are very similar as this regime is the equivalent of the TU for local enterprises which are not allowed to export within the UDEAC zone but can market domestically or export to non-UDEAC countries. 4. Other Special Regimes 19. A high proportion of all imports pays no taxes. INDIRECT TAXES The Customs Service Classification of Imports collects data on the revenue foregone due to exemptions, 1987/88 1990/91 from which an estimate can CFAF b & CFAF b . be made of the proportion of imports exempt from tax. Tax Paying 185.8 43.0 140.4 36.0 Only 36% of imports, in Exempt 245.8 57.0 249.6 64.0 value terms, paid tax in TU 79.0 18.3 60.5 15.5 1990/91, while 22% were TIP 18.9 4.4 26.8 6.9 Investment Code 59.8 13.8 52.7 13.5 exempt due to the TU/TIIP Other 89.1 20.6 109.5 28.1 system (see box). An additional 14% were exempt Total Imports 432.6 100.0 390.0 100.0 under the provisions of the 1984 Investment Code, Source: Customs Department mainly on account of the small and medium scale enterprise regime which provides for exemption for five years. A final 28% were exempt for various reasons - government contracts, diplomatic status, military use or the provisions of Act 13/65 of the UDEAC Code. Some exemptions are also granted, however, to specific firms under the regime stabilise. Furthermore, it is widely accepted that substantial imports are escaping the customs net altogether. If so, the percentage of imports paying duties would be lower than the 36% reported by the Customs Service. 20. In addition to the tax-exempt imports, there are several categories under which large amounts of goods enter Cameroon without paying tax. The most important categories are temporary admissions, entrepot, and transit trade. In 1987/88, CFAF 156.8 billion entered Douala Port under these three categories, in addition to the CFAF 346.8 billion recorded as imports, i.e., "for domestic consumption" (see table 13). In theory, goods entering under these categories are either re-exported or enter the consumption stream after passing through normal customs procedures. However, the volumes re-exported were only 28% of the amounts imported under these regimes: CFAF 44.4 billion in re-exports compared to CFAF 156.8 billion in imports. A better understanding of Customs procedures may explain this gap, 2/ but the hypothesis of significant fraud cannot be rejected. At the very least, the 2/ For instance, the gap for temporary admissions may reflect depreciation of equipment during its use in Cameroon (though that raises the question of why not tax the value used in Cameroon). For transit goods, perhaps some re-exports are cleared elsewhere, though the procedures explained by port officials were that the re-export form had to be issued at the port if taxes were to be avoided. For entrepot goods, data is needed on the amount of goods which were later cleared from entreprot for domestic consumption. - 54 - Customs Directorate is faced with the extraordinary difficult task of policing a system in which only 30% of the goods arriving at Douala port pay tax. Table 13 Indirect Taxes Goods Arriving at Douala Port by Customs Declaration Type, 1987/88 Total Imports Re- Imports Net Duties exports ofRe-exports Collected CFAF Percent CFAF CFAF Percent CFAF bns bns bns bus Domestic Consumption 346.8 69 346.8 76 75.6 Taxed at Normal Rate 149.5 30 149.5 33 72.0 Tax Exempt 197.3 39 197.3 43 3.6 Selected Regimes 156.8 31 44.4 112.4 24 2.1 Temporary Admissions 35.0 7 21.8 13.2 3 0.1 Entrepot 48.5 10 2.5 46.0 10 1.9 Transit 73.3 15 20.2 53.2 12 0.2 Total 503.7 100 44.4 459.2 100 77.7 Source: Customs Department, computer tape wthf, observations. Note: Some entrepot imports may have been later released from entrepot into domestic consumption, i.e., recorded twice in the above data. ii. hmu 21. The Cameroonian system of indirect and trade taxes has led to a distorted incentive environment, sizeable foregone revenues and excessive administrative complexity. These shortcomings stem in part from a certain confusion which exists in the current system between the objectives of indirect taxation, on the one hand, and the instruments utilized to meet them, on the other. Ideally, specific objectives are assigned to each type of tax, with tariffs providing protection to domestic industry, indirect taxes raising revenues irrespective of product origin and excises adding progressivity to the tax system as a whole. In Cameroon, however, the TCA1 is incorporated in the common external tariff and special production regimes provide additional protection while raising revenues. In fact, the general tendency to meet revenue requirements through taxes which differentiate between imports and domestic production has added to the complexity of the system while contributing to excessive levels of protection to domestic industry. Finally, the proliferation of special regimes, with tax treatment which varies by activity and sometimes by firm for the same activity, has created horizontal inequities and further distortions in investment and production decisions. - 55 - 1. Indirect Taxes 22. The problems include the less than comprehensive coverage and the cascading nature of the turnover tax as well as the lack of uniformity in the rates applicable on the same products as between imports and domestic production. 23. As already mentioned above, the ICAI is due on sales at each stage in the processing of a product, without deductibility. This cascading effect provides in theory an incentive for vertical integration of domestic industries. It could also put domestic industry at a competitive disadvantage vis-h-vis imported goods while severely penalizing exports.24/ However, the cascading effect is more in theory than in reality, because nearly all large producers are exempt from the ICAT under the taxe unique system, while informal producers escape the tax collector. In the construction sector, the seeds of a VAT-like system of deductibility exists given the provisions which allow the main contractor to claim the ICAI paid by subcontractors against his liability. 24. The lack of harmonization in rates of indirect taxation as between imported and domestically produced goods implies that a tax intended for revenue generating purposes ends up also having a protective effect. While the TCAI is fixed at 10 percent, the rate of the ICAI varies depending on the product. For domestic products which are subject to the standard ICAI rate of 9%, the system `3 relatively neutral given the existence also of the centimes additionnels. For all other products, however, the rate of the TCAI is above that of the ICAI adding to the effective protection provided by the customs regime. In practice, this impact may be greater than that suggested by the nominal rates since it is not clear how much local output actually pays the ICAI. 2. Customs Regime 25. Cameroon's customs regime imposes heavy economic, fiscal and administrative costs on the country. High nominal tariff rates are combined with pervasive exemptions resulting in excessive and sometimes firm-specific levels of protection. This generates severe inefficiencies in domestic production, provides extensive opportunities for tax evasion and introduces unnecessary complexity in customs administration. (a) Inefficiency 26. The juxtaposition of a highly dispersed tariff structure with discretionary exemptions and substantial tax evasion seriously distorts industrial activity. In particular, in the absence of a duty drawback system, the current system severely penalizes exports. 27. The tariff structure is highly dispersed with rates ranging from 0 to 500% at the 4- digit level of disaggregation. Nominal tariff rates are highest for textiles and lowest for capital goods. Given that well over 50 percent of imports benefit from duty exonerations under some special regime, however, and given the existence of illegal imports and customs 24! For instance, a piece of locally-made furniture could bear an ICAI tax burden of as much as 30% including the ICAI on the wood, on the transport of the wood to the factory, on the furniture sold by the factory to the wholesaler and on the final sale. By comparison, imported furniture might include the ICAI at only 9%, on the final sale. - 56 - fraud, effective rates differ substantially f-om statutory ones. 25/ Nominal and effective tariffs, weighted by import shares, are shown below for consumer goods, intermediate goods and capital goods. INDIRECT TAXES Tariff Structure, 1987/88 (weighted averages in %) Nominal Rate Effective Rate Consumer goods 65.3 34.7 Intermediate goods 60.9 8.7 Capital goods 42.8 16.6 Overall Average 58.9 23.0 SourgM: Customs Department data and SINTIA software 28. As a result of the above, dispersion in rates is common not only across but also within product categories and across firms. Rates of effective protection are even more varied - a feature which is aggravated further by the existence of quantitative restrictions on some products. 26/ Two studies 27/ conducted in the context of the structwal adjustment program found that effective protection rates ranged from negative (e.g. soaps, due to high cost local inputs, and some textiles, due to smuggling from Nigeria) to almost 2000% for paint. ERPs could not be calculated (or were in effect infinite) for a number of products with negative value added at world prices (e.g. sugar, edible oils, milk, salt, plastics, cement). Such excessive levels of protection result in a severe misallocation of resources, imposing large costs on the economy. 29. The TU regime bears substantial responsibility for the highly distortionary incentive environment and the sizeable levels of foregone revenues. In theory, the tax.Munigu system was designed to encourage intra-regional trade. In practice, however, intra-UDEAC trade represents only perhaps 8 percent of the total trade of the UDEAC countries and many of the firms with TU status export none or only a single-digit percentage of their sales. There is no connection in fact between export orientation and TU status. 30. Both the TU and TIP regimes reduce significantly the indirect tax burden of the beneficiary firm, which enjoys higher levels of effective protection than other firms in the producing country. In 1987/88, the average effective tariff rate on non-exempt imports was 25/ For example, the average trade-weighted nominal rate for textiles in 1987/88 was 135.2 percent while the effective rate stood at only 36.5 percent. 26/ Most quantitative restrictions were eliminated over the last two years according to a calendar established under the structural adjustment program. Discussions, including on timing and compensatory tariffs, are underway on the remaining few which apply to *strategic goods* - mainly agroindustrial products. 2L7/ Maxwell Stamp, Etude sur les restrictions guantitatives, March 1988 and Etude coml6mentaire sur les produits strat6giques, February 1990. - 57 - 53 percent while TU/TIP enterprises were subject to a total indirect tax burden of only 14 percent of their turnover. 2&/ Also, because the taxe unique is not collected on sales to firms with TU status, the system places firms without such status at a significant disadvantage in the purchase of locally-produced inputs. 31. The distortions are all the greater given that the TU/TIP rates are negotiated on a case by case basis. Since access to these regimes is heavily regulated and subject to a high degree of politicization and administrative discretion, only large companies, often entirely foreign- owned, have managed to gain access to them. 32. In conclusion, the combination of high nominal tariffs and generous firm-specific exemptions discussed above means that the profitability of any venture is at least as much the result of its success in acquiring a preferred tax status as in producing and marketing efficiently. The differential taxation of firms within the same industry is particularly egregious. For the national economy, the result is the allocation of the country's scarce resources to firms with a lucrative tax status, rather than to firms which use national resources efficiently. Furthermore, the extensive exemptions open the door to fraud which undermines respect for law and leads to a lax attitude towards the responsibility for paying taxes - an attitude commonly justified by the argument that the nominal tax rates are so high that no rational person would pay them. (b) Administrative complexity 33. Cameroon's customs system imposes a serious administrative burden on the Customs Department. The multiplicity of rates is one issue. Equally important, however, is the difficulty of enforcing the customs code when so many goods legally leave the port without paying duty but are liable to pay the TU/TIP in lieu of duty when the goods, now transformed into final products, leave the factory. The factories with permission to import duty-free are scattered over a wide area in the city of Douala (not to speak of the rest of Cameroon), and most have no strong physical barrier delimiting the duty-free production and storage area. It is not practical to have customs agents on site at so many industrial locations. The Customs Department has few ways to verify whether the firm is accurately reporting its sales as it lacks the technical knowledge of how much material is needed for a given volume of output. Not to put too fine an edge on the matter, the amount of tax paid appears to depend in large part on the public spirit of the industrialist. 34. So long as the present exemptions system remains in place, the Customs Department faces an extraordinarily difficult task and the gains to be expected from administrative reforms are strictly limited. Even with the most honest customs agents in the world, the current Cameroonian customs code would permit massive fraud due to the inherent difficulties of policing the TU/TIP system. Similarly, the extensive imports by small and medium enterprises and by government contractors create an open door for abuse. Expactations of the revenue yield from administrative reforms should, therefore, be realistically modest. LB The average indirect tax burden on TU/TIP enterprises has since doubled with the implementation of a number of measures including the excise tax on cigarettes and beer and the virtual elimination of access to duty-free imports. - 58 - (c) Foregone Revenue 35. The pervasive exemptions and administrative complexity of the INDIRECT TAXES Cameroonian customs regime result in Import Revenues Collected and Foregone substantial amounts of foregone revenues for the Government. 1987/88 .1988/89 Revenues foregone through perfectly (in billions of CFAF) legal means are estimated as high as Imports 432.6 402.2 CFAF 100 billion in 1988/89 or 1.5 Taxes on imports 101.1 63.9 times as much as revenues actually Import tax revenue collected. (see box) The effective tariff foregone 119.4 100.4 rate in that year was 16% compared to (in-percent) a theoretical tariff rate (were all Theoretical tariff rate 51.0 40.9 imports to be subject to normal duty Effective tariff rate 23.4 15.9 rates) of 41 %. The effective tariff rate in 1990/91 was estimated at an even Sou rc: Forecasting and Customs Departments and lower 14%. World Bank staff estimates 36. These data on revenue foregone may understate the revenue loss by a significant margin. In addition to the sums cited above, additional losses occur on goods which enter as temporary admissions, transit goods and entrepot goods and which then are diverted into the domestic consumption stream. The Customs Department data on revenue foregone, presented above, exclude such losses. iii. Recommendations 37. While there is often a conflict or trade-off among the four criteria of a good tax system discussed earlier - i.e. revenue, efficiency, equity and enforceability - the Cameroonian system of indirect and trade taxes can be reformed to yield improvements on all these fronts. This could be done on the basis of a reform that simplifies the tax system, broadens the tax base and rationalizes tax rates, improving industrial incentives and raising revenue in the process. Important for achieving these objectives is the clear delineation of the functions of each of the tax instruments, with import taxes being used for protection, a VAT or assimilated tax for revenue generation and excises for income distribution purposes. 38. In line with the agenda developed under the regional reform program, the thrust of the proposed reforms should be: i) the revision of the common external tariff with a view to reducing rates and rationalizing protection; ii) the revision of the system of indirect taxation (ICAI, TCAI), with the introduction of a VAT or a new turnover tax which harmonizes rates as between imported and local goods; and iii) the elimination of special firm-specific production regimes. Intra-regional trade, one of the objectives of the TU regime, could be promoted through the adoption of a preferential tariff rate for intra-UDEAC transactions. A detailed discussion of these reform proposals follows. 1. Sales Tax Reform - Introduction of a VAT? 39. The current turnover tax is a disincentive to local processing because of its cascading nature, in particular given the structure of tariffs. The TU/TIP system in Cameroon has, to -59 - date, made this a minor problem for the large firms. But the TU/TIP system strongly discriminates against small firms, which in effect means most of the locally-owned ones. 40. As the country develops, more small firms without TU/TIP status would be expected to make products for sale to large industry and/or exports. Over time, the allocative inefficiencies from the present system will increase and the advantages of a VAT, which include its relatively low efficiency costs and adaptability to a duty drawback scheme for exports, will grow. The issue is whether now is the moment to make the shift. Notwithstanding the advanced state of preparation for the introduction of a VAT (draft texts have already been prepared by the Tax Department), a number of considerations are explored below. 41. Thiming. Te usual rule is that far-reaching tax reform reduces revenue, as implementation of the new tax collection procedures takes time. That would argue against introducing a VAT, since the macroeconomic situation makes any shortfall in revenue absolutely intolerable. On the other hand, the reform of the TU/TIP system could raise revenues, and the rates on excise taxes recently introduced could be increased enough to compensate for any shortfall. In the longer term, in line with experience in other countries, compliance would be expected to increase with the VAT, leading to improvements in revenue yield, also on direct taxes. 42. Dosign. An important issue in the design of the VAT is its coverage. While it is clearly desirable to cover as wide a set of transactions as possible, administrative constraints may weigh heavily, especially at the outset. Until such time as tax administrators and taxpayers are sufficiently versed with the VAT system, its coverage could be kept limited. These limitations could be done by firm size, by sector or by stages of distribution. 43. Administration. The VAT system could be implemented without much difficulty by the TU/TIP firms, which are generally large and which already have to keep detailed accounts. Not much is known about the structure of industries without TU/TIP status. A large proportion of sales and value added appears to come from the food processing, construction materials and construction industries. The ability to raise significant revenues from a VAT or turnover tax on these industries is unclear. The larger the firms in these industries, the more likely that the tax targets set here could be realized. 44. A value-added tax is often said to be self-enforcing, but that can be misleading in a country without a system to verify effectively claims about taxes paid at earlier stages. In the absence of proper administrative preparation and systems of coordination between the customs and tax departments, the VAT could open new avenues for fraud, through claiming excess deductions. 45. The VAT fraud could be controlled relatively easily, if its application is initially limited to few firms. 22/ A simple computer program could be designed to cross-check the deductions claimed with the tax payments reported, to be sure that the total purchases 29/ If limited to industry and imports, excluding general trade and service, the VAT would probably apply to around 500 firms only. -60- from Firm X were no more than the sales of Firm X. 3Q/ At a second stage, the VAT verification system could be used to cross-check customs data. The deductions for imports could be verified against the customs declarations. However, such a system would require putting in place a simple and fast customs database in order to report the total imports handled by each importer. The existing customs data reporting system may be too cumbersome to permit producing such reports quickly. 46. Tax Burden. As indicated above, because the TU/TIP regimes do a good job of mimicking a VAT, their tax burden would remain unaffected with the introduction of a VAT. The key issue is the effect of indirect tax reform on the ordinary law (droits commun) industries. If these industries are sensitive to higher taxes, that would argue strongly in favor of the VAT and against the turnover tax which would raise their tax burden significantly. Unfortunately, there is no easy way to produce any data about the group, because of the cumbersome ways in which the Government processes the extensive data it requires from taxpayers. There is a distinct risk, however, that raising tax rates on droits commun industries via a more broad-based turnover tax would drive more enterprises out of the formal sector and therefore reduce revenue. Furthermore, the average enterprise may be so small that large sums would have to be spent to collect the revenue due. All of these factors argue in favor of giving serious consideration to a VAT. 47. Additionally, the government and society have an interest in encouraging firms to join the formal sector; that is, to pay taxes, to keep regular accounts, and to use the banking system. The expansion of the formal sector, relative to the informal, allows for a more equitable sharing of the tax burden and a lowering of tax rates. It also permits more rational decisions about borrowing and investment; enterprises will not stay deliberately small and backward so as to avoid attention. The VAT is a system that provides a powerful financial incentive to join the formal sector, for only formal sector firms can claim the deductions for taxes paid on inputs. This argues in favor of a VAT that would encourage entrepreneurs to step forward to join the formal sector. Since some tax fraud is inevitable under any system, it is better to have the fraud come from firms that are modernizing than from informal firms that hide themselves by staying small and backward. 48. Renues, Assuming the same level of compliance, the turnover tax would raise more revenue than a VAT because the former avoids the costly deductibility of taxes paid at earlier stages. The net difference in revenue, however, would be reduced by the amount that the higher turnover tax would lower corporate profits. All else being equal, and based on 1990/91 data, a VAT (on goods) of 23 percent would be required to generate the same revenues as a turnover tax of 13 percent (see table 16). 49. As discussed in the chapter on corporate taxation, the introduction of a VAT or a new turnover tax should aim to increase taxes collected through the indirect tax system so as to 30/ Such a computer program would be feasible only if reporting forms were designed carefully to prevent an overwhelming flood of detail that could not be processed economically and quickly. In particular, the deductions should not be reported on a transactions-by-transactions basis. Instead, a firm would list the sum total of all its purchases in a month (or quarter) from Firm X on one line, then from Firm Y on the next line, and so on. The underlying documents to support the claim would be kept by the firm and be available for verification if a question arose. - 61 - permit the abolition of some burdensome minor taxes, e.g., some stamp and registration duties. 50. In light of the above considerations, it is recommended that the TCAI and the ICAI be abolished in favor of the introduction of a VAT at a single rate but with exemptions for certain "essential" consumer products (see classification in table 14). In the medium term, the VAT would be levied on services as well as goods up to the retail level. This reform could, however, be phased, with initial application being limited to goods at the manufacturer and importer level. If this option is adopted, a separate interim tax would have to be created for services; in line with the recommendations of the regional reform, this tax could be applied at current rates during the transition period. Until such time as the VAT is adopted, all enterprises which are currently benefitting from special regimes would become subject to the ICAI/TCAI when those regimes are eliminated. However, the rates of these taxes would in some cases be determined by the provisions of the Investment Code -- e.g. taxes on inputs purchased or imported by TU/TIP enterprises. Finally, while this report recommends that the system of the centimes additionnels be converted to an equalization fund to even out the differences in the tax base of local governments, those on the ICAI could be eliminated without prejudice to this general proposal. 2. Tariff Reform 51. The only way to increase substantially the revenue from customs in Cameroon is to cut tariff rates. No matter what the administrative reforms, no matter how many police agents are hired, businessmen are going to find ways to avoid taxes that typically are 50% to 100%. If nothing else, Cameroon has long land borders and a fully convertible currency, ideal for smuggling. The surest way to reduce customs revenue would be to impose a surcharge on the existing rates. 52. As rates are reduced, a top priority for tariff reform should be to slash the imports that enter without paying tax. When 64% of imports enter duty-free, the potential for fraud is so vast as to make administrative changes in the Customs Department meaningless. Most reforms of the customs system require approval of Cameroon's partners in UDEAC. Some are of a purely national character, however. Cameroon has already taken measures to correct some anomalies of the tax system which are governed by national laws. These include the various modifications introduced through the Investment Code and the imposition of duties on government imports discussed below. In addition, as already mentioned, excise taxes were introduced in February 1991 on selected consumption goods. (a) Reforms to Date 53. The new Investment Code, which was promulgated in November 1990, modifies the benefits accorded to small and medium scale enterprises. It is clear that some entrepreneurs are abusing the benefits granted under the 1984 Investment Code. A businessman can make a tidy profit by buying a few sewing machines, renting workspace, declaring that he has a small clothing factory, importing several containers of textiles (or, if he is bold, clothing which he declares as textiles on the customs form), and then closing up shop after six months. Furthermore, some small enterprises are deliberately wound up after five years, the period of the privileges under the 1984 Investment Code, and then re-started under a new name. The new Investment Code puts an end to these privileges. - 62 - 54. The new Investment Code also introduces some modifications in the TU/TIP regimes. While the basic structure of the regimes was left intact, since July 1, 1991, all imports of TU/TIP enterprises are subject to a 15% tariff rate when the imports originate from a country outside the UDEAC zone. This change was introduced in large part to arrest the deterioration in customs revenues but also with a view to reducing the disparities in tax treatment between enterprises benefitting from the special production regimes and others. While waiting for the comprehensive reforms which are being elaborated for the whole UDEAC zone, the Government also intends in the short term to harmonize the TU/TIP rates across firms for the same product. 55. Some firms enjoy a legal status that freezes the tax rates they face (regime stabilise) for periods that may run as long as decades. The authorities should urgently identify how extensive is the revenue loss from this problem. The new Investment Code eliminates this regime and the authorities should be vigilant about not according any fiscal privileges to new enterprises outside the framework of the Investment Code. The existence of special rules for individual firms is an administrative burden, an invitation to fraud, and an inappropriate signal to other firms to lobby for special arrangements. In addition, every effort should be made to encourage companies currently benefitting from the regime stabilise to voluntarily shift to the new tax system. 56. With a view to reducing customs fraud, the Custoris Department is considering limiting access to the procedure which permits customs clearance through declarations provided to the SCE (Service du liaison informatique), as this office has difficulties verifying the large number of declarations it receives. It would seem that roughly half of all goods are cleared through self-declaration by the importer with a form provided to the SCE. A procedure meant originally to aid small-scale importers appears to have been exploited by those intent on fraud. While this reform holds promise, it will be important to promote competition in the business of forwarding import freight, i.e., to avoid reforms that effectively constitute a cartel of the large freight forwarders. 57. Another administrative reform adopted in 1988 was to make most imports subject to inspection prior to shipment by a private Swiss-based inspection service. The result: of this reform have been inconclusive. The company claims that its effectiveness is compromised due to sizeable imports which are exempt from pre-shipment inspection or which enter the country under one of the many special regimes outside its control network. Notwithstanding, it seems unlikely that the use of this inspection service will be sufficient to resolve the problems of customs fraud. 58. The one area of administrative reform that would appear to be most promising is the temporary admissions, entrepot, and transit regimes. Extensive recommendations were made in a recent IMF report about ways of reducing fraud due to these regimes. It is expected that the Government will soon act on some of these recommendations. Also, in the context of consultations on the UDEAC reform, the Bank proposes to identify transit procedures that would strictly limit any redirection of goods to the domestic market. 59. Finally, imports for government contracts are now in principle fully taxable. However, the proper implementation of this measure will require administrative and budgetary follow-up. Once operational, this should increase revenues as exemptions for such imports costs the government money, because it permits fraud. - 63 - (b) Agenda for Future Reform 60. Among measures which should be taken urgently is the elimination of the TUTIP schemes. To be sure, these programs are excellent from the perspective of the firms that enjoy them, but Cameroon should not maintain industrial incentives that encourage inefficient firms. Furthermore, the TU and TIP are excessively costly because they open the door to fraud. With the proposed reforms, enterprises which currently benefit from these regimes would become subject to the general system of trade and indirect taxes. * 61. Incentives are, however, needed for export-oriented industries, i.e., relief from tariffs on their imports. Rather than TU/TIP, the best method would be a drawback scheme, by which import duties are paid on entry and then refunded after export.31/ As discussed above, a VAT lends itself easily to the implementation of such a scheme. Currently there is no duty drawback scheme but a system of temporary admissions is available mainly for re- exports. The new Investment Code incorporates some incentives for export industries although it does not fully exempt them from import duties. Also, the Government has recently promulgated a free trade zone law and is currently in the implementation phase of this project. It is recommended that duty-free zones be situated physically at the port but failing that, always with a firm physical barrier patrolled by Customs personnel. 62. Reduction of tariff rates is generally ill-advised for a country with an uncompetitive real exchange rate. There can be little doubt that Cameroon is in this situation: its products are not competitive at current factor prices, given the present exchange rate and present productivity levels. The authorities' strategy for reducing the real effective overvaluation is to combine productivity increases with factor price reductions (or at least a lower rate of increase than in partner and competitor nations). In the interval while this strategy is taking effect, it would be inappropriate to reduce the tariff rates actually paid by business. The reforms proposed here aim therefore to increase the average tariff rate, calculated as tariff revenue divided by imports, by combining lower nominal rates with a vast broadening of the tax base. This would raise the yield from import taxes and rationalize the incentive structure while maintaining a reasonable level of protection for local industry. Also, given that the reforms would not result in an increase in aggregate import demand, there would be no adverse consequences for the trade balance and therefore no further deterioration in economic competitiveness. 63. The recommendations of this report would reduce the disparities in the rates of effective protection across industries and firms. Clearly, some firms would be losers and others gainers from the proposed tariff reform. The concurrent elimination of quantitative restrictions would add to the costs of adjustment of enterprises which continue to benefit from them. This may justify some transitional arrangements in the form of degressive tariff surcharges, based on tariff equivalency calculations, for certain products such as edible oils, rice and sugar. The Government has just established such tariff surcharges for milk, salt, flour and soaps, QRs on all four products having been removed in the last year under the structural adjustment program. 31/ Alternatively, the system of import tariffs could be designed with very low rates on raw materials and intermediate inputs. This is not an attractive solution, however, in the current economic context which is characterised by a misalignment in relative prices and a severe fiscal crisis. -64- 64. Probably the best reform would be to introduce a single tariff rate applicable on all imports pitched at a relatively low rate of 15-20 percent. This would result in a system which is easy to administer and reasonable from the perspective of economic allocation of resources. Even though optimal tax considerations would favor differentiated tariff rates depending on price inelasticities of products, the information requirements for getting such a system tight are so daunting as to relegate it to theory. From the perspective of income distribution, a flat tariff on a broad base would also be preferable to the current system, which permits much of the luxury trade to enter tax exempt. Furthermore, the authorities would retain a tax instrument - excise taxes - that would permit then to tax luxury goods, be they imported or domestically produced, at whatever rate they chose. 65. The most important argument for a flat tariff is that a single rate would be the most practical for Cameroon. It would permit easy policing of imports, without the enormous effort now devoted to determining into what category an import falls. The tariff code which the customs agents are to apply runs now into thousands of lines. The flat tariff would also keep rates low enough so that importers would have little incentive to cheat. Finally, the flat tariff would make the tax system transparent. The reform would be easy to understand and to publicize, and would signal clearly the Government's determination to improve the business climate. 66. While the arguments for a flat tariff are quite compelling, given that the reform of the common external tariff requires agreement among six countries with different resource endowments and levels of development, "second-best" solutions will need to be considered. In this context, while recommending a flat tariff as a long-term goal, the UDEAC reform program includes a common external tariff which would comprise three rates. Imports would thus be classified into three categories comprising: i) necessities, ii) raw material and capital goods, and iii) general consumption goods and luxuries (see table 14 for details). It is now agreed that over a 5-year period, the rate on category III imports would be progressively reduced to attain a final tariff structure with rates of 5%, 15% and 35% on category I, II and III products respectively. In addition, the regional reform agenda includes the adoption of a preferential tariff rate for intra-UDEAC trade in manufactured products subject to rules of origin. This preferential rate would be set at 75% of the normal rate. - 65 - Table 14 Suggested Classification of Imported Products Into Three Categories 1/ Category I Essential Category II Raw Materials Category III General Consumers Products and Capital goods Goods and Luxuries ................................. ........ -. -. -. -. -. ---*. *.. -. --- .--.***.**..*....****......... Tariff Description Tariff Description Tariff I Description Code of Product Code of Product Code I of Product 04 Milk and Milk products 12 Industrial & Medicinal plants 01 Live Animals 30 Pharmaceutical products 25 Cement 02 Meat 90 Surgical Equipment 26 Minerals 03 Fish 27 Petroleum products 05 Other Animal products 28 Inorganic Chemical Products 06 Live Plants 29 Organic Chemicals 07 Vegetables 31 Fertilizer 08 Fruits 32 Paints and Varnish 09 Coffee and Tea 35 Glue and Enzimes 10 Cereal 38 Miscellaneous Chemical products 11 Flour and Mill products 40 Rubber 13 Grain and Resin 44 Wood and Coat 14 Other Vegetable Extracts 45 Cork and Cork products 15 Edible oils 46 Cane and Cotton products 16 Meat and Fish products 47 Wood Pulp 17 Sugar 48 Paper and Paper products 18 Cocoa and its products 49 News Printing & Publishing 19 Cereal Based products 50 Silk 20 Vegetable and Fruit products 51 Wool 21 Other Food Processing 52 Cotton 22 Drinks & Alcoholic Beverages 53 Other Natural Fibres 23 Animal Feed 54 Artificial Filaments 24 Tobacco products F5 Synthetic Fibres 33 Cosmetics 56 Ropes and Hemp products 34 Soap 57 Other Fibrqs 36 Explosives 72 Steel 37 Photographic Equipment 73 Steel products 39 Plastic products 74 Leather 41 Animal Skins 75 Nickel 42 Leather products 76 Aluminum 43 Animal Furs and Petts 77 Magnesium 58 Special Fabrics 78 Lead 59 Other Textile products 79 Zinc 60 flats and Accessories 80 Tin 61 Garments 81 Other Metals 62 Other apparel 84 Electrical and Non-Electrical 63 Other Textile products Machinery 64 Footwear 85 Sound and Video Equipment 65 Pair and Hair products 86 Rail Transport Equipment 66 Umbrellas and Vehicles 67 Artificial Flowers 68 Stone products 69 Ceramics 70 Glass products 7i Precious Metals 82 Metal Tools 83 Other Metal products 8? Read Transport 88 Equpment and Vehicles 69 Water Transport Equipment 91 atches 92 Musical Instrunents 93 Arms end Munitions 94 Metal Furniture 95 Sports Equipment 96 Miscellaneous 97 Antiques & Art Objects 1/ 1988 Edition of The UDEAC Tariff Code * Items tarked with asterisk are designated as luxury products and ore to be subject to excise levies. - 66 - iv) Impact of Proposed Reforms 67. The simulations below consider four cases, with a variant on the first one. The scenarios are guided by a revenue target which was established at 5 percent above revenue projections made by the Government for 1991/92, which projections incorporate the impact of measures introduced in February 1991. All four scenarios assume no change in the system of indirect taxation of services and therefore revenues from these taxes are not included in the simulations. The four scenarios are: (a) tariff rates of 5%, 15% and 70% on category 1, II and III products, respectively, a 13% turnover tax, and a 15% excise tax on "sins" (cigarettes, alcohol) and "luxuries", (Scenario A). The variant (Scenario A*) includes a VAT at 15% instead of the turnover tax with an excise tax at 24%. (b) tariff rates of 5%, 15% and 50% on category I, II and III products, respectively, a 15% turnover tax, and a 20% excise tax (Scenario B). (c) tariff rates of 5%, 15% and 35% on category I, II and III products, respectively, a 28% VAT, and an 30% excise tax (Scenario C). (d) a flat tariff rate of 30%, a 22% VAT and a 22% excise tax (Scenario D). 68. The four scenarios are conceived as the successive stages of the proposed reform program and a maximum of five years is envisaged for the medium term objective which is represented by Scenario C. The results of the simulations are summarized in tables 15-17. Table 15 shows the impact on revenues, exemptions and the tax burden, table 16 provides more detailed information on the assumptions regarding the reduction in exemptions while table 17 shows the impact of the proposed reforms on industrial incentives for selected sectors. - 67 - Table 15 Indirect Taxes Summary Results of Simulation Analysis (based on 1990/91 data) Current System Scenarios _ _ _ _ _ (A B C D A*W T 1. Rate Structure (%) Nominal Effective 1987/8 1987/88 a.Customs duty on category I products 1/ 33.3 6.0 5 5 5 30 5 b.Custons duty on category II products 57.8 14.0 15 15 15 30 15 c.Customs duty on category III products 57.6 41.0 70 50 35 30 70 d.TCA on goods 2/ 10.0 13 15 28/11 22/11 15/11 e.Excise taxes 3/ 15.0 15 20 30 22 24 II.(%)Proportion of imports totally and part exempt 4/ 64 37 31 25 25 37 1II.Receipts from taxes to be reformed (billions of CFAF) 107.1 5/ 169.3 169.3 170.6 170.8 171.2 IV.Average burden of indirect taxes on tobacco and drink companies (%) 6/ 37 40 45 44 38 32 V.Average burden of indirect taxes on other TU/TIP enterprise (%) 7/ 23 25 25 22 22 24 VI.Average effective tariff on non-exempt imports (%) 8/ 52 48 40 38 43 52 VII.Average effective tariff on all imports 19 30 28 29 32 34 VIII.teceipts from taxes subject to reform by customs (% of total receipts 88 70 64 66 74 78 from these taxes) 10/ I I/ Proposed tariff rates on intra-UDEAC trade are 75% of the rates for each product category (see table for classification). 21 To be applied at same rate on all products whether imported or locally manufactured. Applied on duty inclusive price of impor and on the value of sales, net of taxes, of locally manufactured products. The TCA does not apply to petroleum products but it does apply to intra-UDEAC imports. 3/ To be applied only to luxury producta (drinks, watches, precious metals, antiques/art objects and cosmetics and music/video equipment. 41 Proportion of total imports paying no duty or a reduced rate. 5/ This represents the level of revenues generated in 1990/91 by the taxes affected by the reform program. The revenue target wa based, however, on the Gnvemment's projections for 1991/92 or CPAF 161 billion. 6/ (Indirects taxes paid by these firms on goods impotted or sold)/(tumover of drinks and tobacco firms); the calculation of the tax burden under the currcnt system incorporates the impact of the February 1991 measures 7/ (Indirects taxes paid by these firms on goods imported or sold)/(turnover of other TUITCUTIC firms); the calculation of the tax burden under the current system incorporates the impact of the February 1991 measures. 81 (Import duties + turnover tax + special levies on imports - receipts from duties on part exempt lmports)/non-excmpt imports c.i.f.). This ratio is an indicator of the tariff burden on those imports that pay All legi entty dutiEt. 91 (Total receipts from all duties/taxes on imports)/(total imports c.i.f). 10/ Assumes that the Tax Department will now have responsibility for applying the new TCANAT and for collcing the excise lev on TUTIP enterprises; presently Customs is in charge of collecting indirect taxes levied on TUMflP firms. - 68 - 69. Table 15 shows that total receipts from the reformed taxes were CFAF 107.1 billion in 1990/91. In light of the severe revenue constraints and to account for some revenue generating measures that are already effective, however, it was decided to use the Government's projections for 1991/92 as the base year for the revenue targets of the proposed reforms. As indicated above, all four scenarios targetted exceeding this level by at least 5 percent. This is achieved by reducing the proportion of imports subject to exemptions from 64 percent in 1990/91 to less than 37 percent in all scenarios (see table 16 for more details). At the same time, the average effective rate on all imports increases substantially while that on currently non-exempt imports declines. Table 16 Indirect Taxes Structure and Coverage of Import Exemptions Pre and Post-Reforms (as percentage of total imports) Type of Exemption Pre- Post-Reform Reform Scenario A Scenario C 1. Miscellaneous 1/ 27.9 26.5 20.2 2. Intra-UDEAC 0.2 0.2 0.2 3. Investment Code imports 2/ 13.5 10.2 4.9 4. Taxe Unique/TIP imports 22.4 0.0 0.0 [. Total exemptions 64.0 36.9 25.3 6. Proportion of imports non-exempt 36.0 63.1 74.7 7. Total imports 100.0 100.0 100.0 1/ Scenario A assumes a reduction of 5.4 billion following the abrogation of Act 13/65 of the UDEAC Code; Scenario C assumes additional reductions in exemptions of some CFAF 30 billion. 2/ Scenario A incorporates the impact of reforms already introduced (CPAF 13 billion); Scenario C assumes additional reductions in exemptions of about CPAF 17.5 billion. SMM- Customs Depautment and Staff Estimates 70. Scenario A* shows that, holding the tariff structure constant, the VAT would have to be pitched at 15 percent and excise taxes at 24 percent to yield the same level of revenues as a turnover tax of 13 percent combined with excise taxes of 15 percent. The tax burden on tobacco and drink companies increases in all scenarios but one while that on other TIP/'U enterprises remains relatively constant. The adoption of a VAT would reduce the tax burden only slightly given that the existing TUMflP system does a good job of mimicking a VAT for firms that rely on inputs from abroad or from other TUIP firms. The table also indicates - 69 - should ease the administrative burden on customs agents but signals the need to prepare carefully the transition toward a greater role for the tax department. 71. Simulations were made of the impact on revenues and import values if the demand for imports is price-elastic. Because imports which currently pay no tax will face higher prices after the reforms while those currently paying high duties will enjoy lower prices, no significant changes result in import values even under assumptions of high elasticity. The simulations also show that there is very little net impact on revenues from price elasticities, as the additional revenue from those products for which the price declines will be roughly offset by the revenue lost from those products for which the price increases. 72. The proposed reforms will reduce the dispersion in effective rates of protection for domestic production and provide for an improved incentive environment. Table 17 shows the impact of the reforms on effective protection in different subsectors. Nominal rates decline for all four products considered; this combined with the elimination of quantitative restrictions on imports yields a substantial reduction in post-reform ERPs under Scenario C. The only exception is textile products under Scenario A which experience an increase in their effective protection rate; this outcome results from the implicit assumption in the calculations about the elimination of customs fraud. As indicated earlier, a degressive tariff surcharge may be considered for certain products to ease the adjustment during the period of transition. Table 17 Indirect Taxes Comparison of Pre and Post-Reform Incentives for Existing Firms Nominal Tariffs (%) Effective Rates of protection Sector Pre- Pre- Post-reform 1/ Reform Reform Scenario A Scenario C Scenario A Scenario C Food Processing 110 70 35 359 261 71 Textiles 135 70 35 66 124 49 Drinks 142 70 35 228 81 40 Tobacco 242 70 35 257 52 11 I1 Post-reform EhPs are theoretical ones calculated on the basis of noma trs and the share of va lue added to total output. They assume therefore no fraud and no QRs. &rnt Customs Department and enterprise surveys. - 70 - CHAPTER VII - RESOURCE TAXATION 1. Sustainable development in Cameroon requires the appropriate use of its natural resources and protection of its environment. The country's economy is largely agricultural, and will remain so over the medium term. Prior to the discovery of oil - reserves of which are unlikely to last into the next century - the country's most important exports were coffee, cocoa, and tropical hardwoods. The nation has (potentially) adequate high-quality farm land, rich tropical forests, and reasunable fishery potential. However, on current trends, Cameroon will destroy much of its natural resource base in the next ten years. For example, a continuation of today's extensive agricultural patterns will further deplete soils and accelerate slash and burn farm incursion into forests, as will wasteful forestry practices. These in turn can be expected to reduce forest productivity, but also to contribute to a decline in the quality of the environment in the wider continental context. Moreover, the success of agriculture and the future of the rural and forest-dwelling populations are dependent in part on the course of urbanization, so that there is a tight linkage between efficient use of land, both urban and rural, rational treatment of the environment, and the well being of the population as a whole. 2. Since the nation has an overriding interest in certain resources, selected sectors are examined in the report to see if a reform of their fiscal treatment can more adequately serve the nation's needs. In addition to raising a number of issues, ranging from the appropriate incentive framework for the development of domestic industry, to the level of resource rents attributable to the Government as owner of the resource, to questions of sustainability and inter-generational equity, taxation of natural resources offers a potential broadening of the revenue base. 3. Cameroon is rich in mineral and other natural resources and is well endowed with fertile agricultural land. The optimal use over time for the benefit of current and future generations of this "natural capital" is an important strategic issue. It requires the determination of the optimal depletion rate, with implications for the management and regeneration of the resource where it is renewable. Questions of inter-generational equity are central to decisions about the manner and pace of resource exploitation. If sustainability of the use of an asset or resource is important, maximization of its net present value for the benefit of the current generation cannot be the sole objective. The welfare of future generations will have to be incorporated into the analysis which may result in some cases in choices to preserve assets in their current form. In many cases, there are environmental issues of great importance affecting Cameroon's economic welfare, the ecosystem of the region and global wqrming. Taxation alone cannot respond to all these issues but it can constitute a coherent part of the policy framework designed to deal with them. 4. Resources which should be analysed from this point of view include land, water, petroleum, natural gas, bauxite and other minerals, and fisheries and other stocks of plant and animal life including forests. In the following sections, particular attention focuses on forestry and petroleum, and, to a lesser extent, agricultural and urban land. Extension of the analysis to other sectors is recommended. A. FOREST RESOURCES 5. Tropical forests are one of Cameroon's most important natural resources. The total forest area is estimated at 22 million ha, and contains the largest and most diverse pool of genetic resources known in Africa and probably the world. Over a hundred species are - 71 - logged, with the best known being sapelli, ayous and azobe. Other economic activity involves exploitation of fruit and other crops within the forest including cultivation of plants for medicinal purposes. Renenewable or non-renewphle 6. Although forests are usually regarded as a renewable resource, that characteristic depends in fact on how they are conserved and managed. In addition, Cameroon's unique forest ecology and habitat are a non-renewable resource, once exploited. And the tropical forest itself can be conceptualized as two non-renewable assets: the first, the timber growing in the original virgin forest; the second the forest space and environment which permits regrowth. After the virgin tree stand has been exploited, second growth forest exploitation (the forest as a renewable resource) is dependent on the continued existence of this environment. Thus policies which recognize and deal with both renewable and non-renewable characteristics of the tropical forest are required. Valuation and treatment of the resource 7. There are a number of ways of approaching the valuation and treatment of these resources. Optimal depletion rates of known non-renewable resources are normally obtained with reference to the rate of interest used to discount a benefit -tream based on the market value of the resource. While non-marketable benefits of forest resources and the environmental costs of exploitation can be incorporated into the analysis, the information requirements of such an exercise often renders it operationally irrelevant. This would require quantifying the value placed on the continued existence of forest resources as a habitat, as an environmental resource important both to Cameroon and more widely, and as a potentially sustainable asset for transfer to future generations. In addition, valuation of the asset is complicated by the fact that much in-forest production is not marketed, although crops of considerable potential market value exist. Of significant importance also are the social and market value of the gane pool and the potential development of pharmaceuticals. 8. Clearly, the Government as national "owner" of the resource can allow it to be used for a certain return or rent. The Government can expect less rent from someone growing trees in the forest than from someone cutting trees the owner has provided. Selective felling followed by natural regeneration or replanting under a lease shorter than needed for growth of trees to maturity can be seen as a process by which the concessionaire borrows trees for marketing against future delivery of similar trees to the lender. Using an appropriate interest rate, the yield to the owner can be calculated and the lease rent determined. A tax surcharge could be imposed for costs associated with the process which are not borne by the concessionaire (such as damage to water tables, loss of habitat). However, such taxes would reduce the yield of rent to the national owner; and it is not clear that these problems are best handled by raising charges to cover external costs. The estimation of these costs is difficult, since she loss to current and future generations is likely to be great but unquantifiable in precise terms. Where such costs are considered unacceptably high, a levy would have to be set in excess of the rent that would otherwise accrue to the owner and sufficient to eliminate any incentive to the forester. Given difficulties of implementation, it should be more effective and administratively simpler to establish nature reserves, banning exploitation in the areas where irreversible ecological damage (or damage that is very costly to reverse) is feared. This is the approach being taken in the context of preparing the forest/enviromnent project to be financed by the World Bank. - 72 - 9. Where controlled exploitation is desired, the approach should combine definition of an appropriate return to the Government as owner of the resource, with provision for tree regeneration and environmental sustainability, plus a stake for native forest dwellers. As damage to their environment can permanently harm their way of life, their interests must be taken into account. This can be done by defining boundaries and methods of exploitation under management contracts, and/or through provisions in the contracts, which may include a role for local populations in carrying out or policing the contract. 10. In addition, plantations can be developed on previously cleared land. This is considered as tree agriculture rather than forestry for the purposes of this report. 11. The Government is currently reviewing legal, institutional and administrative provisions in this sector in the context of the structural adjustment program and the forestry/environment project. i. Current system Conservation and exploitation arraneements 12. Classification of forest land into national park and reserves, forestry production areas, or community forests is the responsibility of the Ministry of Agriculture. The administration decides on the new areas to be logged and invites applications. The maximum concession under present legislation is 200,000 ha of forest and a Presidential decree of attribution is required for concessions larger than 15,000 ha. (See Grut, Egli and Gray, Annex 1, pp 6,7). The process by which licenses are allocated is not transparent and it is not evident that all the rent generated by this process reaches the government budget. Currently, approximately 7.6 million ha are under licence with only about 600,000 ha being actively exploited in any given year. Logging licenses are granted for a 20 year period; the concession is divided into cutting areas of 2,500 ha, each of which may be cut for three years after which it is permanently closed. Previously cut areas may not be re-entered. - 73 - Table 18 Forestry Sector Production (in cu m) 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Exports of logs 799098 744978 704540 722091 699573 811196 Delivery to factories 1179148 984335 982763 895429 918793 996449 Total Production 1/ 2083084 2087379 2090595 1970490 2120603 2476275 (as % of total) West 0.7 0.4 0.6 1.1 0.8 1.1 Northwest 2.4 2.6 6.2 3.4 2.8 4.2 Littoral 10.4 11.4 8.2 7.4 6.7 8.0 Center 15.4 16.1 17.6 17.8 17.8 16.7 South 15.7 14.9 17.1 18.9 17.9 15.0 East 55.1 54.3 50.3 51.4 54.0 55.0 11 Total production figures do not correspond to the sum of exports and delivery to factones. 13. The Government recently decided to set aside an area of 6 million ha in the south- east, freezing the allocation of any further concessions, while new conservation, land use planning and management arrangements are explored in the context of proposed Global Environment Facility (GEF) and World Bank financed projects. Recommendations for tax reform in this sector have been tailored to match the institutional reforms now being developed. 14. Total production has been around 2 million cubic meters for most of the eighties. A sharp increase was registered in 1989/90 when total production and exports of logs reached 2.5 million and 800,000 cubic meters respectively (see table 18). Most forest exploitation is undertaken by foreign companies, but there is also a small number of domestic companies and a small wood industry. Over 50 percent of production originates in the eastern province, with the south and center provinces together accounting for an additional one-third. While over a hundred species are currently logged, 15 represent 86 percent of total production and 3 (ayous, sapelli, azobe) account for 58 percent. Tax Arrangements IS. Forestry is subject to a number of different taxes (see table 19). To initial taxes of exploitation (CFAF 2/ha) and agrement (CFAF 15 ha) are added a logging tax at 5% of the mercurial value; a security deposit CFAF 40/ha and exploration tax of CFAF 2/ha (both paid once only); and yearly taxes as follows: county tax (CFAF 10/ha/yr); reforestation tax 20, social contribution 40 and forestry development tax 28, for a total of CFAF 98/ha/yr. In addition there are export taxes assessed at 40 percent of the mercurial value, of which 30 percentage points are customs duty. 2 percentage points are a tax on export logs, and 8 percentage points go to the public enterprise in the sector. - 74 - Table 19 Forestry Taxes Tax rates and their allocation Allocated to - - Type of tax Tax base Rate Treasury Dir ONADEF FEICOM (CFAF) Foret Reforestation tax ha/yr 20 100% Forestry development tax 1/ ha/yr 28 40% 60% County tax 2/ ha/yr 10 100% Social contribution 3/ ha/yr 40 100% Licence tax 4/ ha 15 50% 50% Transfer tax ha 50 100% Exploration tax ha 2 100% Logging tax mercurial 5% 20% 80% Export tax on logs mercurial 40% 80% 20% 1/ Contribution aux travaux de d6veloppenent forestier (CTDF) 2/ Redevance communale 3/ Participation h la realisation des infrastructures socio-6conomique (PRISE) 4/ Taxe d'agr6ment Source: Forestry Department 16. Forestry taxation is governed by its own legislation (currently under revision) FORESTRY SECOR separately from the Loi de Finances. As Allocation of taxes shown in table 19, forest revenue is allocated (in percent) to the following budgets: FEICOM (the inactive Fonds Sp6ciale d'Equipement et Tay.59 16.3 d'Intervention Intercommunale); the direct Treasury 16.5 16.3 account of the Forest Directorate in the ONADEF 62.3 64.2 Ministry of Agriculture; and ONADEF, the FEICOM 18.7 14.8 forestry public enterprise which emerged from the merger of CENADEFOR and ONAREF; Total 100.0 100.0 and the Government. The bulk of taxes collected is allocated to ONADEF (two-thirds) Source: Forestry Department with the Treasury receiving no more than one- sixth of the total in the last two years (see box). - 75 - Table 20 Forestry Sector Taxes Collected (in CFAF '000s) 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Reforestation tax 140961 80423 74905 67784 89045 115627 Forestry development tax 182988 141975 11368 73443 54295 163719 County tax 75826 68205 30012 24758 43954 56278 Social contribution 83116 221381 130169 91960 231341 191006 Licence tax 16012 15170 2752 2541 1456 10332 Exploration tax 1349 641 688 669 8527 Total fixed taxes 498904 528503 249846 262273 420759 545489 Logging tax 1610073 562720 1365293 717529 991381 1069290 Export tax on logs 678443 1039380 463437 Other 6264 104634 106382 41957 76341 67447 Total 2125241 1874300 2760900 1484096 1488481 1682226 Source Forestry Department ii. Lssues Tax yield 17. Table 20 shows revenues generated by each of the taxes specific to the forestry sector. Despite the large number of taxes, the overall burden of taxation on the sector is light, relative to the value of the output and to the rent which should be derived from the resource. According to a recent Bank study, the Government charges concessionaires far less than they would be willing to pay. In addition, forest fees were for the most part set long ago and areas fees have been eroded by inflation while posted prices (valeur mercuriale), which constitute the tax base for ad valorem taxes (logging and export taxes), have fallen substantially behind prices in the international market. Table 21 shows that the posted price for sapelli represented in 1989 and 1990 only one-fourth of its fob Douala value. Table 21 Forestry Sector Posted versus fob prices 1985 1986 1987 1988 1989 1990 Logs (sapelli), in US$ 1/ 174 222 259 271 274 344 Logs (sapelli), in CFAF 78171 76880 77839 80716 81407 93659 Posted Values 22000 22000 22000 22000 22000 22000 1 .rom the miternational comndility markets division's pice series for fob DnlD a - 76 - 18. Forest fees are also cumbersome to administer, requiring tallies and physical measurement of felled logs which are often infeasible. Collection rates are low and many concessionaires are in arrears; tax arrears in April 1991 amounted to CFAF 3.4 billion or one-third of total collection since 1984/85. The Government does not possess effective means to check that contracts are respected or to ensure proper forest management and regeneration. The result is that assessed revenue is unduly low and collections are even lower - although the difference between the return to the government and what the concessionaire is willing to pay may be collected by other means. Table 22 shows an estimate of the shortfall in revenues under current taxation arrangements. Table 22 Forestry Sector Analysis of taxes due versus taxes paid (1989/90) Calculation of Taxes Difference taxes due collected (in %) (CFAF 000) (CFAF 000) 1 Reforestation tax 152273 115627 32% Forestry development tax 213182 163719 30% County tax 76136 56278 35% Social contribution 304546 191006 59% Sub-total, fixed annual taxes 746137 526630 42% Licence tax 10332 Exploration tax 8527 Total, fixed taxes 746137 545489 37% Logging tax 1 1600784 1069290 50% Export tax on logs 1/ 4195172 Total 6542093 I/ Taxes due are calculated on the basis of the average mercuriale for the top 12 species weighted by their share in production. Soure-: Forestry Department and staff estimates Associatd.prhbems 19. The administration is unable to prevent entry of shifting cultivators along logging roads. Large areas of forest are destroyed every year by slash and burn cultivation in areas opened up by concessionaires. This problem is aggravated by the current system of - 77 - establishing rights to land, which normally requires evidence of cultivation, while use of the forest without clearance does not establish rights. Hence the existing legal system does not effectively protect the rights of forest dwellers and the maintenance of in-forest production, whether marketed or non-marketed. 20. The present system suffers from waste (about half the felled timber is left in the forest), and abuse of contract arrangements (relating to areas logged or re-logged, types of species and dimensions permitted for felling). The combined effect of destructive logging practices and burning and clearance for the expansion of agriculture is that an apparently renewable resource may prove to be non-renewable, entailing irreversible loss of bio- diversity, of habitat for forest dwellers including pygmies, and of an exploitable economic resource capable of contributing to the growth of industry and exports; together with climate change with adverse consequences for agriculture and water supply both in Cameroon and the region. Adverse climate change resulting from the destruction of a large part of its moist timber resource has already been observed in COte d'Ivoire. Problems to be addressed by taxation 21. The situation is disturbing from both a revenue and a wider economic and environmental point of view. Aspects of this situation which should be addressed through taxation are: the under-valuation overall of the timber resource; the incentives for waste and abuse afforded by the current structure of taxes; the loss of potential Government rents and revenues; and the extent to which forest land is treated as a free good. A tax system is needed for this sector which would be transparent and straightforward to administer while helping to address the efficiency, equity and revenue problems identified. iii. Recommendations Proposed reform 22. It is proposed that the Government move to a radical reform of taxes on the sector in line with the management and institutional reforms currently under discussion between the Government and the Bank, that is: - institution of an annual concession rent as the major revenue source, to replace the current plethora of small forest fees; - the level of the concession rent to be set by competitive bidding; - management concessions to replace the present logging concessions; - each concession to have a forest management plan; - inspection of concessions by private firms, selected by international competitive bidding, on behalf of the Government. 23. The aim of this fiscal and institutional reform is to give the concessionaire a long- term interest and obligation to look after the forest environment, including the forest-dwelling population, through the management plan. It replaces ineffective targeted levies (eg for regeneration) directly with the management plan. Performance under the plan would be - 78 - verified by an outside private firm acting as the agent of the Government and chosen by international competitive bidding. 24. The company would pay an annual rent for the concession determined at tender, thus ensuring that the Government receives the current market value for exploitation of the resources subject to the restrictions in the management contract. The annual rent would replace all taxes unique to the sector except the export tax on logs. The concessionaire would continue to pay all taxes in the general regimes: import duties, turnover tax (ICAI), and income tax (IS). It is recommended that export taxes be retained, as a revenue measure, as an interim response to the under-pricing and waste of the resource and as a second best response to the structure of foreign trade barriers which discriminate more against processed wood products than unprocessed logs. Furthermore, an export tax set at a high rate would be preferable to an export ban, which would be difficult to enforce, would result in a sharp decline in government revenues and employment in the short term and could have the undesired counter-effect of accelerating logging for export in the period before the ban is introduced. It is also recommended that the administratively determined obligation for processing be eliminated, allowing forest enterprises to base their decisions on market signals (adjusted by the proposed export tax). 25. Given the upfront annual payment for the entire "value" of the concession, the proposed system provides the concessionaire with the incentive to reduce waste as well as to guard the contents of his concession against encroachment from shifting cultivators. In addition, however, accompanying changes to agricultural taxation would be required, to reduce farmer incentives to move into new areas of forest land, burning forest left by loggers. These are dealt with in the section on Agricultural Taxation. 26. Under the new arrangements, it is proposed that a proportion (10 percent) of the annual concession rent be allocated to the communities resident in the concession area. Until 1983, concessiobaires were required to provide roads, schools and other facilities; since then, there has been a requirement to pay in money terms, but the amount appears to be negotiated case by case between the administration and the concessionaire, leaving the local populations with an uncertain or no return. The payment to local populations could be defined as compensation for loss of amenity, and/or payment for services rendered if there is an agreement that they would contribute services laid down in the management plan. Such issues remain to be resolved in the context of the Forestry/environment project and the SAL, under which policies to ensure the rational exploitation and long-term conservation of the forestry resource are being developed. Imnlementation 27. This system should be adopted for any new concessions let. A two-step process would be required. First, the Ministry of Agriculture would designate an outside firm, chosen by competitive tender, to manage the bidding process. The same or another firm would be chosen at tender to oversee the concessions once granted. 28. Following selection of the management firm, that firm, together with forestry administration officials, would establish boundaries for concessions as well as a minimum acceptable bid (or reservation price) to serve as a barrier to collusive bidding. The determination of this reservation price requires information on the resource content of the concession (the establishment of management plans will also require inventories) as well as on - 79 - the actual and potential market value of the resource. Since standing timber values can only be calculated as a residual (these residuals would indicate market value which could be adjusted to incorporate non-marketable benefits), access to independent market price quotations (see below for a discussion of the problems) is very important. This calculation would also require estimates of production and transport costs (standing timber to export-gate) which could be based on the actual costs of a firm with average efficiency. Finally, provisions could be made to incorporate an adjustment clause to the annual concession price which would reflect the evolution of international log prices as well as production costs. 29. In order to minimize possible abuses, it may be worth considering adopting the system used in COte d'Ivoire whereby bidders have to go through a pre-selection process in which their past performance is vetted. Qualifying firms would constitute the short list from which bids would be solicited. In addition the Government would need to decide on the way in which tenders are to be evaluated, including any special provisions for local or small firms as a way of encouraging local entrepreneurs and combatting potential industry concentration. 30. Transitional arrangements would be required for existing concessions. It is recommended that holders of existing concessions move to a system of annual rent payments by raising the rates of existing taxes and fees, and offering the holders a choice between paying the higher fees or an annual rent calibrated to be in line with average rents per hectare in new concessions. These and other implementation issues are being discussed with the Government. Interim Recommendations 31. In the interim, even while retaining the principal elements of the current system, revenues from the sector can be increased and the system simplified. This could be done by combining the numerous area taxes into a single one and by revising upwards the posted prices (valeurs mercuriales) on which the export and logging taxes are levied. This partial reform would also facilitate the transition to the new system for existing concessions, as discussed above. While the Government increased the posted prices only very recently, this exercise was undertaken without any reference to world market prices. It is recommended that the prices set for tax purposes be brought in line with market prices with a revision in the rate of taxation, if necessary. In light of the unreliability of declared fob prices due to prevalent transfer pricing practices in the industry, a study should be undertaken to determine appropriate price indicators. These would be used to update regularly posted prices; they would also serve to determine the export tax on logs as well as the reservation price for concessions under the proposed system. Finally, it is recommended that revenue from export taxes should go direct to the Government budget, abolishing the current system of tied revenues to FEICOM, ONADEF and the Forestry Directorate. iv. Imnagl of PropPe_LReforms 32. The proposed reforms should improve considerably forestry management practices, lead to the proper valuation of this important asset and increase the likelihood that Cameroon's forests will be exploited in a stainable manner. It is, however, difficult to estimate the level of revenues that the prop. m,ed system would generate as it would be dependent on an auction process, the amount and value of forest land the administration decides to let out, and costs associated with extraction. However, it is clear that revenue from the sector can be substantially increased, especially if the rents which previously escaped - 80 - are captured. At a minimum, revenue neutrality could be assured by setting the reservation price for the auctions at the level of revenues generated by the current system. 33. While the reform is in preparation, it would be useful to introduce some administrative measures to make the existing system more effective and to raise the revenue contributed by this sector. A certain amount can be achieved by stronger Government control, better training and equipment, and upgrading the administrative effort involved; but a thorough-going reform of the agencies concerned (mainly the Forestry Department in the Ministry of Agriculture) will be necessary to achieve substantial results. The forestry/environment project under preparation would aim to reinforce the institutions in charge of the management of the sector while assisting in the effective implementation of the proposed reforms in concession and tax policies. B. AGRICULTURAL TAXATION 34. Cameroon has a rich endowment of fertile agricultural land and a favorable climate over much of the country. It produces for domestic consumption and export a variety of food crops, livestock, coffee, cocoa, cotton, bananas, tea, palm oil and some horticultural products. There are a number of large agricultural plantations, especially of palm oil, rubber, tea and bananas, but the bulk of production of other crops is carried out in small family holdings. The supply of inputs (primariy fertilizers and chemicals) is being privatized and subsidies removed. 35. Eagros. There has been substantial liberalization of export crop marketing arrangements but producer prices and margins for traders are still fixed, though this is done according to world prices as at the beginning of each season. The effect of bringing producer prices into line with world prices, together with the over-valued exchange rate, has severely depressed rural incomes. The concomitant rise in the price of inputs as subsidies are removed is resulting in a drop in aggregate production and exports. Robusta coffee, in particular, is now barely profitable and there is some evidence of a switch out of export crops. 36. Food crops. While the traditional food crop sectir is unregulated and prices are set by the market, agro-industrial products such as rice, flour, vegetable oils and sugar continue to be subject to administratively fixed prices and to quantitative restrictions on imports. These large agro-industrial units are economically very costly (value-added negative at world prices) and can survive only with massive protection. However, given the difficulties in controlling land borders, most of these enterprises face severe financial problems. Decisions will soon have to made about the future of these inefficient import-substitution activities in the context of the program for import liberalization. i. Culrrent.Syst 37. The agriculture sector is lightly taxed, especially since the removal of export taxes on agricultural commodities under the structural adjustment program. There remain the poll tax, the cattle tax, and direct taxes on personal and company income derived from agriculture. The schedular personal income tax is at a flat rate of 15 percent. For those individuals who choose not to report income on the basis of actual accounts, a notional assessment, or forfait, is applied. The forfait is calculated according to a number of factors including the kind of crop, area planted, and quantity harvested. The base is a scale of notional profit per hectare varying by product and region. - 81 - 38. However, collection and enforcemeat of income taxes in rural areas are difficult. The forfait system cannot work adequately in the absence of a cadastre f agricultural land. Large modern sector estates are not reliable tax-payers, and bankrupt agricultural parastatals pay no taxes at all. 39. Taxation of agriculture involves revenue, efficiency and equity issues. Any proposals for reform must be tailored to recognize the administrative difficulties of enforcing taxation in this sector, and the importance of the sector for the long-term future of the country. ii. Is s"e Relative price issues 40. At the current exchange rate, telative prices as between agricultural and urban indistrial activity are seriously biased. This is aggravated by the trade and indirect tax system as well as the investment code provisions which favor industrial activities. There are also distortions within the agriculture sector as between production for export which is severely penalized and production of agro-industrial crops which benefit from high levels of protection. As a result, resources are attracted into uneconomic activities because tax-adjusted incomes and prices do not reflect real economic returns or actual opportunity ",osts. One consequence is rural-urban migration (see discussion on urban taxation), which strains the inadequate urban infrastructure, raises unemployment and deprives rural areas of productive workers. 41. In this context, the relatively lig%t tax burden on agriculture can be seen as some kind of compensation for the artificially low returns to economic activity in the sector, reducing the distortion in relative prices from which it suffers. Certainly, no recommendation can be made to move quickly into a tax regime which would substantially increase the tax burden on this sector. Looking to the medium-term, however, it is useful to define the tax structure which would be appropriate once the real exchange rate and the trade and other distortionary tax provisions are corrected. 42. Certain measures affecting agro-industrial enterprises benefiting from privileged tax regimes would also be appropriate and could be introduced without delay. These enterprises, including parastatals, should also be required to pay corporate income taxes due. The ADMrODriae tax-b 43. Taxation of rural income is impractical in the traditional sector as it is virtually impossible to measure, being derived from a large number of sources including income in kind. Expenses incurred in earning income cannot in general be documented. Income may also be so low in many cases that the administrative costs of assessment and collection exceed the revenue. Although taxation of adUtion is subject to many of the same disadvantages, especially when it is for own consumption or is not marketed, taxation of marketed output, and in particular agricultural eporm, has often been adopted as the only practical way of extracting revenue from this sector. This gives economically inefficient signals, however, except in the presence of significant negative externalities. Taxation of VuruEhagEWjDpQ is also inefficient unless it can be deducted under a value added tax. - 82 - 44. The most economically efficient tax on this sector is one on land. Such a tax would help to register the economic and environmental fact that land does indeed have a value which is worth protecting and enhancing. This is particularly relevant in the Cameroonian context where traditional practices of shifting cultivation treat land effectively as a free good and contribute to soil depletion and degradation, with well-known disastrous consequences both for the environment and for the food supply and well-being of rural populations. Rapid population growth aggravates these problems. Taxation of land would help create incentives for more intensive cultivation and higher productivity in food and other crop production, and inhibit encroachment on forests. 45. The question of the appropriate base arises: the alternatives being market value, actual income from land, or potential income under full utilization. Market value is more precise conceptually but is not practical when transactions are infrequent; taxation on the base of actual income suffers from the same disadvantages as axation of income and production; all three are difficult to measure in practice. The last, potential income under full utilization, has the advantage of discouraging the holding of land for speculative purposes, and of creating incentives both for more intensive use and for safeguarding and increasing the productive utilization of the land. Taxation on this basis would require a cadastral survey and the establishment of a land registry. Land could then be taxed according to the potential value of production on a scale which took into account access to amenities (e.g. water supply, access roads) and proximity to market and export centres. Once this standard was established, it would be administratively far simpler to apply and would permit much less discretion and evasion than taxation of income or production (land area being far harder to falsify). The schedule would require revision only when changes in amenities took place. 46. Who should be taxed? Taxation of owners appears appropriate at first sight, particularly where ownership of land is concentrated in a few wealthy hands and equity can thereby be enhanced. In recent years, the Cameroonian Government has been distributing land titles to a small number of political favorites, eroding the dispersion of ownership under customary law. However, owners can be hard to identify, especially where there is a conflict between traditional and modern systems of land tenure. This militates against the taxation of ownership. 47. It would be therefore be preferable to tax land p_kers rather than land owgers. This is similar in concept to the occupancy tax recommended for urban dwellings, where ownership can also be hard to determine. It would also require a less detailed cadastre than one required to document ownership. In cases where land was not in use, there is less economic reason for taxation; but it could be worth considering the adoption of a system whereby unused land reverted to national estates, or was transferred to local communes for agro-forestry, with multiple possible uses (e.g. firewood, shade, fruit, wind-breaks). iii. Recommendations 48. In the short-run, reinforcement of the agencies responsible for tax collection through control, training, and better equipment is recommended. Privileged tax regimes (TU, TIP) which were designed to promote industrial activity should be renounced as soon as possible and modern sector agricultural enterprises including parastatals should be required to pay corporate income tax and to hand over the with-holding tax on employees' salaries. It is also recommended that the tax on exports of agriculture commodities be reintroduced as a proxy to a progressive income tax. Exports would thus be taxed only when prices on the international - 83 - market exceed a certain threshhold, taking into account the level of the real exchange rate; this would done with a progressive rate structure designed to capture part (larger at higher prices) of the rents which would accrue to exporters and farmers. 49. The proposals for taxation of the production value of land in the medium-term should be elaborated in the context of developing policy designed to create rational incentive structures for resource management in the medium-term and for safeguarding the environment. Taxation of modern sector income from agriculture would remain and would be extended to middle-income earners in rural areas as administrative resources permit. Once there is an improvement in the real exchange rate and tariff and other distortions have been reduced, the existing forfait system would be upgraded into a full tax on productive value. In the first instance it would be applied at a low rate to modern sector agricultural enterprises; its extension to the country as a whole would follow on from the establishment of a cadastre and land register. iv. Impact of Proposed Reforms 50. It is expected that in the medium-term, the proposed land tax would increase government revenues from the agriculture sector while promoting a more efficient exploitation of natural resources. In the interim, revenues from the sector would increase substantially only with a recovery in the international price of export commodities. C. URBAN TAXATION 51. Cameroon has a rapid rate of urbanization which is expected to raise the urban proportion of the population from 40 percent currently to 50 percent by the end of the decade. The largest cities are Douala (about I million) and the capital Yaound6 (about 0.8 million), followed by the regional centres of Bamenda, Bafoussam, Ngaoundere, Garoua and Maroua. Conditions in most Cameroonian towns are worse than in comparable middle-income developing countries, with unpaved streets, inadequate drainage and other facilities, and an unhygienic environment. This section examines taxes which contribute to local government budgets. Issues regarding the the social costs of urbanization and the appropriate tax base and system for financing municipal activities are discussed. The weaknesses of the current tax system are signalled and recommendations for improvements are made for the short and longer terms. i. Current system 52. Local government activities ar' financed through additional levies tacked onto certain national taxes and through purely local taxes, some of which represent in fact user charges. Municipal revenue is extremely low: 0.74 percent of GDP in 1986/87 as compared with 9.2 percent of GDP in France. (This year represents the state of affairs before the economic and financial crisis). 1. National ta 53. Of the 0.74 percent, only 0.074 percent represents municipalities' own funds, while 0.67 percent is transferred from central Government, mainly through the system of "centimes additionnels." According to this system, the commune receives 10 percent of the turnover tax - 84 - (ICAI), the company tax (IS), the proportional tax on individual business income (BIC), the proportional tax on salaries, and the progressive surtax on aggregate personal income. 54. In addition, municipalities receive 25% of the revenue from the real property tax (txe foncibre). As discussed in chapter V on wealth taxation, this tax was introduced in 1989 and is imposed on real property for which an ownership title is registered. In practice this means it is applied only in urban areas. The tax base is the surface area, with no regard to zhe location of the property or whether or not it is improved. The expected return of this tax was CFAF 3.5 billion annually but the actual return was only CFAF 120 million in 1989/90. Proceeds were raised to an estimated CFAF 200 million in 1990/91 after lawyers were asked to require settlement of this liability before registering rent or sales agreements. It appears that the tax is .urrently collected on only 3-4 percent of those liable, and returns in Yaound6 and Douala are particularly low. The feeble return on this tax indicates that means of collection are inadequate and signals the need for an effective fiscal cadastre. Additional taxes on property which are not shared by the municipalities include the property transfer tax and the tax on rental contracts (see wealth taxation). 2. Local taxes 55. Municipalities' own revenue is of two kinds. "Direct" revenue comprises the poll tax (impOt forfaitaire), the patente and licences. These taxes are assessed and collected by the central government authorities on behalf of the municipalities and imputed to their treasury accounts. "Indirect" municipal revenues cover a wide range of fees and charges including building permits, municipal abattoir and market fees, and charges for rubbish collection and other urban services; municipalities themselves are responsible for their collection although the central government remains in charge of imputing the revenues to the appropriate treasury accounts. 56. Poll tax. Local agents or "prefects" are responsible for making an annual inventory of the population liable for the poll tax, which is imposed on the economically active earning less than CFAF 25,000 (per year). Although local collection agents have a reasonably good knowledge of their local population, no official tax payer list exists. Coupons indicating payment are not identified with the taxpayer's name and no list of those to whom coupons have been issued is kept. The only record is the number of coupons issued which indicates the total number who have paid. 57. Patentes and licences. These are effectively business taxes aimed at the informal sector, though formal sector businesses also pay them. Their rates are determined by a complicated system of evaluation of type of business, machinery used, and rule of thumb methods of estimating turnover. While this is a cumbersome system, it appears to function relatively well because payment of the tax is also a licence to operate. The taxpayer is expected to pay patente and licence fees at the beginning of the year without receiving any notice of taxes due ("emission des rolles") from the tax department. (see also chapter on company taxation). 3. Composition of revenue 58. Table 23 shows the composition of local government revenues for six urban centers. Drect taxes account for more than one-half of total revenues in all cases and for over 80 percent for Yaounde and Douala. Among the direct taxes, the "centimes additionnels" have a - 85 - preponderant share for Yaounde and Douala but are of lesser importance for the other towns. Indirect tax (i.e. user fees) yields are low in all but one urban center - Bamenda - where market fees alone account for 27 percent of total revenues. Table 23 Urban Taxation Composition of revenues for six urban centers Yaounde Douala Bafoussam Bamenda Bertous Ebolowa Population in 1987 647949 812035 110924 109421 42319 33 935 Total revenues (CFAF 000s) 1/ 2971.6 8022.3 526.6 282.5 138.1 88.9 Total revenues (in percent) 100.0 100.0 100.0 100.0 100.0 100.0 Direct Taxes 80.9 84.5 66.4 61.3 55.7 67.7 local direct taxes 33.1 19.7 30.8 54.5 34.5 54.1 centimes additionnels 47.9 49.0 33.8 6.9 21.2 13.6 other 2/ 0.0 15.8 1.9 0.0 0.0 0.0 Indirect Taxes 13.1 6.9 12.8 36.4 17.7 28.3 market fees 5.2 3.1 2.9 27.3 6.9 9.1 abattoir fees 0.0 0.0 0.9 1.3 1.8 0.7 construction permits 2.5 0.7 1.1 0.5 1.5 6.5 parking fees 3.6 1.7 1.7 3.6 4.1 6.5 advertising fees 0.4 0.2 1.5 1.0 0.8 0.4 other 1.5 1.2 4.7 2.6 2.7 5.2 Water, electricity, garbage 5.1 8.5 8.6 0.6 26.3 1.3 collection charges I Land use fees 0.91 0.1 12.1 1.6 0.2 2.7 1/ Does not include revenues carried forward from the previous year. 2/ Includes inheritance and gift taxes, earmarked for local government since 1987. Source: Administrative accounts: 1988/1989 for Douala and Yaoundd; 1989/1990 for the others. as published in "Appui au D6veloppement municipale chaine fiscale", Groupe Huit-Breef 1991. ii. Lsue 1. General considerations 59. Incentives to urbanization are normal in developing countries and the establishment of well-functioning towns and cities is clearly part of the development process. A degree of - 86 - urbanization and urban infrastructure such as markets, processing and transport facilities are needed to enable the trade and transformation of agricultural products. However, the standard incentives to urbanization are reinforced in the case of Cameroon by the overvalued exchange rate, which biases the rural/urban terms of trade. This bias is worsened by the structure of protection to domestic industry. Thus income from agriculture is low relative to earnings available from non-traded activities in Government and from the protected urban industrial . sector, and the rate of urbanization is faster than would be justified by movements in the real relative returns to economic activity in cities as opposed to rural areas. As a result, many young and productive workers are being lost to the agriculture sector which will continue to . be the backbone of Cameroon's economy, while urban unemployment, already at worrying levels, will continue to rise sharply. The fast growth of population and labor supply accentuate these pressures. 60. The relative price bias induced by the exchange rate is aggravated by the tax structure, which provides greater tax shelters for investment in residential real estate than for productive investment. Real estate is also a store of wealth which is largely inaccessible to redistributive taxation. At the same time, the generally ineffective system of municipal finance cannot fund either the investment or the services necessary to upgrade urban infrastructure and living conditions and cater for the inflow of migrants from the countryside; migrants are able to treat urban space as a virtually free good, and do not internalize the social costs attached to their arrival in the city (as well as those associated with their departure from the countryside); and municipalities cannot count on the share of central Government finance which is in principle due to them. 61. This situation is difficult to remedy given uncertainties about land ownership deriving from a mixture of customary and modern concepts of ownership and the absence in large part of records. Furthermore, few streets have names and few buildings addresses or numbers. A precondition of appropriate urban (and indeed national) taxation is hence a cadastral survey of at least the major urban areas. 62. These problems are circular in that: (1) improved revenue collection for central Government and hence a larger allocation for municipalities depends partly on better taxpayer identification, which is hard to achieve without street names and numbers or other definition of properties; (2) roads, urban markets, storage and other facilities are important as outlets for agricultural products. The absence of certain types of urban infrastructure thus aggravates the relative disadvantage of the agricultural economy. 63. Reform of urban taxation, including better definition of the tax base, is therefore important both for municipalities and for the economy as a whole in order to broaden the effective base, improve equity, and create a more rational incentive structure. Specifically, urban taxation should: - help fund urban infrastructure in expanding towns and provincial centres; - provide a workable system of cost recovery for urban services; - help counter allocative distortions by imposing some of the real costs of urbanization; - act as a proxy for progressive income and wealth taxation; - 87 - - improve taxpayer identification in the tax system as a whole. 2. Weaknesses of the current system 64. Because municipal finances are so dependent on sharing in central revenue, they are susceptible to the same problems as the general system (see chapter VIII). In addition to the poor collection performance of the general system, municipal finances suffer from the unreliability of disbursements by the central government. This is in part due to a lack of transparency in revenue accounting: no distinction is made in revenue paid by companies between that paid on their own account and that on account of their employees; and the total base on which the "centimes additionnels" are calculated is not clearly defined. More importantly, however, the budgetary crisis has resulted in part of the funds due to the municipalities being utilized instead to finance central government expenditures. 65. The centralized system of municipal financing has an added disadvantage in that taxpayers often do not perceive the link between improvements in their immediate envirornent and their tax contributions. On the other hand, some of the indirect local taxes, which in effect represent user charges, have been eroded by inflation and currently are at levels significantly below requirements for cost recovery. 66. Despite he weaknesses of the system, substantial revenue is URBAN TAXATION derived from patentes and licences Direct taxes in municipal finances and from "centimes additionnels", particularly from those on turnover Yaoundd Bamenda Bafoussam tax and income tax. Private sector economic activity is clearly the Total (CFAP 000s) 2324 173 350 mainstay of local finances whether revenue comes via the Government imp6t forfaitaire 4 8 6 budget or directly to the patentes+licences 37 81 40 municipality (see box). By contrast, centimes ICAI 22 8 6 the sources of local finance centimes Ht 37 3 45 frequently found in other countries, Direct taxes as % of such as taxes on land, buildings and total revenues 81 61 (16 occupancy, largely flow to the Govermnent budget in Cameroon. Source: see table 20. iii. Recommendations 67. In the short-run, recommendations will need to relate to better operation of the existing system; in the medium-term, the central versus the local tax base should be reviewed and movement towards a more decentralized system should be considered. Linked to urban taxation should be a greater measure of local responsibility on the expenditure side. The policy and investment response to urban growth should be located closer to the areas concerned, requiring a linkage of local taxation and spending power now absent in Cameroon. 68. Medium-term urban tax reform is being supported by the World Bank financed second urban project which will develop the cartographic base for an urban fiscal cadastre. - 88 - 1. Short-term measures 69. Direct taxes. In the short term, efforts should concentrate on improved assessment and collection of the best yielding taxes; the ICAT, the BIC, and other company income taxes; and to improve accounting standards in, and liaison among, the three Departments of Taxes, Registry and Treasury within the Ministry of Finance. In addition to a more general upgrade of the system of tax administration (see chapter VIII), consideration should be given to the establishment of a locally based and computerized fiscal register, decentralization of operations, payment of communes for collection services and separation of municipal receipts offices from local offices of the central government. 70. Recommendations made on the system of real property taxation would also increase the yield of this tax in the short term while longer term reforms are under preparation. These related to enhanced inter-agency cooperation to improve taxpayer identification and rate differentiation to take into account the value of the property in question. 71. Indirect taxes. Municipalities, especially in small towns with less access to revenue- sharing, should aim to rationalize and improve recovery of these local taxes. In some cases, tariff increases will be appropriate; in others revenues may be best increased by improving collection rates. In larger towns, the problems of efficient collection of charges for urban services are similar to some extent to those experienced by the public enterprises SONEL and SNEC (electricity supply and urban water supply respectively). Some revenue gains could be expected from cooperation with these enterprises on their information base; by the same token, the enterprises, which have notorious problems in determining their list of subscribers and ensuring that the appropriate tariff is paid, would benefit from the establishment of a cadastre and list of properties as envisaged in the urban project. 2. Medium-term reform program 72. The improvements suggested above will of necessity take time, and require a staged program of implementation and the resources to carry it out. In the longer run, a move to a secure base of local taxation which is not as dependent on central government receipts is recommended. The tax on property offers a suitable base; to the extent possible, this tax should be assessed on market values. Therefore, improved identification of taxpayers through a fiscal cadastre should be accompanied by a system to monitor the evolution of property values. In addition, as soon as the urban cadastre is available, a "taxe d'habitation" should be enacted, proportional to the rental value of each property and levied on the occupant without regard to the tenure arrangement. These two reforms have the additional advantage of addressing equity concerns in a way which would probably be more effective than other instruments available. 73. These ownership and occupancy based taxes should be combined with an improved system of user charges for services provided by the municipalities. The minimum objective should be cost recovery; however, fuller accounting of the social costs of urbanization may require tariff charges which go beyond cost recovery levels, incorporating a tax element. 74. It will also be desirable to remedy, at least to some extent, the extreme inequality among localities if the new system is to be acceptable. At present, revenue from "centimes additionnels" per inhabitant goes from CFAF 15 in rural towns to an average of CFAF 1,308 in urban communes. This average includes CFAF 3,991 for Yaound6 and 6989 for Douala - 89 - (see bey). If the main future base for local taxation is the value of URBAN TAXATION land and other property, these Municipal revenues per inhabitant (1984/85 - 1987/88) inequalities among regions and D Yaounde Urban Rural localities may well be maintained communes communes or exaggerated unless a supplementary source of finance is Direct taxes 10852 4970 2766 416 of which: "centimes" 6989 3991 1308 15 used. For this, it is hard to see a Indirect taxes 719 702 567 43 alternative to central grant finance, Other 0 715 425 36 according to a formula weighted 11598 63833 757 516 by local population and degree of Total wealth. It is recommended that the system of "centimes additionnels" be transformed into an equalization fund for this purpose. The "centimes" on the turnover tax (ICAI) may have to be eliminated to be consistent with the proposals of the UDEAC regional reform program. 75. It is proposed that these issues be worked through with the Urban Project team and the relevant agencies in Cameroon in the coming months in the context of their existing plans to institute a fiscal cadastre and upgrade collection of the land tax. iv. Impact of Proposed Reforms 76. In the medium-term, the implementation of the property tax will provide the municipalities with a reliable source of finance, enhance the overall progressivity of the system while permitting decentralized decision-making and a more readily perceivable link between taxpayer contributions and public services. The proposals aim to increase resource mobilization from the sector but given recommendations for decentralization, this will have little direct effect on central government revenues. Indirectly, improved taxpayer identification through the fiscal cadastre should also increase yields from other taxes. D. PETROLEUM RELATED RESOURCE MOBILIZATION 77. Cameroon has modest but valuable reserves of petroleum (crude oil and natural gas). Oil has been produced since 1977, and production levels rose quickly to exceed those from longer-established African oil producers such as Congo and to equal production from its neighbor Gabon. Its reserve base, however, is more limited, amounting to about half that of Gabon or Congo, and less than a quarter that of Angola; Cameroon's oil production, and thus exports, face a more rapid decline than those of the other African producers mentioned. Barring future discoveries of new reserves through increased exploration activity, Cameroon could be a net importer of petroleum fuel by the year 2000. 78. The fiscal effect of the petroleum subsector on Cameroon's economy is significant because petroleum related taxes play an important - though declining - role in government finances through: i) taxes on the production of crude oil by the international petroleum companies (royalties, dividends, tax on profits); and ii) the tax on the domestic consumption of petroleum products. Together these two sources of revenue amounted to CFAF 183 billion in 1989/90, or 38 percent of total revenues. (The proportion is estimated to have been higher in 1990/91 because of the one-off surge in prices early in the year). In addition, unless - 90 - specifically exempted, enterprises in the sector are subject to the set of economy-wide taxes. Petroleum is therefore the first ranking source of revenues for the treasury. 79. This section examines taxes at the different stages of the petroleum chain, from the upstream activities of petroleum production by the international petroleum companies to the downstream activities of petroleum refining, storage and distribution. The analysis draws on information which has recently become available with the completion of the diagnostic study on the petroleum sector. General taxes such as income taxes and the turnover tax have been considered in earlier chapters. 1. The upstream: petroleum exploration and production i. Current System The Reserve Situation 80. Crude Oil. Cameroon's original economically recoverable crude oil reserves are estimated to have amounted to some 135 million metric tones (MMT), or 1000 million barrels (MMB). Of these, approximately 60 percent have been produced. The remaining reserves (53 MMT/400 MMB) are divided among the present producing rightsholders as follows: Elf SEREPCA 81.42% Pecten Cameroon 13.63% Tepeam (Total CFP) 4.95% 100.00% 81. Production peaked in 1985/86 at 8.942 MMT or 178,000 barrels per day (13D). It has since been declining by 5-10 percent annually despite the commissioning of some new, small fields. Production amounted to only 146,000 BD in 1990/91 and unless substantial new reserve additions are made, existing fields will decline rapidly; the Elf-operated Rio Del Rey fields will produce until 2000, the Pecten-operated Lokele fields and Tepcam-operated Moudi field until 1995. The future of oil production in Cameroon is thus linked to the success or otherwise of exploration efforts leading to the discovery of new reserves. 82. The producing companies also hold extensive exploration licences, mostly with comparatively light minimum exploration work obligations. The result is that large prospective tracts of exploration acreage are tied up for long periods with little exploration activity. Opening the Cameroonian exploration "market" to new entrants is an essential prerequisite to successful competition for investment. 83. Natural Gas Reserves. Gas has been discovered by five operators and proven reserves are currently estimated to approximate 110 billion standard cubic meters (BCM) or about 4 trillion cubic feet (TCF). Approximately 15 percent of reserves consist of "associated gas," which is being flared along with oil production. While no reliable figures are available, total associated gas production is reported to average 250,000 million cubic feet per day (MMCFD). No natural gas is at present being economically exploited or developed in Cameroon, despite the fact that the proven gas reserves are over 10 times the energy equivalent of the remaining proven crude oil reserves. Recent efforts by a Canadian company - 91 - to acquire licences and develop a gas-to-electricity plant do not appear to have borne fruit, due in part to electricity tariffs that do not allow for sales of gas at economic costs. Cameroon's Share of Oil Production 84. Table 24 shows that the country's "share" in oil production has risen from zero in 1977/78 to two-thirds since 1985/86. This presumably reflects the replacement of old concession agreements with more modern joint-venture contracts during the early 1980's (see discussion below). Table 24 Petroleum Sector Total Production and Shares (in metric tons)1/ YEARS PETROLEUM FIELDS TOTAL CAMEROON'S SHARE RIO DEL REY LOKELE MOUDI PRODUCTION %PRODUCTION _._._. 1977/78 295900 295900 0 0.0 1978/79 960550 960550 0 0.0 1979/80 2472023 2472023 757852 30.7 1980/81 3572317 3572317 2143390 60.0 1981/82 4737218 4737218 2842331 60.0 1982/83 5456032 94972 59015 5610019 3484996 62.1 1983/84 6223098 669909 349548 7242555 4621733 63.8 1984/85 6203778 2243784 333032 8780594 5639872 64.2 1985/86 6(Y' 040 2524140 387376 8942556 5925974 66.3 1986/87 5905238 2407213 349589 8662040 5752789 66.4 1987/88 6079244 1998979 287069 8365292 5598393 66.9 1988/89 6222645 1595759 236509 8054914 5431562 67.4 1989/90 6086720 1529156 235150 7851026 5282044 67.3 1990/91 5678945 1338861 214761 7232568 4885143 67.5 CUMUL 65924748 14402772 2452050 82779571 52366080 63.3 % 79.6% 17.4% 3.0% 100.0% 61.7% SProduction figures for the last three years were derivd from data available in barrels using the conversion rate of 7.357 barrels per ton. Spyr=,; Ministry of Mines, Energy and Water and Etvde Diagnostic des Entreprises du Secteur des Hydrocarbures. September 1991 - 92 - Institutional, Fiscal and Contractual Arrangements 85. Exploration and production of petroleum in Cameroon are carried out by the international petroleum companies in joint venture agreements (accord d'association) with the State, which is represented by the National Hydrocarbons Company (Socidtd Nationale des Hdrocarfureb, SNH). Petroleum companies currently active in the country include Elf Serepca, Pecten, Tepcam and Mobil. A new contract is in the final stages of negotiation with Phillips-Fina. SNH is a fully state-owned company created in 1980, with responsibility for promotion and safeguarding the interests of the State. More specifically, SNH is charged with the negotiation and supervision of joint operating agreements with the petroleum companies and the marketing of the Governme. It's share in production. 86. There is no petroleum-specific legislation in Cameroon. Instead, activities in the sector are governed by the 1964 mining law (Loi 64-LF-3) supplemented by the 1978 Law (Loi 73-14).2/ The legislative framework is further complicated by the specific agreements between each operating company and the Government (convention d'etablissement) which themselves are signed into law by the Head of State and which often have provisions contradictory to existing legislation. Fiscal arrangements for the sector are those specified in the general tax legislation of the country (Tax, Registration and Customs Codes) and in sector-specific legislation and company-specific contracts. The latter often modify substantially the provisions of the general tax legislation and have in effect created a special regime applicable to exploration and production activities in the petroleum sector. 87. Under current legal and contractual arrangements, the main derogations from the general fiscal regime include: i. corporate income tax (IS). The rate of taxation is higher (either 57.5% as specified in the 1978 law or 48.6475% which is the dividend tax inclusive rate of Tax Code) while the rules regarding the determination of taxable income are more advantageous to the companies as the limits normally placed on certain deductions (interest, technical assistance) are eliminated and accelerated depreciation is allowed. Also until recently, company revenues were calculated on the basis of prices posted by the government rather than actuals. ii. other taxes paid by corporations, These, including the tax on dividends and the tax on royalties, may be suspended. iii. tu eL t CA. Petroleum companies are exempt. iv. customs duties. Goods destined for exploration are exempt from import duties while duties on imports for other petroleum related activities are reduced to 5 percent for a period of five years. Export duties are suspended. 32/ Minor modifications have been introduced in subsequent legislation including Loi 82- 20 of 1982 and Loi 89-15 of 1989. - 93 - 88. Most of these derogations are specified in the agreement signed between each company and the State. In accordance with the 1964 mining law, each operator has to conclude an agreement (convention d'etablissement) with the State covering its country-wide interests; conditions specific to each permit are set in a separate decree. The agreement, which is often concluded within the framework of the Investment Code, defines the rights and obligations of the two parties and includes certain fiscal provisions. Since 1978, the obligation to enter into a joint operating agreement (JOE) has also been introduced. 89. Petroleum exploration and production activitias in Cameroon are subject to fiscal arrangements which are unique to the sector and in some cases to the industry worldwide. These Include the payment of royalties to the State coupled with a minimum mining rent guarantee for the companies and production sharing arrangements between the operators and the State. The rent and production sharing arrangements between the Government and the petroleum companies are discussed in greater detail below. Some modifications were introduced in 1990 without, however, changing the main lines of the system. 90. As indicated above, petroleum taxation in Cameroon is based on a hybrid system unique in the world. Under this system, government participation in petroleum activities takes the form of equity in the operating companies (20%) and interest (50%) in a joint venture arrangement with the same operators. The result is 60% equity share for the Government and participation in the Operations Committee of the joint venture and the Board of Directors of the petroleum companies. 91. Inherent in the provisions of the joint venture agreement, however, is a fiscal element because the Government's share in production exceeds its participation in the venture and because special provisions are made for the repayment of advances made to the Government to cover its share of the costs. While the Government is obliged to bear 50% of costs in line with its interests in the joint venture, its rights to production vary depending on the level of cumulative product*:n from a given exploration permit but are always higher then 50%: they are set at 60% when production levels are below 15 million tons, 65% between 15 and 30 million tons and, 70% once they exceed 30 million tons. In addition, the operator covers the Government'a share of expenses through an obligatory advance which is repaid through part of the Government's share in production. Advances for exploration expenditures do not bear interest and reimbursement is made only if there is production and subject to a maximum annual limit based on a minimum take for the Government of 40% of production. 92. In accordance with the 1964 mining law, a production royalty is levied on petroleum companies operating in Cameroon at a rate of 12.5 percent. 3/ However, the production royalty levied by the Government is coupled with (and overriden by) a minimum mining rent guarantee for the operator, calculated for each exploration permit. Contrary to the mining law, this means that the production royalty is variable and can be negative if necessary to ensure the minimum mining rent. This also has the effect of reducing or even nullifying the progressivity inherent in the production sharing arrangements. The guarantee is in the form of a percentage of technical profits, fixed until recently at 13%. 2/ The 1978 law revised the provisions of the 1964 mining law regarding the tax treatment of the royalty. It is since considered an operating expenditure and is therefore not credited against final corporate income tax liability. - 94 - Changes introduced in 1990 93. A number of changes were introduced in the above arrangements in 1990 L4I without however, modifying the basic structure of production and rent sharing arrangements. The 'hanges were effected through amendments to existing agreements and were made known to the industry at large during the campaign for the promotion of the Douala basin. 2/ In addition to defining the concept of negative royalties, clarifying the fiscal regime and adopting a market-based method for the determination of the price of petroleum, amendments were signed to introduce greater incentives for exploration and production for existing operators. For existing concessions, these include: o possible extension of reduced (5%) import duty rates beyond the 5-year limit for new investments in existing fields o obligation for the Government to pay interest on debt outstanding, including for research expenditures, resulting from the application of the annual reimbursement limit. Regarding new concessions or new investments on inactive concessions, new incentives include: o instead of 13%, guaranteed mining rent rates of: - 22% for Rio del Rey - 22, 24 or 26% according to the R ratio (cumulative revenues from the basin divided by cumulative costs) for the Douala basin. o ability to consolidate costs and revenues across all research permits for a given basin for the purposes of the calculation of the mining rent and the reimbursement of costs by the Government. o for Rio del Rey, elimination of 40% minimum Government take; instead the production share available for debt service would depend on the price of petroleum: 35% if less than $13/barre, 30% if above. 21/ The companies' requests for change date back to 1985. 35/ However, the precise terms for new contracts were not made available to the industry, which reduced considarably the level of interest of companies in the Dounala basin. - 95 - General considerations regarding taxation of petroleum production 94. Natural resource extraction has many attractions as a potential source of government revenues. While the theory of exhaustible resource economics provides a useful framework for analysis, devising an actual rent-sharing or taxation system for application to resource extraction in general, and oil and gas operations in particular, is quite difficult in practice. This is partly because theory assumes that there is perfect competition in the market and that there is a known homogeneous stock of the resource. If this were the case, profit-maximizing resource owners would release mineral rights in such a way that in equilibrium their unit value increases at the rate of interest J.i/. Unfortunately, the world stock of petroleum is neither fixed nor known. The market is severely distorted by non-economic considerations such as perceptions of political or other ion-technical risk, and the Pppropriate sharing of risk between Government and oil companies is a key issue in determining agreements. What is needed is a legal, contractual and fiscal framework which strikes a fair balance between the resource-generation needs and rights of the state as owner of the resource, and the investor's requirements to earn a rate of return which is adequate in the light of the technical and other risks taken. 95. The "easy" basins have been explored first, so that real unit exploration costs rise over time. After discovery of a potentially commercial accumulation come the costs of development and bringing production to market followed by the costs of keeping existing fields producing. The division of economic rents from petroleum production, therefore, must be made not just as a function of the production costs, but must take into account the quasi- rents of exploration which are the last component of the long-run marginal cost: producers must earn enough not just to produce existing fields, but to go and find increasingly expensive new reserves. 96. There is a wide diversity among countries as to the sharing of such rents. The main criteria for assessing a system of petroleum taxation are: i) Rrogressivity/regressivity, that is, does it give the state a progressively greater share of rents as these become larger compared to the marginal cost of finding, developing, and producing? 2) absolute and marginal government take, that is, the proportion of the technical profit of operation overall, and of the next barrel produced, which the government takes; 3) flexibilty, that is, does the government take adjust sensibly to economic conditions such as unit cost of development and transportation, world oil or gas price, and reserve size, well productivity, oil quality, etc.? This last criterion, related to progressivity, is important if small or marginal accumulations are to be exploited, while ensuring that viable fields produce as long as is economically justifiable (avoidance of premature abandonment). 97. The next section evaluates the current legal, contractual and fiscal framework for petroleum exploration and production in Cameroon. Among the issues examined are: (1) adequacy of legal/contractual framework; (2) incentives for increased investment in exploration activities; (3) policies to maximize government revenue from oil production while encouraging incremental investment, development of small or otherwise marginal fields, aij 36/ See, for example, A. Kemp, Petroleum Rent Collection around the World, The Institute for Research on Public Policy (Halifax, Nova Scotia, 1987), pp. 5 ff. - 96 - avoiding premature abandonment of producing fields and (4) level of competition in the sector. Inadequacies of the Cameroonian System 98. Notwithstanding its overall importance, petroleum taxation in Cameroon is extremely complicated, highly inefficient and does not always benefit the Treasury. In particular, the incentives framework at the crude oil production stage has been structured such that exploration for crude oil has progressed at a very slow rate and has now practically ground to a halt, leading to an inexorable decline in Cameroon's oil production. The complexity of the system favors existing operators while derogations from general tax legislation create unnecessary distortions in the overall economic environment. Finally, SNH controls substantial amounts of revenue from its equity parti1ipations in the petroleum companies which should be made available to the government budget. 99. Petroleum taxation in Cameroon is rather sui generis, which in itself is unfortunate in that comparability is an important feature from the perspective of the potential investor. Whereas most countries which compete successfully in the "market" for exploration budgets use one of the two main forms of fiscality preva!%nt today - either production sharing or tax- and-royalty - Cameroon uses a hybrid system. The system as a whole is comparatively disadvantageous to the company as evidenced by the virtual halt in exploration activity until recently. In particular, the restriction on the level of production available for cost recovery constrains operators' ability to reach payout - an important yardstick for oil companies. 100. The application of the Cameroonian fiscal system to hypothetical oilfields demonstrates some of the problems. The current fiscal terms and conditions as published by the Government during the recent exploration promotion exercise for the Douala Basin have been used to assess the ca.hflow the State (including SNH) would receive under those terms for hypothetical offshore oilfields similar to those already producing in the country, under a number of sensitivities. The basic results of this exercise are summarized in table 25 below: - 97 - Table 25 Petroleum Sector Results of Simulations I1 (Base) 2 3 4 5 Assumptions: Reserves (MMB) 100 50 100 100 100 Price ($/Bbl in 1990) 22 22 14.67 22 33 Development Costs ($MM) 300 200 300 400 300 Project Results net P.V. @ 10% 697 264 335 600 1241 net P.V. a 15% 383 122 155 309 723 IRR 38% 26% 26% 32% 52% years to payout 7.15 7.91 8.0 7.58 6.6 Contractor Economics net P.V. @ 10% 80 -26 -29 19 210 net P.V. @ 15% 16 -47 -55 -31 97 IRR 17% 7% 7% 11% 26% years to payout 8.9 12.54 12.46 10.58 7.7 share of NPV @ 10% 12% -10% -8.7% 3.2% 16.9% State/SNH Economics net P.V. @ 10% 617 290 364 581 1032 net P.V. @ 15% 366 169 210 340 626 IRR 71% 60% 54% 61% 96% share of NPV @ 10% 88% 110% 108.7% 96.8% 83% Sour.e: Staff calculations. 101. The Camerounian fiscal regime is extremely regressive and inflexible. This is best illustrated by looking at the State share %f discounted wealth generated by an oil development as different price, reserve, and cost sensitivities are applied. Cameroon takes 88% of the NPV from the base case of 100 MMB development, costing $300 million in development capital to bring on stream. 2/ As the project is made less economic by decreasing reserves or prices (cases 2 and 3 respectively) or increasing costs (case 4), the Statetake larger share of the project rent, causing the investor to earn an internal rate of return (IRR) of 7% in cases 2 and 3. No oil company would willingly invest at such an IRR, and would 37/ This assumes a 1990 oil price of $22/Bbl, escalating from 1992 at 5% per annum. - 98 - probably shut down a field yielding such a meager contribution to corporate profits. This regressive fiscality has the doubly deleterious effect of discouraging development of all but the most obviously profitable discoveries, while encouraging premature abandonment of declining fields or fields affected by worsening market conditions. Furthermore, case 5 shows that the state take goes dwn when oil prices are increased (or fields otherwise become extremely profitable), which is diametrically opposed to sound sectoral policy in any country, most critically one with Cameroon's development needs. 102. Overall, the Cameroonian taxatior framework offered to potential investors is less attractive ihan those of Nigeria, Congo, Gabon, or Egypt, and only slightly more so than Angola. This bodes ill for the country's future success at encouraging exploration investment. Although it appears that 8 of the 13 blocks (9 offshore and 4 onshore) offered for licensing in the recent promotion effort received bids, both the contract terms and conditions and the method of promotion have led to at best mediocre results from this exercice. Contract terms and conditions are not only unattractive to the oil industry but also extremely inefficient as revenue-generation instruments for the Government. The absence of a model contract or explanatory materials regarding the highly complicated fiscal regime appears also to have contributed to the lukewarm reception of the promotion effort. 103. In addition to the unattractive fiscal provisions, new investments are hampered by the uncertain legislative framework and Government policy toward State participation. As already mentioned above, there is no single legislation governing petroleum sector activities in Cameroon. The multiplicity of texts not only adds to the complexity of the system but results in uncertainty due to frequently contradictory provisions in the various laws and in particular between relevant legislation and contractual arrangements. 104. There is also uncertainty about Government policy regarding future participations in petroleum companies. While the State has a 20 percent share in existing operating companies, it is not clear whether this policy - which petroleum companies do not favor - will continue to be applied. Furthermore, SNH's mandatory equity participation in the development and production phase bothers oil companies both for financial and operational reasons; control over decision-making and operations is extremely unclear at a 50:50 participation split. Companies may also worry that SNH would find it difficult to raise such a large share of development expense. 105. Since the recent promotion seminar, the government has made the tax terms more favorable to existing operators, which now seem more positive about exploration. However, this has not changed the basic structure of the production and rent-sharing arrangements. While it is reasonable to assume that the same terms would be extended to new investors, the complexity and the unique features of the Cameroonian system constitute significant barriers to entry for any new operators. Existing companies are well-versed in the complexities of the system and certain understandings have developed between the Government and the State over the years. Considering also the uncertainty regarding the Government participation policy and the absence of model contracts and analysis showing the peculiarities of the Cameroonian system, the new investor is at a substantial comparative disadvantage. The future of exploration activity in Cameroon and of production of hydrocarbons in general depends to a large extent on Cameroon's ability to open the "market" to competition and new investors. - 99 - iii. Recommendin 106. With a view to increasing transparency in the sector and enhancing incentives for exploration and production, it is proposed that the institutional, legal, contractual and (especially) fiscal system rnplied to petroleum activities should be revised. The main thrust of a new system should be: (i) redefinition of the role of SNH; (ii) new petroleum legislation, separate from the mining law, with a view to consolidating Government policy in one central document and simplifying legal and contractual arrangements in the sector; (iii) abandoning Government policy of participadon in the equity of the petroleum companies. This implies no equity in new companies and the sale of existing holdings; failing the latter, SNH should be asked to remit all dividend earnings from these investments to the Treasury; (iv) replacement of the hybrid production-sharing plus tax plus "guaranteed mining rent" system, by a simple, clear and flexible one. Production-sharing using incremental ratios changing in function with an approximation of field profitability should be considered; (v) elimination of all inconsistencies between the common law fiscal regime and tax arrangements included in contractual agreements with the petroleum companies. For new investments, this implies full conformity with the tax regime once the economy-wide reforms proposed in this report have been implemented; for existing operations, the Government should explore possibilities for modifying the fiscal stabilization provisions of the contracts; (vi) development of a state-of-the-art Model Contract which would be used in conjunction with the revised petroleum legislation as part of a promotion exercise and as a basis for negotiations with interested companies; and (vii) assistance in exploration promotion by a firm with successful experience in such exercises. -100- 2. The Downstream - Petroleum refining. storage. distribution i. Current System 107. Consumption. Petroleum products are an essential input to the PETROLEUM SECTOR prodiv.tive sectors of the economy, Consumption of Petroleim, Products and to the transport sector in ('000 tonnes) particular which in 1987/88 accounted for 70% of total domestic 1985/86 .L687 1990/91 est. consumption of these products. Petroleum products make up the Gasoline 291 311 215 most common source of commercial Jet/Kerosene 179 164 162 energy. 3econd to woodfuels if Diesel 306 247 227 traditional energy sources are Heavy Fuel 112 93 100 .Other 149 98 82 included. After a period of continuous growth for many years, TOTAL 1,037 913 786 officially recorded consumption has been declining since 1985/86 due to Source: Plan Energdtique National, Jan. 1990. the overall reduction in economic activity in the formal sector and to widespread smuggling from Nigeria. Consumption of petroleum products, which was 1,037,000 tonnes in 1985/86, stood at 814,000 tons in 1989/90 and is estimated at less than 800,000 tons in 1990/91 (see box). It is made up essentially of gasoline for transportation (one-fourth) followed by diesel (one-fourth) used also for transport as well as in the industrial sector and for power generation. Kerosene used by the household sector represents about one-sixth of total consumption. 108. Refinjng. The demand for petroleum products in Cameroon is satisfied by output from the Soci6td Nationale de Raffinage (SONARA) located at Kribi, the snareholders of which are the Government (19%), public enterprises (47%) and four international petroleum companies (34%). This refinery has a capacity of 2 million tonnes per year (100,000 barrels per day), somewhat below the cut-off level for economic viability. The refinery is composed of simple distillation and reforming units, and lacks the capacity to upgrade low-value heavy atmospheric residue--a large share of total production-to lighter high-value products. It has a monopoly on all products supplied to the extent that it is able to produce them; some liquified petroleum gas (LPG), for example, is imported as the refinery does not possess the necessary units to satisfy the entire demand for this pioduct. 109. Until this year, crude oil processed by the refinery was supplied by SNH, which disposes of the Government's share of the country's crude oil. This moderately heavy crude is ill-adapted to Cameroon's demand slate which is highly skewed toward lighter products, and to SONARA's refinery configuration. As a result, the refinery produced large surplus quantities of heavy atmospheric residue which it was unable to treat, and exported at a loss to US or European refiners. These exports amounted to an estimated 621,000 tonnes in 1987/88, or 68% of the entire petroleum product consumption of the country. In effect, to make three tonnes of product for local consumption, SONARA refined five tonnes of local crude, exporting two tonnes of surplus fuel oil. Crude oil more appropriate to its market and unit configuration (light Angolan or Nigerian crude) is now made available to SONARA through the intermediation of SNH, which has been in charge of crude imports. However, - 101 - current policy appears to favor satisfying local demand for fuel oil through SONARA's output which requires continued refining of some Kold crude for this purpose. 110. Cameroon's crude sold PETROLEUM SECTOR on the international market in Estimated Transfer to SNH I/ arms-length transactions is pitched at a price equivalent to ($/bbl) the spot price of crudes of SONA Price 14.00 14.00 20.25 20.00 20.00 similar quality. Cameroon's Market Price 25.73 17.61 13.13 13.00 13.00 heavy crude sells at a discount Transfer to SNH -11.73 2.64 6.87 7.00 7.00 to those of the North Sea, Nigeria or Angola, as it Estimated Volume produces fewer high-value light Sold ('000 bbl) 9,775 10,83110,988 10,870 10,850 products than these crudes. Rent Transfer From products thathese ru . oConsumer to SNH($m)-1 14.7 28.6 75.5 76.1 76.0 However, that portion of______________________ SNH's crude oil which is sold 1/ Based on crude oil transfer price to the refinery is priced at a notional "Official Price" which Source: World Bank Staff Estimates bore in the past little or no relation to the price on the international market, and was observed at prices of about US$7 per barrel above the international price. In addition, the exchange rate used to convert the crude price to CFA francs was artifically fixed at CFAF350/$, increasing further the cost of supply to SONARA. 111. Petroleum product prices at the refinery gate for sale into the distribution network are set on a cost-plus basis, so the distortions at the level of crude pricing are passed on to the consumer. Inflated transfer prices therefore have the effect of transferring a portion of the consumer surplus back through the refinery to SNH, acting as an implicit tax on the consumer and a disguised subsidy to SNH (see box). The ex-refinery price for gasoline was substantially revised downwards (by CFAF 85/1) in April 1991 in line with the reduced price at the pump. Simultaneously, the crude supply price was adjusted so that SONARA now purchases SNH crude at US$15.4/barrel, down from 20, converted at an exchange rate of CFAF 300/$. ./ Nigerian Brass is sold at a US$1.8/b premium which appears to be justified by the higher quality of this crude. 112. By virtue of a "convention" signed in 1977 within the framework of the 1960 Investment Code, SONARA benefits from a special tax regime and fiscal stabilization for the duration of the contract - 25 years. The arrangements include a reduced rate for thc corporate tax at 30 (+3)% (rather than 35 (+3.5)%) while the minimum company tax (IMF) is set at CFAF 4,400,000 (instead of CFAF 600,000). While exonerated during the first five years of operation, SONARA now pays the corporate income tax and the minimum company tax at the rates indicated above and the tax on dividends, the "patente" and the turnover tax at statutory rates. In addition, SONARA benefits from a reduced rate of duty on its imports of 5% for the duration of its contract. 38/ A slightly lower than current world market price for the crude is compensated by the exchange rate used to yield approximately the *correct" price level in CFA Francs. - 102 - 113. Distribution. The activities of supplying the consumer with petroleum products encompass wholesale distribution (storage and bulk transport) and retail distribution (point of sale). Distribution is carried out by subsidiaries of six international petroleum companies which purchase petroleum products at the refinery gate and assure all the activities necessary between this point and the consumer. The physical activities of bulk storage and bulk transport are provided by a joint public-private company Soci0td Camrounaise de Dp8ts PMroliers (SCDP) in which the distribution companies jointly hold the capital with the Government. In addition, many of the service stations are run by the petroleum companies as franchise operations, which provides the manager of the point of sale with the right incentives to minimize costs and losses and maximize sales. 114. While some improvements could bA made to PM OLEUM SECTOR reduce SCDP's costs and losses, particularly through Petroleum Product Distribution introduction of greater competition in bulk transport, a Comparison with neighbors comparison of costs with neighboring countries reveals Gasoline, 1988 that distribution in Cameroon is relatively efficient, (CFAF/litre) essentially due to vigorous competition at this stage of Cameroon 25.8 the petroleum chain. CAR 55.1 Cote d'Ivoire 20.4 115. The storage and distribution companies do not Senegal 25.7 benefit from any special fiscal provisions. Gabon 28.1 Togo 17.6 Pricing of Petroleum Products in Cameroon Source: World Bank, 1989 116. The prices of petroleum products are set administratively in practically all developing countries. This is because it is generally assumed that the level of competition is insufficient to provide marginal cost pricing. It is therefore assumed that under a system of deregulated prices, local monopolies would set prices at above optimal levels, and some of the consumer surplus would accrue to the distribution companies in the form of monopoly rents rather than to the Treasury in the form of tax. 117. Cameroon sets its prices according to a mechanism of which the broad lines date from the colonial period and can be found in varying forms in most other countries of the franc zone. Under this system, prices to the consurrer are fixed over time and over space, requiring spatial and temporal cross-subsidization. In addition, subsidization across products is required so as to maintain the price of kerosene at the low price desired by the authorities. Prices are set according to a schedule, which lays out a large number of line-items. These belong to one of four broad categories: (i) Cost of SuInly. This is the price at which the petroleum products enter the distribution network. It is made up of the ex-refinery price at which SONARA sells products. As indicated above, the cost of supply is based upon cost-plus refining, treating until recently a non- optimal crude oil sold at above world market prices. The savings to Cameroon on a yearly basis of importing as opposed to the present set-up would have been $76 million per year on average over 1987 - 1989. - 103 - (il) Distribution Cost Allowances. This category of line-items Is intended to cover the operating costs of the distribution companies. Included are costs associated with wholesale and retail distribution, covering storage, bulk transport, financial charges and depreciation as well as piofit margins. (ill) Parafiscal Levies. These are levies contained in the PETRO SECTOR consumer price which do not Collections from parafiscal levies, 1989/90 flow to the treasury but are earmarked for some specific CFAP billions purpose. In this respect, they represent revenue foregone for Eqalization +2.8 the treasury. Cameroon has Equalization, deficit +S.4 fewer such earmarked levies and collects smaller amounts Total +2.7 than its neighboring countries (see table 26): S.ource: Diagnostic Study, 1991. equalization (pdr6quation) levy to enable: i) regional cross-subsidization necessary for pan-territorial pricing; the result is near equivalent prices at widely differing localities which for gasoline have been set at CFAF 190 per litre in Douala and at 217 in Maroua since April 1991; and ii) inter- product subsidization, with a view to allowing the poorer population to have access to kerosene for household consumption at affordable rates while taxing the use of gasoline; the price of kerosene has remained unchanged at CFAF 89/liter. . stabilization levy theoretically to enable temporal cross-subsidization; in practice a windfall tax; and . harbor and toll ta'es which amount to very small sums. Collections from the stabilization levy amounted to CFAF 5.3 billion in 1989/90. However, since prices at the pump do not vary as a function of prices on the world market, the sums mobilized through this levy have never served their designated purpose. Instead, as the box table shows, stabilization funds have financed the Government's equalization policy (CFAF 2.6 billion in 1989/90), with the surplus feeding the Treasury. (iv) Taxes on Petroleum Consumption. These comprise: consumption tax; and . turnover taxes relating to depot throughput and retail delivery. - 104- 118. Despite the fiscal Importance of taxes and levies on petroleum consumption, in practice these are determined as a residual in the petroleum price structure. A surge in the price of crude oil, to the extent that It is mirrored by a corresponding rise in the input price to the refinery ("official price"), would result in a reduction of tax take, because of the fixed nature of the consumer price. 119. Table 26 (relating to the situation before the recent change in Cameroon) provides a comparison of the petroleum product price systems of a number of countries in West Africa, by broad category of line item. Table 26 Petroleum Sector Composition of Consumer Prices in some West African Countries Premium Gasoline (CFAF/1) Cameroon Burkina CAR RCI Gabon Mali Mauritania Senegal Togo Import/Ex-refinery 117.4 77.3 85.0 82.9 64.4 93.5 49.7 56.7 46.2 Price Distribution Cost 31.8 68.5 65.6 27.0 31.0 40.3 21.5 29.1 20.4 Petroleum Taxes 105.0 42.9 82.1 170.6 147.5 146.6 34.5 93.5 29.7 Other Levizs 25.8 96.3 117.4 69.5 37.1 44.6 100.4 170.7 108.7 TOTAL Consumer 280.0 285.0 350.0 350.0 280.0 325.0 206.1 350.0 205.0 ogre: World Bank 199 120. In all countries in the above comparison, gasoline (taken as representative of all products) retails at prices between two and one-half and four times the price in the United States, with taxes and levies making up a far larger proportion of the consumer price in these countries than in the US. Direct petroleum taxes in Cameroon stood at CFAF 105/1, compared to 30 at the low end for Togo and 170 in COte d'Ivoire. Parafiscal levies in Cameroon are uniformly lower than in neighborirg countries, and the cost of distributing petroleum products is at the low end of the sample. Under this price structure, a large proportion of the rent was captured through the refinery (and SNH); for gasoline, the cost of supply was nearly three times import parity (the price a country like Togo, for example, actually paid), and this ratio averaged 2.12 times across all products. 121. The new price schedules introduced in April 1991 have substantially changed the relative weight of taxes and rents in Cameroon's pricing system. Prices to the consumer are now substantially lower for gasoline (while remaining unchanged for gasoil and kerosene) mainly through the reduction in the rent previously captured by SONARA (and SNH) and only minimally through the reduction in the excise tax. The table (see box) compares the new price structure to the one prevailing before April 1991. ii. Ssue 122. A number of distortions exist in the pricing/taxation arrangements of downstream activities in the petroleum sector. First, the refinery benefits from a monopoly supply - 105 - position and fiscal stabilization while its operations are subjeca to a cost-plus price PE OLEUM SECTOR setting mechanism; as indicated above, in Comparion of Price Schedules the past the system was used mainly to Premium Gasoline (CFAF/1) capture substantial rents for SONARA and SNH through setting inflated prices P 91 Eag-4/01 and margins. Second, prices to the Ex-refinery price 117.4 32.4 consumer are fixed, smothering the price Distribution cost 31.8 37.4 signals that consumers need to optimize Petroleum taxes 105.0 95.0 their consumption choices amongst Other levies 25.8 25.2 competing sources of energy. Third, the use of parafiscal taxes to attain certain :,tal Price 280.0 190.0 pricing objectives has been inefficient, non-transparent and has unnecessarily Source: Diagnostic Study, 1991 increased costs to the final consumer without corresponding revenues for the Treasury. The adoption of new price schedules in April 1991 substantially reduced the rents accruing to the public enterprises of the sector but created other distortions in the process and above all did not address the systemic problems. 123. At the refining stage, remaining distortions relate to the administratively fixed prices for the purchase of crude by SONARA and the setting of ex-refinery prices on the basis of a cost-plus pricing mechanism. This pricing structure isolates the operations of SONARA from world market price signals. Given SONARA's monopoly supply position in the domestic market, all incentives for efficiency are removed. In particular, the cost-plus ex-refinery price setting mechanism has in the past led to over-investment in facilities the purpose of which is to minimize technical problems to the operator, and under-investment in cost-saving equipment such as heat recovery units. The cost to the country of refining crude oil is therefore higher than it would be under an appropriate incentives framework. 124. Information now available from the diagnostic study of the sector allows an up-to-date analysis of the financial and economic viability of the refinery operation. With the new price structure and assuming some pick-up in the consumption of gasoline, it is estimated that after- tax "rofits for SONARA would be about CFAF 11 billion (compared to some 21 billion previously). While the refining operation as a whole is financially profitable, an element of cross-product subsidization at the refinery level was introduced with the new price structure. 125. The table (see box) shows that while the average price of crude pw Ahaxed by SONARA is CFAF 31.9 per liter, the ex-refinery price for premium gasoline is set at only CFAF 32.4 per liter. A simple calculation assuming uniform costs of production for the three products shown in the table yields a breakeven price of CFAF 57.2 per liter. While the magnitude of the cross-subsidy cannot be calculated in the absence of product- specific refining costs, it is clear that revenues from gasoil sales are being used to subsidize the refinery's gasoline production - without, however, jeopardizing the overall profitability of the operation. 126. The same table also shows that the Government's policy regarding consumer prices is radically different from the implicit incentive structure provided to SONARA. While the ex- refinery price is lowest for gasoline and highest for gasoil, taxes are calibrated such that the consumer price for gasoline is higher than that for gasoil and the consumption of kerosene is actually subsidized (note negative levy). There is no rational explanation for this price - 106 - structure which leads intermed iate and final consumers to face entirely PETROLEUM SECTOR different relative prices; pezhaps the Current Price Scheeales pressure to lower prices for gasoline CFAF/I at the pump without reducing tax revenues led to the hasty and sub- Premium optimal response of April 1991. aoline Kerosene Gasoil Average crude price 1/ 31.9 31.9 31.9 Ex-refinery price 32.4 68.6 115.5 127. While SONARA is able to Distribution cost 37.4 25.2 19.0 generate financial profits under this Petroleum taxes 95.0 13.0 artificial and highly distorted price Other Levies 25.2 -4.9 12.5 structure, the issue of its economic Retail Price 190.0 89.0 160.0 viability remains. A comparison of the cost of meeting local demand 1/ This is a weighted average of Cameroonian crude at through imported versus SONARA- CFAF 29/1 and Nigerian Brass at 32.4. refined crude shows that importing Source: Diagnostic Study, 1991. would save the country some CFAF 8 billion annually. Put a different way, SONARA adds CFAF 10 (or 15%) to the cost of each liter of petroleum consumed in the country. To put the magnitude of this cost into perspective, it is worth noting that SONARA's expenditures incorporate a fixed cost element of CFAF 18 billion/yr, 45% of which is made of personnel expenditures (including technical assistance). The level of SONARA's fixed costs is 4-5 times that observed in efficient refineries worldwide. 128. A subsidiary issue at the refining stage is whether there is any need for refining Kold crude at all. Current policy is to satisfy the country's demand for fuel oil through SONARA's output which is achieved by refining some Kold crude (126,000 tonnes or 13% of total) despite the inferior match with SONARA's configuration. An alternative would be to meet the country's fuel oil needs through imporis, allowing SONARA to refine only Nigerian brass. 129. To summarize, the refinery introduces a number of distortions which result in higher costs for the consumer/lower resource mobilization for treasury: * the process of refining itself as opposed to importing products; the refinery's supply monopoly instead of a liberalized system for the procurement of refined crude; * refining as a cost-plus operation rather than placing the refinery under an appropriate incentives framework; and * setting administered prices rather than a market equivalent price. 130. Assuming the need to maintain administratively fixed prices for petroleum products in the short term rather than deregulating them, such a system should, nonetheless, obey certain broad principlos in order to provide reasonably efficient allocation of resources. First, it should provide the consumer with the right price signals to ptimize consumption. Second, the cost related elements making up the final before-tax pricu to the consumer should be set independently of the actual costs incurred by the operators, so as to provide appropriate - 107 - incentives to the latter; if they operate efficiently, they should generate profits, while inefficiency should be sanctioned by financial losses. Third, tax elements of the price paid by the consumer should as far as possible go directly to the treasury rather than feed into earmarked funds and other parafiscal levies, so as to respect budgetary orthodoxy and minimize fraud and corruption. Cameroon's price setting mechanism fails on all three points. 131. One particular issue relates to the subsidization of kerosene for household consumption. This practice alters the price signals required for the optimization of consumption decisions. Evidence suggests that consumption of kerosene has been on the increase in the last three years (11%) even while demand for other petroleum products has been declining (15%) and that mixing gasoil with kerosene for industrial use has become common practice. Notwithstanding, one important economic rationale for continuing to subsidize kerosene may be the need to reduce consumption of fuelwood (a substitute) for environmental reasons. iii. Recommendations 132. Much can be done to improve the efficiency of downstream petroleum activities while increasing at the same time resource mobilization from the sector. Increased competition and greater liberalization are essential to this process. Deregulation of all prices is recommended in the long term; even in the short term, a complete overhaul of the manner in which prices are set is required. In order to be efficient, this system must respect the following principles: (i) Provide correct price signals to the consumer. This is needed to allow consumers to optimize their consumption. It implies having consumer prices that vary over time (both up and down), across products and in different localities in line with international prices and domestic costs of distribution. In practice it means adjusting the consumer price on a quarte:ly basis, say, in response to changes of petroleum prices on the international market and to changes in the exchange rate. On the specific issue of the kerosene subsidy, it is recommended that changes in current policy should be done on the basis of an analysis of cross-price elasticities with respect to both industrial (gasoil) and household (fuelwood) substitutes. (ii) Provide correct incentives to operators. This is needed to ensure that the refinery and product distributors are as efficient as possible. In particular, it means moving away from cost-plus setting of ex-refinery prices, which has stifled all incentives for the refinery. Crude oil purchase prices by the refinery and ex-refinery prices must be set at import-parity linked levels, with adjustments as necessary. In addition, it is recommended that: a) SONARA's supply monopoly be removed and the refinery be placed in competition with imports of refined products; and b) SONARA be allowed to source and purchase its own crude without being obliged to refine Cameroonian crude or requiring SNH intermediation for imports. The first recommendation may need to be phased in over a period so as to allow SONARA sufficient time to increase the efficiency of its operations and reduce its costs. This could be done in the context of a performance contract between SONARA and the Government, which would ifnr lia include measures to reduce fixed (in particular personnel) costs as part of the restructuring required to become competitive with imports. During the interim period, the ex-refinery price could incorporate a fixed, but declining, margin to compensate for - 108 - SONARA's inefficiency while imported products could be made subject to an equivalent levy. (iii) Simplify taxes by eliminating jargifsca_ LeyJ. All levies that do not go to treasury should be eliminated. Ideally, the entire fiscal content of the petroleum product price schedule should be collapsed into two items: a fixed &g valorem tax (or a VAT once it's introduced) and an excise tax. In practice this means abolishing the stabilization levy and transforming the equivalent amount into a straight tax. The equalization levy should also be eliminated implying that the . Government must agree to abolish the principle of near pan-territorial pricing of petroleum products. 133. A final recommendation relates to the tax treatment of SONARA. As elsewhere in this report, it recommended here that derogations from the general tax regime should be kept to a minimum, if not eliminated, once the reforms proposed in this report have been implemented. In this context, the authorities are encouraged to subject SONARA to the ordinary tax regime before the end of its 25-year long privileged tax status. iv. Imnact of Proposed Reforms 134. It is difficult to estimate the net impact on Government revenues of the recommendations pertaining to the petroleum sector. Improving incentives for investment in exploration activity will require a smaller take for the Government from downstream activities; no change in fiscal arrangements may, however, mean declining revenues from the sector on account of declining production with no prospect for new discoveries. Proposals regarding upstream activities, on the other hand, should improve resource mobilization for the treasury through efficiency gains at the refinery stage and through the elimination of parafiscal levies without increasing consumer prices. -109- CHAPTER VIII - ADMINISTRATION AND IMPLEMENTATION 1. Even with the best tax administration, the current tax system in Cameroon would be near to unadministrable. To the extent that the system does collect revenues, this appears due to a fortunate combination of civic virtue and sheer inertia. Both taxpayers and tax administrators succeed in participating in the system only because they have done so before . and can therefore be governed by routine. 2. In part, this is a consequence of the needless complexity and the lack of transparency . of the system itself; neither taxpayers nor administrators are well-informed about their liabilities and responsibilities. But administration is further hampered by a shortage of necessary administrative infrastructure in terms of training, codification, facilities and ot6er resources. In addition, the system suffers from the fragmentation of functions, notably as between assessment of lax liabilities and their collection. 3. Although streamlining the tax regime would improve the situation, it is doubtful that the kind and magnitude of tax reforms recommended in this report can be absorbed by the present system of administration. Even though these reforms result in simplification, they also result in change, and it seems unlikely that major change can be implemented without a complete overhaul of the system of tax administration. Such an overhaul would require at least two years, and probably three, for the first major steps. Notwithstanding this, the calendar for reforms in the area of tax administration could be drawn up to be consistent with the phased implementation of the changes in tax policy and tax structure recommended in this report. While some aspects of the policy reform may be introduced more immediately, most will require at least a one-year gestation period during which time both taxpayers and tax administrators will need to be educated. 4. In the following sections, the main weaknesses of the current system of tax administration are identified and recommendations made for reform. The implications of the proposed policy reforms for tax administration and taxpayers are examined next. i. Current Problems and Recommended Actions 5. One of the principal weaknesses of the system of tax administration lies in the separation of functions as among: identification of taxpayers, definition of the base, calculation of tax liability, notification of amounts due and collections. For local taxes, there is yet an additional step which is the disbursement of revenue shares to municipalities. The Tax, Customs and Registry Departments are responsible for the first four stages, depending on the tax, while the Treasury Department is responsible for collection of all but customs taxes (including TU and TIP). Very little or no collaboration or commmunication takes place among these different Departments of the Ministry of Finance. 6. The system performs inadequately, especially with regard to revenue generation, also because each step in the process is poorly deflned and executed. Taxpayer identification is generally dependent on the goodwill of taxpayers, though there are some variations according to the type of tax. Enumeration of taxpayers for the turnover and company taxes depends on records of who has voluntarily paid any particular tax in the past; if a potential taxpayer has escaped the system altogether, there is no way of catching up with the defaulter. Once in the system, there is some follow-up after the end of the fiscal year of taxpayers for whom records already exist. Identification of employees depends on employers voluntarily supplying lists. - 110 - Definition of the base is difficult not only in geographical terms, in that it may be difficult or impossible to locate companies, individuals, land or taxable land use; poor accounting also makes estimation of the base for company and self-employment income tax difficult. Accurate calculation of tax liability suffers from the existence of a highly complicated set of legal requirements and amendments which are not adequately codified. There are diverse requirements for payment: some taxes are paid by withholding, some by voluntary payment, and some by tax notification in the following fiscal year. Where taxes are paid locally, such as patentes and licences, tax yield is somewhat better; but ex post assessments are centralized in Yaoundd and very poorly done. Nor is there any link between assessments and revenue collected, so it is impossible for either the assessment or the collection agency to determine whether appropriate amounts have been paid. Collection is dependent on a combination of goodwill, as noted above, and the performance of an under-staffed, under-equipped and under-trained force of loct. and central tax collectors. 7. Problems peculiar to customs administration have already been discussed in the section on indirect and trade taxes. What follows is a description of the nine major shortcomings of the general system of tax administration: o Lack of unique taxpayer identification numbers; o Lack of a clear line of overall administrative responsibility; o Perverse reporting flow o Lack of codification; o Lack of training and explanatory materials; o Lack of direction at low levels; o Insufficient and inappropriate computing facilities; o Lack of other office equipment; and o Lack of financial support. 1. Lack of Uniaue Taxpayer Identification 8. Taxpayers currently have no unique identification number assigned to them. The same taxpayer can have at least five different numbers assigned by the different parts of the administration - customs and tax departments, the social security fund, the register of commerce and the statistics office (SCIFE). At the same time, within the tax department, the identification number of a given taxpayer changes from year to year, rendering follow-up of the taxpayer across time nearly impossible. The establishment of a system of unique taxpayer identification numbers at the tax department has been entrusted to a private consulting firm, and the task has already taken several years. There is an urgent need to complete and extend the assignment of these numbers. The highest priority should be accorded to this task, upon which the efficacy of the entire system of assessments and collections ultimately rests. Yet the task appears to suffer from a low priority and a lack of the appropriate lines of control and authority that would ensure proper attention. - 111 - 2. Lack of Responsibility 9. There is no single individual in the Ministry of Finance responsible for taxes. Instead, tax administration is split between four Departments-one for customs (Direction Generale des Dounanes); one for income taxes, other indirect taxes, and the patente (Direction . des Impots); one for licenses, the property tax and registration (Direction de l'Enregistrement); and the Treasury (Direction de Tresor) as collecting agent. The Customs department assesses liabilities and collects them, thus overseeing the full process of taxation. . However, the Tax and Registration departments only issue assessments, which are in turn paid to the Treasury. There appears to be no systematic feedback or coordination among these departments. 10. It follows that the first task of administrative reform is to institute a management umbrella over the entire tax function, with responsibility for all taxation, oversight and coordination of the several bureaucracies, and leadership in the preparation and implementation of reform. 3. Perverse reporting flow 11. The process by which income taxes are levied and collected, and the accompanying information flow is unnecessarily complex and the fragmentation of functions inhibits adequate audit. 12. In the case of taxes which require the issuance by the tax authorities of a statement of liability, taxpayers report in person to inspectors, having filled out the appropriate forms stating their income. Inspectors compute the total tax liability from the numerous taxes, computations which are then checked, corrected, and "adjusted" by their supervisors. Following this, but not immediately,29/ a statement of liability ("rolle") is issued to the taxpayer, who then pays the total to Treasury and receives a receipt. The Treasury department itself has no record of who paid the tax, or how much was due to each type of tax. Thus, audit is virtually impossible at higher levels. Instead, it must rely on field work to correlate liabilities with receipts. 13. In part this difficulty stems from the plethora of income taxes-it is too much for the system to handle. The recommended reforms would ease this burden. It would further be eased by integration of the Treasury's tax payment records with the Tax Department's liability records on the computer recommended for the tax authorities. In the longer run the two administrations could be merged. "/ The period between determination of the liability and issue of a bill is an extended one, though this will be rectified under the new, computer-based methodology. Currently, paper returns are returned to impot, where they are coded for entry on the central computer. The computer then issues a print-out of liabilities (the "roll") and prints a tax bill. The taxpayer must retrieve this bill and take it to Tresor for payment. Under the new system, the return will be entered into the computer at the inspectorate. It is likely that a more efficient method could be found that would result in shorter delays. This should be one important task of an overall management of the tax function. - 112 - 4. Lack of codification 14. Neither the tax law nor the process of lawmaking are adequately codified. There exist codes of income tax and customs laws, but these are decades out of date. Since their issue, laws have been changed by the legislature, by Presidential flat, and by regulatory rulemaking. Moreover, the tax law can be changed by several different avenues, with no adequate means for monitoring and codifying these changes. Finally, actual practice at the level of the individual inspector is not always consistent with the law, with the practice of other inspectors, or with the practice of the same inspector at different times - nor could it be, given that few know what the law really is at any moment. 15. The first step towards solving this problem is to codify the law, regulations, and practice, and to charge a body within the tax administration with maintaining that code and disseminating it. Certain private accountancy firms have, to a large extent, already undertaken this task of codification, so that the task may not be as daunting as it might appear at first sight. 16. Two further difficulties present themselves, however. The first is that dissemination, regular updating and interpretation of the codes require management and financial resources- the appointment of an appropriate authority with an adequate budget. 17. The second is that such an effort will fail if the law and the lawmakers do not have a consistent philosophy or guide to the design of the taxes that can anchor change. The principles espoused and the tax reforms recommended in this report give a clear statement of principles to guide further tax changes once the new system is implemented. However, the Government should minimize future changes to the system, and the process by which the system is changed ought to be clearly laid out and circumscribed. Such changes are usually motivated by a need for revenue. Once an appropriate system is in place, the need for further revenue should be met by growth in the economy and, where necessary, changes in tax rates. 5. Lack of training and explanatory materials 18. There is no administrative infrastructure of training and explanatory materials that would guide both inspector and taxpayer. Without established methods for disseminating information to inspectors, training them, and explaining tax reforms to taxpayers, so one can be expected to understand or comply with the new tax system. 19. To solve this problem, the administrative section responsible for codifying the tax law ought to disseminate information and train the force of inspectors to execute the new laws. Included in its budget must be funds for public education, public relations, training material, a force of instructors, and resources to give training courses. 20. Aside from these regular functions, this section could be entrusted with organizing a publicity campaign to precede the launching of the tax reform. The success of any major tax reform depends in part on the extent to which the general population has been sensitized and in part on a few vocal proponents. Information should therefore be made available to the public about the reasons for the overhaul of the tax system and tax administration, the philosophy behind the reforms, the expected outcomes and the responsibilities of each and every individual in society. - 113 - 6. Lack of direction at low levels 21. It appears that management at lower levels is often uninformed, unmotivated and corrupt. This weakness may be related to the system of recruitment and promotion as well as to the difficulties of administering the present system. The adoption of the reforms recommended here, in both the tax system and administration, might go some significant way toward establishing a spirit that would promote more effective management. 7. Insufficient and inappropriate uomputing facilities 22. The Tax Department is currently in the process of changing over its tax filing system from one based entirely on paper to one that is computerized: the "Trinite" system, or Traitement Informatique des ImpOts et Taxes de l'Etat. This process is currently being implemented in Yaounde, and will next be implemented in Douala. 23. Development of the necessary software and tax records has taken three years. The delay has been partly unavoidable because of the absence of unique, computer-based identification numbers for tax purposes. Thus, the contractor has had to construct and implement a system of numeric taxpayer identification essential to the future effectiveness of the system. Coupled with this is a problem of line authority--the contractor does not report to tax authorities. 24. However, another important reason for this delay is that the tax authorities must rely on the processing facilities of the government's central computing department (CENADI) where they appear to have low priority. Moreover, the facilities provided for the development work at the Tax Department are inadequate to maintain the local job entry terminals in good working order. 25. It is essential that the tax authorities be provided with their own computing facilities if the system is to move forward. Given the dramatic fall in the cost of such facilities in recent years, this would be a worthwhile investment. Moreover, acquisition of such a system should be accompanied by an independent review of the procedures currently being implemented with a view to improving them and speeding their successful completion. The design of the tax system and the choice of appropriate rates to achieve the government's revenue needs can only be successfully accomplished when data on tax returns are available to policymakers on a timely basis. 26. The policymaking function requires knowledge about the computer, data, and methods by which these data can be made available in useful ways. This is a function that might usefully be placed within the purview of the legislative office within the Tax Department. 8. Lack of other office equipment 27. Both effective administration of the tax system and the implementation of significant reform require rapid and reliable written communication. This requires that management have the appropriate tools, foremost of which are personal computers. Given the price of these, an investment is warranted in computers able to do word processing and simple spreadsheet manipulation. Probably not more than a dozen, in key management locations, could dramatically ease bottlenecks and make certain critical tasks such as policymaking, - 114 - codification, public information, training and dissemination of information much more efficient and responsive. 9. Lack of financial support 28. The fiscal health of the system of tax administration, and the morale of the tax authorities themselves are critical to an effective tax system. And that system itself is key to the government's fiscal health. Thus, these functions should recei-;e disproportionate support from the budget and be largely protected from the effects of the economic crisis. Without their cooperation, the rest of the business of government must falter. 29. Underlying many, but not all, of the other problems discussed here is a shortage of financial support. If the Government shows some determination to overhaul the system, it should be possible to mobilize donor support. The French Government has already agreed to provide substantial technical assistance to the Ministry of Finance and the German authorities have expressed interest. It is clear that no serious tax reform is likely to be effective without additional financial and technical support. ii. Implications of Reform 1. Cost of CoMpliance and Administration 30. Providing that the administrative reforms recommended here and in the French audits (of customs, tax and treasury departments) are implemented, the new tax system should be reasonably easy to implement and administer, and would require fewer administrative personnel. 31. Both the reforms of trade and indirect taxes and of income taxes are aimed at simplifying the inspector's task. Particularly within the income tax, the current operation of the system by inertia is helpful. Thus, while it is necessary for public cooperation that the new reforms be widely publicized and explained, it is unnecessary that the individual taxpayer have sufficient understanding to calculate his/her own tax. 32. Corporate tax returns are now necessarily prepared almost exclusively by professional tax accountants; this would not change in the new system though the costs of compliance should be reduced. Simplifications of the form should make administrative review and audit easier. 33. In the individual tax, where most liabilities are calculated either by the employer or by the inspector, the task of the inspector is made easier. Rather than calculating taxable incomes, adjustments and taxes for as many as eight different taxes, the inspector needs merely to calculate total income and one tax, which might largely be reduced to tables. In addition, the relatively high thresholds for filing income taxes should eliminate a sizable number of taxpayers from the rolls, from withholding, and from any but the most perfunctory dealing with the system of tax administration. 34. The reform of indirect taxes will likely add to the administration and compliance burden of the system if the value-added tax is adopted. The relative merits of this reform have been discussed at length in Chapter VI and a staged implementation recommended in order to allow for sufficient time for the education of the taxpayer as well as for the training - 115 - of tax inspectors. It is important to note, however, that the proposed reform would result in a substantial reduction of the administrative burden of the Customs Department which is currently in charge of the administration of the TU and TIP regimes. 2. Institutional Support for Reform 35. Within the Ministry of Finance, it will be necessary to place an umbrella of management over the tax functions. This may be served by the appointment of a deputy minister with four staff offices responsible respectively for legislation and legal affairs, training, public information, and policy analysis. Each of these would need to be supplemented with homologous groups in each of the four tax-functional offices--Customs, Tax, Registry, and Treasury. These offices would assume the coordination and implementation functions of the reform, including further administrative reform, led by the deputy minister. 36. To the legal groups belongs the responsibility for codification of law and practice, followed by review of each part of the code--customs, indirect taxes, corporate income tax, individual income tax, and registry taxes - for conformity with the new reforms. It is likely that the codified law will reveal numerous anomalies, lacunae, and sources of favoritism incompatible or inconsistent with the new reforms. 37. To the training groups belongs the responsibility for educating and training the force of inspectors and auditors in the new law, and-optionally--for recommending reforms that may improve their performance. 38. To the public information groups belongs the responsibility for educating the public in the new reforms. 39. Finally, to the policy analysis groups belongs the responsibility for evaluating the reforms, iii particular the impact on revenues and the economy at large, and any proposals for modification. They would be responsible for acquiring and maintaining the new Treasury computer and office equipment, for converting Trinite to the new computer system and for improving and operating the information base on liabilities and payments needed for the evaluation of the tax system. It will be important to ensure that the process of conversion does not delay or adversely effect continued expansion of the Trinite system to Douala. 3. Implications for the Tax Authorities 40. The Tax Department will be required to implement changes in income and indirect taxes. This will include design of new forms. In this regard the corporate income tax forms are likely to require the most work so as to simplify and radically reduce the burden on taxpayers. Given the simplifications of the individual income tax, the appropriate forms should be relatively easy to construct based on current ones. 41. The Tax Department's work load can be expected to increase substantially with the elimination of the TU/TIP regimes, currently administered by Customs, and the incorporation of enterprises hitherto benefiting from these regimes into the general indirect tax system net. The introduction of the value-added tax will add administrative complexity, and require the ability to process new and more information and to set up an efficient system of cross-checks not only within the Tax department but also with Customs. - 116 - 42. The Tax Department will also be responsible for the implementation of the training of inspectors and auditors, overseen and assisted by the training offices. Related to this will be some reprogramming of staff. By reducing the number of taxpayers and the burden of calculations required of inspectors in direct taxes, the inspectorate may be able to assume the expanded responsibilities for the administration of the new indirect tax system without requiring any increase in personnel. It might, however, be desirable to expand the auditing and enforcement function of the Tax Department. 43. As discussed in Chapter VI, the impact of the proposed reforms in indirect and trade taxes will be to reduce substantially the administrative burden on the Customs Department. The simplification of tariffs, the elimination of the TU/TIP regimes, and the reduction in other special exemptions and exonerations will result in substantially more uniform treatment of imports across products and more importantly across importers. This will facilitate enormously customs clarance procedures while improving the revenue yield from these customs taxes. 44. The immediate impact of proposed reforms on the registry department will be small. In the medium term, in line with the calendar for the elimination of registration and stamp fees and their replacement by the value-added tax, this department should be abolished. Its potentially most important function - assessment of the property tax - would be transferred to the local authorities in the long term. In the short term, the Registry department could devote some resources to a simplification of its system of fees and licenses to avoid duplicative taxes and to simplify the registry process. It should also coordinate closely with the Urban Ministry on the fiscal cadastre and the preparation of the taxe d'habitation which would be introduced upon completion of this work. 45. Treasury's supplementary responsibility will consist of the integration of information on payments with that on liabilities and the design of a now collection system that would promote timely and accurate policy analysis. 4. Implications for Taxoaygrs 46. Individuals. The most important implication of the reform for taxpayers at large is that they should find the reformed tax system easier to understand and more transparent. The reform should also help to alleviate suspicions that others are being treated more favorably and that special treatment is widely available for certain individuals. This will also depend on the effectiveness of administrative reforms at the operational level. 47. It seems likely that the reformed system will also generally be perceived as more equitable. At the same time, numerous groups with significant political voice will find their tax burdens increased. Primary among those are taxpayers that receive special treatment for certain kinds of income, from which favorable treatment will be removed. Likewise, higher income individuals will, as a group, find their tax burdens increased. 48. Business. The tax-privileged part of the corporate business sector will be dissatisfied with the recommended reforms while other firms will be relieved of severe impositions. On balance, this sector will find its perceived tax liabilities increased and its administrative burden increased as well. At the same time, though, the effects should ultimately be favorable to the sector. - 117 - 49. The most important effects of the reform for business come through the reforms in customs and indirect taxes. Although these will be simpler and arguably more fair, many Important businesses will lose favorable indirect tax treatment under the several firm-specific regimes that currently exist. Moreover, for many businesses, the favorable impact of customs reform on the consistency and honesty of customs administration may be invisible. The gains to the economy of the overall reform of customs and indirect taxes will be significant, and will favor business activity in Cameroon, but these benefits cannot be isolated and evaluated by most businesses. 50. The direct tax side will also appear unfavorable to businesses. Certain corporate tax favoritism will be abolished (tax free allocations to reserves, for example) and collection will be accelerated over an extende4 period to bring collections to a current basis. Thus, business will see a tax increase-though a temporary one. Possible gains from eventually more favorable treatment of investment and inventory, as well as from reform of registration taxes lie in the future. The statutory tax rate, now not perceived as a burden, will in any case not be reduced. 51. Corporations (and other businesses) will also be called on to administer a somewhat more complicated system of withholding at source, which is likely to require the introduction of new forms, procedures, and record-keeping requirements. This is unavoidable, and the burden is worthwhile given the likely gains to the fisc. - 118 - CHAPTER IX - OVERVIEW OF IMPLEMENTATION SCHEDULE 1. It is proposed that the implementation of these reforms be spread over four years. While a detailed calendar of implementation can only be drawn up in discussions with the anthorities, a tentative one is outlined below: YEAR 1: o Administrative Reform - Appointment of Deputy Minister for Tax with offices for legislation and legal affairs, public information, training, and policy analysis; - Establishment of homologous staff offices in Customs, Tax, Registry and Treasury Departments; - Codification of law and practice, managed by legal affairs; - Establishment of unique taxpayer identification numbers; - Acquisition of office automation equipment where needed; - Commence study of acquisition of computer and conversion of Trin1te o Corporate Income Tax - Adopt "all events" test limiting deductions for reserves; - Eliminate deductibility of in-kind benefits; - Introduce simplified filing forms and switch to quarterly payments; - Eliminate minimum tax of greater of 600,000 FCFA or 1 percent of sales; - Introduce minimum quarterly prenayment with refundability. o Personal Income Tax - Eliminate exclusion for rental income from related parties; - Eliminate presumptive deductions, require existence of documentary evidence; - Eliminate deductibility of interest payments from progressive surtax; - Subject all interest income to the proportional tax on income from securities; - Update valuation of in-kind benefits received by public sector employees; subject them and non-wage indemnities to the tax on salaries; - Eliminate the minimum aspect of the progressive surtax. o Registration Fees - Commence study for reform of registration and stamp duties and taxes; o Indirect and Trade Taxes - Eliminate TU and TIP regimes and apply common law or Investment Code provisions to these companies; - 119 - - Eliminate customs duty, entry duty and complementary tax and introduce new import duty, with three rates and a calendar for rate reduction; - Introduce preferential tariff for UDEAC trade; - Prepare for the introduction of a VAT; -- Eliminate remaining quantitative restrictions, introducing compensatory tariffs if necessary; - Reform entrepot, transit and temporary admissions regimes; - Introduce duty drawback scheme; - Stop granting regime stabilise and examine possibility of revising existing ones; - Implement decision to tax public sector imports. o Forestry - Initiate study for appropriate indicators of fob values to replace posted prices; -- Combine all area taxes into a single tax; - Increase posted prices; - Abolish earmarking; - Introduce new legislation which adopts management concessions as the goal but with a 3-year transition period; - Initiate and complete study of implementation methods for management concession plans; - Initiate study on the transfer of revenues to forest residents. o Agriculture - Initiate taxation of large estates and public agricultural enterprises under general income tax and (existing) real property tax regimes; - Introduce progressive windfall tax on exports of agricultural commodities; o Urban - Continue urban cadastre in Yaounde; - Commence study of administrative decentralization; - Institute systematic cooperation between Ministries of Urbanism and Finance on property tax assessment; - Differentiate property tax rates with respect to improvements and location. o Petroleum - Identification of technical assistance to revise fiscal arrangements for exploration and production; - Recruitment of a firm to assist in exploration promotion; - Redefine SNH's role in the petroleum sector; - Eliminate SONARA's monopoly on petroleum supply and place it in competition with imports; - Allow SONARA to purchase its own crude without SNH intermediation; - 120 - - Replace cost-plus setting c refinery prices by import parity linked prices plus a degressive surcharge during a transitional period of adjustment for SONARA; - Eliminate the stabilization and equalization levies, abandoning pan-territorial pricing; - Establish flexibility in consumer prices through quarterly adjustments; - Review other recommendation ensuing from the operational audit of the sector; YEAR 2: o Administrative Reform - Prepare training and public education materials and launch a publicity campaign about the objectives of the reform; - Acquire computer and begin conversion of Trinite; - Audit Trinite; - Update legislation as necessary to conform to proposed changes. o Corporate Income Tax - Study feasability of full or partial expensing; - Merge and update patente schedules; - Revise Investment Code as necessary. o Individual Income Tax - Reduce threshholds for the application of presumptive taxes o Registration Fees - Modify system as recommended o Indirect and Trade Taxes - Introduce a VAT at importer/manufacturer level; to replace TCAI and ICAI; - Create TCA on services to replace ICAI; rates to take into account elimination of any registration fees. - Proceed with import duty rate reductions, including on compensatory tariff surcharges; - Adjust excise tax rates if necessary; - Reduce exemptions under regime stabilise. o Forestry - Select private firm(s) to administer tender process and management concessions. - 121 - - Commence auction of forestry management concessions on a pilot basis; o Agriculture - Implement nominal tax on cultivated land; - Commence planning of rural cadastre o Urban - Complete study of administrative decentralization; - Complete urban cadastre in Yaounde; - Set up system for monitoring property values in Yaounde; - Commence urban cadastre in Douala; - Commence and complete study to set structure of taxe d'habitation in Yaounde; o Petroleum - Replace current hybrid fiscal system with a simple, clear and flexible one; - Revise Petroleum Code; - Adopt new Government policy of non-participation in the equity of petroleum companies and initiate sale of existing holdings; - Develop a model contract; - Launch in exploration promotion campaign; - Restru( are SNH in line with its new role; - Second year of adjustment for SONARA; - Carry out study on the subsidization of kerosene consumption; - Implement other recommendations of the operational audit. YEAR 3: o Administrative Reform - Complete conversion of Trinite to new computer - Actions on any recommendations to enhance Trinite - Study restructuring of collection process to ensure appropriate feedback; - Modify legislation as necessary; - Abolish Registry Department and incorporate any remaining functions into Tax Department. o Corporate Income Tax - Commence four year pro Laa transition to current accrual; o Individual Income Tax - Elimination of schedular taxes; - Introduction of simplified progressive tax; - Introduction of new withholding program on wages, interest, and rent; - 122 - -- Incorporation of realized capital gains in tax base. o Registration Fees - Eliminate tax o, the transfer of property. o Indirect and Trade Taxes - Prepare for extending the coverage of the VAT to services and wholesale and retail trade; - Continue with reduction of compensatory tariff surcharges; o Forestry - Extend system of management concessions to all new concessions; - Calibrate revenues from concessions under old regime to new level. o Agriculture - Initiate rural cadastre; o Urban - Commence regional government decentralization; - Introduce taxe d'habitation in Yaounde; - Continue Douala cadastre; - Initiate study on how to transform system of "centimes additionelles to an equalization fund. o Petroleum - Final year of adjustment for SONARA; - Implement recommendations of study on kerosene subsidy. YEAR 4: o Administrative Reform - Finish conformance of individual and corporate tax laws; - Reorganize levying and collection process to ensure feedback at end of year, following education program during the year; - Assess new level of administrative demands and consider staffing requirements o Corporate Income Tax - Abrogate the Investment Code; - Second year of phase-in; - Implement accelerated depreciation or full or partial expensing if recommended; - 123 - o Indiv-Aual Income Tax - Conform to revised code as necessary; o Registration Fees - None o Indirect and Trade Taxes - Extend coverage of the VAT; - Reduce import duty rates to attain proposed final tariff structure o Agriculture - Study and introduce rural taxe d'habitation province by province as rural cadastre is completed; o Forestry - None; o Urban - Complete Cadastre in Douala; - Initiate taxe d'habitation in Douala; - Commence planning for additional urban cadastres in regional centers; - Initiate implementation of equalization fund. o Petroleum - Ensure full consistency between the common law fiscal regime and tax arrangements included in new contractual agreements with petroleum companies; for ongoing operations, explore possibilities for modifying the fiscal stabilization provisions of existing contracts; - Place SONARA in full competition with imports; - Examine possibility of full liberalization in prices; APPENDIX I APPENDIX I Page 1 of 10 Table 1 Central Government Revenues (in CFAF '0Ds) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 TOTAL REVENUES 120.8 350.2 467.4 650.3 785.5 870.4 705.1 582.7 563.0 477.7 Oil revenues 74.2 97.8 266.2 350.0 382.0 252.0 207.0 190.9 145.0 Royalties 50.0 70.0 103.0 123.0 159.0 150.0 150.0 160.0 121.0 Profits tax 24.2 27.8 35.7 72.0 88.0 52.0 24.0 24.0 24.0 Other 0.0 0.0 127.5 155.0 135.0 50.0 33.0 6.9 0.0 Non-oil tax revenues 104.2 249.0 342.4 363.5 377.5 386.8 383.0 343.3 314.6 303.5 Taxes on Income and Profits 16.5 77.0 137.9 133.2 130.6 109.6 111.2 120.1 88.4 100.6 Personal Income Tax (IRPP) 11.5 33.3 55.1 50.2 46.3 51.9 55.5 54.7 49.4 53.2 Proportional taxes (TP) 4.9 15.5 27.4 23.7 20.8 24.8 26.0 26.6 25.9 29.3 Progressive surtax (SP) 6.6 17.8 27.7 26.5 25.4 27.1 29.5 28.1 23.6 23.9 Corporate Income Tax 5.0 24.1 62.8 58.6 51.8 48.1 32.5 53.6 34.4 32.5 Other 0.0 19.6 20.0 24.3 32.5 9.6 23.2 11.8 4.6 14.9 Taxes on property 1.9 4.8 4.9 4.7 6.5 7.0 7.1 5.2 5.3 5.1 Annual tax on corp assets (TSS) 1.0 2.7 2.3 2.5 3.7 4.0 3.6 2.7 2.9 2.7 Taxes on transfer of property 0.9 1.7 2.1 1.9 2.5 2.6 3.2 2.1 2.1 1.9 Other 0.0 0.4 0.5 0.3 0.3 0.4 0.4 0.4 0.4 0.5 Taxes on Goods and Services 26.1 61.5 81.2 85.0 91.5 109.3 108.6 89.2 121.6 109.9 Turnover tax (ICAI) 8.5 26.6 45.1 41.5 46.1 49.5 53.2 43.4 25.4 24.0 Tax on petroleum products 0.0 0.0 0.0 0.0 0.4 3.8 4.0 5.0 41.8 37.7 Taxe unique (TU) 12.2 29.1 26.8 33.1 34.6 39.3 39.9 31.0 43.9 37.6 Taxe interieur a La prod (TIP) 0.8 2.4 6.9 6.5 6.4 9.3 7.0 6.5 6.1 7.5 Other 4.6 3.4 2.4 3.8 4.0 7.4 4.4 3.2 4.4 3.2 Taxes on International Trade 55.8 93.8 108.3 129.4 133.4 144.7 136.4 116.3 83.9 73.9 Taxes on Imports 43.1 76.2 89.8 109.5 111.5 126.7 115.4 101.2 63.9 65.1 Taxes on Exports 12.4 16.6 18.5 19.9 21.9 18.0 21.0 15.1 20.0 8.8 Other 0.3 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 3.9 11.8 10.1 11.2 15.6 16.1 19.7 12.5 15.4 14.0 Registration Duties 1.5 6.8 7.1 8.1 8.7 9.1 12.2 7.2 4.9 3.5 Stamp Duties 2.4 5.0 3.1 3.1 6.8 7.1 7.6 5.3 10.5 10.5 Non-Tax Revenues 16.6 27.1 27.2 20.6 57.9 101.7 70.1 32.4 57.5 29.2 APPENDIX I Page 2 of 10 Table 2 Central Government Revenues (in percent) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 TOTAL REVENUES 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Oil revenues 21.2 20.9 40.9 44.6 43.9 35.7 35.5 33.9 30.4 Royalties 14.3 15.0 15.8 15.7 18.3 21.3 25.7 28.4 25.3 Profits tax 6.9 5.9 5.5 9.2 10.1 7.4 4.1 4.3 5.0 Other 0.0 0.0 19.6 19.7 15.5 7.1 5.7 1.2 0.0 Non-oiL tax revenues 86.3 71.1 73.3 55.9 48.1 44.4 54.3 58.9 55.9 63.5 Taxes on Income and Profits 13.6 22.0 29.5 20.5 16.6 12.6 15.8 20.6 15.7 21.1 Personal Income Tax (IRPP) 9.5 9.5 11.8 7.7 5.9 6.0 7.9 9.4 8.8 11.1 Proportional taxes (TP) 4.0 4.4 5.9 3.6 2.7 2.8 3.7 4.6 4.6 6.1 Progressive surtax (SP) 5.5 5.1 5.9 4.1 3.2 3.1 4.2 4.8 4.2 5.0 Corporate Income Tax 4.1 6.9 13.4 9.0 6.6 5.5 4.6 9.2 6.1 6.8 Other 0.0 5.6 4.3 3.7 4.1 1.1 3.3 2.0 0.8 3.1 Taxes on property 1.6 1.4 1.0 0.7 0.8 0.8 1.0 0.9 0.9 1.1 Annual tax on corp assets (TSS) 0.8 0.8 0.5 0.4 0.5 0.5 0.5 0.5 0.5 0.6 Taxes on transfer of property 0.7 0.5 0.4 0.3 0.3 0.3 0.4 0.4 0.4 0.4 Other 0.0 0.1 0.1 0.0 0.0 0.0 0.1 0.1 0.1 0.1 Taxes on Goods and Services 21.6 17.6 17.4 13.1 11.7 12.6 15.4 15.3 21.6 23.0 Turnover tax (ICAI) 7.1 7.6 9.6 6.4 5.9 5.7 7.5 7.5 4.5 5.0 Tax on petroleun products 0.0 0.0 0.0 0.0 0.1 0.4 0.6 0.9 7.4 7.9 Taxe unique locate (TU) 10.1 8.3 5.7 5.1 4.4 4.5 5.7 5.3 7.8 7.9 Taxe interieur a la prod (TIP) 0.6 0.7 1.5 1.0 0.8 1.1 1.0 1.1 1.1 1.6 Other 3.8 1.0 0.5 0.6 0.5 0.8 0.6 0.6 0.8 0.7 Taxes on International Trade 46.2 26.8 23.2 19.9 17.0 16.6 19.3 20.0 14.9 15.5 Taxes on Inports 35.7 21.8 19.2 16.8 14.2 14.6 16.4 17.4 11.4 13.6 Taxes on Exports 10.3 4.8 4.0 3.1 2.8 2.1 3.0 2.6 3.6 1.9 Other 0.2 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 3.2 3.4 2.2 1.7 2.0 1.9 2.8 2.1 2.7 2.9 Registration Duties 1.2 1.9 1.5 1.2 1.1 1.0 1.7 1.2 0.9 0.7 Stamp Duties 2.0 1.4 0.7 0.5 0.9 0.8 1.1 0.9 1.9 2.2 Non-Tax Revenues 13.7 7.7 5.8 3.2 7.4 11.7 9.9 5.6 10.2 6.1 APPENDIX I Page 3 of 10 Table 3 Central Government Revenues Taxes on Income and Profits (in CFAF) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Taxes on Income and Profits 16474 76997 137917 133169 130599 109598 111173 120141 88400 100568 Personal Income Tax (IRPP) 11475 33293 55126 50244 46252 51902 55530 54704 49429 53155 Proportional taxes (TP) 4852 15484 27424 23718 20841 24768 26000 26639 25879 29255 salary income (TS) 2885 8430 14114 13260 12213 14336 15072 14719 13880 13670 comm/ind profits (BIC) 530 2937 4013 3935 2456 3452 3792 3465 5060 5160 agriculture profits (BA) 10 2 67 60 0 15 2 40 9 10 non-commercial profits (BNC) 43 54 267 170 36 140 57 250 200 160 reaL estate income (RF) 72 65 735 793 105 286 213 1000 110 475 income from securities (RCM) 1312 3996 8228 5500 6031 6539 6864 7165 6620 9780 Progressive surtax (SP) 6623 17809 27702 26526 25411 27134 29530 28065 23550 23900 Corporate Income Tax 4999 24121 62804 58620 51845 48090 32456 53603 34390 32520 Taxes on Royalties 0 11146 11770 14587 19278 8565 10814 6982 3280 4467 Other 0 8437 8217 9718 13224 1041 12373 4852 1301 10426 Memorandum Non-oil tax revenues 104179 248972 342409 363450 377540 386782 382997 343282 314625 303480 Total revenues 120768 350233 467415 650254 785477 870439 705076 582700 563000 477728 APPENDIX I Page 4 of 10 Table 4 (in percent) Central Governent Revenues Taxes on Income and Profits 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Taxes on Income and Profits 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Personal Income Tax (IRPP) 69.7 43.2 40.0 37.7 35.4 47.4 49.9 45.5 55.9 52.9 Proportional taxes (TP) 29.5 20.1 19.9 17.8 16.0 22.6 23.4 22.2 29.3 29.1 salary income (TS) 17.5 10.9 10.2 10.0 9.4 13.1 13.6 12.3 15.7 13.6 com/ind profits (BIC) 3.2 3.8 2.9 3.0 1.9 3.1 3.4 2.9 5.7 5.1 agriculture profits (BA) 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 non-commerciaL profits (BNC) 0.3 0.1 0.2 0.1 0.0 0.1 0.1 0.2 0.2 0.2 real estate income (RF) 0.4 0.1 0.5 0.6 0.1 0.3 0.2 0.8 0.1 0.5 inrome from securities (RCM) 8.0 5.2 6.0 4.1 4.6 6.0 6.2 6.0 7.5 9.7 Pro ressive surtax (SP) 40.2 23.1 20.1 19.9 19.5 24.8 26.6 23.4 26.6 23.8 Corporate Income Tax 30.3 31.3 45.5 44.0 39.7 43.9 29.2 44.6 38.9 32.3 Taxes on Royalties 0.0 14.5 8.5 11.0 14.8 7.8 9.7 5.8 3.7 4.4 Other 0.0 11.0 6.0 7.3 10.1 0.9 11.1 4.0 1.5 10.4 Memorandum (as % of) Non-oil tax revenues 15.8 30.9 40.3 36.6 34.6 28.3 29.0 35.0 28.1 33.1 Total revenues 13.6 22.0 29.5 20.5 16.6 12.6 15.8 20.6 15.7 21.1 APPENDIX I Page 5 of 10 Table 5 Central Government Revenues Taxes on Property (in CFAF) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Taxes on property 1902 4798 4875 4671 6455 7018 7148 5200 5315 5053 Annual tax on corp assets (TSS) 1010 2711 2283 2457 3656 4012 3614 2725 2876 2719 Tax on real property 0 0 0 0 0 0 0 0 90 130 Tax on transfer of real estate 891 1461 1785 1520 1881 2019 2271 1685 1450 1157 Other transfers of property 0 265 317 413 620 630 887 416 604 725 Other (company creation/merger) 1 361 490 281 298 357 376 374 295 322 Memorandum Non-oil tax revenues 104179 248972 342409 363450 377540 386782 382997 343282 314625 303480 Total revenues 120768 350233 467415 650254 785477 870439 705076 582700 563000 477728 APPENDIX I Page 6 of 10 Table 6 Central Government Revenues Taxes on Property (in percent) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Taxes on property 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Annual tax on corp assets (TSS) 53.1 56.5 46.8 52.6 56.6 57.2 50.6 52.4 54.1 53.8 Tax on real property 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.7 2.6 Tax on transfer of real estate 46.8 30.5 36.6 32.5 29.1 28.8 31.8 32.4 27.3 22.9 Other transfers of property 0.0 5.5 6.5 8.8 9.6 9.0 12.4 8.0 11.4 14.3 Other (coMany creation/merger) 0.1 7.5 10.1 6.0 4.6 5.1 5.3 7.2 5.6 6.4 Memorandum (as % of) Non-oiL tax revenues 1.8 1.9 1.4 1.3 1.7 1.8 1.9 1.5 1.7 1.7 Total revenues 1.6 1.4 1.0 0.7 0.8 0.8 1.0 0.9 0.9 1.1 APPENDIX I Page 7 of 10 Table 7 Central Goverrnent Revenues Taxes on Goods and Services (in CFAF) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Taxes on Goods and Services 26122 61543 81190 84998 91543 109307 10856 89158 121605 109901 Turnover tax OICAO) 8529 26630 45091 41481 46097 49483 53196 43445 25360 23972 Tax on petroleum products 0 0 0 0 400 3800 4000 5000 41800 37720 Uaxe unique locate (TU) 10855 21150 25581 31870 33800 38471 39634 30362 43570 37220 Taxe unique autre 1348 7960 1194 1275 828 868 298 634 370 374 Taxe interieur a La prod (TIP) 756 2424 6883 6525 6390 9330 7036 6485 6090 7463 Motor vehicle taxes 236 725 500 711 843 726 844 437 1300 1137 Tax orn insurance contracts 2124 1977 1941 3136 3185 3718 3474 2683 3115 2015 other 2274 677 0 0 0 2911 84 112 0 0 Memorandum Non-oiL tax revenues 104179 248972 342409 363450 377540 386782 382997 343282 314625 303480 Total revenues 120768 350233 467415 650254 785477 870439 705076 582700 563000 477728 APPENDIX I Page 8 of 10 Table 8 Central Government Revenues Taxes on Goods and Services (in percent) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Taxes on Goods and Services 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Turnover tax (ICAI) 32.7 43.3 55.5 48.8 50.4 45.3 49.0 48.7 20.9 21.8 Tax on petroleun products 0.0 0.0 0.0 0.0 0.4 3.5 3.7 5.6 34.4 34.3 Taxe unique locaLe (TU) 41.6 34.4 31.5 37.5 36.9 35.2 36.5 34.1 35.8 33.9 Taxe unique autre 5.2 12.9 1.5 1.5 0.9 0.8 0.3 0.7 0.3 0.3 Taxe interieur a La prod (TIP) 2.9 3.9 8.5 7.7 7.0 8.5 6.5 7.3 5.0 6.8 Motor vehicle taxes 0.9 1.2 0.6 0.8 0.9 0.7 0.8 0.5 1.1 1.0 Tax on insurance contracts 8.1 3.2 2.4 3.7 3.5 3.4 3.2 3.0 2.6 1.8 Other 8.7 1.1 0.0 0.0 0.0 2.7 0.1 0.1 0.0 0.0 Memorandum (as percent of) Non-oiL tax revenues 25.1 24.7 23.7 23.4 24.2 28.3 28.3 26.0 38.7 36.2 Total revenues 21.6 17.6 17.4 13.1 11.7 12.6 15.4 15.3 21.6 23.0 APPENDIX I Page 9 of 10 Table 9 Central Government Revenues Taxes on International Trade (in CFAF) 1976/77 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Taxes on International Trade 55500 92830 108302 129420 133381 144715 136363 116300 83920 73943 Taxes on Imports 43066 76193 89814 109522 111506 126670 115358 101249 63919 65101 customs duty 7310 15388 19401 21659 22485 26112 23447 20707 11593 11480 entry duty 15977 29958 35221 40640 44570 49610 44885 39795 25831 26670 import turnover tax (TCAI) 8082 16737 20030 22935 25144 28798 25968 22119 14783 15421 complementary import tax(TCI) 11697 14110 15162 24288 19307 22150 21058 18628 11712 11530 Taxes on Exports 12434 16637 18488 19898 21875 18045 21005 15051 20001 8842 exit duty 15353 15917 17567 18678 16730 14949 12967 16478 4911 tax on tog exports 490 956 287 18 35 13 40 120 30 other 794 1615 2044 3179 1280 6043 2044 3403 3901 Other 262 957 0 0 0 0 0 0 0 0 Memorandum Non-oil tax revenues 104179 248972 342409 363450 377540 386782 382997 343282 314625 303480 Total revenues 120768 350233 467415 650254 785477 870439 705076 582700 563000 477728 APPENDIX I Page 10 of 10 Table 10 Central Goverment Revenues Taxes on International Trade (in percent) 1976/77 1981/82 1982/83 1983/84 1984/85 135/86 1986/87 1987/88 1988/89 1989/90 Taxes on International Trade 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Taxes on Imports 77.6 82.1 82.9 84.6 83.6 87.5 84.6 87.1 76.2 88.0 customs duty 13.2 16.6 17.9 16.7 16.9 18.0 17.2 17.8 13.8 15.5 entry duty 28.8 32.3 32.5 31.4 33.4 34.3 32.9 34.2 30.8 36.1 import turnover tax (TCAI) 14.6 18.0 18.5 17.7 18.9 19.9 19.0 19.0 17.6 20.9 complementary import tax(TCI) 21.1 15.2 14.0 18.8 14.5 15.3 15.4 16.0 14.0 15.6 Taxes on Exports 22,4 17.9 17.1 15.4 16.4 12.5 15.4 12.9 23.8 12.0 exit duty 0.0 16.5 14.7 13.6 14.0 11.6 11.0 11.1 19.6 6.6 tax on tog exports 0.0 0.5 0.9 0.2 0.0 0.0 0.0 0.0 0.1 0.0 other 0.0 0.9 1.5 1.6 2.4 0.9 4.4 1.8 4.1 5.3 Other 0.5 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Memorandun (as percent of) Non-oil tax revenues 53.3 37.3 31.6 35.6 35.3 37.4 35.6 33.9 26.7 24.4 Total revenues 46.0 26.5 23.2 19.9 17.0 16.6 19.3 20.0 14.9 15.5 APPENDIX II APPENDIX II Page 1 of 4 INVESTMENT CODE PROVISIONS A. GENERAL GUARANTEES Legal and economic guarantees including on transfers and access to the MIGA facility. B. EXPORT PROMOTION i. Eligibility criteria: None, benefits based on performance not a priori eligibility. ii. Benefits: -- reduction in taxable income by an amount equal to 5% of export value of manufactured products; -- exoneration from export duties, insurance and transport taxes. C. PROMOTION OF NATURAL RESOURCE USE i. Eligibility critgria: -- TIP or TU status. ii. Benefits: -- exoneration from taxes and duties on water and electricity and on purchase of raw material and intermediate goods of local or UDEAC origin; -- 15% customs duty (and 0% TCAI) on raw materials and inputs imported from outside the UDEAC zone. D. BASIC REGIME i. Eligibility criteria: -- positive list of activities; -- need to satisfy two of following criteria: . at least 1 employee/CFAF 10 million of investment . at least 25% of raw material is local . at least 25% of turnover is exports or at least 10% of turnover generates foreign exchange. APPENDIX II Page 2 of 4 ii. Benefits: Durine initial investment period (3 years): -- 15% duty on imported capital goods and construction material; - exoneration from taxes on locally produced capital goods and construction material; -- exoneration from the turnover tax (ICAI) on services; -- exoneration f:m the property transfer tax; - exoneration from the registration fee for rental contracts (DESBI); - exoneration from the tax on insurance contracts (DESCA); - exoneration from the tax on the distribution of credit (TDC) on loans contracted for the project; -- exoneration from the minimum company tax (IMF); - exoneration from the tax on corporate assets (TSS); -- 50% reduction in corporate tax (IS); - administrative facility (one stop investment agency). During this period, the difference between taxes due under common law and taxes due under the special provisions of the Investment Code are placed in an escrow account. During period of operation (5 years): - exoneration from IMF; - exoneration from TSS; -- 50% reduction in IS or tax on profits of unincorporated businesses (BIC); - 50% reduction in TPRCM; - authorization to deduct depreciation normally imputed to first three years of operation from taxable revenue of the next five years; -- reduction in taxable income by an amount equal to 50% of transport and utility costs when the enterprise is located outside main urben centers. E. PME REGIME i. Eligibility criteria: - need to qualify for basic regime; and - need to meet all of following criteria: . at least 1 employee/CFAF 5 million investment; . maximum investment level less than CFAF 1.5 billion; . at least 35% Cameroonian participation in capital. APPENDIX II Page 3 of 4 ii. Benefits: Same as in the basic regime plus: During period of operation (10 years): -- reduction in taxable income by an amount equal to 25% of wage bill due to Cameroonian employees. F. CONTRACT REGIME i. Eligibility Criteria: - same positive list of activities as basic regime; - need to satisfy one of the two following criteria: . at least 50% of raw material is local; . at least 50% of turnover is exports or at least 25% of turnover generates foreign exchange; plus . at least I employee/CFAF 20 million of investment. ii. Beneits - same as basic regime during the initial investment period of 5 years; - same as PME regime during operating period of 12 years. G. FREE TRADE ZONE REGIME i. Eligibility criteria: -- exclusively export oriented activities; ii. Benefits - defined under separate legislation. H. REINVESTMENT REGIME i. Eligibility criteria: - same positive list of activities as basic regime; - investment program approved under the reinvestment regime of the Tax Code; - at least 20% increase in production, productivity or number of permanent Cameroonian employees. APPENDIX II Page 4 of 4 ii. Benefits: For a period of three years: - benefits accorded under the Tax Code; - 15% duty on imported capital goods and construction material; - exoneration from taxes on locally produced capital goods and construction material; - exoneration from the tax on capital increase; -- exoneration from DESBI. APPENDIX III Table 1 PERSONAL INCOME TAX Income Distribution by Household Size and Revenue 1 part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Totat nome Brackets# of Income # of Income # of Income # of Income # of Income # of Income # of Income # of Income # of Income (000s) hsehotds (mittion) hseholds (mittion)hseholds (miLlion)hseholds (mittion)hseholds (mitLion)hseholds (mittion)hseholds (mittion)hseholds (mittion)hseholds (million 0 - 500 554 188 223 78 46 15 69 25 56 19 58 21 45 15 107 37 1158 398 501 - 700 472 280 147 87 65 39 59 36 52 32 39 23 33 20 67 41 934 558 701 - 1000 702 599 182 154 98 83 87 78 74 62 68 58 58 49 94 79 1363 1162 1001 - 1500 627 757 218 267 131 163 132 165 102 127 98 119 88 110 162 204 1558 1912 1501 - 2000 324 556 131 227 113 197 107 184 88 153 83 145 49 86 117 202 1012 1750 2001 - 2750 186 434 136 322 106 251 107 256 116 274 103 244 67 157 129 303 950 2241 2751 - 3500 78 239 66 201 61 188 73 227 63 198 80 248 48 149 114 358 583 1808 3501 - 4500 36 144 49 193 46 182 44 172 77 302 71 279 44 172 112 442 479 1886 4501 - 5500 21 101 20 101 39 194 37 182 35 173 36 178 39 188 65 324 292 1441 5501 - 6500 6 35 4 24 17 101 19 111 i8 106 47 283 18 107 35 206 164 973 6501 - 7500 6 40 5 35 8 57 12 81 15 103 22 153 17 118 27 185 112 772 7501 + 10 121 12 152 21 286 41 677 52 655 55 657 38 448 78 1020 307 4016 Total 3022 3494 1193 1841 751 1756 787 2194 748 2204 760 2408 544 1619 1107 3401 8912 18917 O-X 0)-4 to-U (D rn4 Table 2 PERSONAL INCOME TAX Income Distribution by Household Size and Revenue (in percent) part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total ncome Brackets# of Income # of Income # of Income # of Income # of Income # of Income # of Income # of Income # of Income (000s) hseholds (milion) hseholds (mi ttion)hseholds (million)hseholds (miLLion)hseholds (miition)hseholds (mi Lion)hseholds (mflion)hsehotds (mittion)hseholds (million 0 - 500 47.8 47.2 19.3 19.6 4.0 3.8 6.0 6.3 4.8 4.8 5.0 5.3 3.9 3.8 9.2 9.3 100.0 100.0 501 - 700 50.5 50.2 15.7 15.6 7.0 7.0 6.3 6.5 5.6 5.7 4.2 4.1 3.5 3.6 7.2 7.3 100.0 100.0 701 - 1000 51.5 51.5 13.4 13.3 7.2 7.1 6.4 6.7 5.4 5.3 5.0 5.0 4.3 4.2 6.9 6.8 100.0 100.0 1001 - 1500 40.2 39.6 14.0 14.0 8.4 8.5 8.5 8.6 6.5 6.6 6.3 6.2 5.6 5.8 10.4 10.7 100.0 100.0 1501 - 2000 32.0 31.8 12.9 13.0 11.2 11.3 10.6 10.5 8.7 8.7 8.2 8.3 4.8 4.9 11.6 11.5 100.0 100.0 2001 - 2750 19.6 19.4 14.3 14.4 11.2 11.2 11.3 11.4 12.2 12.2 10.8 10.9 7.1 7.0 13.6 13.5 100.0 100.0 2751 - 3500 13.4 13.2 11.3 11.1 10.5 10.4 12.5 12.6 10.8 11.0 13.7 13.7 8.2 8.2 19.6 19.8 100.0 100.0 3501 - 4500 7.5 7.6 10.2 10.2 9.6 9.7 9.2 9.1 16.1 16.0 14.8 14.8 9.2 9.1 23.4 23.4 100.0 100.0 4501 - 5500 7.2 7.0 6.8 7.0 13.4 13.5 12.7 12.6 12.0 12.0 12.3 12.4 13.4 13.0 22.3 22.5 100.0 100.0 5501 - 6500 3.7 3.6 2.4 2.5 10.4 10.4 11.6 11.4 11.0 10.9 28.7 29.1 11.0 11.0 21.3 21.2 100.0 100.0 6501 * 7500 5.4 5.2 4.5 4.5 7.1 7.4 10.7 10.5 13.4 13.3 19.6 19.8 15.2 15.3 24.1 24.0 100.0 100.0 7501 + 3.3 3.0 3.9 3.8 6.8 7.1 13.4 16.9 16.9 16.3 17.9 16.4 12.4 11.2 25.4 25.4 100.0 100.0 Total 33.9 18.5 13.4 9.7 8.4 9.3 8.8 11.6 8.4 11.7 8.5 12.7 6.1 8.6 12.4 18.0 100.0 100.0 o -V o XC -41 3-4 Tabte 3 PERSONAL INCOME TAX Income Distribution by Household size and Revenue (in percent) 1 part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Tota I ncome Brackets# of Income # of Income # of Income # of Income # of Income # of Income # of Income # of income 4 of Income ('000s) hseholds (million) hsehotds (mittion)hseholds (mittion)hseholds (mittion)hseholds (mittion)hsehoLds (miLLion)hseholds (mitlion)hseholds (million)hseholds (mittion 0 - 500 18.3 5.4 18.7 4.2 6.1 0.9 8.8 1.1 7.5 0.9 7.6 0.9 8.3 0.9 9.7 1.1 13.0 2.1 501 - 700 15.6 8.0 12.3 4.7 8.7 2.2 7.5 1.6 7.0 1.5 5.1 1.0 6.1 1.2 6.1 1.2 10.5 2.9 701 - 1000 23.2 17.1 15.3 8.4 13.0 4.7 11.1 3.6 9.9 2.8 8.9 2.4 10.7 3.0 8.5 2.3 15.3 6.1 1001 - 1500 20.7 21.7 16.3 14.5 17.4 9.3 16.8 7.5 13.6 5.8 12.9 4.9 16.2 6.8 14.6 6.0 17.5 10.1 1501 - 2000 10.7 15.9 11.0 12.3 15.0 11.2 13.6 8.4 11.8 6.9 10.9 6.0 9.0 5.3 10.6 5.9 11.4 9.3 2001 - 2750 6.2 12.4 11.4 17.5 14.1 14.3 13.6 11.7 15.5 12.4 13.6 10.1 12.3 9.7 11.7 8.9 10.7 11.8 2751 - 3500 2.6 6.8 5.5 10.9 8.1 10.7 9.3 10.3 8.4 9.0 10.5 10.3 8.8 9.2 10.3 10.5 6.5 9.6 3501 - 4500 1.2 4.1 4.1 10.5 6.1 10.4 5.6 7.8 10.3 13.7 9.3 11.6 8.1 10.6 10.1 13.0 5.4 10.0 4501 - 5500 0.7 2.9 1.7 5.5 5.2 11.0 4.7 8.3 4.7 7.8 4.7 7.4 7.2 11.6 5.9 9.5 3.3 7.6 5501 - 6500 0.2 1.0 0.3 1.3 2.3 5.8 2.4 5.1 2.4 4.8 6.2 11.8 3.3 6.6 3.2 6.1 1.8 5.1 6501 - 7500 0.2 1.1 0.4 1.9 1.1 3.2 1.5 3.7 2.0 4.7 2.9 6.4 3.1 7.3 2.4 5.4 1.3 4.1 7501 + 0.3 3.5 1.0 8.3 2.8 16.3 5.2 30.9 7.0 29.7 7.2 27.3 7.0 27.7 7.0 30.0 3.4 21.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 U2 -a (D m O X Table 4 PERSONAL INCOME TAX Schedutar Taxes Assessed by Household Size and Income part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total ncome Brackets # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes du ('000s) hseholds (million) hsehotds (mittion)hseholds (mittion)hseholds (mittion)hseholds (mittion)hseholds (million)hseholds (million)hsehotds (miltion)hseholds (mittion 0 - 500 663 21.8 236 13.2 53 2.0 76 3.7 68 2.9 69 3.6 51 3.0 117 8.2 1333 58.4 501 - 700 510 11.4 164 6.4 67 1.2 64 2.0 63 2.3 49 2.9 35 1.5 75 5.4 1027 33.1 701 - 1000 725 21.5 201 10.2 109 3.1 99 4.0 81 2.8 82 3.8 65 4.1 102 6.2 1464 55.7 1001 - 1500 633 23.4 230 12.0 138 4.7 139 5.5 110 4.5 107 10.2 93 9.0 184 12.3 1634 81.6 1501 - 2000 331 15.2 133 8.0 113 5.6 110 4.6 93 4.7 87 4.7 53 2.7 126 8.1 1046 53.6 2001 - 2750 182 12.4 137 7.9 112 6.4 106 6.9 119 8.1 103 9.2 69 4.6 136 11.4 964 66.9 2751 - 3500 78 7.0 66 6.9 62 5.9 75 6.4 61 5.9 81 9.9 48 4.2 112 13.2 5B3 59.4 3501 - 4500 35 3.5 51 4.8 47 5.3 46 5.8 76 13.0 71 6.6 45 7.8 113 12.4 484 59.2 4501 - 5500 21 2.3 19 4.9 37 5.1 38 10.0 35 4.2 36 9.7 39 5.4 66 13.7 291 55.3 5501 - 6500 6 1.4 4 0.5 17 2.3 21 4.5 19 2.6 47 11.5 18 4.5 35 5.6 167 32.9 6501 - 7500 5 1.4 5 0.8 8 1.3 12 2.6 15 3.8 23 5.2 17 4.7 27 11.2 112 31.0 7501 -10000 4 4.5 3 0.6 11 7.6 18 3.6 28 8.0 29 9.8 18 5.4 41 9.2 152 48.7 10000 -15000 5 9.2 7 5.0 6 2.1 8 4.5 13 10.8 19 12.8 13 7.4 29 14.8 100 66.6 15000 + 1 0.4 3 5.4 4 9.4 15 39.3 13 12.4 8 17.7 7 9.8 9 15.1 60 109.5 Total 3199 135.4 1259 86.6 784 62.0 827 103.4 794 86.0 811 117.6 571 74.1 1172 146.8 9417 811.9 M M OX. 0 -C o )j Table 5 PERSONAL INCOME TAX Progressive Surtax Assessed by Household Size and Income 1 part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total ncome Brackets # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due N of Taxes du (000s) hseholds (million) hsehotds (miLton)hseholds (mittion)hseholds (mittion)hsehotds (miLLion)hseholds (mi(tion)hseholds (mittion)hseholds (mittion)hseholds (million 0 - 500 663 1.9 236 0.7 53 0.1 76 0.2 68 0.2 69 0.2 51 0.1 117 1.0 1333 4.4 501 - 700 510 2.0 164 0.4 67 0.2 64 0.1 63 0.1 49 0.2 35 0.1 75 1.0 1027 4.1 701 - 1000 725 11.7 201 0.6 109 0.3 99 0.2 81 0.2 82 0.2 65 0.1 102 0.3 1464 13.6 1001 - 1500 633 31.6 230 1.2 138 0.4 139 0.4 110 0.3 107 0.6 93 0.2 184 0.6 1634 35.3 1501 - 2000 331 36.1 133 4.0 113 0.8 110 0.4 93 0.5 87 0.2 53 0.1 126 0.3 1046 42.4 2001 - 2750 182 37.5 137 10.9 112 5.2 106 2.4 119 1.0 103 1.2 69 0.2 136 1.0 964 59.4 2751 - 3500 78 25.9 66 11.0 62 7.8 75 5.5 61 2.8 81 2.1 48 0.3 112 0.3 583 55.7 3501 - 4500 35 17.5 51 14.1 47 9.4 46 7.0 76 8.3 71 5.8 45 3.1 113 4.4 484 69.6 4501 - 5500 21 15.2 19 8.1 37 11.7 38 10.5 35 7.5 36 6.7 39 3.9 66 7.3 291 70.9 5501 - 6500 6 5.7 4 1.7 17 8.5 21 9.0 19 6.2 47 14.3 18 3.9 35 6.1 167 55.4 6501 - 7500 5 5.2 5 4.6 8 6.0 12 6.6 15 7.0 23 10.9 17 7.0 27 7.4 112 54.7 7501 -10000 4 11.6 3 6.5 11 11.2 18 15.7 28 21.4 29 18.3 18 9.6 41 22.6 152 116.9 10000 -15000 5 20.1 7 11.9 6 10.3 8 12.2 13 20.3 19 20.8 13 13.7 29 26.2 100 135.5 15000 + 1 6.5 3 12.4 4 29.9 15 115.8 13 53.4 8 38.1 7 24.9 9 86.3 60 367.3 Total 3199 228.5 1259 88.1 784 101.8 827 186.0 794 129.2 811 119.6 571 67.2 1172 164.8 9417 1085.2 (D rn I-I 0 X Table 6 PERSONAL INCOME TAX Total Taxes Assessed by Household Size and Income I part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts TotaL ncome Brackets # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes due # of Taxes du (000s) hsehotds (million) hseholds (mittion)hseholds (mittion)hseholds (mittion)hsehotds (mittion)hsehotds (mittion)hsehotds (milion)hseholds (mill ion)hseholds (mittion 0 - 500 663 23.7 236 13.9 53 2.1 76 3.9 6E 3.1 69 3.8 51 3.1 117 9.2 1333 62.8 501 - 700 510 13.4 164 6.8 67 1.4 64 2.1 63 2.4 49 3.1 35 1.6 75 6.4 1027 37.2 701 - 1000 725 33.2 201 10.8 109 3.4 99 4.2 81 3.0 82 4.0 65 4.2 102 6.5 1464 69.3 1001 - 1500 633 55.0 230 13.2 138 5.1 139 5.9 110 4.8 107 10.8 93 9.2 184 12.9 1634 116.9 1501 - 2000 331 51.3 133 12.0 113 6.4 110 5.0 93 5.2 87 4.9 53 2.8 126 8.4 1046 96.0 2001 - 2750 182 49.9 137 18.8 112 11.6 106 9.3 119 9.1 103 10.4 69 4.8 136 12.4 964 126.3 2751 - 3500 78 32.9 66 17.9 62 13.7 75 11.9 61 8.7 81 12.0 48 4.5 112 13.5 583 115.1 3501 - 4500 35 21.0 51 18.9 47 14.7 46 12.8 76 21.3 71 12.4 45 10.9 113 16.8 484 128.8 4501 - 5500 21 17.5 19 13.0 37 16.8 38 20.5 35 11.7 36 16.4 39 9.3 66 21.0 291 126.2 5501 - 6500 6 7.1 4 2.2 17 10.8 21 13.5 19 8.8 47 25.8 18 8.4 35 11.7 167 88.3 6501 - 7500 5 6.6 5 5.4 8 7.3 12 9.2 15 10.8 23 16.1 17 11.7 27 18.6 112 85.7 7501 -10000 4 16.1 3 7.1 11 18.8 18 19.3 28 29.4 29 28.1 18 15.0 41 31.8 152 165.6 10000 -15000 5 29.3 7 16.9 6 12.4 8 16.7 13 31.1 19 33.6 13 21.1 29 41.0 100 202.1 15000 + 1 6.9 3 17.8 4 39.3 15 155.1 13 65.8 8 55.8 7 34.7 9 101.4 60 476.8 Totat 3199 363.9 1259 174.7 784- 163.8 827 289.4 794 215.2 811 237.2 571 141.3 1172 311.6 9417 1897.1 O X Table 7 PERSONAL INCOME TAX Total Taxes Assessed by Household Size and Income (in percent) part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts T otal ncomp Brackets Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total (000s) income taxes income taKes income taxes income taxes income taxes income taxes income taxes income taxes income taxes 0 - 500 47.2 37.7 19.6 22.1 3.8 3.3 6.3 6.2 4.8 4.9 5.3 6.1 3.8 4.9 9.3 14.6 100.0 100.0 501 - 700 50.2 36.0 15.6 18.3 7.0 3.8 6.5 5.6 5.7 6.5 4.1 B.3 3.6 4.3 7.3 17.2 100.0 100.0 701 - 1000 51.5 47.9 13.3 15.6 7.1 4.9 6.7 6.1 5.3 4.3 5.0 5.8 4.2 6.1 6.8 9.4 100.0 100.0 1001 - 1500 39.6 47.0 14.0 11.3 8.5 4.4 8.6 5.0 6.6 4.1 6.2 9.2 5.8 7.9 10.7 11.0 1000 100.0 1501 - 2000 31.8 53.4 13.0 12.5 11.3 6.7 10.5 5.2 8.7 5.4 8.3 5.1 4.9 2.9 11.5 8.8 100.0 100.0 2001 - 2750 19.4 39.5 14.* 14.9 11.2 9.2 11.4 7.4 12.2 7.2 10.9 8.2 7.0 3.8 13.5 9.8 100.0 100.0 2751 - 3500 13.2 28.6 11.1 15.6 10.4 11.9 12.6 10.3 11.0 7.6 13.7 10.4 8.2 3.9 19.8 11.7 100-.0 100.0 3501 - 4500 7.6 16.3 10.2 14.7 9.7 11.4 9.1 9.9 16.0 16.5 14.8 9.6 9.1 8.5 23.4 13.0 100.0 100.0 4501 - 5500 7.0 13.9 7.0 10.3 13.5 13.3 12.6 16.2 12.0 9.3 12.4 13.0 13.0 7.4 22.5 16.6 100.0 100.0 5501 - 6500 3.6 8.0 2.5 2.5 10.4 12.2 11.4 15.3 10.9 10.0 29.1 29.2 11.0 9.5 21.2 13.3 100.0 100.0 6501 - 7500 5.2 7.7 4.5 6.3 7.4 8.5 10.5 10.7 13.3 12.6 19.8 18.8 15.3 13.7 24.0 21.7 100.0 100.0 7501 + 3.0 6.2 3.8 4.9 7.1 8.3 16.9 22.6 16.3 15.0 16.4 13.9 11.2 8.4 25.4 20.6 100.0 100.0 Total 18.5 19.2 9.7 9.2 9.3 8.6 11.6 15.3 11.7 11.3 12.7 12.5 8.6 7.4 18.0 16.4 100.0 100.0 -V (D T O X Table 8 PERSONAL INCOME TAX Total Taxes Assessed by Household Size and Income (in percent) I part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total ncome Brackets Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total Total 000s) income taxes income taxes income taxes income taxes income taxes income taxes income taxes income taxes income taxes 0 - 500 5.4 6.5 4.2 8.0 0.9 1.3 1.1 1.3 0.9 1.4 0.9 1.6 0.9 2.2 1.1 3.0 2.1 3.3 501 - 700 8.0 3.7 4.7 3.9 2.2 0.9 1.6 0.7 1.5 1.1 1.0 1.3 1.2 1.1 1.2 2.1 2.9 2.0 701 - 1000 17.1 9.1 8.4 6.2 4.7 2.1 3.6 1.5 2.8 1.4 2.4 1.7 3.0 3.0 2.3 2.1 6.1 3.7 1001 - 1500 21.7 15.1 14.5 7.6 9.3 3.1 7.5 2.0 5.8 2.2 4.9 4.6 6.8 6.5 6.0 4.1 10.1 6.2 1501 - 2000 15.9 14.1 12.3 6.9 11.2 3.9 8.4 1.7 6.9 2.4 6.0 2.1 5.3 2.0 5.9 2.7 9.3 5.1 2001 - 2750 12.4 13.7 17.5 10.8 14.3 7.1 11.7 3.2 12.4 4.2 10.1 4.4 9.7 !.4 8.9 4.0 11.8 6.7 2751 * 3500 6.8 9.0 10.9 10.2 10.7 8.4 10.3 4.1 9.0 4.0 10.3 5.1 9.2 3.2 10.5 4.3 9.6 6.1 3501 - 4500 4.1 5.8 10.5 10.8 10.4 9.0 7.8 4.4 13.7 9.9 11.6 5.2 10.6 7.7 13.0 5.4 10.0 6.8 4501 - 5500 2.9 4.8 5.5 7.4 11.0 10.3 8.3 7.1 7.8 5.4 7.4 6.9 11.6 6.6 9.5 6.7 7.6 6.7 5501 - 6500 1.0 2.0 1.3 1.3 5.8 6.6 5.1 4.7 4.8 4.1 11.8 10.9 6.6 5.9 6.1 3.8 5.1 4.7 6501 - 7500 1.1 1.8 1.9 3.1 3.2 4.5 3.7 3.2 4.7 5.0 6.4 6.8 7.3 8.3 5.4 6.0 4.1 4.5 7501 +10000 3.5 14.4 8.3 23.9 16.3 43.0 30.9 66.0 29.7 58.7 27.3 49.5 27.7 50.1 30.0 55.9 21.2 44.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 -uX 10 X Table 9 PERSONAL INCOME TAX Sfective Tax Rates by Income Bracket and Household Size 1 part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total ncae Brackets Income Tax Income Tax Income Tax Income Tax Income Tax Income Tax Income Tax Income Tax Total Tax (1000s) (mitlion) Rate (mittion) Rate (million) Rate (million) Rate (mittion) Rate (miLtion) Rate (mittion) Rate (mittion) Rate Income Rate 0 500 188 12.6 78 17.8 15 14.0 25 15.6 19 16.3 21 18.1 I5 20.7 37 24.9 398 15.8 501 - 700 280 4.8 87 7.8 39 3.6 36 5.8 32 7.5 23 13.5 20 8.0 41 15.6 558 6.7 701 - 1000 599 5.5 154 7.0 83 4.1 78 5.4 62 4.8 58 6.9 49 8.6 79 8.2 1162 6.0 1001 - 1500 757 7.3 267 4.9 163 3.1 165 3.6 127 3.8 119 9.1 110 8.4 204 6.3 1912 6.1 1501 - 2000 556 9.2 227 5.3 197 3.2 184 2.7 153 3.4 145 3.4 86 3.3 202 4.2 1750 5.5 2301 - 2750 434 11.5 322 5.8 251 4.6 256 3.6 274 3.3 244 4.3 157 3.1 303 4.1 2241 5.6 2751 - 3500 239 13.8 201 8.9 188 7.3 227 5.2 198 4.4 248 4.8 149 3.0 358 3.8 1808 6.4 3501 - 4500 144 14.6 193 9.8 182 8.t 172 7.4 302 7.1 279 4.4 172 6.3 442 3.8 1886 6.8 4501 - 5500 101 17.3 101 12.9 194 8.7 182 11.3 173 6.8 178 9.2 188 4.9 324 6.5 1441 8.8 5501 - 6500 35 20.3 24 9.2 101 10.7 17 12.2 106 8.3 283 9.1 107 7.9 206 5.7 973 9.1 6501 * 7500 40 16.5 35 15.4 57 12.8 81 11.4 103 10.5 153 10.5 118 9.9 185 10.1 772 11.1 7501 * 121 43.2 152 27.5 286 24.7 677 28.2 655 19.3 657 17.9 448 15.8 1020 17.1 4016 21.0 Totat 3494 10.4 1841 9.5 1756 9.3 2194 13.2 2204 9.8 2408 9.9 1619 8.7 3401 9.2 18917 10.0 00X r,j Table 10 PERSONAL INCOME TAX Effective Tax Rates by Income Bracket and Household size part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total Income Bracket TP SP Total TP SP Total TP SP Total TP SP Total TP SP Total TP SP Total TP SP Total TP SP Total TP SP Total ('C000s) 0 - 500 11.6 1.0 12.6 16.9 0.9 17.8 13.3 0.7 14.0 14.8 0.8 15.6 15.3 1.1 16.3 17.1 1.0 18.1 20.0 0.7 20.7 22.2 2.7 24.9 14.7 1.1 15.8 501 - 700 4.1 0.7 4.8 7.4 0.5 7.8 3.1 0.5 3.6 5.6 0.3 5.8 7.2 0.3 7.5 12.6 0.9 13.5 7.5 0.5 8.0 13.2 2.4 15.6 5.9 0.7 6.7 701 - 1000 3.6 2.0 5.5 6.6 0.4 7.0 3.7 0.4 4.1 5.1 0.3 5.4 4.5 0.3 4.8 6.6 0.3 6.9 8.4 0.2 8.6 7.8 0.4 8.2 4.8 1.2 6.0 1001 - 1500 3.1 4.2 7.3 4.5 0.4 4.9 2.9 0.2 3.1 3.3 0.2 3.6 3.5 0.2 3.8 8.6 0.5 9.1 8.2 0.2 8.4 6.0 0.3 6.3 4.3 1.8 6.1 1501 - 2000 2.7 6.5 9.2 3.5 1.8 5.3 2.8 0.4 3.2 2.5 0.2 2.7 3.1 0.3 3.4 3.2 0.1 3.4 3.1 0.1 3.3 4.0 0.1 4.2 3.1 2.4 5.5 2001 - 2750 2.9 8.6 11.5 2.5 3.4 5.8 2.5 2.1 4.6 2.7 0.9 3.6 3.0 0.4 3.3 3.8 0.5 4.3 2.9 0.1 3.1 3.8 0.3 4.1 3.0 2.7 5.6 2751 - 3500 2.9 10.8 13.8 3.4 5.5 8.9 3.1 4.1 7.3 2.8 2.4 5.2 3.0 1.4 4.4 4.0 0.8 4.8 2.8 0.2 3.0 3.7 0.1 3.8 3.3 3.1 6.4 3501 - 4500 2.4 12.2 14.6 2.5 7.3 9.8 2.9 5.2 8.1 3.4 4.1 7.4 4.3 2.7 7.1 2.4 2.1 4.4 4.5 1.8 6.3 2.8 1.0 3.8 3.1 3.7 6.8 4501 - 5500 2.3 15.0 17.3 4.9 8.0 12.9 2.6 6.0 8.7 5.5 5.8 11.3 2.4 4.3 6.8 5.4 3.8 9.2 2.9 2.1 4.9 4.2 2.3 6.5 3.8 4.9 8.8 5501 - 6500 4.0 16.3 20.3 2.1 7.1 9.2 2.3 8.4 10.7 4.1 8.1 12.2 2.5 5.8 8.3 4.1 5.1 9.1 4.2 3.6 7.9 2.7 3.0 5.7 3.4 5.7 9.1 6501 - 7500 3.5 13.0 16.5 2.3 13.1 15.4 2.3 10.5 12.8 3.2 8.1 11.4 3.7 6.8 10.5 3.4 7.1 10.5 4.0 5.9 9.9 6.1 4.0 10.1 4.0 7.1 11.1 7501 + 11.7 31.6 43.2 7.2 20.3 27.5 6.7 18.0 24.7 7.0 21.2 28.2 4.8 14.5 19.3 6.1 11.8 17.9 5.0 10.8 15.8 3.8 13.2 17.1 5.6 15.4 21.0 Total 3.9 6.5 10.4 4.7 4.8 9.5 3.5 5.8 9.3 4.7 8.5 13.2 3.9 5.9 9.8 4.9 5.0 9.9 4.6 4.2 8.7 4.3 4.8 9.2 4.3 5.7 10.0 0 to.4 (Dmrn O APPENDIX III Table 11 PERSONAL INCOME TAX SIMULATIONS Average Income by Household Size for Each Income Bracket (000 CFAF) Income Brackets 1 part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Total 0 - 500 339 350 326 362 339 362 333 346 343 501 - 700 593 592 600 610 615 590 606 612 597 701 * 1000 853 846 847 897 838 853 845 840 853 1001 - 1500 1207 1225 1244 1250 1245 1214 1250 1259 1228 1501 - 2000 1716 1733 1743 1720 1739 1747 1755 1726 1729 2001 - 2750 2333 2368 2368 2393 2362 2369 2343 2349 2359 2751 - 3500 3064 3045 3082 3110 3143 3100 3104 3140 3101 3501 - 4500 4000 3939 3957 3909 3922 3930 3909 3946 3937 4501 - 5500 4810 5050 4974 4919 4943 4944 4821 4985 4934 5501 - 6500 5833 6000 5941 5842 5889 6021 5944 5886 5932 6501 - 7500 6667 7000 7125 6750 6867 6955 6941 6852 6895 7501 + 12100 12667 13619 16512 12596 11945 11789 13077 13073 Total 1117 1515 2282 2724 2856 3045 2890 2979 2060 0,f 0 Table 12 PERSONAL INCOME TAX SIMULATIONS Average Tax Assessed by Household Size for Each Income Bracket (000 CFAF) Income Brackets 1 part 2 parts 2.5 parts 3 parts 3.5 parts 4 parts 4.5 parts 5 parts Totat 0 - 500 36 59 40 51 46 55 61 79 47 501 - 700 26 41 21 33 38 63 46 85 36 701 - 1000 46 54 31 42 37 49 65 64 47 1001 - 1500 87 57 37 42 44 101 99 70 72 1501 - 2000 155 90 57 45 56 56 53 67 92 2001 - 2750 274 137 104 88 76 101 70 91 131 2751 - 3500 422 271 221 159 143 148 94 121 197 3501 * 4500 600 371 313 278 280 175 242 149 266 4501 - 5500 833 684 454 539 334 456 238 318 434 5501 - 6500 1183 550 635 643 463 549 467 334 529 6501 - 7500 1320 1080 913 767 720 700 688 689 765 7501 * 5230 3215 3357 4661 2339 2098 1863 2205 2707 Total 114 139 209 350 271 292 247 266 201 (D m 0 X- APPENDIX III Scenario 2 Table 13 PERSONAL INCOME TAX SIMULATIONS Current Income Tax Schedule Proposed Income Tax Schedule Taxable Marginal Maximum Marginal Maximum Revenues 1/ Tax rate Taxes Due Tax rate Taxes Due (000s) (000s) (000s) 0 - 500 0% 3 21 0% 0 501 - 700 10% 20 10% 20 701 - 1000 15% 65 10% 50 1001 - 1500 20% 165 15% 125 1501 - 2000 25% 290 15% 200 2001 - 2750 30% 515 20% 350 2751 - 3500 35% 777.5 20% 500 3501 - 4500 40% 1177.5 25% 750 4501 - 5500 45% 1627.5 25% 1000 5501 - 6500 50% 2127.5 30% 1300 6501 - 7500 55% 2677.5 30% 1600 7501 + 60% 35% I/ System of income splits with Deductions per dependent 30 maximum of 5 splits with maximum 5 2/ Minimum presumptive surtax O O -0 03 -0 0 0 -4 APPENDIX III Scenario 2 Table 14 PERSONAL INCOME TAX SIMULATIONS Revenue and Distributional Impact of Proposed Reforms Income Taxes Due (in mitlions) 0 dependents 1 dependent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Brackets Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed ('000s) system system system system system system system system system system system system system system 0 - 500 24 0 14 0 2 0 4 0 3 0 16 0 63 0 501 - 700 13 5 7 1 1 0 2 0 2 0 11 0 37 6 701 - 1000 33 26 11 6 3 3 4 3 3 2 15 5 69 45 1001 - 1500 55 51 13 18 5 11 6 10 5 8 33 23 117 121 1501 - 2000 51 52 12 21 6 17 5 16 5 13 16 37 96 156 2001 - 2750 50 49 19 37 12 29 9 28 9 30 28 71 126 243 2751 - 3500 33 32 18 27 14 25 12 30 9 25 30 95 115 234 3501 - 4500 21 22 19 31 15 28 13 27 21 44 40 128 129 279 4501 - 5500 18 17 13 17 17 32 21 32 12 29 47 116 126 242 5501 - 6500 7 7 2 5 11 19 14 23 9 21 46 108 88 181 6501 - 7500 7 7 5 7 7 12 9 16 11 21 46 92 86 155 7501 + 52 32 42 44 71 78 191 194 126 180 363 525 845 1053 Total 364 299 175 213 164 254 289 378 215 371 690 1198 1897 2714 O -U1 w) V 0 m rj" APPENDIX III Scenario 2 Table 15 PERSONAL INCOME TAX Revenue and Distributional Ipact of Proposed Reforms Comparison of Effective Rates of Taxation 0 dependents 1 dependent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Brackets Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed (0cos) system system system system system system system system system system system system system system -*****************************------ - ------- - --------------------- - ------------------...............................-........................ 0 - 500 10.5 0.0 16.8 0.0 12.2 0.0 14.2 0.0 13.4 0.0 19.5 0.0 13.7 0.0 501 - 700 4.4 1.6 7.0 1.0 3.5 0.7 5.4 0.0 6.2 0.0 11.6 0.0 6.1 1.0 701 - 1000 5.4 4.1 6.4 3.7 3.7 3.4 4.7 3.4 4.4 2.6 7.0 2.3 5.6 3.6 1001 - 1500 7.2 6.7 4.7 6.5 3.0 6.2 3.4 5.9 3.5 5.5 6.9 4.8 5.8 6.0 1501 - 2000 9.0 9.2 5.2 9.0 3.2 8.7 2.6 8.4 3.2 8.2 3.5 3.0 5.3 8.6 2001 - 2750 11.8 11.4 5.8 11.3 4.4 11.0 3.7 10.9 3.2 10.5 3.8 9.8 5.6 10.7 2751 - 3500 13.8 13.5 8.9 13.2 7.2 13.1 5.1 13.0 4.5 12.9 4.0 12.6 6.4 12.9 3501 - 4500 15.0 15.6 9.4 15.3 7.9 15.1 7.1 14.8 7.1 14.7 4.5 14.2 6.8 14.6 4501 - 5500 17.3 17.2 13.5 17.4 9.1 17.2 11.0 16.9 6.8 16.8 6.7 16.6 8.8 16.9 5501 * 6500 20.3 18.9 9.2 19.0 10.7 18.8 11.0 18.4 7.9 18.4 7.7 18.1 8.9 18.3 6501 - 7500 19.8 20.3 15.4 20.6 12.8 20.6 11.4 20.0 10.5 20.0 10.0 19.9 11.1 20.0 7501 + 43.2 26.5 25.4 26.8 24.7 27.3 28.2 28.6 18.6 26.5 16.9 24.4 20.7 25.8 .***** ****** *****------------------------------------------------------------------------ .................................................... Total 10.2 8.4 9.2 11.2 9.2 14.2 12.8 16.8 9.5 16.4 9.1 15.7 9.8 14.0 cl to -O (D (D M 00 -- APPENDIX III Scenario 3 Table 16 PERSONAL INCOME TAX Current Income Tax Schedule Proposed Income Tax Schedule Taxable Marginal Maximum Marginal Maximum Revenues 1/ Tax rate Taxes Due Tax rate Taxes Due (000s) (000s) (000s) ..-- .- .-------- .-...--.---.-.-..---. ------------------ 0 - 500 0% 3 2/ 0% 0 501 - 700 10% 20 10% 20 701 - 1000 15% 65 10% 50 1001 - 1500 20% 165 15% 125 1501 - 2000 25% 290 15% 200 2001 - 2750 30% 515 20% 350 2751 - 3500 35% 777.5 20% 500 3501 - 4500 40% 1177.5 25% 750 4501 - 5500 45% 1627.5 25% 1000 5501 - 6500 50% 2127.5 30% 1300 6501 - 7500 55% 2677.5 30% 1600 7501 + 60% 35% 1/ System of income splits with Credit per dependent 60 maximum of 5 splits with maximum 5 2/ Minimum presumptive tax 0( - (D (D M :3 z 0 0 -41 "- APPENDIX III Scenario 3 Table 17 PERSONAL INCOME TAX Revenue and Distributional Impact of Proposed Reforms Income Taxes Due (in mittions) 0 dependents I dependent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Brackets Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed (c0oos) system system system system system system system system system system system system system system 0 - 500 24 0 14 0 2 0 4 0 3 0 16 0 63 0 501 - 700 13 5 7 0 1 0 2 0 2 0 11 0 37 5 701 - 1000 33 26 11 0 3 0 4 0 3 0 15 0 69 26 1001 - 1500 55 51 13 5 5 0 6 0 5 0 33 0 117 57 1501 - 2000 51 52 12 13 6 5 5 0 5 0 16 0 96 70 2001 - 2750 50 49 19 29 12 17 9 10 9 4 28 0 126 109 2751 - 3500 33 32 18 23 14 18 12 18 9 12 30 30 115 133 3501 - 4500 21 22 19 28 15 23 13 19 21 28 40 71 129 191 4501 - 5500 18 17 13 16 17 28 21 26 12 22 47 79 126 187 5501 - 6500 7 7 2 4 11 17 14 19 9 17 46 84 88 148 6501 - 7500 7 7 5 7 7 11 9 14 11 18 46 75 86 132 7501 + 52 32 42 44 71 76 191 188 126 170 363 523 845 1032 Total 364 299 175 170 164 195 289 295 215 269 690 861 1897 2089 o O) -U C) (0 m0 D z -.. 0 0 -4"- APPENDIX Ill Scenario 3 Table 18 PERSONAL INCOME TAX Revenue and Distributional Impact of Proposed Reforms Comparison of Effective Rates of Taxation 0 dependents I dependent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Brackets Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed C000s) system system system system system system system system system system system system system system 0 - 500 10.5 0.0 16.8 0.0 12.2 0.0 14.2 0.0 13.4 0.0 19.5 0.0 13.7 0.0 501 - 700 4.4 1.6 7.0 0.0 3.5 0.0 5.4 0.0 6.2 0.0 11.6 0.0 6.1 0.8 701 - 1000 5.4 4.1 6.4 0.0 3.7 0.0 4.7 0.0 4.4 0.0 7.0 0.0 5.6 2.1 1001 - 1500 7.2 6.7 4.7 1.9 3.0 0.0 3.4 0.0 3.5 0.0 6.9 0.0 5.8 2.8 1501 - 2000 9.0 9.2 5.2 5.8 3.2 2.4 2.6 0.0 3.2 0.0 3.5 0.0 5.3 3.9 2001 - 2750 11.8 11.4 5.8 9.0 4.4 6.5 3.7 4.1 3.2 1.4 3.8 0.0 5.6 4.8 2751 - 3500 13.8 13.5 8.9 11.5 7.2 9.6 5.1 7.8 4.5 6.0 4.0 4.0 6.4 7.4 3501 - 4500 15.0 15.6 9.4 14.0 7.9 12.5 7.1 10.8 7.1 9.3 4.5 7.8 6.8 10.0 4501 - 5500 17.3 17.2 13.5 16.4 9.1 15.0 11.0 13.7 6.8 12.6 6.7 11.3 8.8 13.0 5501 - 6500 20.3 18.9 9.2 18.2 10.7 17.0 11.0 15.8 7.9 14.9 7.7 14.1 8.9 14.9 6501 - 7500 19.8 20.3 15.4 19.9 12.8 19.2 11.4 17.7 10.5 17.0 10.0 16.3 11.1 17.1 7501 + 43.2 26.5 25.4 26.4 24.7 26.6 28.2 27.7 18.6 25.0 16.9 24.3 20.7 25.3 Total 10.2 8.4 9.2 8.9 9.2 10.9 12.8 13.1 9.5 11.9 9.1 11.3 9.8 10.8 O 0) -0 n0 to (D (D Ml 0 0 t, -4 APPENDIX III Scenario 4 Table 19 PERSONAL INCOME TAX SIMULATIONS Current Income Tax Schedule Proposed Income Tax Schedule Taxable Marginal Maximum Marginal Maximun Revenues 1/ Tax rate Taxes Due Tax rate Taxes Due (0os) (000s) (Ds) 0 - 500 0% 3 2/ 0% 0 501 - 700 10% 20 15% 30 701 - 1000 15% 65 15% 75 1001 - 1500 20% 165 15% 150 1501 - 2000 25% 290 15% 225 2001 - 2750 30% 515 25% 412.5 2751 - 3500 35% 777.5 25% 600 3501 - 4500 40% 1177.5 25% 850 4501 - 5500 45% 1627.5 25% 1100 5501 - 6500 50% 2127.5 35% 1450 6501 - 7500 55% 2677.5 35% 1800 7501 + 60% 35% 1/ System of income splits with Credit per dependent 30 maximun of 5 splits with maximum 5 2/ Mininun presumptive tax Cn, Gj -U CD 'D M71 , z 0 0 --h "- APPENDIX III Scenario 4 Table 20 PERSONAL INCOME TAX SIMULATIONS Revenue and Distributional Impact of Proposed Reforms Income Taxes Due (in millions) 0 dependents 1 dependent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Brackets Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed ('000s) system system system system system system system system system system system system system system 0 - 500 24 0 14 0 2 0 4 0 3 0 16 0 63 0 501 - 700 13 7 7 0 1 0 2 0 2 0 11 0 37 7 701 - 1000 33 38 11 4 3 0 4 0 3 0 15 0 69 43 1001 - 1500 55 67 13 18 5 7 6 3 5 0 33 0 117 96 1501 - 2000 51 60 12 21 6 14 5 10 5 6 16 10 96 121 2001 - 2750 50 56 19 39 12 29 9 25 9 23 28 50 126 223 2751 - 3500 33 38 18 30 14 27 12 31 9 24 30 86 115 236 3501 - 4500 21 25 19 35 15 31 13 28 21 44 40 128 129 291 4501 - 5500 18 19 13 18 17 34 21 33 12 29 47 114 126 247 5501 - 6500 7 7 2 5 11 20 14 24 9 21 46 111 88 189 . 6501 - 7500 7 8 5 8 7 13 9 17 11 22 46 97 86 164 7501 + 52 34 42 47 71 82 191 199 126 187 363 584 845 1132 Total 364 361 175 225 164 256 289 371 215 357 690 1179 1897 2749 Cn O -U 0 0 0 rV'- APPENDIX III Scenario 4 Table 21 PERSONAL INCOME TAX SIMULATIONS Revenue and Distributional Impact of Proposed Reforms Comparison of Effective Rates of Taxation 0 dependents 1 dependent 2 dependents 3 dependents 4 dependents 5 dependents Total Income Brackets Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed Current Proposed ('Os) system system system system system system system system system system system system system system ----- --- *********----------------------------------------------------------------------------------- 0 500 10.5 0.0 16.8 0.0 12.2 0.0 14.2 0.0 13.4 0.0 19.5 0.0 13.7 0.0 501 - 700 4.4 2.4 7.0 0.0 3.5 0.0 5.4 0.0 6.2 0.0 .1.6 0.0 6.1 1.2 701 - 1000 5.4 6.2 6.4 2.6 3.7 0.0 4.7 0.0 4.4 0.0 7.0 0.0 5.6 3.4 1001 - 1500 7.2 8.8 4.7 6.4 3.0 4.2 3.4 1.8 3.5 0.0 6.9 0.0 5.8 4.8 1501 - 2000 9.0 10.6 5.2 8.9 3.2 7.3 2.6 5.4 3.2 3.8 3.5 2.1 5.3 6.7 2001 - 2750 11.8 13.2 5.8 12.1 4.4 10.9 3.7 9.7 3.2 8.3 3.8 6.9 5.6 9.8 2751 - 3500 13.8 16.0 8.9 15.0 7.2 14.1 5.1 13.3 4.5 124 4.0 11.4 6.4 13.0 3501 * 4500 15.0 18.1 9.4 17.3 7.9 16.5 7.1 15.7 7.1 14.9 4.5 14.2 6.8 15.3 4501 - 5500 17.3 19.3 13.5 19.0 9.1 18.3 11.0 17.6 6.8 17.0 6.7 16.4 8.8 17.2 5501 - 6500 20.3 20.9 9.2 20.8 10.7 20.1 11.0 19.3 7.9 19.0 7.7 18.6 8.9 19.0 6501 - 7500 19.8 22.6 15.4 22.8 12.8 22.6 11.4 21.4 10.5 21.2 10.0 20.9 11.1 21.3 7501 + 43.2 28.2 25.4 28.3 24.7 28.5 28.2 29.5 18.6 27.5 16.9 27.2 20.7 27.8 Total 10.2 10.1 9.2 11.8 9.2 14.3 12.8 16.5 9.5 15.8 9.1 15.5 9.8 14.2 C,j U0) -0 (D MD fM OO 0 0