Taxation challenges in Togo and Benin

ECOPA has been selected by the World Bank to carry out an exciting intervention on tax revenue mobilization in Togo and Benin. In this post, Léa Bousquet and Charles Vellutini summarize key challenges and issues at the outset of the project.

Background and context

Mobilizing government revenue is at the core of the development challenge in sub-Saharan Africa (SSA). Unfortunately, as shown below, revenue has been decreasing in recent years in Togo and Benin — even if projections for 2017 are more optimistic. While Benin’s performance was markedly below the (decreasing) SSA average, Togo outperformed its peers with tax revenue on an upward trend. Even for Togo, however, tax revenue is below the 20 percent objective set by the West African Economic and Monetary Union (WAEMU).[1]

Government and tax revenues for SSA countries, Benin and Togo (percent of GDP)

As emphasized by the IMF[2],[3], broadening the tax base and ensuring better tax buoyancy remain key challenges in both countries. The intervention’s relevance could hardly be overemphasized.

Identifying tax policy bottlenecks in revenue mobilization

The focus of ECOPA’s intervention is on tax policy. While aspects of tax administration will need to be considered as elements of the revenue mobilization context, this assignment is essentially about identifying bottlenecks in tax policy design — namely the design of tax bases, structures and progressivity of tax rates, unitary taxes, and, not least, exemptions, preferential rates and other types of tax expenditures.

Similarly, the objective of the analysis and the related proposed policy options is revenue mobilization, as opposed to redistribution and equity considerations. However, there need not be a tradeoff between revenue mobilization and redistribution, and more generally poverty alleviation. This is because improved domestic revenue mobilization is a precondition to the expanded provision of public services and goods, such as education and health services. This is especially true in SSA economies.

A data-informed approach

The methodological focus of the intervention is on data-based analysis. It is proposed to identify bottlenecks in revenue mobilization through a variety of quantitative techniques, such as tax expenditures analysis (where are the ‘revenue leaks’ in tax design?), tax buoyancy analysis (is tax policy adapted to the structural changes unfolding in the economy?) and other data-based approaches. This quantitative approach is useful to produce a well-research policy discussion; it is specifically useful in prioritizing issues. A number of tax policy bottlenecks may exist – but where should the reform effort be focused? A quantified approach is typically efficient in addressing this essential question.

Issues in revenue mobilization

While the intervention will generate its own data-based findings, at the outset of the project ECOPA will take stock of the wealth of policy research and analysis existing on taxation in SSA economies. This large and well documented policy experience[12] has suggested the following issues:

  • Fiscal transition in Sub-Saharan Africa. As free trade agreements have been implemented in the region[13], domestic taxation (VAT, excise taxes, direct taxation, inter alia) need to make up for diminishing revenue from tariffs. This has been a central challenge to the region’s revenue mobilization capacity. ECOPA will pay special attention to the fiscal transition happening in both countries as a potential driver behind the downward trend reported above, and an important issue for any policy option.
  • Broadening the VAT tax base is in itself a major topic. The international experience, for instance in Europe, shows that VAT has the potential to become a major provider of domestic, non-tariff revenue – with associated challenges in the VAT perimeter, rate(s) and exemptions.
  • Excise taxes are important. They tend to be simpler than VAT in terms of administration and can be efficient in revenue mobilization. One aspect of excise taxes, however, is that they can, if applied excessively to services and goods with relatively high price elasticity, be a significant source of distortions in the economy[14]. For excise taxes, the trade-off between revenue mobilization and distortions – “dead-weight losses” through excessive impacts on consumption and allocative decisions – needs to be carefully internalized.
  • Agriculture, the informal sector and tax base erosion. In a SSA context, the presence of a large un-reporting and un-taxed sector is a fact that needs to be accounted for in any feasible revenue mobilization policy.
  • Progressivity, growth and tax buoyancy. In contrast, some (formal) sectors of the economy are growing vigorously – for example mobile telephony – and it is important to determine whether existing tax instruments correctly address those activities, including by reviewing tax expenditures in those sectors.

While special attention will be paid to these issues, ECOPA will need to keep an open and fact-based approach: it is likely that the intervention’s fact-finding and data analysis effort will produce country-specific issues and bottlenecks.

[1] “West African Economic and Monetary Union: Common Policies of Member Countries-Press Release; Staff Report; and Statement by the Executive Director for the West African Economic and Monetary Union” (IMF, July 2017).

[2] “Benin: 2017 Article IV Consultation and First Review Under the Extended Credit Facility Arrangement and Request for Modifications of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin” (IMF, 2017).

[3] “Togo: 2016 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Togo” (IMF, 2016).

[4] “IMF Regional Economic Outlook: Sub-Saharan Africa” (IMF, October 2016).

[5] “Benin: 2010 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility: Staff Report; Staff Supplements and Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin.” (IMF, 2010).

[6] “Benin: 2012 Article IV Consultation and Fourth Review Under the Extended Credit Facility Arrangement—Staff Report; Staff Supplements; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Benin” (IMF, 2012).

[7] “Benin: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Benin” (IMF, 2015).

[8] “Benin: 2017 Article IV Consultation and First Review Under the Extended Credit Facility Arrangement and Request for Modifications of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Benin” (IMF, 2017).

[9] “Togo: 2011 Article IV Consultation and Sixth Review Under the Extended Credit Facility Arrangement: Staff Report; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Togo” (IMF, 2011), 20.

[10] “Togo: Staff Report for 2013 Article IV Consultation” (IMF, 2013).

[11] “Togo: 2016 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Togo” (IMF, 2016).

[12] Gérard Chambas, Mobiliser des ressources locales en Afrique subsaharienne (Paris: Economica, 2010); Zmarak Squire Shalizi Lyn, Tax Policy in Sub-Saharan Africa (The World Bank, 1996), https://doi.org/10.1596/0-8213-1165-4; Ehtisham Ahmad and Nicholas Stern, “Chapter 20 Taxation for Developing Countries,” vol. Volume 2 (Elsevier, 1989), 1005–92; FIAS-DFID, “Analysis of the Effects of the Taxation System on Business Investment in Africa. Results from Ten Country Studies,” April 2007; Parthasarathi Shome, Tax Policy Handbook, illustrated edition (International Monetary Fund, 1995).

[13] This includes, among others, progress in the ECOWAS regional free trade zone and the West African Economic Partnership Agreement with the European Union.

[14] For this reason, excise taxes are normally limited to low price elasticity goods and services such as alcoholic beverages, tobacco products, oil products and luxury goods.