OSCARO.COM : DATA MINING ET STRATEGIE DE TARIFICATION 1 Using Marginal Effective Tax Rates to Assess Tax Incentives in the WAEMU Charles Vellutini Managing Director, Economic Policy Analysis Vienna, 14 May 2012

The Issue WAEMU (West Africa) sought to evaluate (i) its tax harmonization policy across member countries ; (ii) the attractiveness of its tax system internationally A plethora of tax regimes and tax incentives (General Tax Laws, Investment Code, Special Economic Zone, Mining Codes...) Marginal Effective Tax Rates (METRs) account for the complexity of general tax laws and assert the corporate tax burden supported by corporation for each tax regime 2

Result 1: Heavy Tax Burden: the standard regimes METRs in the WAEMU 3

The Effective Corporate Tax Burden – Standard regime (régime général) 4

Result 2: Tax Incentives Are Not so Effective 5

Investment codes (i): Multiplicity and dispersion of regimes 6

Investment codes (ii): METRs only moderately attractive - and dispersed 7

Free zones: Attractive METRs, but fueling general complexity of the tax system 8

The Duration of Exemption Contributes to the Strength of Tax Incentives 9

Illustration: Investment Codes in Benin 10

The number of tax procedures is positivelly correlated with intra-country METR dispersion 11

Number of tax procedures is correlated with time spent on taxation 12

The cost of complexity Too many tax regimes in a given country – of which tax incentives  Too many tax procedures/ steps needed to access an attractive tax regime  Multiple opportunity for non-transparency  Negative impact on business climate  Shrinkage of tax base 13

Tax incentives are part of a broader issue: making the tax system work Heavy and arbitrary tax system Weak tax compliance Weak tax revenue 14

Towards modern business taxation Simplify the standard regime and make it more attractive… – Little or no discrimination across sectors – No distinction between new and old investment projects – No ex ante permits/authorizations – Use existing tax and accounting mechanisms …To be able to eliminate « incentives » as separate specific mechanisms  Strategy being implemented by many countries (Ireland, France, etc.) 15

Examples of instruments for simple, attractive business taxation Reducing the corporate income tax Tax credit on investment (ex France: Crédit impôt recherche) Credit VAT on investment goods with no actual payment of the VAT (ex Guadeloupe) = in effect a tax subsidy on investment 16

Reform options in West Africa: combine a harmonized 25% CIT with investment tax credit 17  Significant impact on all countries METRs as a function of investment tax credit rate (Industry)

QUESTIONS? 18