A working paper issued by the International Monetary Fund (IMF) looks at taxation trends in the countries of the Middle East and North Africa in the period from 1990 to 2012, focusing on non-resource taxes. Revenues from these taxes have slightly decreased while revenue from resource taxes has greatly increased. Most of the oil producing countries of the region raise very little tax revenue from non-resource taxes, generally less than 5% of GDP, and in most cases these taxes have been reduced since 1990.
Government revenue has been lost as a result of trade liberalization. Income taxes (rather than indirect taxes) have partly made up for this. Revenue from indirect tax has remained stable and fees and stamp duty are significant sources of revenue.
Personal income taxes are used to raise revenue in all the countries of the region with the exception of the Gulf Cooperation Council (GCC) countries. The personal income taxes have progressive rates on wage and business income, with flat rates on portfolio and property income including capital gains. Revenue from these taxes is however weak, raising on average around 2% of GDP in non-resource countries and less than 0.5% of GDP in the resource rich countries.
The paper indicates that all the countries of the MENA region have opportunities to increase the equity of their tax systems and reduce the complexity. Egypt and countries to the east such as Syria, Lebanon, Palestine and Jordan, collectively known as the Mashreq, have scope to increase tax revenue, whereas for the countries of the Maghreb the focus should be on improving efficiency, especially in tax on capital income and consumption taxes. In view of the decline in the oil price the countries of the Gulf Cooperation Council (Saudi Arabia, Oman, Qatar, Bahrain, Kuwait and the United Arab Emirates) need to lay the foundation for raising more revenue from their tax systems in the future.
The countries of the MENA region must consider fundamental reforms, especially in value added tax and excises, personal income tax and tax incentives for investment. Most of the resource rich countries should concentrate on improving the efficiency of managing resource revenues and address equity issues on the spending side of their budget.
The resource rich countries such as the GCC countries should aim to build effective tax systems with broad bases and low rates. They need to build institutions and capacity; capture non-resource economic rent; raise more tax revenue from non-nationals; tax real property and impose excise taxes on some widely-consumed items.
The non-resource countries should improve the equity and efficiency of their tax systems as well as raising additional revenue. In the non-resource Maghreb the tax rates are already quite high and they therefore just need to focus on equity and efficiency. Their policy options include reducing the number of VAT rates; making more effective use of excise taxes; reducing corporate income tax rates; and restructuring personal income tax rates and bases.
In the Mashreq countries tax rates are rather lower than international practice and there is scope to increase revenues as well as to focus on efficiency of the tax system. Policy options for this group of countries include raising the rates of VAT; increasing personal income tax rates; and improving the efficiency of excise taxes. Corporate income tax rates are appropriate but the paper suggests that the tax incentives for encouraging investment should be abolished, particularly the tax holidays available in Egypt and Jordan.
The non-resource countries should consider the implications for employment of labor taxes including social security contributions. Consideration should be given to the combined effect of higher personal income tax rates and social security contributions on certain groups such as younger workers and women. The countries also need to review the rate differentiation and exemptions in the area of tax on investment income.
All countries of the region can benefit from more efficient taxation of real property. This could include a reduction of fee rates on the transfer of real property and an increase in the rates or efficiency of recurrent taxes on real property.
The paper finally looks at the policy process and public participation, looking at tax policy advice and the internal and external sources of information. This is a core function of tax policy making but is practically absent in MENA countries. This function is often handled by a small number of officials who make legislative proposals with no analysis of issues such as revenue impact or economic and social consequences. The proposals for tax policy changes in the annual budget laws of MENA countries show an absence of analytical underpinning. The paper therefore concludes that tax policy analysis capacity should be established within the Ministries of Finance of the region to undertake a structured approach to analysis of tax policy.