Following the conclusion of consultations with Tunisia under Article IV of the IMF’s articles of agreement the IMF issued on 15 October 2015 a staff report and selected issues paper including an Annex on the subject of fair taxation in Tunisia.

The report finds that indirect taxes in Tunisia are inefficient and are less burdensome for the higher income taxpayers, while direct taxes are biased in favor of income from capital and offshore enterprises. The report therefore recommends that both direct and indirect taxes could be updated to improve fairness. A tax reform in Tunisia is currently being finalized following extensive consultations.

Tunisia’s tax to GDP ratio is 22.5%, double the average for Middle East and North Africa (MENA) countries. The largest source of tax revenue in Tunisia is indirect taxation with the value added tax (VAT) and other taxes on goods and services raising around 12% of GDP (i.e. around half the total tax revenue). Income taxes on individuals and corporate income tax raise around 5.5% of GDP which is almost twice the average for emerging markets. Despite these relatively high levels of tax collection the IMF report considers that the efficiency and fairness of tax collection are low.

Tunisia’s VAT collection efficiency ratio is well below the emerging market average. In addition to the standard VAT rate of 18% there are also two lower rates, and some stages of the economic chain are VAT exempt. The VAT exemptions include wholesale agro-products; cultural activities; restaurants; hotels and some other sectors. The cost of providing the exemptions amounts to around 4% of GDP and this represents inefficiency in the tax system.

The turnover thresholds for VAT registration are low compared to the regional and international average. The existence of multiple thresholds adds to complexity in the tax system. An analysis of consumption has indicated that the wealthiest fifth of the population obtains around 40% of the benefit of the VAT exemptions, while the fifth with lowest income obtains only around 10% of the benefit.

Direct taxes in Tunisia are considered by the IMF to penalize wage earners and excessively favor the offshore sector. The individual income tax is designed as a schedular system with a narrow tax base, and around 80% of the personal income tax collected relates to salaries and pensions.

Non-wage income including income from self-employment benefits from a regime that levies tax on the basis of a presumptive and tax base. This system is used for taxing the income of small enterprises and the liberal professions. This type of system encourages underreporting of income and tax avoidance, and the tax administration does not have sufficient powers to verify the income and accounting records of these taxpayers. The yield from this type of taxation remains at less than 1% of income tax revenue. The effective is made worse by the inaccurate taxpayer registers.

According to the IMF earnings from capital are either excluded from the income tax or where they are taxed they benefit from low tax rates. This means that dividends, interest and rents are taxed at low rates or not taxed at all. The dividend taxation was reintroduced in 2014 but at the low rate of 5%.

The corporate income tax efficiency collection ratio is among the lowest in the region and is half the average for emerging markets. The efficiency of the corporate income tax is reduced by tax exemptions and holidays, and by inefficiency in dealing with companies in offshore locations. Incentives given to offshore sectors include a lower tax rate and a full deduction for reinvested profits.

Property taxes currently raise only very little revenue. Increasing the revenue from property taxes would help to increase the tax on the wealthy. Collection could be raised by dealing with the outdated valuation techniques and the erosion of the property tax base due to the incomplete cadastral records.

International trade taxes account for only 4% of revenues are considered by the IMF report to favor offshore companies. Customs duties have seven tariff rates, some at very high levels, and are considered to increase complexity and encourage smuggling. Owing to an inadequate valuation system and discretionary application of customs rules there is tax evasion through reporting low import valuations.

The IMF considers that the main priorities in tax reform therefore need to include reducing the number of VAT exemptions and abolishing preferential treatment in customs duties. VAT rates should be simplified from three to two and excise taxes limited to a shorter list of products but better targeted at tobacco and beverages. Customs duty rates should be reduced from seven to three.

Income tax reform should include increasing tax revenue from dividends and reducing the difference between offshore and onshore corporate income tax rates. The progressivity of personal income tax should be improved by increasing the threshold for exempt income and simplifying the taxation of small enterprises. Tax and customs administration should be reformed by strengthening the large taxpayer unit and by introducing a risk based compliance system.