The Middle East and Central Asian economies need to streamline their taxation systems to boost revenues and tackle challenges compounded by the Covid-19 pandemic and the war in Ukraine, the International Monetary Fund has said.
Domestic revenue mobilisation through taxation is a longstanding challenge for regional economies. Insufficient revenues often constrain social and infrastructure spending, denting growth prospects of the regional economies and impeding their ability to meet sustainable development goals, the IMF said in a report on Tuesday.
Tax revenue gaps — the difference between potential and actual non-hydrocarbon tax collection — are very large, estimated at more than 14 per cent of cumulative non-hydrocarbon gross domestic product of the region, the fund said.
There is considerable scope to raise additional tax revenue, with some of the largest gaps found in low-income countries and fragile states in the region. Tax gaps are smallest in the Caucasus and Central Asian countries, reflecting the progress they have made recently, according to the Washington-based lender.
“Despite recent progress, including the introduction of value-added and corporate income taxes in some petroleum-exporting countries, efforts to put in place modern, efficient and fair tax systems remain a priority," IMF director of the Middle East and Central Asia department Jihad Azour, senior economist Priscilla Muthoora and the department’s division chief Genevieve Verdier, wrote in a separate blog post.
“Tax revenue as a share of gross domestic product remains relatively low despite progress in broadening tax bases in many countries,” they said.
Countries in the region, like other emerging markets and developing economies, derive the bulk of their tax revenue from consumption-based taxes through a variety of indirect taxes and fees.
However, the revenue yields are relatively low and the use of direct taxes — especially personal and corporate income taxes — is relatively limited, the IMF said.
Economies in the broader Middle East, North Africa and Central Asia have taken steps in recent years to reform their tax systems to improve revenues, maintain spending and meet their sustainable economic development goals. A taxation system is also essential for countries, especially emerging nations, to cut their dependence on debt, which has been on the rise consistently, to bridge budget deficits.
However, collection is limited largely to consumption-based taxes and fees included in general sales tax and value-added tax. The hydrocarbon-rich countries in the six-member economic bloc of the GCC that have already introduced value-added tax are at different stages of levying corporate taxes.
The UAE, the Arab world's second-largest economy, in January said it will introduce a federal corporate tax on the profit of businesses on or after June 1, 2023.
A standard statutory tax rate of 9 per cent applies to companies, positioning the UAE competitively when compared with other financial centres and developed economies. There is, however, no plan to introduce personal income tax, the government said at the time.
The average top corporate tax rate among the 27 EU countries is 21.3 per cent, 23.04 per cent among Organisation for Economic Co-operation and Development countries, and 69 per cent in the G7, according to the Washington DC-based Tax Foundation.
Tax policy design, especially low tax rates and pervasive tax exemptions, is among the main reasons driving tax revenue shortfalls in the region, the IMF said.
Hydrocarbon-exporting countries, especially those in the GCC, have particularly low rates for corporate income tax, personal income tax and consumption-based taxes, despite recent progress. Tax exemptions are also widespread across the broader region and significant for direct and indirect taxes, the IMF said.
“Our research shows that eliminating widespread exemptions and inefficient incentives would broaden tax bases and make tax systems fairer and more transparent,” IMF executives said.
“Several countries have made notable progress broadening the tax base or are in the process of doing so. Egypt, for example, aims to reform its income tax law to simplify the legal framework and streamline exemptions.”
Tax system reforms, such as redesigning personal income and value-added taxes, and further developing property taxes, “could boost collection, make systems more progressive and support inclusion”, the executives said.