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Public finance

Incentives to become formal

by Karim Okanla

In depth

The more people pay taxes, the better: market in Porto Novo, Benin.

The more people pay taxes, the better: market in Porto Novo, Benin.

Since democratisation in 1991, tax reforms have led to increased government revenues in Benin. Due to the large informal sector, however, the country’s tax base remains small. To further increase tax revenues, the government should give businesses incentives to register as formal companies.

Like in most sub-Saharan countries, Benin’s fiscal system was first established under colonial rule. In 1960, the country gained independence from France under the name of Dahomey. A few years later, Benin introduced a series of reforms abolishing the colonial fiscal system. The two agencies responsible for collecting taxes were merged, and in 1968, the General Directorate for Tax Collection was established. It was entrusted with the exclusive responsibility of collecting money owed to the government.

According to Giulia Piccolino, an affiliate of the Hamburg-based GIGA Institute for African Affairs, the reforms were only partial and did not comprehensively restructure the fiscal system. Internal revenues stayed quite small, and the taxation system remained underdeveloped. Piccolino sees this as one cause of the fiscal crisis that hit Benin under Mathieu Kérékou’s Marxist regime in the 1980s. Back then, public debt accumulated, and by the end of the decade, the state was bankrupt. The government could not pay its employees’ salaries anymore and the banking system collapsed.

Among other things, Benin’s democratisation process in the early 1990s was a response to this fiscal collapse, Piccolino argues. Fiscal reforms have since led to an increase in tax revenues from not quite 11 % of gross domestic product (GDP) in 1992 to more than 17 % in 2011. This figure is actually higher than the 15 % tax-to-GDP ratio that the World Bank considers appropriate for low-income countries. Piccolino states that Benin seems to have reduced its aid dependency since the 1990s, even though it still receives considerable aid.

However, several governance problems like corruption and weak institutional capacity remain. The case of Sebastien Ajavon is an example, believed to be linked to political malfeasance. Ajavon is the founder of Benin’s largest supplier of frozen chicken. He was fined 167 billion CFA Francs (the equivalent of about € 254 million) for allegedly evading taxes. Some people argue that the fine was politically motivated, because Ajavon had ran for office against Patrice Talon, the current president, in the election of 2016. After coming in third in the poll, he supported Talon in the run-off, only to declare that he was joining the opposition a few months later. Soon after, he was accused of tax evasion.

Efforts to reorganise tax collection with an eye to more efficiency are under way. In 2014, Benin introduced the Taxe Professionnelle Synthétique for micro and small enterprises (MSE). Earlier, there had been several tax collection systems, now there is only one. Signing up for the tax register and commercial register is done in one place. The MSE are no longer taxed according to rental value; the new yardstick is turnover. Accordingly, tax calculation has become more transparent and predictable. Unfortunately, the reform has not encouraged many businesses operating in the informal sector to officially register as formal companies.

Broaden the base

Rene Charles Dovi, an expert on tax matters based in Cotonou, believes that ongoing reforms have helped to harmonise the way taxes are collected in Benin. Nonetheless, he sees “room for improvement”. In his eyes, it is a great problem that many businesses remain informal, which is often a competitive advantage. After all, registered companies must comply with more rules and regulations, including tax laws.

A tax-collection professional says the government should offer incentives to people operating the informal sector to formalise their business. Access to micro-finance services could be an incentive. Even though tax rates would have to be kept low, more formal businesses would mean more tax revenues. The same professional suggests that taxes should be levied on institutions that now enjoy tax exemptions, including private institutions of learning for example. Their exemption was granted to promote private education following in view of the failure of government institutions in the 1990s. More generally speaking, non-governmental organisations could be taxed too.

According to a senior tax official interviewed by Piccolino, about 80 % of internal revenues are collected from some 75,000 civil servants and up to 800 large companies. There are certainly more individuals and business organisations that should pay taxes. They could be identified in cooperation with local governments as well as professional organisations. To motivate such partners, they could be given small share collected taxes.

The use of information and communication technologies (ICT) could accelerate tax payment. For example, small taxpayers could use rapid money transfer systems like ‘Mobile Money’ or electronic transfers to clear their bills. Moreover, the government is working on computerising the administration and developing new tools to prevent fraud and embezzlement. To reduce the scope for tax evasion and avoidance, the government could benefit from cooperating with various partners, including law firms, asset management firms, insurance companies, mobile-phone operators and even trade unions.

Donor involvement

International donors support Benin’s tax-related reforms. The International Monetary Fund (IMF) is prominently involved, for example in capacity building tax administration. Awareness raising has been done to motivate citizens to pay their taxes, and tax payment has been made easier. The modernisation of tax collection remains a key task, and donor support is needed. Especially in remote areas, where the lack of computers and electric power thwart digitisation, revenue officers must work in a slow and outdated manner. All too often, taxpayer registration is still being done using pen and paper, and taxes are collected in cash.

To improve efficiency of tax collection and management, the IMF is encouraging the complete overhaul of the fiscal administration. One goal is to merge the various revenue-collection services into a single one. Doing so will affect functions of management, control and effective tax collection. The IMF is in favour of defining the division of labour precisely. According to its proposals, the central administration should be in charge of conception and design, animation and back-up services, whilst operational units should be responsible for management, control and effective tax collection.

Land ownership is another serious challenge. Due to unclear and insecure land rights, buying land in Benin is fraught with unpredictability. It is common for many people to claim ownership of the same plot. The matter is usually brought to court, and it can take several years before a ruling is issued. Meanwhile, the rightful owner is denied the privilege of using his property.

The government has been trying, unsuccessfully, to get a grip on the issue for a long time. Now the idea is to collect taxes on land, and that may help to sort out things. If that happens, the government standing will improve. For it to earn and keep the trust of the people, however, what matters most is that it must handle taxation transparently and make good and accountable use of the budget.

Karim Okanla is a lecturer in media studies, communication and international organisations at Houdegbe North American University in Cotonou, Benin.