Public finance

Re-starting from scratch

Due to a complete collapse of the economy during the civil war, Liberia’s financial system had its fair share of problems. Matters began to improve only after President Ellen Johnson Sirleaf was elected in 2006. The new administration made transparency a priority, so the budget process became a truly public affair. Nonetheless, tax collection is still haunted by secrecy and unaccountable civil servants. Tax evasion is a serious challenge.

By Samwar S. Fallah

In Liberia, there are no reliable statistics on public finance for the time before 2006. After President Johnson Sirleaf took office, however, related matters became the topic of public debate.

In 2009, the Public Financial Management Act was passed. It outlines the procedures and processes for financial management. In addition, a budget act was passed. The budgetary period begins 1 July and ends 30 June. The budget is prepared by the Ministry of Finance and submitted to the national legislature, where modifications are possible.

Liberia levies taxes on personal incomes and company profits, real estate property, international trade as well as domestic sales of goods and services. Other relevant sources of revenue are fees for government services and budget support from donor governments.

The national budget and a supplemental budget for the financial year 2010/11 have entitled the government to a total expenditure worth around $ 390 million. Taxes make up around 64 % of the government’s revenue. Non-tax revenue (from fees, for instance) and donors’ budget support make up the remaining 19 % and 17 % respectively.

Section 7 of the Tax and Revenues Code of Liberia of 2000 states: “All tax revenues shall be considered general revenue of Liberia.” That means that all taxes serve to fund government expenditure in general. Individual taxes are not geared to specific purposes. The law requires the finance minister to provide the House of Representatives and the Senate with a statement on the cumulative revenue status at the end of every fiscal period.

In the past four years donors, including the EU and World Bank, have made contributions to Liberia’s budget. Other donors, including the International Monetary Fund, set conditions before providing direct budgetary support to Liberia. Donor contributions fluctuate from year to year.

In one of her many budget messages, President ­Ellen Johnson Sirleaf told legislators that, “as in the years before”, the budget for the financial year 2007/2008 did not capture external sources of funding, primarily because “no firm commitments have been received”. According to the president, the government was working diligently on reducing fiduciary risks that might stop donors from granting direct budget support.

The national budget for 2007/2008 was worth almost $ 200 million. Tax on international trade accounted for the largest share of revenue with almost $ 69 million or a little more than one third of the total. At the end of the 2007/2008 budgetary period, the government reported that it had collected almost $ 144 million in taxes, which exceeded its earlier projection by 6.4 %.

Tax revenues have since been rising fast, and reached around $ 290 million in 2009/2010. The national budget, however, allocated more than $ 370 million in the same period. The initial budget for 2010/2011 stayed at that level, but later a supplementary budget was passed, raising the total volume to over $ 390 million. The main reason was the EU’s announcement in November 2010 that it would provide an additional ­
€ 12.5 million ($ 19 million) in budget support. The EU and its members are the most important foreign contributor to Liberia’s public finances, their total budget support for 2010/2011 amounts to € 32.5 million.

A mid-term review showed that the government had raked in $ 160 million in the first six months of the budget year, an increase of 33 % over last year’s corresponding period and 23 % more than projected. Tax revenue contributed $ 120 million or 75 %.

Liberia’s public-sector corporations are mostly exempted from paying taxes. They include the Liberia Broadcasting Corporation, the National Port Authority, the Liberia Petroleum Refining Company, the Forestry Development Authority, the Liberia Telecommunications Corporation, Roberts International Airport, the National Oil Company of Liberia and others.

The heads of these corporations argue that their facilities were damaged in the war and need to be rebuilt. Some of the public sector corporations nonetheless make profits and pay taxes accordingly. Civil society organisations and Liberia’s auditing commission insist that the public sector corporations contribute to the national budget because they generate income.

Difficult enforcement

Taxes are Liberia’s main source of government revenue. Accordingly, tax evasion and withholding of ­taxes present serious challenges. Tax collection depends on the integrity of civil servants, of course, but integrity cannot be taken for granted. Corruption is widespread. In 2010, three senior tax collectors were dismissed after they conspired with a rubber company to reduce taxes. Many businesses try to avoid paying taxes. As an audit of several ministries has shown, even some government agencies did not collect and remit income taxes from their staff.

Tax officials have to travel to distant areas to collect taxes and then return to Monrovia and deposit the money in the consolidated account of the Ministry of Finance. They obviously have some scope for manipulation. In the current setting, it is difficult to hold the tax collectors accountable. It is impossible to know whether the collectors are reporting everything that they collect.

Liberia needs a system to track collections. In late 2010, the Ministry of Finance introduced software known as ASYCUDA, which enables the tracking of revenue collection. Due to a general lack of capacities and infrastructure, this system is only being used at the National Port Authority (NPA) so far. This is the country’s major port, through which most imports and exports travel. More commercial banks are starting operations in Liberia, but there is, so far, no guarantee that they will be of much help in collecting taxes.

Liberia does not have a good mechanism for enforcing tax laws and punishing evaders. It is common for both individuals and businesses to withhold payments. Some business people say what really matters is personal connections, so only those without close ties to the government pay taxes.

To persuade people to pay taxes, the Ministry of Finance has embarked on a vigorous tax awareness campaign. It has organised public programmes for people from the business community. Billboards on main streets carry messages like “taxes bring development” or “good taxpayers are nation-builders”. Liberia’s anti-corruption commission is supporting the campaign too.

There have also been warnings that defaulters and evaders will face prosecution. So far, however, no prominent business entity or individual has been prosecuted because of failure to pay taxes.

International perspective

Fighting cross-border tax evasion is another important issue. In February, Liberia and Ghana signed a tax information exchange agreement. The idea is to boost government revenue, contribute to formalising the informal sector and ensure that full taxes are paid on all business deals that involve partners from both countries.

Liberia now has 12 such agreements with other countries, mostly EU members. The OECD is promoting such agreements in its fight against tax havens. To meet the international standard, countries must have at least 12 agreements of this kind. According to an OECD press release, Liberia’s agreement with Ghana was “an important step” towards greater cooperation in Africa.

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