Since the 2011 uprising, Tunisia has been facing many economic and social challenges, prompting the government to initiate a series of reforms on several levels, particularly on the taxation front. Despite the country’s best efforts to making several reforms to the taxation system during the last decade, it has failed to meet local needs and expectations.
In May 2013, the Ministry of Finance and Economy, in cooperation with national and international organisations, launched an in-depth fiscal reform programme. The diagnosis of the fiscal system at that time identified the following weaknesses:
- Inadequate local taxation system to promote regional development
- Ineffective and complex administrative procedures
- Prevalence of tax evasion
Given the diagnosis, the following fiscal reform programme objectives were set:
- Simplify and modernise the fiscal system
- Insure tax fairness
- Promote decentralisation and local taxation system development
- Establish a transparent fiscal system and fight tax evasion
According to the heritage foundation, Tunisia’s 2016 fiscal freedom score (calculated based on a measure of the tax burden imposed by government) was 74%, scoring lower than the MENA average as well as that of neighbouring countries such as Romania, Egypt, Algeria and Turkey.
In response to the immediate economic aftershocks of the revolution, the interim Tunisian government increased public sector employment by 26% between 2010 and 2013, worsening Tunisia’s fiscal situation and leading to a drop in the fiscal freedom index in 2012 (shown below):
The authorities have initiated several reforms to improve fiscal transparency and modernise public financial management. The government established in early 2015 presented to accelerate the reform agenda in this area.
Tax administration modernisation
As part of the 2014 tax administration plan that aims to establish a unified tax administration and to strengthen monitoring capabilities, some measures have been taken to strengthen tax audits and improve collection. In October 2014, the consolidation of tax laws and codes into a single code was approved in effort to improve transparency.
Development of a macro-econometric forecasting model
The authorities launched the development of a macro-econometric forecasting model, with support from the European Union, to improve their fiscal projections.
This model, which is being developed at the Ministry of Finance, was approved in 2015 and is currently in the test phase. It is “based on the interaction between different macroeconomic variables (GDP, price of oil, and dollar-dinar exchange rate), and other exogenous variables (international trade, consumption, and the civil service wage bill) to predict the principal fiscal aggregates, such as the revenue and public expenditures provided in the government budget”.
With assistance from the European Union and the cooperation of MDCI’s Directorate General of Forecasting (DGI), a project is being developed to formulate a quarterly macro-fiscal model.
2017: Adoption of the new fiscal law of tax incentives on investment by the parliament members
The finance minister Lamia Zribi stated that, “The tax incentive system costs the State nearly one billion dinars a year, while investment represents only 25% of GDP.”
This incentive cost to investments ratio reflects the weaknesses of the current fiscal system. On 1 February 2017, parliament members passed the new fiscal incentives law bill, with the objective of streamlining and simplifying the tax incentives system to encourage investment and promote regional development, exports and fisheries.
1. Incentives for investment in non-coastal regions to boost regional development
The bill will allow firms located in the regional development zones to fully deduct income and profits from investments during the first five years of their operational entry, for the first priority group, and during the first 10 years for the second priority group.
The bill may also help alleviate the tax burden on businesses located in lagging regions, even after the end of the period of total deduction of income and profits from operations.
2. Deduction of the tax burden for fully exporting companies
Another objective for this new law is to boost exports. The new law draft will allow exporting companies to fully deduct from the tax base the income reinvested within them without requiring the minimum taxation until 31 December 2025. The new law draft will also allow investors subscribing to their capital to fully deduct the reinvested earnings and profits, while considering the minimum tax.
3. Tax incentives for priority sectors
To encourage investors to contribute to companies operating in priority sectors, such as information and communication technologies (ICT), the automotive and aeronautical components industry and the pharmaceutical industries, the bill suggest allowing investors to deduct all income and profits reinvested in their capital subscription from the income tax base or corporation tax.
These new companies will benefit from the deduction of their profits or operating income in the first four years of activity by 100%, 75%, 50% and 25%.
While the Tunisian government has been prioritising fiscal reforms, progress on the structural reform agenda, as well as amendments to the investment and tax codes, have been slow to materialise. The government ought to spur reforms in order to facilitate regional development, attract more investment and finance its budget. Indeed, the fiscal reform would help prevent fraud and increase the tax revenues needed to finance the budget without increasing indebtedness.
Rihab Zaatour is an analyst at Infomineo.
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