Felix Emok N’Dolo, Director-General, JC Colas-Groupe CHD, on tax efficacy: Viewpoint

Felix Emok N’Dolo, Director-General, JC Colas-Groupe CHD

In June 2015 the Ministry of Economy and Finance, in partnership with the Chamber of Commerce of Djibouti, organised a conference entitled “The National Forum of the Tax System”. The presence of the highest authorities in the republic at the conference showed the great interest in and importance of this event. The objective of the conference was to analyse the tax system in Djibouti and propose solutions that would make it more efficacious.

But why does the tax system need reforming? Frankly, this question raises key issues related to what the role of the tax system should be in regards to investment decisions, as well as the role of citizens and the state as economic and social actors. While the tax system is not the principal factor that pushes an investor to invest in a specific country, an overly complicated, poorly administered or unreliable tax system is a veritable brake on investment. Furthermore, the revenues and duties collected impacts the ability of the state to ensure effective regulation. A tax system is generally considered efficacious based on its efficiency, equity and simplicity, as well as the stability of the system and the cost of collection.

Efficiency

In theory, taxes should not cause distortions to individual economic choices. Therefore, a tax system should have a large base and focus on reducing, as much as possible, differences in implementation and enforcement. Discussions on the efficiency of Djibouti’s tax system have focused on streamlining exemptions. This has led to a review of the investment code, with a number of proposed resolutions.

Equity

Equity can be analysed in two ways: vertically or horizontally. Horizontal equity is based on people who are in the same or an equivalent economic situation being treated in the same fashion. The effective implementation of this type of equity requires a definition of categories for revenue collection. The current tax system is based on contributors paying taxes for each type of income classification for which they are eligible. However, following discussions at the June 2015 conference in Djibouti, the need to expand the number of contributors is clear.

Vertical equity implies that contributors who have higher incomes should pay higher taxes, which means the average rate of tax increases with an individual’s overall income. This creates a problem: determining an equitable progressive rate. Another interpretation would be that vertical equity corresponds to implementation of a rate that is proportional to income, or a flat tax rate. In Djibouti both types of vertical equity are applied: there is a proportional flat tax for business profits, while property taxes fall under a progressive system that takes into account any income derived from new construction. A progressive tax rate is also applied to salaries, pensions and annuities.

Simplicity

This refers to the ease of applying tax regulations and implementation costs. The existence of a large number of taxes and associated costs, as well as the application of tax credits and exemptions, can cause complications, errors and litigation. One of the workshops at the June 2015 conference focused on simplifying and streamlining the tax system.

Systemic Stability

An unreliable tax system is generally a source of unpredictability for investors, and it is considered ideal to ensure that reforms are well thought-out. As a result, following discussions at the Djibouti conference, proposed reforms have been classified by their expected timeline and impact, such as short-, medium- and long-term, which allows for a better understanding of their roll-out.

Cost of Collection

The cost of collecting taxes is also an important factor in ensuring the efficacy of a fiscal system. The cost is related to both its simplicity and reliability, as previously discussed, and is equally relevant to the organisational structure of the tax administration. Following discussions during the June 2015 conference, a workshop was dedicated to modernising Djibouti’s current tax administration.

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Felix Emok N’Dolo

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