Yemen: Local fees reform Status and challenges

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Yemen Local fees reformStatus and challenges

• Workshop on raising taxes through regulation?

Laurent Corthay Private Sector Development
Specialist, WBGWashington, DCFEBRUARY, 25,
2009
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Background Broad tax reform project

• Tax policy simplification
• Simplify/strengthen income tax and GST
• Design of new, integrated SME tax system
• Consolidation/reduction of other instruments
  local taxes fees
• Tax process simplification
• Income tax and GST process streamlining/simplifica
  tion
• Re-design architecture of Tax Authority to
  implement new processes
• Capacity-building and training
• Tax administrators to conduct risk-based
  assessment
• Private sector to comply with new processes based
  on self-assessment

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Where do we stand?

• Completed inventory of local taxes and fees
• Covers Governorate and District levels
• Captures all taxes and fees administered locally
  (incl. sectoral fees of local office of line
  ministries)
• Inventory relatively easy as rules are set at
  national level
• Inventory shows
• 1500 instruments (taking categorization into
  account)
• 55 types of fees (some with 500 categories of
  business size and activities)
• New categories created on ad hoc basis
• On the bright side positive list in the law
  limits local authorities ability to introduce
  new fees

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Viewed from a company Hotel in Sanaa

• Operating fee (District 500 categories, annual)
• Professional permits fees (Governorate other
  categorization annual)
• Registration fee (Ministry of Trade annual)
• Membership fee (Chamber of Commerce annual)
• 3 Local Council Support fees monthly surcharges
  on
• Electricity bill (1)
• Water bill (3)
• Phone bill (1)
• 3 City Improvement fees
• Surcharge of 5 on electricity bill
• Hotel and residency fee 5
• Annual fee of YR40k for 5-star hotels
• Tourism tax 5 daily fee on rooms
• Zakat religious tax (2.5 on capital) used as a
  business operation levy (split Gov/District)
• As well as other standard local taxes
• Property and property transfer taxes
• Fuel tax
• Earmarked contributions to social, transport, and
  development funds

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Complementary objectives

• GOY requested a revenue neutral reform
• Implies that financial burden on businesses will
  be the same
• Objectives
• Reducing compliance costs for businesses
• Limiting unnecessary contacts with administration
• Improving local govt administrative efficiency
• Focus is limited (for now) to admin/regulatory
  fees

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Reform approach

• User fees and charges
• Maximize use, and set fee as cost-recovery plus
  return on investment

Comprehensive inventory
Elimination / legalization
Legal?
Nature of instrument?

• Standard taxes
• Apply principles of revenue productivity,
  accountability, equity, simplicity and
  non-distortion

• Regulatory fees and charges
• Licensing and permit fees
• Business patents, and other charges

Purpose of instrument?

• Revenue-generating purpose de facto a tax
• Merge into one local business levy
• Eliminate and address revenue loss through tax
  policy and transfers

• Obvious legitimate regulatory purpose
• Set fees on cost recovery basis
• Streamline procedures to limit compliance and
  administrative costs

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Expected results

• Simplified fee system
• Rules-based system for fee setting
• Eliminate/collapse those that are obviously not
  necessary/duplicative (but not likely to be that
  many)
• Offset revenue loss through more efficient means
  (but which?)
• Opening the door for a broader and indepth
  analysis of regulatory quality of these
  instruments
• Broad-based licensing reforms (if strong
  commitment from top of Govt)
• Is the license/instrument necessary to protect
  environment, health and safety?
• Is it efficient/business-friendly?

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The big question

• Project starts as a component of large tax
  project
• Scope/impact limitation Mandate is to focus on
  is fees exclusively (not regulatory content) at
  least as first step
• Main counterpart is Tax Authority and Min Fin.
  They all know fees are an issue, but none has
  final authority over the question gt need to work
  new counterpart
• Not enough data to estimate compliance burden
  basic inventory captures financial burden only
  fees, amount, frequency

Limited impact if done as a fee only reform, but
regulatory reform implies substantial resources,
capacity and political will. Are these conditions
met?
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Thank youQuestions?
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