26 September 2006

26 September 2006 Minutes

Minutes, Private Sector Working Group, September 26, 2006

1. It was agreed to hold the next PSWG outside of Maputo, in Chimoio, at the same time as CTA’s regional conference for the central region. The dates are tentatively October 30 and 31, but are likely to move by a couple of days. A small group – Ramón Ynaraja, Fritz Kauffman, Nelson Guilaze – will assist with the organization of the trip.

2. Summary of the 2007 Doing Business Report. Jim Lafleur presented the 2007 results. Mozambique’s ranking fell from 137 (the imputed ranking adjusted for 20 countries added to the data base) in 2006 to 140 in 2007. In one area, business start-up, there was considerable time improvement, and there was some progress in others, but other countries also introduced reforms; thus the relative decline. A summary of Mozambique’s performance is attached.

3. Ramón gave a summary of the presentation of the draft labor law PSIA (Poverty and Social Impact Assessment) on Friday September 15th, by Louise Fox of the World Bank. The main points were: (a) the labor law makes some improvements, including some that the Doing Business ranking doesn’t capture (e.g. the introduction of arbitration for individual labor cases); (b) labor law reform has in other countries led to job creation only when combined with a healthy economy and simultaneous reforms in other areas; (c) because of a lack of provision for a transition, the new law may create lay-offs of up to 10% of the private sector workforce, which is bloated because of dismissal costs, and (d) even with the new law, Mozambique’s labor law would remain one of the most rigid in the region according to Doing Business.

Paolo Fumane said that CTA’s position is that passage of the law should be postponed in order to permit agreement on improvements that would raise Mozambique’s ranking further (as the Government has committed to do in the PARPA and PAP matrixes). Andrea and Ramón, who both attended the briefing, were under the impression that the law was enough of an improvement to justify the disruption and finality of passage. There was a discussion, but no consensus. [Again though, all available analysis, including the PSIA, indicates that passage of the law would make achievement of the PARPA/PAF labor ranking improvements impossible.]

Gilberto pointed out that the PSIA is not yet cleared by the World Bank and that the draft of the law has not entered the Parliament yet, leaving room for further changes in the draft or for a possible postponement. The views in the paper, which everybody now has, are those of the author, not the World Bank. Gilberto expects the final cleared version to emerge in a month or two.

4. Capital flight issues – Avisos 2 and 6. Avisos 2 and 6 (attached) require that importers that pay advances to their suppliers either do so through a letter of credit or cover the full amount of the import with a bank guarantee. In addition, payment for all imports must now be handled through the banking system. CTA (Lafleur and Fumane) reported that the central bank has agreed to postpone implementation of the Avisos until the new year, to allow current transactions to run their course. They also said the Central Bank is working more closely with CTA than in the past, although it remains reluctant to consult on consequencese before issuing commercially these Avisos. There followed an inconclusive discussion of the extent the Central Bank should consult. The EC regretted that, after the discussions held on Aviso #5 (that applied to restrictions on loans in foreign currency), the monetary authorities have again imposed a new restriction that, regardless of its justification, has direct negative impact on trade activities and was not consulted with private sector representatives.

5. VAT Summary. There was a discussion, kicked off by Ramón of the draft EU-funded report on the “VAT Refund Situation in Public Works Contracts in Mozambique". This study found considerable ($50 million) VAT debts to companies for the period 1999 to 2006, although also that the situation had been partly addressed resolved after 2004 by the use of the Road Fund for VAT payments.

Felix Fischer said an IMF review concluded that allowing VAT debt to be used to offset other, non-VAT, taxes, is a bad idea. There was also a discussion of the difficulties companies have paying and the widespread use of multas (for submitting invoices from EDM with no NUIT, for example), and the rejection by the IVA section of documentation prepared by other parts of the Ministry, especially Customs. Also, the granting of exemptions for construction is problematic and, finally, the road fund should not be used to cover the large historical VAT debt. IMF comments on the VAT paper are annexed below.

6. Next meeting: Chimoio around the end of October.

Attachments:

1. Doing Business Summary

2. Labor PSIA

3. Avisos 2 & 6

Dear Economists,

Please find below comments on the VAT study made by the Fiscal Affairs Department on the first draft of the report.

We have just met with Joan Martins, the author of the VAT study and discussed with him comments made by the Fiscal Affairs Department on the first draft of the report. Mr. Martins was in broad agreement with all our points raised and asked for our comments to be sent to you so that they could be reflected in the final report. Moreover, I would also recommend to share our comments with the donor community since they also had received the initial draft which had generated some skepticism.

Our main points on the first draft are:

Exempting road construction activities from the VAT should not be considered as a solution. The proper way to address this issue should be to strictly apply the VAT law to public sector construction contracts and to provide for the required funds in the national budget. It would also be important to require that government contracts be evaluated and awarded on a tax-inclusive basis. This would help ensure that National Road Administration (ANE) makes adequate provisions for the total costs of a contract, including VAT. The revenue administration mission led by Mr. Castro and the recent tax policy mission led by Mr. Varsano have both urged the authorities to reduce exemptions and to avoid new exemptions to selected activities. These would further compromise the VAT chain.

According to our information the World Bank agreed two years ago with the authorities to include VAT in their funding for future projects in Mozambique. This should be mentioned in the report. In addition, as we are aware, most of the road projects that appear to have generated VAT arrears were emergency, extra-budgetary projects for reconstruction following the floods.

We are also concerned about the validity of the VAT claims. No arrears should be paid to construction companies without a prior audit to verify that the construction activities were properly completed and that the amounts claimed are correct. It would also be important to clarify the legal situation with regard to the debts. For example, there may be specific issues, such as a government position that the contracts were on a tax inclusive basis.

Finally, we strongly oppose the suggested use of "credit certificates" to offset future tax liabilities. The only advisable solution that could be considered would be to allow creditors to use a non-endorsable VAT certificate against their own future VAT liabilities (and not against any other types of taxes).

In addition, there are a few assertions in the draft report that could be better supported or documented. For example:

In Section 2.1, the report states "...it is a known fact in Mozambique that the VAT services responsible for therefunds are not, at all, complying with the legal deadlines established by the law, nor proceeding with the accrual and payment for late funds."

On p. 8, "Some construction companies claimed to be waiting for more than a year"; On. p. 18, "The legal rule of 30 days is not usually followed" and "Although due by law, interest is not paid for late refund of VAT."

Links

Banking Notice 2 GGBM 2006 Import Export Regulations (English)

Doing Business 2007 moz summary

Labor PSIA draft Sept 27 2006

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