28 July 2006
28 July 2006 Minutes
This special meeting of the PSWG was called to discuss two agenda items:
1. A presentation, attached, by a FIAS team led by Paul Barbour, on how the tax system impinges on the private sector.
The team calculated a marginal effective tax rate for different sectors, showing large variations among sectors a huge variation, from 57% for finance to 16% for agriculture without CPI and from 20% for finance to 6% for agriculture with CPI. Without CPI, Mozambique’s rates are fairly high by African standards, with CPI they are fairly low.
The CPI exemptions do not serve tourism well, since they don’t apply to many tourism imports (e.g. televisions).
Given that CPI benefits are only available to bigger investors who afford to follow all the steps, SMEs end up paying effective rates between 71% and 78% (an METR of 78% means that an after tax rate of return on an investment of 20% requires a 91% before tax rate of return). This creates flight to the informal sector.
The team also pointed out that the exemption on taxes for listed securities and t-bills was “idiosyncratic", and an unnecessary incentive given that the low risk and high returns from both these investments.
2. A presentation by Paulo Fumane of CTA on the labor law that emerged from the Conselho de Ministros on Tuesday, July 25.
A slightly updated version of the labor hand-out is attached.
The PSWG will prepare a presentation of the changes and issues for the next Development Partners Group Meeting in early September.