The Cut on Oil Price and the Need for a New Tax Reform
Angola currently faces a challenging economic environment after a notable period of development, namely due to the cut in the oil price, a raw material that generates approximately 70% of the Angolan state’s tax revenue.
Not anticipating a substantial recovery in international oil prices and considering the adverse risks that Angola may face due to this scenario, it is crucial to adopt tax and monetary policy measures in order to manage the volatility of crude revenues. Such a commitment – within a broader framework of ambitious structural reforms – will support macroeconomic stability and debt sustainability, mitigate imbalances in the foreign exchange market and promote economic growth.
The tax reform initiated in 2010 was one of the first major efforts to increase non-oil tax revenue and to mitigate the effects in the Angolan economy arising from the instability in oil price. The origin of the above mentioned tax reform was mainly due to the high levels of oil revenue’s dependence, the existence of an outdated, inefficient and overly complex tax system as well as the need to update the Tax Authority. In this context, new Tax Laws came into force over the last few years, adjusting the tax law to the new social-economic reality, extending the tax base and raising revenues from non-oil sectors.
At the same time, the bases for a more modern and technically robust Tax Authority were established. This resulted in a significant increase in the number of tax assessments and also significantly increasing the number of tax matters under inspection. However, it became clear that, although the tax reform represented an important effort in strengthening mechanisms to obtain tax revenue, that was not enough. As a result of the decrease in the oil price, some additional tax reforms are being reconsidered with the ambition of increasing tax revenue from the traditional business sectors of the economy.
In this context, it is being considered the implementation of a Value-Added Tax (VAT) in the Angolan Tax System. The Government believes that, if properly and timely implemented, VAT is likely to be an important source of stable revenue from economic activities others than Energy and Natural Resources. Although little information has been publicly disclosed concerning the introduction of VAT, it is expected that this new tax will be neutral during the economic value chain of a specific good or service (such neutrality is not granted by the current Consumption Tax which is due over each transaction or service). In fact, in a cumulative or cascade tax – like the current Consumption Tax – the tax base includes the tax that burdened the previous transaction, directly interfering in the goods’ or service’s price formation.
In case VAT is adopted, it is important to outline an implementation strategy for this new tax, taking into account the characteristics of a country like Angola, namely the geographical dispersion, the need for technological training among many other essential aspects for the introduction of a tax such as VAT. On a different perspective, the Government is also considering to review the current real estate tax, introducing measures to enhance the tax revenue. In fact, taxation over this sector’s revenues is incipient, namely as a result of the downgrade of the real estate’s tax records and the lack of communication between tax offices and the notaries responsible for the public deeds related to transfer of real estate.
There is indeed much to do concerning real estate taxes but we should began by updating the real estate records and their owners. The correct identification of the taxpayer’s will be critical to ensure tax collections. In our opinion, the implementation of such a process – which would immediately enable a greater efficiency on collections – would significantly increase the Angolan State’s revenue with Urban Property Tax (UPT).
After registration of the housing stock and their holders, a deep review of the UPT could be undertaken. Its extinction could be even considered, moving taxation over real estate income towards a system where direct taxation is ensured within the scope of a single tax (as in other more sophisticated fiscal systems). This would be an important step towards the elimination of scheduler taxation underlined in the Angolan tax system and which has no parallel in modern tax systems.
Another aspect under the attention of the Angolan Government is the level of tax expenditure arising from the existing tax benefits. In fact, these tax benefits proliferate through miscellaneous laws and remain in force under reduced or non-existing control mechanisms. Therefore, the systematisation of miscellaneous laws is expected but also the reduction of the level of discretion in the evaluation of some tax benefits. A tax system where taxpayers know in advance the scope and extent of benefits to which they can apply for, as well as the requirements with which compliance is mandatory, provides greater security to economic agents and allows a more strict control of Government expenditure.
The new Private Investment Law has moved into this direction, establishing objective criteria for granting benefits which are measurable a priori by foreign investors whenever dealing with investment projects higher than USD 1 million.
Additionally, and still related with tax benefits, it should be reminded the need of diversification of the Angolan economy; in accordance with this national purpose, it is expected the establishment of new tax incentives for the development of economic sectors considered as relevant. These are some of the aspects which are under consideration by the Angolan Government and new developments are expected in the short to medium term.
Author: Gustavo Amaral, Associate Partner, Tax, KPMG Angola