HIPC forces Mozambique to rush tax changes

Mozambique has been forced to rush implementation of a major change to the tax system because it is a condition of debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative, Finance Minister Tomaz Salomao told the Mozambican parliament on Thursday 25 March.

Mozambique hopes to reach HIPC "completion point" on 1 July, which will reduce its debt service payments from $113 million per year to $100 million per year. But a condition of HIPC is that Mozambique introduce value added tax (VAT) by 1 April. With just a week to go before the deadline, Mr Salomao went to parliament to admit that neither the government nor the business community were ready, and that the start date would be delayed to 1 June. The business community and many members of parliament had appealed for more time, until 1 January.

The government has not yet announced the rates and exemptions, nor has it issued the forms and other documents businesses need to apply the system. But Mr Salomao told parliament that since VAT was a condition of HIPC imposed by the international community, it must be in place before Mozambique's debt relief is considered by the boards of the World Bank and IMF in June. (This was also the first public admission that the completion point had slipped from 1 June to 1 July.)

Until now, Mozambique has used sales taxes which were paid by both wholesalers and retailers. Mozambique had wanted to shift to a simpler system of taxes paid mainly by wholesalers, but the International Monetary Fund insisted that Mozambique adopt VAT instead. This was opposed by the business and donor communities because it is a very complex tax requiring an advanced level of accounting. Many small businesses in Mozambique are run by people who are only semi-literate and who will not be able to meet the bookkeeping requirements. The widely predicted result is that even more business people will shift to the 'parallel' market and not pay any taxes at all, and that this will also increase bribery and corruption.

The government's proposed simplified tax, agreed with the business community, was intended to bring more small traders into the tax system and reduce illegality. But it was rejected by the IMF, which is seeking to impose VAT throughout Africa. South Africa recently admitted it was having major problems with VAT and faced millions of dollars in fraud, while Mozambique's tax administration is much less sophisticated than that of neighbouring South Africa. Mozambique repeatedly delayed the introduction of VAT, so the IMF included implementing VAT by 1 April 1999 as a condition when Mozambique was given preliminary approval ("decision point") for HIPC debt relief by the IMF and World Bank boards on 8 April1998. But less than a year proved to be not enough time to get ready.

Tomaz Salomao is still appealing to the big accounting firms to train small businesses (at the big firms' expense, because small firms cannot afford to pay for the proposed week-long courses). Confusion, increased corruption, and a rise in black-market trading is being predicted by Mozambican business journalists such as Carlos Cardoso, editor of the daily Metical, who take this as evidence that IMF and World Bank claims to oppose corruption are just rhetoric. But Mr Salomao has made clear that Mozambique has no choice if it wants even the limited debt relief under offer with HIPC.

Joseph Hanlon, Maputo