Chapter 6. Tax policies to create a dynamic private sector and efficient government

Côte d’Ivoire’s tax system needs radical change if the country’s development and economic transformation goals are to be achieved. Partial reforms will not do. Complete tax reform, adapted to present conditions, must create well-balanced taxation that generates revenue and motivates taxpayers. Fundamental features will include a gradual reduction of customs tariffs and development of other taxes such as value-added tax (VAT). Far-reaching cross-sector reforms should also produce a stronger and simpler tax system with fewer exemptions and up-to-date procedures. They should result in an efficient, competent and transparent tax administration to increase the trust of taxpayers and fight fraud.


The tax system must be thoroughly reformed to help the country reach emergent nation status

Côte d’Ivoire’s tax system needs radical change if the country’s development and economic transformation goals are to be achieved, as it does not generate enough revenue to pay for the investment in public goods and services needed for the transformation of the economy. It is not the inexpensive instrument that collects revenue, and it discourages movement of firms from the informal to the tax-paying formal sector. The country’s tax system can play a big part in achieving emergent nation status but political changes must be made, and the tax administration’s capacity and efficiency must be improved – a lengthy but necessary process.

Government revenue is lower and grows more slowly than in many comparable countries, which holds back economic transformation. In view of the tax structure and economic forecasts, revenue growth will barely exceed GDP growth in coming years unless government policies change. The budget has little room for manoeuvre and thus slows the public spending needed to achieve emerging nation status, especially investment in training the future workforce (recruiting and training teachers, expanding technical education, investing in healthcare and building and maintaining public infrastructure to help business activity). The structure of the tax system and the economy suggests more revenue can be collected. This will cost more but the economic gains will exceed these if tax reforms are gradual and extra revenue is used as effectively as possible. Comparative analysis of other sub-Saharan Africa countries suggests 20% more revenue is possible, with domestic revenue reaching 20% of GDP (at least XOF 130 billion [CAF francs] of extra revenue) in 2017.

The tax structure adds to operating and tax compliance costs for firms, and affects the range of economic incentives for individuals and companies, as well as economic transformation and development. The Ivorian system has many weaknesses. It expanded gradually, which has made it very complex and increased compliance costs and distortions. It lost its transparency and revenue declined, with taxes collected on a small tax base and numerous one-off exemptions and deductions granted. The tax authorities have many problems, including extensive bureaucracy and insufficient computerisation. Reform is needed to instil compliance with rules and standards. Many tax records and databases are not yet computerised or are incomplete. Limited staff capacity and a big workload also slow compiling full directories of taxpayers. Computerising procedures and digitalising directories could greatly improve efficiency and speed up processing.

The tax system influences decisions by informal businesses on whether they enter the formal sector, so the government should use a mix of dissuasion and incentives. Incentives would include lowering taxes and simplifying compliance, especially for small businesses, while dissuasion would mostly be a matter of increasing tax inspection, detection and penalties. High taxes on salaries, profits and consumption can encourage firms, business-people and workers to stay in the informal sector. Formal businesses have to bear both the tax burden and the administrative cost of their tax declarations and payment.

Figure 6.1. A modern tax system adapted to the economy is essential for economic emergence

Note: This figure refers to the recommendations and action plan presented at the end of this report. “ER 1” stands for the main expected result and bracketed numbers to action plan recommendations.

Source: Authors.

VAT has a big part to play in formalising the economy. Informal businesses pay it on their inputs but cannot deduct it as the sector is not in the tax system. The VAT system is based on fractioned payments where those liable to pay collect it on goods and services they sell and can deduct it from their inputs. They pay in tax the difference between the VAT they have collected and what they can deduct. But the deduction is on condition that the inputs are used for taxable operations (substantive requirement) and that the taxable person has the proper invoices (formal requirement). The periodic payments and need for invoices encourage the taxable person to ask suppliers for them if he wants to bill the VAT that he can then deduct. Also, he needs to engage in taxable activity because the VAT on his inputs is not deductible unless they are used in taxable operations. The incentive of VAT could extend all along the production chain and eventually lead to formalisation of informal sector operators obliged to do so under pressure from customers or suppliers who refuse to bill without including VAT. Also, VAT can have a formalising role compared with other taxes.

Efforts to encourage formalisation can have a major knock-on effect. If more and more firms become formal, pressure to follow suit will increase, especially through the production chain VAT effect. This means spot-checks can have significant effects. Also, if the number of formal firms increases, informal firms are more likely to be detected and the authorities can devote more resources to the resulting smaller number of informal firms.

A detailed survey of the tax system is needed to clarify the reforms proposed in this chapter, which deals with Côte d’Ivoire’s biggest challenges. The proposals recommend adjustments to make the tax system more efficient, fair and resilient as well as major investment to strengthen the tax administration. This is a long and complex process and this chapter urges consideration and discussion within the public administration, the government, the private sector and civil society. An in-depth study could be done, with similar aims to the proposals made here – improving collection and making the tax system more efficient, fair and inclusive. Most countries with similar tax system constraints to Côte d’Ivoire have done detailed upstream studies of their overall tax reform (recently South Africa for example) that can be a model for Côte d’Ivoire.

Thorough reforms must be adapted to local conditions and the Ivorian economy

Côte d’Ivoire cannot be content with partial tax reforms. They need to be thorough and tailored to local conditions. They should be introduced gradually and aim to create a simplified and coherent system appropriate for the country’s level of development and capacity, as well as the needs of an emerging economy. The structure of tax revenue is by nature resilient – as a country develops, more VAT and income tax is generated. Without broader reforms, steps to modernise the tax system can be counter-productive. Replacing taxes that tend to create major distortions with taxes seen as more neutral will not always have the intended effect if the tax administration is not strengthened at the same time, or if national economic conditions are not right.

For the Ivorian tax administration to contribute to the process of becoming an emerging economy, five key reforms are needed:

  • Make the tax administration more efficient, in particular through computerising procedures and reducing paperwork to reduce compliance costs.

  • Try to bring the informal economy into the tax system, especially by broadening the reach of VAT and reforming synthetic taxation to make it more efficient.

  • Focus on broadening the tax base and simplifying the system by abolishing the many minor taxes, and expanding the range of property tax and VAT.

  • Enhance people’s confidence in the tax system and their respect for it by making its administration more transparent, responsible and predictable.

  • Take a systematic approach to granting and assessing existing exemptions and tax breaks that balances the real benefits of lowering taxes to attract more investment and the impact on revenue and the efficiency of the system.

The tax administration must work better

Administrative procedures must be improved (Recommendation 1)

The government should draft a strategy to reform and modernise the tax administration. It might be useful to talk with aid donors who could give technical and financial help. This would need in-depth research and surveys to answer these key questions:

  • What software to use, based on international comparison?

  • How to phase in implementation of reforms? What trial projects in what ministries?

  • What legal changes will be needed to adjust the procedures?

  • How to set up links with banks to enable online payment?

Computerising the tax administration will be long and complicated. The changes must be carefully designed and prepared, taking into account other countries’ experiences and seeking expert advice about basic principles (Box 6.1), and computerisation needs trained staff to use the new tools. Institutional and procedural changes will also have to be made to adapt the tax system to new possibilities and constraints arising from computerisation.

Box 6.1. Computerising and reforming the tax system: Viet Nam and Mozambique

Many countries computerise to streamline their tax administration. Viet Nam is completing a project, begun in 2013 with World Bank help, to increase capacity and especially reduce the cost of taxpayer compliance. The project includes a USD 70 million component to install computer equipment, reform regulations and train civil servants.

In Mozambique, the Beira city council began using computers in 1992 to register land and help planning to make land management more efficient. Computer tools were developed to handle property lease applications faster and make land-use planning easier. The system worked well and inexpensively but is not operational because of political economy constraints. However, these examples can still inspire Côte d’Ivoire to introduce and develop computerisation and deal with the political challenges it involves.

Modernisation of the tax administration must go hand in hand with modernisation of other administrations, such as land. The government needs to do computerised surveying to improve registration of land titles and make them more secure. These changes must be closely linked to the tax administration to ensure the description of the property is revised. The surveying information must be used efficiently to maintain an up-to-date register of property values, which need to be regularly re-assessed because they are used for taxation. As the tax-base broadens, rates could be reduced and cheaper properties exempted. Revenue from property tax can be used to improve the quality of urban services.

Transparency of the tax administration and the fight against fraud must be increased (Recommendations 2 and 3)

Increasing transparency must be at the core of tax administration reforms, to enhance public confidence and the image of the tax authorities. The government ministry (especially the two departments in direct contact with taxpayers) should set up a working group to draft a strategy based on transparency and communication. This would include a list of key publications (annual report, a simple guide for taxpayers) and public access (such as a website). The ministry should strengthen auditing and monitoring in all departments – including the customs and tax general directorates (DGD and DGI) – to improve services to taxpayers.

Côte d’Ivoire has made good progress in reducing tax fraud but more effort is needed. Computerisation can help, through cross-checking data, for example. Expanding risk management in choosing cases to investigate and increasing their number would also be useful, focusing on businesses under-stating their turnover to qualify for simplified tax-brackets to escape paying VAT and for ordinary income tax brackets, such as the combined rate ceiling of XOF 50 million.

VAT has a big part to play in formalising the economy, but Côte d’Ivoire should try to combine incentives with dissuasive measures. Dissuasion is mainly effected through better monitoring, detection and penalties imposed by the tax authorities. Box 6.2 describes Brazil’s efforts to formalise business.

Box 6.2. Increasing formalisation of business with customers

Many developing countries have problems collecting taxes and VAT, especially when they have large informal sectors. An original solution was to get customers to ask for receipts in shops, resulting in formalisation of more transactions. Brazil’s Sao Paulo state launched a programme (Nota Fiscal Paulista) in 2007 to do this. The country already allows online tax declarations, with businesses required to report electronically their sales to tax authorities on a regular basis. Individuals can now register online and get an ID number that can be linked to their purchases. They can thus track them online and report purchases not registered by the vendor, acting in effect as “citizen tax inspectors.” This has obliged shop-owners to record transactions online and report them to the tax authorities. All customer IDs are included in a prize-winning lottery, which encourages people to carry out formal transactions. The programme has worked very well and millions of customers have signed up, and VAT and tax revenue has risen.

Source: Naritomi (2013).

The tax base should be broadened and simplified

VAT exemptions must be reviewed and reduced (Recommendation 4)

Reforming VAT exemptions is a major issue for the government, as they account for much of the total of XOF 200 billion or more of exemptions in 2014. Exemptions are often granted when taxpayers cannot get reimbursed for their VAT credits. The budget ministry managed by the end of 2015 to clear its backlog of VAT reimbursements and was handling new requests in less than a week. These improvements will allow the government to abolish some VAT exemptions, which make the VAT system confusing and hard to manage.

A thorough reform of exemptions should aim for their gradual abolition. The entire VAT exemption for initial investment in material and equipment as defined by the investment law could be abolished, as long as VAT credit reimbursements continue to be handled efficiently. Then VAT could be applied to staple items currently exempted. Ivorian agricultural businesses can be victims of distortion of competition if they have to pay VAT on their inputs while rival foreign firms can deduct VAT on theirs in their own country. Some social exemptions can also be abolished because they do not always fulfil their purpose and benefit richer Ivorians (see Phase II report).

Tax-breaks and exemptions must be streamlined (Recommendation 5)

The company tax in Côte d’Ivoire is quite competitive, so tax incentives to firms under the investment law are not so necessary. The government should review tax incentives and exemptions to increase tax revenue. The most costly exemptions of all are (temporary) tax holidays on industrial and commercial profits.

First, it would wise to stop giving new advantages to sectors. Then all tax incentives should be included in the national tax law and limit sector laws to regulating organisational or technical matters. After that, some incentives could be abolished, including exemption from VAT and from tax on industrial and commercial profits in the Abidjan district under the investment law (tax holidays for other regions could be less generous). Some tax incentives can be abolished immediately, such as VAT exemption on purchases by investors and tax advantages under the mining law (abolishing customs duty exemptions if machinery can be imported by suspending duty under the rule on temporary imports, and exemption from VAT during production or even the stages of prospection and building a mine). Changes in the exemptions can be detailed after an in-depth study.

Taxation must be simplified and more efficient (Recommendations 6 and 7)

The tax burden falls on a very small number of taxpayers, mainly big firms and formal sector employees. The informal sector is a big part of the economy but provides little government revenue. This tends to increase taxes on the formal sector, which in turn leads to more distortions between the formal and informal economies and more incentives to stay in the informal sector or join it. The tax system could be simplified, which would help the country’s development in two ways: by making taxes easier to pay (encouraging taxpayers to stick to the rules and so broaden the tax base) and making the system fairer and more inclusive by depending on more taxpayers (though streamlining does not guarantee this). Box 6.3 describes Mexico’s efforts at streamlining.

Box 6.3. A simpler tax system to encourage the informal sector: Mexico’s Régimen de Incorporación Fiscal

The Mexican government introduced a new tax system for small taxpayers (income of less than 2 million Mexican pesos (MXN) in January 2014. This Regimen de Incorporacion Fiscal (RIF) is part of an overall “Grow Together” strategy to encourage small firms to switch to the formal sector by greatly lowering a range of charges (social security, VAT, excise taxes) during the first 10 years of their operation. Tax is calculated on turnover at a rate comparable to other tax regimes. VAT is also simplified according to the firm’s activity and size, and includes several exemptions.

Taxpayers under the RIF have to file declarations and pay instalments every two months, which makes administration easier (declarations are normally monthly). A firm has to join the national taxpayers register to qualify. The RIF also provides support services, such as administrative help and online tools, to make payments easier.

Source: OECD (2015).

Côte d’Ivoire has a flat-tax system for individual firms with turnover below XOF 50 million. This can be useful for very small firms without the capacity to manage taxes such as VAT, company tax or income tax, and if well-administered can persuade informal businesses to move into the formal sector. The flat-rate (or synthetic) tax should be reformed to introduce different brackets in the declared turnover figure so firms near the top end have an incentive to enter the full-assessment system. In-depth studies are needed on streamlining tax, gradual elimination of small turnover taxes, as well as simplifying liability for small businesses, in particular by reducing the number of minor taxes that especially penalise them.

The tax system works better

The role of excise and land taxes is increased (Recommendations 8 and 9)

Excise taxes could be reformed by broadening the tax base through calculating it on retail not wholesale prices. Some duties and charges according to the value could be increased, though this would be a problem as Côte d’Ivoire is bound by WAEMU’s directives about excise taxes.

Reform of property taxes is also possible as they have strong potential with the expansion of towns and cities and efforts to modernise surveying. But assessment rules should be transparent and linked to market values so taxpayers can estimate the value of their own property. Current tax rates could be lowered and owners of small properties exempted.

Customs duties must be gradually reduced (Recommendation 10)

Customs duties provide much of government revenue. As trade increases, they increase, too, but can be an obstacle to trade in the long run. Less customs duty protection can have the opposite effect, expanding trade and offsetting loss of revenue from duty protection. Export taxes can make local exporters less competitive in foreign markets if they make the goods more expensive. They can also create distortions in production choices by encouraging producers to turn out goods that are less taxed.

But much economic activity is still hard to tax in Côte d’Ivoire because of the limited capacity of the tax authorities. Customs duties are one way to tax the informal sector and agricultural producers. In the long term, these stakeholders should be charged VAT and income tax, but, for now, taxing trade is the easiest and most efficient way to share the tax burden among all those involved. So the path to a modern tax system, one that depends on higher VAT and individual taxes and less on customs duties, will have to be taken step by step.

The government must review its taxation of trade and a detailed study is needed of the budgetary effects of lowering customs duties, taking into account the benefits for trade and the experiences of other countries that have made similar reforms. Consultations with the private sector about the effect of such changes and advice from experts could also help rebalance the system so revenue does not fall in the short term and private sector growth is more likely in the medium and long terms.

Individual income tax must be simplified (Recommendation 11)

Income tax revenue will probably remain modest in the short term, but it would be wise quickly to set up a simpler and more impartial system in readiness for its expansion and to encourage SMEs to contribute more to economic development. Individual income tax in Côte d’Ivoire is based on a complicated and old-fashioned schedular system, taking into account different classifications of income, (hard to determine its base, many deductions, complex calculations) that discourages small businesses from going formal. Tax complexity makes it difficult to comply with procedures and unclear how much to pay (which can be very high). The government could switch to a dualist tax system, whereby employment income would be progressively taxed while capital income would be taxed at a lower and uniform rate. A simpler and more reliable system might encourage more people to pay taxes, especially if this included a more efficient tax administration. These efforts should be part of broader administrative reform and better tax collection.

The dualist tax system is a simplified schedular system. All forms of employment income should be taxed the same way. Tax on wages and salaries and the national contribution tax should also be lumped together and deducted at source. Individual income tax revenue should be increased by broadening the tax base rather than raising already-high rates. So the number of income brackets should be reduced to simplify things. The 20% allowance should be fixed (a flat-rate, not depending on a percentage of income) to avoid the advantage of it increasing with higher income. Tax bases should be broadened by eliminating or reducing deductions that tend to give an advantage to wealthier households.


Naritomi, J. (2013), “Consumers as tax auditors”, Job market paper, Harvard University, Cambridge, MA,

OECD (2015), “Taxation of SMEs in OECD and G20 Countries”, OECD Tax Policy Studies, No.23, OECD Publishing, Paris,