Balancing the Tunisian Tax System
Fiscal reforms are urgently needed to reestablish macroeconomic equilibrium, promote investment and competitiveness for onshore and offshore sectors, strengthen revenue collection, and improve equity and raise transparency. In particular, tax and fiscal transfers to firms in Tunisia contain distortions and discourage investment, and also contain weaknesses and inequities. Importantly, the Tunisian tax system’s distortions make the country’s income distribution even more unequal. Indeed, only one-third of Tunisia’s tax revenues are from direct taxes compared with two-thirds from indirect taxes. Wage earners, particularly—who mostly belong to the middle class—pay three-quarters of the income taxes compared with one-quarter by non wage earners. This blog explores how both the corporate and payroll taxes distort the tax system and provides suggestions for improvement.
Corporate Profit Tax
The statutory corporate tax rate on profits in Tunisia is 30% (with the exception of 35% for banking, insurance, hydrocarbons, and telecommunications companies). Exporters pay no corporate profits tax for the first 10 years of operation, and 50% of normal profits tax thereafter. Agricultural and fishing profits are subject to a 10% corporate tax.
Taxation of legally registered microenterprises, which constitute the large majority of companies, is relatively low or even insignificant. Such enterprises may opt for a “forfeiture” system, whereby they pay 2 to 2.5% of revenues rather than a tax on profits. Microenterprises with a tax identification number do not keep books, and reported revenues are underestimated. As a result, for those firms the effective average rate of direct and indirect taxation is estimated to 4.85% of profits (INS 2007).
Payroll Taxes
Taxes and total charges levied on payroll are the most burdensome taxes in the country. Total charges paid by employers can only be as high as 28.5% for firms that have no tax offsets or exemptions. These taxes include social security and health insurance contributions (16.5%), a vocational training tax (1 to 2% of total gross wages), and a contribution to fund an employee housing program (1%). As with profits taxes, there are a variety of exemptions from payroll charges, such as agriculture, exporters, and firms investing in priority areas. Employee contribution set at 9.18% of payroll. Taxes and social charges related to employment combined amount to nearly 38% of payroll for onshore firms. In addition, a value-added tax of 18% is levied on all domestic consumption of goods and services in Tunisia, with a lower rate for certain products: 12% (such as transport of goods or some products and services to support tourism sector) and 6% (such as services provided by doctors, pharmaceuticals, medical analysis laboratories)
Tax System Imbalances
According to a simulated tax burden for a medium-size domestic manufacturing firm in Tunisia, and based on the World Bank’s Doing Business “paying taxes” data,[1] such a firm would pay more than 64% through taxes on profits, payroll, and input use.[2] A company facing such a constraint cannot achieve financial balance or invest without circumventing burdensome taxation, especially with regard to social charges.
Moreover, declared employees of the private and public sectors contribute 80% of total personal income tax due to withholding regulations, while the self-employed and self-declared (accountants, lawyers, doctors, pharmacists) contribute 3% of total personal income tax.
Tax reform priorities
To address these vulnerabilities and distortions, Tunisian authorities are preparing a comprehensive program of reforms that focus on:
- Boosting tax revenue and improving the equity, efficiency, and transparency of the tax system.
- Rationalizing tax benefits and incentives in a revenue-neutral way by reforming the corporate income tax.
- Reducing the dichotomy between the onshore and offshore sectors through a review of the convergence of the corporate income tax.
- Modernizing tax administration and strengthening the control and evaluation mechanisms in customs administration.
[1] “Toward a New Economic Model for Tunisia,” 2012, African Development Bank, Tunisian Government.
[2] To put it into a production operation in order to achieve an output
Sofiane Ghali is a full professor of economics and Dean of the Higher School of Economic and Commercial Sciences of Tunis (ESSECT, University of Tunis). His fields of specialization are in the areas of industrial organizations and international economics. He has published papers in internationally refereed journals and contributed to several studies for Tunisian national agencies and organizations such as the ITCEQ and IACE, and international organizations like the World Bank, OECD, EIB, FEMISE, ERF, and GDN. He holds a Ph.D. in Economics.
Sami Rezgui is a full professor at the University of Manouba in Tunisia. He is specialized in the areas of macroeconomic policies, international economics, industrial economics and innovation policy. He is author of several research papers published in international journals and he is also consultant and contributor to various reports for international agencies (OECD, World Bank, Femise, Mediterranean Institute) and national institutions (Institute of quantitative Studies, Arab Institute of Business Managers, Ministry of Trade, Investment Agency Promotion). He Holds a Ph.D. in Economics.
