In Togo, the International Monetary Fund (IMF) has advised the government to reduce VAT exemptions to enhance revenue collection. However, the government intends to first perform a comprehensive analysis of its tax systems.
In its most recent report, the IMF urged Togo to reassess its tax structure to boost government revenue. The organization recommends decreasing VAT exemptions, broadening the personal income tax (IRPP), and aligning with the global minimum tax for specific corporations.
The government is seeking to postpone action.
The primary focus is on VAT exemptions, which could have contributed 60.8 billion CFA francs to the national budget in 2023, accounting for 42.4% of the total tax expenditures of 143.2 billion CFA francs (the revenue the State misses out on due to exemptions, rate reductions, or special measures). This significant amount would represent 2.6% of GDP and over 17% of cash revenues. In 2022, exemptions had already resulted in a loss of 40.8 billion CFA francs in VAT revenue. This is a considerable figure, especially in a context where enhancing public revenue mobilization has become a critical priority.
In light of these recommendations, Lomé is opting for a more measured strategy, as an abrupt removal of certain measures could destabilize specific sectors and potentially raise living costs. The authorities have committed to reviewing VAT exemptions by June 2025 to assess which ones genuinely aid low-income families and which disproportionately favor businesses and wealthier demographics.
The primary goal is to differentiate between progressive exemptions that assist low-income groups and regressive ones that primarily benefit affluent households or select privileged economic sectors.
This reduction in exemptions will inevitably lead to higher taxes on certain goods and services. The rationale presented is that some exemptions disproportionately advantage the wealthy over the less fortunate. However, altering these tax incentives could inadvertently raise living expenses, particularly for households that allocate a significant portion of their income to consumption. Moreover, any revenue gained from eliminating an exemption does not come without consequences; it imposes an additional financial strain on those who previously relied on it. Companies currently enjoying a more lenient tax framework may find their competitive edge diminished. Should they face increased VAT costs, they are likely to either raise prices or reduce their investment activities.
The International Monetary Fund (IMF) has proposed a solution: implementing targeted cash transfers to mitigate the effects on the most vulnerable populations. Lomé aims to complete its comprehensive medium-term revenue mobilization strategy (SMRMT) by the end of June 2026, which may incorporate cash transfers in addition to existing initiatives supported by the World Bank. This approach is driven by several factors, including the rollout of a biometric identification system designed to enhance targeting and prevent duplicate allocations. By the end of 2025, the government intends to register half of the population, including over half of the impoverished and vulnerable households, with the full registry expected to be completed by 2026.
A Sensitive Reform
The discussion surrounding the implications of this reform remains ongoing. Some economists argue that VAT exemptions are crucial for maintaining the purchasing power of the poorest citizens. In contrast, others highlight the potential revenue loss for the government, which could hinder its ability to invest in infrastructure and public services.
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Another contentious issue involves special tax regimes that, while attracting investment, also lead to revenue shortfalls for the state. The IMF suggests that companies benefiting from these tax incentives should gradually be required to establish operations in designated special economic zones.
