MALAWI ADOPTS U.S. TAX RECOMMENDATIONS IN BUDGET

UNCLAS LILONGWE 000507

SIPDIS

SENSITIVE

STATE FOR AF/S ADRIENNE GALANEK AND BRUCE NEULING
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE FOR EB/IFD/ODF LINDA SPECHT
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
TREASURY FOR OTA/BOB WARFIELD
JOHANNESBURG FOR FCS
MCC FOR KEVIN SABA

E.O. 12958: N/A
TAGS: EFIN ECON EINV EAID MI BUD FIN
SUBJECT: MALAWI ADOPTS U.S. TAX RECOMMENDATIONS IN BUDGET

REF: LILONGWE 409

This message is sensitive but unclassified-not for Internet
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SUMMARY
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1. (SBU) In presenting the draft budget to Parliament on 10
June, Malawi's finance minister proposed several tax reforms
which follow recommendations made by U.S. Treasury experts.
The changes include a higher floor and simpler structure for
personal income tax, lower excise rates on most imports,
creation of commercial courts, and exemptions for capital
gains and capital equipment depreciation. The reforms
generally aim for a more regular and business-friendly tax
environment in Malawi. End summary.


2. (U) Following on an assessment from U.S. Treasury's Office
of Technical Assistance, the GOM appears to be ready to adopt
a number of tax reforms that Treasury had earlier
recommended. The principal reforms are:

- Resetting the personal income tax floor from MK36,000
($302) per year to MK60,000 ($504)
- Reducing most excise duties by 50 percent
- Changing the refund mechanism to enable prompt VAT and
witholding refunds
- Raising depreciation allowances for buildings and computer
equipment
- Raising the capital gains exclusion for personal income tax
- Removing a number of discretionary powers from the Ministry
of Finance
- Establishing a system of commercial courts for tax cases
- Restructuring the revenue authority's incentives system to
expand the tax base rather than maximize revenue
- Enhancing the revenue authority's public image with changes
in its customer service organization


3. (SBU) Finance Minister Goodall Gondwe had set revenue
neutrality as a priority objective in his tax reform scheme,
but the local IMF representative has described the program to
us as slightly revenue negative. However, Gondwe's speech
indicated that the GOM would finally allow retail fuel prices
to rise this year, which may generate enough revenue to
offset the cost of the reforms.


4. (SBU) COMMENT: Gondwe's program is evidence that the GOM
is taking the challenge of tax reform seriously. While the
private sector's complaints of an arbitrary and dysfunctional
tax system are the immediate incentive for this effort, the
finance ministry has taken a thoroughgoing approach to the
problem. The GOM has consulted very widely with the private
sector and civil society to garner suggested reforms, but it
appears to be following most closely the advice from the U.S.
Treasury and the Malawian society of accountants. That
Malawi has opted for a systematic reform rather than a system
of patches may be an indication that the government is
actually listening to private investors.
GILMOUR