DJIBOUTI GETS READY FOR JAN 1 VAT TAX

UNCLAS DJIBOUTI 000893

STATE FOR AF AND AF/E
LONDON, PARIS FOR AFRICA WATCHER
CJTF-HOA FOR POLAD

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV ECON EFIN ETRD ODIP DJ
SUBJECT: DJIBOUTI GETS READY FOR JAN 1 VAT TAX


1. (U) SUMMARY. After several years of discussion, the GODJ will
implement a 7% value added tax (VAT) beginning in January 2009.
During the first implementation phase, only Djibouti's largest
companies--those with an annual turnover of almost half a million
dollars--will be required to charge VAT. Although there is some
trepidation among businesses about the mechanics of VAT
administration, GODJ tax authorities continue to run an aggressive
education campaign. To assuage consumers' concerns that the VAT
will further push up already inflated prices, tax officials have
used advertisements in Djibouti's national newspaper to highlight
the VAT's intended negligible impact on final prices. In light of
ongoing high levels of food insecurity, primary foodstuffs will also
be exempt from VAT. END SUMMARY.


2. (U) According to Mahdi Osman Awaleh, Tax Director for the
Ministry of Finance (MOF),the GODJ began preparing for the VAT in
2003 by modernizing administrative procedures, computerizing the tax
system, and tightening enforcement of tax collection. Partly as a
result of these efforts, Osman said, 2006 and 2007 saw
record-breaking tax revenues. Preparations continued with the
formation of a VAT Technical Committee in January 2006, and the
first official public announcement by the Minister of Finance in May

2007. France and the International Monetary Fund (IMF) have
provided ongoing technical assistance to the Ministry of Finance in
preparation for the VAT, and the IMF explicitly required VAT
implementation as part of Djibouti's recent new Poverty Reduction
and Growth Facility.


3. (U) Starting January 1, 2009, VAT will be levied at a fixed rate
of 7%. The 7% VAT will be deducted from any applicable Internal
Consumption Tax (TIC),which ranges from 0% to 33% depending on the
item. Only businesses with an annual turnover of DF 80 million (USD
452,000) will be required to charge VAT during the first
implementation phase. Later, Osman said, the ceiling will be
gradually lowered to apply to more businesses. According to Osman,
about 150 companies will fall into the first group, and all are
well-structured, with sound accounting systems. The Ministry of
Finance has published a VAT Guidebook, and has posted it on the
Internet. In addition, Osman said that the tax office was reaching
out to companies to encourage them to begin working with an
accounting firm or with the Chamber of Commerce to ensure that their
accounting systems will be able to process VAT correctly. Osman
said that his office intends to be somewhat lenient as businesses
grapple with the new tax, and will not immediately impose sanctions
for late VAT payments. Tax officials have also been holding regular
VAT workshops for businesses and government officials, and have
printed a series of full-page information bulletins in the national
newspaper.


4. (U) A large number of goods and services will be exempt from VAT,
including school books, pharmaceutical products, banking and
insurance activities, kerosene, and basic foodstuffs. A full list
of VAT-exempted products and services is available in the VAT
Guidebook, and the exemptions have been prominently featured in the
ongoing newspaper awareness campaign. Osman said that while the VAT
is intended to raise additional tax revenue, its price impact on
consumers will be negligible, with increases of a maximum of 2% on
some products.


5. (SBU) Final legislation on the VAT is expected to pass by
December. EmbOffs have not/not seen draft legislation. However,
Osman told EconOff that the legislation would explicitly exonerate
diplomatic missions and aid agencies and other exempt institutions
from VAT payment. According to Osman, diplomatic missions and aid
agencies will receive an upfront exemption on imported goods, and
will be able to submit VAT receipts for locally purchased goods for
reimbursement.


6. (SBU) COMMENT. While the GODJ hopes that the VAT will raise
much-needed revenues, many ordinary Djiboutians worry that it will
simply exacerbate price inflation for basic goods. These fears
linger, despite the GODJ's active campaign to educate businesses and
consumers. While the first group of companies required to charge
VAT is likely well-equipped to handle the change, both tax officials
and businesspeople are braced for the eventual expansion to
secondary groups of smaller companies, many of which operate with
informal or obsolete accounting systems. In coordination with
Djibouti's small diplomatic corps, Post will continue to monitor the
status of the final VAT legislation to ensure that appropriate
exemption conditions are included. END COMMENT.

SWAN