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