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Speeches & Transcripts February 25, 2021

Tajikistan: Towards Tax Predictability as an Incentive for Growth and Honesty

At the time of last year’s Consultative Council, in early February 2020, COVID-19 was largely—but erroneously—still considered a localized event somewhere else, and it did not feature in the discussions around this table. Three months later, the global pandemic has brought to the fore a myriad of challenges in health, on social security, and surrounding challenges of macro-fiscal and financial stability. And nine months later still, Tajikistan has been able to prove wrong the, in hindsight, alarmist projections made during late spring 2020. Agriculture has responded with increased production to the risks of interrupted supply chains, as has manufacturing—with the importance of, and opportunities in, increasing economic self-reliance having become evident to communities throughout the country.

The overarching policy objectives discussed during recent Consultative Councils, and the steps taken by the Government of the Republic of Tajikistan in response, have proven accurate and timely, having provided for the figurative lighthouse on the distant horizon. This mental picture— relating to a quote by Roman philosopher Lucius Annaeus Seneca that, “if one does not know to which port one is sailing, no wind is favorable”—implies that, even with strong headwinds ( such as the ones caused by the global COVID-19 pandemic), it is still possible to move a ship, on a zig-zag course, even upwind in the desired direction.

All the pre-COVID-19 economic policy challenges, whether they related to the external value of the Tajik somoni, interest rates, wage levels, or employment opportunities, including for the young in rural and remote areas of the country, have as response the need to focus on increasing the confidence of entrepreneurs to accept market risks and employ their financial resources to invest, to innovate, to create markets domestically and abroad, and—in so doing—to create additional employment opportunities and a broader tax base.

During recent Consultative Council Sessions, the DCC has argued that (i) a modern tax code; (ii) a Tax Committee that prioritizes tax audits on the basis of risk analyses rather than the need of having to meet pre-specified, potentially inaccurate tax collection targets; and (iii) the effective use of tax exemptions, with a clear understanding of the balance of fiscal costs and development outcomes, represent the keys to developing more of a real partnership with the private sector, to outlining an approach to economic policies that would increase businesses’ productivity and profitability, job opportunities and wage levels, and the base from which to levy corporate and personal income taxes.

This year’s discussion falls in the period of public consultations on such a draft tax code. With leadership and commitment from the Minister of Finance, the technical working group has sought to balance the overarching twin objectives of domestic revenue mobilization and private sector development. An outcome, by which businesses and Government benefit concomitantly, would have to have the new tax code, and its subsequent implementation, change inherent incentive structures. In essence, the objective is to decide on a set of tax policy and tax administration measures that encourages (and convinces) businesses to (i) invest, innovate, expand, and export; and (ii) be honest in its tax declarations provided to the Tax Committee.

This, in turn, requires a focus on principles and processes. If decisions on tax audits are based on considerations of expected tax payments, penalties, and pre-payments, effective tax obligations end up being, essentially, a “negotiated settlement”. And, like in any negotiations, tax authorities and businesses would start with, respectively, “maximum requests” and “minimum offers”, resulting in incentives to (i) slow down business expansions (as strategy to become a less attractive target for tax audits); and (ii) hide, to the effect possible, turnover and revenue (to maintain the maximum “bargaining ground” vis-à-vis the tax authorities). By contrast, if tax obligations are predictable (even if considered “too high”) and tax audits be made dependent on the quality and accuracy of tax statements, businesses—in balancing costs plus expected tax obligations against potential revenues—have incentives to exploit existing commercial opportunities in domestic and neighboring markets, thereby stimulating investment, innovation, and employment generation. Similarly, if the likelihood of tax audits depends on risk assessments, derived from internal consistency checks, and if it is understood that it is “high risk” enterprises that will be audited, it will be in the companies’ own interest to be honest in its interactions with the Tax Committee.

To this end, the obligations of both the tax authorities and businesses can be supported by simplifying the tax code as much as is possible, with minimum complexities, exceptions, and rates. The easier it is for the Tax Committee to identify potential under-reporting, the easier it is for businesses to comply with the tax code, and the faster the country will be able to develop a partnership with the private sector and increase the latter’s confidence in the improving business climate and available profit opportunities.

The second critical feature of the current debate on the tax reform, beyond the discussions on specific rates, links to the ability to use the instrument of tax exemptions and incentives in an effective manner. The Government has every right to define development objectives that would warrant the temporary granting of tax incentives—to all companies that would qualify. Political decision-makers, including Parliament, would need to know both the fiscal costs of revenues foregone and development results achieved to develop an informed opinion about whether there is a proper balance between tax revenues lost and socio-economic benefits derived in the use of this policy instrument. As demonstrated in many other countries, it is a delicate policy instrument, one that, if not properly monitored, risks undermining fiscal stability objectives of Government and an environment of fair competition required by businesses.

Everyone who has had the benefit of attending recent sessions of the Consultative Council and/or taken the time to re-read their conclusions will—I believe—agree that both the quality of the public debate on policy priorities and the follow-through on promises made on these occasions have been impressive. At this difficult period of time, Tajikistan is preparing the groundworks of an effective COVID-19 policy response, one that has the potential of providing investors with a much stronger foundation. The DCC is very encouraged by the Government’s commitment to consulting on the draft tax code publicly, with the private sector and development partners alike, in an effort to instill confidence into the future of successful private sector activities, increasing economic self-reliance, and exports into large neighboring markets with in-principle demand for goods and services “made in Tajikistan”. The DCC is confident that, in follow-up to a successful tax reform, other factors affecting the ease of Doing Business, spanning challenges of legal certainty to the availability of international courier services, will be addressed as well.

Especially for Tajikistan’s young generations, including those living in rural and remote areas, the envisaged confidence-building elements of the ongoing tax reform have the potential of opening doors to new, high-impact, high-value activities, viz., in (i) a modern digital economy on the basis of reforms and investments en route to the provision of a more accessible, faster, and less expensive internet; and (ii) the entire value chain from agricultural production over storage to food processing—both with a view to increasing economic opportunities in domestic economies and addressing risks of income and food insecurity. The parallel focus on an enabling institutional context, whether in terms of (i) the modernization of the legal framework in the telecom sector, the establishment of an independent (public) regulator (that would allow for proper competition to bring down prices and increase quality of services); or (ii) the institutional context that would support the production, processing, and—possibly—exporting of high-quality local food (from seeds and fertilizers to quality certification and food safety standards), holds the key to Tajikistan’s ability to generate dynamic rates of sustainable and inclusive growth, increase domestic productivity (which would translate into higher wages), and support a policy outcome that supports the interests of entrepreneurs, households, and the Government alike.

In recognizing the considerable progress made and depth of challenges remaining, with a view to translating the current COVID-19 crisis into an opportunity for taking an important steps onto a different level of development, the members of the DCC appreciate the country’s focus on the proverbial light house and its commitment to reaching the envisaged destination, notwithstanding the direction from where—or how strong—the wind is blowing. Given the country’s economic history, most of the potential investments that a successful, confidence-building tax reform, anchored in the twin objectives of domestic revenue mobilization and private sector development could generate, would be “greenfield” investments; they would thus come with modern standards, new technology, and additional jobs.

It is with pleasure to conclude by reconfirming the commitment expressed by the members of the DCC to support Tajikistan in its efforts to strengthen the foundation of its economy and improve its ability to provide perspectives for its entrepreneurs and its households. DCC members would be able to provide more and faster access to technical and financial support (most of which is coming in on grant terms) if internal processes of authorizations, approvals, and ratifications were clearer, faster, and more streamlined. For multilateral development partners, grants are available to Tajikistan only temporarily and only an exceptional basis. Maybe there is a possibility to “test” streamlined procedures and fast-track approvals, for grant financing and during the current crisis period, so as to ensure maximum support when needed and while still on grant terms. We thank you, Mr. Prime Minister, and the Government, with which we work on a continuous basis, for the consistently constructive collaboration, and wish everyone in Tajikistan the best possible starting position for a much more prosperous fourth decade of the country’s independence.