Tax rates have a marked contribution to the growth of the economy, but each country or region has its specifics. In Algeria, tax rates have been at their lowest level for the last 50 years, but questions remain whether our competitive tax rates contribute to a more attractive business environment. Corporate income tax is at 19% for companies dealing in manufacturing activities and 25% for those dealing in services and trading, while personal income tax is charged at a climbing scale from 20% to 35%. At the same time, the Algerian tax system has been simplified in order to present an equal administrative tax burden on corporate bodies and on individuals. Although a number of attractive factors are already in place, they still need to be improved upon and adapted to meet the needs of entrepreneurs.
In developed markets, policy makers use tax rates as a key leverage for economic recovery, while rates are typically used in emerging countries as a way to attract more investors. However, it should not be taken for granted that low tax rates are by themselves sufficient to recover from a financial crisis or to act as a distinctive differentiator for attracting more investors or enhancing the creation of profitable businesses.
In terms of the tax regime, Algeria is quite atypical due to the key role played by petroleum taxes, which account for a significant share of the annual budget. However, this reliance on one form of taxes can limit the efficiency of other taxes and hinder development of other existing or potential sources of income. If the reduction of tax rates for non-petroleum activities can contribute to a better economy, the challenge remains in their stability and essentially in their effectiveness.
A tax cut’s effectiveness resides in its ability to enhance income and generate new revenues, which could in turn be reinvested. It is not clear whether low tax rates have had a visible effect on the Algerian economy, although the potential is there for lower tax rates to more effectively generate tax revenues by boosting overall GDP. Algeria has a stable tax system and it is important that the rates stay predictable. Furthermore, no new, more restrictive constraints should be placed on firms wishing to make foreign direct investment.
Stability of the tax system shall be the key path for successful growth. However, lower taxes have the risk of increasing demand for consumption products, which could be problematic if this demand is met primarily by imports and not by local production. Algeria’s large informal economy also makes it challenging to collect reliable information on the impact of fiscal policies, while ambitious infrastructure investments launched by the government also distort data.
The threat to hydrocarbon revenues is now becoming a serious issue due to oil price volatility, combined with shrinking oil reserves and the slower rate of new discoveries. Improving the effectiveness of tax incentives is a way to create new options for successful and sustainable development, and a way to adapt macroeconomic measures to day-to-day business life and to the specifics of each industry. Analysis needs to be conducted to find out whether the reduction of tax rates achieves the regional or economic development goals originally planned by fiscal policies. Unfortunately it is not guaranteed that tax savings lead entrepreneurs to consume more local products and to invest. Ideally savings would be spent on more structured investments, rather than on short-term consumption.
Algerian tax legislation includes incentives for exporters, foreign direct investors and small businesses launched by young entrepreneurs. These incentives have the potential to provide long-term benefit to the economy. Small enterprises need to be coached in order to become the major firms of the future, while foreign direct investors may consider partnering with young entrepreneurs, combining the respective tax incentives and providing knowledge and skills transfer. Tax incentives should not be viewed exclusively as a way to achieve higher profits, but also as a way to boost the economy. While new types of incentives can be explored, studies should also be conducted to assess the real benefits derived from low tax rates and tax holidays.
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