Viewpoint: Samir Hadj Ali
In the current context – with fiscal resources having dropped significantly as a result of the substantial recent decline in hydrocarbons tax revenues – it seems that additional government income will not be raised at the expense of the profitability of companies via an increase in corporate income tax. The solutions for enhancing tax revenues seem to be predominantly oriented on the consumption of goods, while corporate tax rates remain stable.
Current Algerian tax law specifies three separate rates of corporate income tax: 19% for manufacturing activities; 23% for construction activities, and civil and hydraulics works, as well as for tourism and thermal activities, excluding travel agencies; and 26% for other activities. The “other activities” category relates predominantly to trading and services.
After a brief attempt at maintaining just one rate, the Supplementary Finance Act of 2015 took account of the hopes of goods producers to restore the corporate income tax rate to 19% for manufacturing activities, and return to a variety of rates by reference to business type, which may help to enhance and promote some activities.
Manufacturing companies have successfully contested an increase in the rate of corporate income tax that they pay. Under the Finance Law of 2015 it was raised from 19% to 23%, while the old rate of 25% was reduced to 23% for service providers and dealers, including importers. When policymakers aimed to go back to a single rate for the taxation of the profits of corporations, manufacturers claimed an injustice because this new rule increased their corporate tax by four percentage points, while other taxpayers received a reduction of two points.
The tax authorities argued that it was difficult to track the sources of profitability among the various business activities, under a system in which they have to deal with three categories of activities rather than managing a single category of tax.
Ultimately, the correct application of three tax rates relies on the ability of companies to keep separate accounts for each of their activities to determine the share of profits derived from each category. This will determine which rate of corporate income tax must be applied. Otherwise the 26% rate shall apply by default. To qualify for the rate of 23%, construction companies and civil and hydraulics works must contribute to the social security fund.
The main losers in this new three-tier system seem to be businesses in the tertiary sector, which is taxed at the highest rate of 26%. This rate – which applies to the trading of goods without transformation – leaves service providers worse off, except those in the tourism sector, which are highly encouraged. Many service providers feel as though they are being ignored, given that traders tend to be categorised as the outsiders of the economy in a country where the tertiary sector contributes more than 40% of GDP and employs nearly 60% of the workforce.
Policymakers may look at the option of encouraging service providers with a lower rate, but the overall corporate income tax rate remains low compared to other countries in the region. The promising sign for the economy from this is that the rate for manufacturing companies, which need stability for initiating new investments, remains stable.
The ongoing simplification of the tax system for companies that have total annual sales of under AD30m (€248,000) is also in its second year of implementation with the same threshold, which to some extent is leverage for value creation.
The small stakeholders of today may become the major taxpayers of tomorrow, provided that they have a clear estimate of their cash flow and stable tax assumptions, with an achievable return on equity to enhance their capacity for being new investors or developers of extension of existing investments. This is why the stability of business tax rates matters.
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