Algeria's hydrocarbon sector dominates public finances but exhibits high volatility, while non-hydrocarbon tax revenues remain low and stagnant at around 10% of GDP. Using regression benchmarking, the study identifies a significant non-hydrocarbon tax gap of 2–4% of GDP, highlighting substantial untapped potential. Key constraints include weak VAT and CIT performance, a narrow property tax base, and a large informal sector (est. 32% of GDP).
Key findings and recommendations:
- Tax potential analysis: Baseline model (Model 1) suggests a non-hydrocarbon tax gap of 2.0–4.1% of GDP, implying a potential of 13.5% of GDP on average. Model 2, controlling for the extractive sector share, still shows a significant gap of around 2% of GDP.
- Revenue composition: VAT and CIT revenues are significantly lower than peers, with VAT averaging 3.3% of GDP (vs. 6.5% in non-fuel EMEs) and CIT at 1.8% of GDP (vs. 3.4% in non-fuel EMEs). Tax expenditures are substantial, with VAT and CIT expenditures totaling ~1.7% of GDP.
- Reform options:
- Indirect taxation: Rationalize VAT exemptions and zero-ratings, restrict reduced rate to basic necessities, and improve refund mechanisms. Expand excise taxation on fuels and tobacco.
- Direct taxation: Streamline CIT rate structure and incentives, simplify PIT structure by consolidating deductions and limiting exemptions, improve mining sector fiscal regime with a progressive royalty system, and develop a functional property tax system with updated valuations.
- Tax administration: Introduce a risk management framework for major sectors, focus on tax arrears recovery (est. 200bn dinars annually), and conduct a TADAT assessment.
- Medium-term revenue strategy (MTRS): Implement a comprehensive tax reform framework spanning 4–6 years with political commitment, capacity development support, quantified revenue targets, and a holistic approach addressing policy, administration, and legal frameworks.
- Structural reforms: Broaden financial inclusion, limit cash usage, fight corruption, improve transparency, and reduce the informal sector to support revenue mobilization.
The reforms aim to strengthen revenue resilience, support sustainable fiscal consolidation, and reduce reliance on external borrowing.
