Tax reform should focus on investment and growth

According to the Fiscal Monitor, a report published by the International Monetary Fund (IMF) in October 2026, tax reforms should be evaluated based on their impact on investment, economic growth, and inequality, rather than just the amount of revenue they generate. The report emphasizes that the goal of tax policy should be to support sustainable development and not only to increase government income.

Era Dabla-Norris leads the IMF report

Era Dabla-Norris, the Deputy Director of the IMF's Fiscal Affairs Department, is responsible for preparing the report. In an interview with Agence Ecofin, she discusses how African countries can simplify value-added tax (VAT) systems and ensure timely reimbursement of tax credits. She also addresses the challenges of tax incentives and the impact of taxes that fail to consider company profits.

Tax revenue benchmark needs rethinking

The IMF has traditionally used a tax revenue target of 15% of GDP as a benchmark for developing countries. However, Dabla-Norris argues that this should not be the sole measure of tax system success. Even countries that exceed this threshold may still need reforms to remove barriers to investment and growth. The focus should be on how taxes affect economic activity, not just on the revenue they generate.

Simplifying VAT reduces administrative burdens

To make VAT more neutral, Dabla-Norris emphasizes that timely reimbursements are essential. However, tax administrations with limited resources often struggle to prevent fraudulent claims. She suggests that African countries should prioritize simplifying VAT systems to reduce the burden on tax authorities. A simpler VAT structure can also reduce the number of companies that accumulate excessive tax credits and limit opportunities for tax evasion.

Tax expenditures require transparency

According to data from the OECD, tax expenditures—such as temporary profit exemptions—make up about a fifth of total tax revenues in low-income countries. Dabla-Norris argues that governments should move away from temporary exemptions and instead offer incentives tied to actual investment. She also stresses the importance of publishing detailed evaluations of tax expenditures to ensure budget transparency and public accountability.

Gross turnover taxes distort economic activity

Some African countries tax companies based on their gross turnover, not net profits, which can place a heavy burden on businesses with low margins. Dabla-Norris explains that this approach fails to consider a company's profitability and ability to invest. While lowering the tax rate may help, it cannot fully address the issue when companies have very different profit margins, some of which are negative.

Natural resource taxation needs careful rules

The Fiscal Monitor highlights challenges in taxing extractive industries such as mining. It suggests reforms such as accelerating cost deductions and limiting interest deductions. Dabla-Norris warns that without strict rules on transfer pricing and anti-fiscal avoidance, companies might deduct costs without paying taxes on the corresponding economic profits. She emphasizes that clear international tax rules are essential for managing these risks.

Targeted social transfers can replace VAT exemptions

The IMF acknowledges that VAT exemptions on essential goods can help protect the poorest households when social safety nets are weak. However, it recommends replacing broad exemptions with targeted financial assistance. Dabla-Norris notes that effective social registries, digital payment systems, and reliable aid distribution mechanisms are necessary to ensure that vulnerable populations are not harmed when exemptions are phased out.

Labor tax reforms can boost work incentives

The Fiscal Monitor suggests that reforming labor taxation can encourage more people to work and increase their incomes. However, in many African countries, a significant portion of the workforce—particularly farmers and self-employed individuals—is not part of the formal tax and social benefits system. Dabla-Norris explains that the relevance of these reforms depends on how many workers are included in the formal system.

Tax transparency can encourage formal sector participation

Dabla-Norris points out that workers may be more willing to join the formal sector if they see the tangible benefits of their tax contributions, such as access to healthcare and public services. She emphasizes that clearly communicating how tax revenues are used can increase taxpayer compliance and support for the formal economy.

National and international tax reforms must work together

The IMF's national tax reform program must be balanced with international tax cooperation. Dabla-Norris highlights that developing countries are pushing for stronger tax rights, better information sharing, and more inclusive international tax rules. She explains that national reforms and international cooperation are complementary, not mutually exclusive, and both are necessary to build effective tax systems globally.