Kieran Holmes and Laura Llewellyn-Jones offer an insight into a growing financial landscape
Burundi is a country in East Africa bordering Rwanda, Tanzania and the Democratic Republic of Congo. It is one of the poorest countries in the world, owing in part to its geography, past conflict, corruption and poor legal system. Most of the country does not have electricity and only around 2% of inhabitants hold bank accounts.
There is a mandatory pension scheme for formal sector employees - Institut National de Securité (INSS), which has been running for 50 years. This 'formal sector' consists of registered businesses paying tax and social security contributions. There is a separate scheme for the civil service, Office National des Pensions et Risques Professionels des Fonctionaires (ONPR), as well as a small number of private arrangements. The contribution rate into INSS is 10% of salary up to a ceiling, of which 4% is paid for by employees. There is an additional contribution of 3% required for Occupational Hazard benefits. The benefits provided are defined benefits, with a pension payable equivalent to 30% of final average salary for 15 years' service on reaching age 60 and additional accrual for more service.
How does it work?
Low coverage rates are a massive problem. The majority of the population in Burundi is in the informal sector working in farming and not eligible. There are also limited locally available investment options for a social security scheme. It is important to keep funds within the country, but with limited asset classes available, diversification is difficult. Real estate is often a significant part of the investment portfolio, often under political pressures towards various projects. Other options include government bonds and private equity. It is hard to maintain an accurate membership database, as simply writing to members is impractical.
Along with Rwanda, Burundi joined the East African Community (EAC) in 2007 as a precursor to joining the EAC common market in 2010. To integrate into the common market, Burundi needed to bring its tax system into line with the other partner states. Harmonisation was required in terms of tax base, tax rates and tax administration. Burundi enacted a Value Added Tax in 2009 and it set up the Office Burundais des Recettes (OBR) in the same year. It became operational in 2010, recruiting its own staff, defining its structure and human resources policies, training staff and implementing IT systems, all along similar lines to the other EAC revenue authorities. During 2011 and 2012 a new income tax law, a tax procedures law and a VAT amendment law were drafted with IMF assistance and declared in 2013. The new laws significantly expanded Burundi's tax base and corrected perceived deficiencies in the VAT and income tax laws.
How are pensions taxed?
The new income tax law reduced the top rate of tax to 30%, which is the same as the corporate tax rate, creating a structure that is neutral as regards choice of business entity, with corporates and sole traders being taxed at the same rate. It established a simplified employee taxation system, incorporating just two personal tax rates and an exempt amount. The definition of employment income contained in the new law is very comprehensive and includes all payments made to an employee in cash or in kind, specifically mentioning salaries, allowances, commissions, compensation and termination payments, employee family payments, pension payments, including those from qualified pension funds, gifts, and all other payments and benefits given in present, past or future employments.
The law appears to follow the classic exempt exempt taxed (EET) structure as both employer and employee deductions are exempted from tax, as is the income of qualified pension funds and social security agency of the state, with payments from pension funds included in the comprehensive definition of employment income. A late amendment, to the effect that pensions or retirement benefits paid by the state social security fund or the qualified pension fund to beneficiaries are exempt, had the effect of making the entire pension structure exempt, creating an easy means of tax avoidance rather than the intended tax deferral for retirement.
What are the challenges?
Clearly the generous exemption of pension and retirement benefits will need to be revisited at an early stage in order to remove this anomaly in the structure. But this is not the only, or even the main, challenge facing reformers. Many tax exemptions remain in other laws and these will need to be removed in order to streamline the tax system. Burundi's level of tax exemptions remains unacceptably high in relation to its current tax take and the country's tax incentives regime also needs to be reviewed.
Burundi has shown great political courage in the reforms attempted to date. Nonetheless, additional reforms are required to rationalise the tax system further, and to generate sufficient revenues to finance the correct levels of capital investment for development, especially at a time of uncertain sources of international development assistance.
Kieran Holmes is commissioner general of the Office Burundais des Recettes. Laura Llewellyn-Jones is actuarial consultant to Rwanda Social Security Board