A Stronger, More Transparent Tax Regime for Yemen

Speeches Shim

Monday, February 7, 2022
With USAID support, Yemen increased tax collection by nearly 50 percent–from about $800 million in 2020 to $1.2 billion in 2021.
USAID

“The USAID support is laying the foundation for a new tax system, highlighting the positive benefits and gains that would come from proposed tax reforms, including greater transparency.” — Mohamed Salem Saleh Karwan, Deputy Head, Yemen Tax Authority

Governments cannot function without sustainable sources of funding to pay public employees, provide essential public services, and foster a functional and prosperous society. For decades, Yemen has depended largely on energy exports to fill state coffers, and the country has had one of the lowest tax collection rates in the world. The results have led to major spending deficits, which the government has filled by borrowing from the Central Bank, tapping into its reserves, and relying on foreign loans and aid. Today, with support from USAID’s Economic Recovery and Livelihoods Program (ERLP), Yemen is trying to diversify its revenue base and stabilize its public finances to create a healthier social and economic environment.

Transparent public financial management is at the heart of government legitimacy and its ability to create favorable conditions for boosting the domestic labor force, promoting business growth, and fostering economic opportunities for its citizens. As part of the USAID focus on improved governance in Yemen, ERLP is supporting the Ministry of Finance, along with the Tax Authority, and the Ministry of Agriculture, Irrigation, and Fisheries to adopt key reforms for broadening Yemen’s tax base and improving collection.

“In this phase, we are working on quick but vast reforms that will have long-lasting and deep-rooted effects,” explains Mohamed Salem Saleh Karwan, Deputy Head of the Tax Authority. “The reforms are meant to enhance the role of the Tax Authority in financing the public budget and revenue collection, and to facilitate the taxation process – including through the automation of the tax procedures – while also enhancing transparency according to international standards.”

ERLP’s experts have looked at the lessons and best practices gained from experiences in other Gulf Region countries to guide recommendations for new tax scenarios in Yemen. The aim is to increase government revenues without adding unfair financial burden on those with the fewest means. For example, their proposed reforms include replacing the current sales tax system with an excise tax that could be applied to specific goods or services (e.g., cigarettes, soda, amusement activities).

In addition, the ERLP team’s suggestions set forth a transition strategy for adopting a value-added tax system, along with a framework for improving the efficiency of taxpayer registration, tax auditing, and the processing of returns. Finally, experts are collaborating with the Ministry of Fisheries to increase taxation revenues from the country’s fisheries sector, which constitutes Yemen’s second most important source of exports.

To improve transparency and accountability within Yemen’s tax system, ERLP has recommended reforms that include measures to modernize and digitize the tax collection system. They also involve a focus on capacity strengthening among tax officials, combining greater responsibility and engagement with stronger anti-corruption awareness and practices.

“The importance of building the capacity of the tax authority team has become a necessity, especially after the previous marginalization of the tax authority role,” says Mr. Karwan. “If we can build a loyal and qualified team that believes in the reforms and the development, then we can really achieve our goals.”

Already, in the past year, ERLP support has contributed to a nearly 50 percent improvement in tax collections. Thanks to enhanced revenue administration capacity, along with real GDP growth, totals reached YER 290 billion in 2021, compared to YER 200 billion in 2020, or an increase from roughly $800 million to $1.2 billion.

The collection of taxes is essential not only for paying for public goods and services, but also for establishing the social contract that connects citizens to the broader economy, the government, and each other. Increasing the capacity and legitimacy of the country’s tax authorities is a critical element of Yemen’s post-conflict recovery, and advances the shared goal of social stability for its people.

USAID’s Economic Recovery and Livelihoods program (ERLP) addresses critical economic stabilization challenges in Yemen. At the macroeconomic level, it works with public and private institutions to restore economic stability, enhance fiscal management, and increase international trade flows. At the microeconomic level, ERLP strengthens agricultural, fisheries, and private sector performance and competitiveness—creating jobs, raising incomes, and improving livelihoods.

Last updated: May 11, 2022

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