DEMOCRATIC REPUBLIC OF CONGO ECONOMIC UPDATE Reassessing Tax Incentives: Falling Short of Promised Growth and Equity July 2025  DRC ECONOMIC UPDATE © 2025 The International Bank for Reconstruction and Reassessing Tax Incentives: Falling Short Development/THE WORLD BANK of Promised Growth and Equity 1818, H street NW, Washington, DC20433 USA All rights reserved Photos : Pexels, Unsplash ACKNOWLEDGMENTS The DRC Economic Update (DRCEU) evaluates the recent growth performance and mac- roeconomic policies in the Democratic Republic of Congo (DRC), thus providing a basis for policy dialog with the Government and other stakeholders. The first section of the Economic Update evaluates the drivers of growth and the macroeconomic framework. Three-year perspectives are also included, underlining risks and challenges. The second section evaluates tax expenditures in more detail, focusing on their recent evolution and the economic impact of tax incentives. The macroeconomic projections are based on data available as of April 24, 2025. This Economic Update was prepared by a multidisciplinary team led by Cedric Deguenonvo (Senior Economist) under the guidance of Chadi Bou Habib (Lead Economist). The team in- cludes Moise Tshimenga Tshibangu (Economist), Aly Sanoh (Senior Economist), Sandra El Saghir (Senior Economist), Rajiv Kumar (Senior Economist), Francisco Javier Arias Vazquez (Senior Economist), Sabrina Gilbert (Consultant) and Kaushiki Singh (Consultant). Paulin Shamavu Balungwe (Public Sector Specialist) provided valuable input on public financial management reform issues. The report was prepared under the overall guidance and supervision of Albert Zeufack (Division Director), Hassan Zaman (Regional Practice Director), and Abha Prasad (Practice Manager). The team thanks Jean-Pascal Nganou (Program leader) for helpful comments and sug- gestions; and well as the staff from the Central Bank of Congo, the Ministry of Finance and the Ministry of Planning, for their constructive engagement during the preparation of the report. Artificial Intelligence was used in the preparation of this report. It benefited from constructive comments from the following peer reviewers: Samer Matta (Senior Economist, EAWM2) and Violeta Vulovic (Senior Economist, EMFTX). The findings, interpretations, and conclusions expressed in this DRCEU are those of World Bank staff and do not necessarily reflect the views of the Executive Board of The World Bank or the governments they represent. For information about the World Bank and its activities in DRC, including e-copies of this publication, please visit: https://www.worldbank.org/en/country/drc. Reassessing Tax Incentives: | i Falling Short of Promised Growth and Equity CONTENTS Acknowledgments i Abbreviations and Acronyms vi Executive Summary vii Section 1 : The State of the Economy and Outlook 1 Section 2: An Analysis of DRC’s Tax Expenditures 21 1.1 Recent economic developments 1 2.1 Tax revenue trend and composition 21 1.1.1 Global and regional trends 1 2.2 Sectoral Composition and Policy Objectives 26 1.1.2 Growth in the Democratic Republic of Congo (DRC) 2 2.3 Estimates of the impact of tax expenditures 28 1.1.3 Impact of unbalanced growth on job creation 6 2.3.1 Distributional impact of VAT tax expenditures 28 1.1.4 DRC’s external balance 7 2.3.2 Tax holidays and effective corporate 1.1.5 Fiscal balance and public debt 9 taxation 29 1.1.6 Monetary Policy and Inflation 13 2.3.3 PIT deductions and exemptions 32 1.1.7 Financial sector 15 2.3.4 Excise tax expenditures and negative externalities 32 1.2 Growth outlook 18 2.4 Administration of tax expenditures : 1.3 Macroeconomic recommendations 20 challenges and opportunities 34 2.5 Policy recommendations 35 Appendix 1: Data 36 Appendix 2: Major Tax Expenditures 37 Appendix 3: Details on Distributional Impact of VAT Expenditures 38 Appendix 4: METR Methodology 42 References 45 Reassessing Tax Incentives: | iii Falling Short of Promised Growth and Equity List of Figures Figure 1: Global and regional GDP growth (in %), 2022–2027 1 Figure 2: Real GDP growth (in %), DRC and SSA, 2010-2024 2 Figure 3: Real GDP growth (in %), various SSA countries, 2022-2024 3 Figure 4: Non-Resources GDP growth (in %), DRC and SSA, 2010-2024 4 Figure 5: Poverty rates and GDP per capita (in % and constant local currency units), 2012-2027 4 Figure 6: Demand side contribution to GDP growth (in percentage points of GDP), 2010-2024 5 Figure 7: Demand contribution to growth (in %), 2010-2024 5 Figure 8: Growth in value-added by sector (in %), 2024 6 Figure 9: Supply side contribution to growth (in percentage points of GDP), 2010-2024 6 Figure 10: GDP growth and employment growth (in %), 2010-2023 6 Figure 11: Elasticity of employment to output growth, by sub-sector, 2010-2023 6 Figure 12: Exports of copper, cobalt, gold, and other exports (in % GDP), 2018-23 7 Figure 13: International prices of copper, gold, cobalt, and oil (in USD per unit) 7 Figure 14: Share of DRC exports in world exports (in %), 1994-2024 8 Figure 15: Imports of energy, intermediate goods, and consumption goods (in % GDP), 2018-24 8 Figure 16: Current account deficit and components (in % GDP), 2018-24 8 Figure 17: Foreign direct investment (% GDP), 2018-24 9 Figure 18: Official reserves (USD millions and weeks of imports), 2015-24 9 Figure 19: Revenue, total and by component (in % GDP), 2018-24 10 Figure 20: Public expenditure composition (in % GDP), 2018-24 10 Figure 21: Revenue, expenditures, and fiscal balance, (% GDP), 2018-24 11 Figure 22: Central bank policy rate and CPI year-on-year inflation (%) 15 Figure 23: Consumer price index and food inflation, year-on-year (%) 15 Figure 24: BCC policy rate, bank debit rate, and bank credit rate (in %) 16 Figure 25: Monetary Policy Rate (in percent, December 2024-May 2025) 16 Figure 26: Credit to the private sector in SSA (in % GDP), various countries, 2024 17 Figure 27: Revenue in SSA by country (in % GDP), 2024 21 Figure 28: Tax revenue by type (in % GDP), 2015–24 22 Figure 29: Tax revenue and components, DRC and peer countries (in % GDP), 2022 23 Figure 30: Revenue lost to tax expenditure, by tax type (in % GDP), 2017–23 24 Figure 31: Cost of tax expenditures, DRC and peers (in % GDP), 2022 25 Figure 32: Tax expenditure estimates by sector (in % GDP and number of measures), 2023 26 Figure 33: Tax expenditure estimates by policy objective (in % GDP and number of measures), 2023 27 Figure 34: Spending on food and beverage items with reduced VAT rates, by income group (in % of VAT tax expenditures), 2020 28 Figure 35: Corporate tax rates, DRC and comparators (in %) 29 Figure 36: METR for investment during and at the end of tax holiday in DRC 31 Figure 37: Reporting of tax expenditures by region over the period 1990-2020 34 Figure 38: Households expenditure by category 38 Figure 39: Household food expenses by VAT rate 39 Figure 40: Households consumption (top five products consumed across income groups 39 Figure 41: Household food expenses with VAT rates by income group 40 Figure 42: Household food expenditure composition by income group 41 Figure 43: Household food expenditure composition by income group while controlling the location 41 Figure 44: Effect of capital allowances on tax burden 42 iv | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity List of Tables Table 1: Public debt and debt service (% GDP, unless otherwise indicated), 2020-2024 13 Table 2: EATR and METR for investment in various assets under different financing scenarios 31 Table 3: Implicit excise rate on consumption of select alcoholic products in DRC (in %) 32 Table 4: Selected macro indicators, 2022-2027 36 Table 5: Macroeconomic parameters assumed in estimation of EATR and METR 44 Table 6: Tax and economic depreciation rates for various assets in DRC (in %) 44 Table 7: Capital cost recovery for various assets in DRC 44 List of Boxes Box 1: Fuel price subsidies are fiscally costly, but the pace of reforms has been uneven 11 Box 2: Public financial management challenges and reforms 12 Box 3: De-dollarization progress in DRC 14 Box 4: Amendment 2025 Budget 19 Box 5: Tax incentives in the amended budget 2025 27 Box 6: Firms perceptions on the tax system in DRC (2024) 30 Box 7: Effective tax rates measures 31 Box 8: International Experience on Tax Incentives 34 Box 9: METR and EATR as measures of tax burden on investment 43 Reassessing Tax Incentives: | v Falling Short of Promised Growth and Equity ABBREVIATIONS AND ACRONYMS ANAPI National Investment Promotion Agency IMF International Monetary Fund (Agence Nationale de Promotion des IO Input-Output Investissements) KFM Kinsafu Mining BCC Central Bank of the Congo (Banque Centrale du Congo) METR Marginal Effective Tax Rate CAD Current Account Deficit PIT Personal Income Tax CDF Congolese franc SICOMINES Sino-Congolese Mines (Sino-Congolaise des Mines) CIT Corporate Income Tax SSA Sub-Saharan Africa COVID-19 Coronavirus disease SSC Social Security Contributions CPI Consumer Price Index STDA Excise Duty Traceability System DRC Democratic Republic of Congo (Système de traçabilité des DSA Debt Sustainability Analysis droits d’accise) EATR Effective Average Tax Rate TE Tax Expenditure EMDE Emerging Market and Developing TFM Tenke Fungurume Mining Economies USD United States dollar FDI Foreign Direct Investment VAT Value-Added Tax GDP Gross Domestic Product WDI World Development Indicators GNI Gross National Income WEO World Economic Outlook GTED Global Tax Expenditures Database IFPRI International Food Policy Research Institute vi | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity EXECUTIVE SUMMARY Section 1: The State of the Economy and Outlook i. Despite global challenges that have limited v. Macroeconomic stability has been maintained world economic growth in 2024, Sub-Saharan over the past 4 years. The government stopped Africa (SSA) experienced positive growth. In central bank monetization of deficits in 2020 and 2024, global economic growth held steady at 2.8 has maintained fiscal discipline, supported by re- percent (GEP, 2025), constrained by restrictive forms such as the issuance of local currency trea- monetary policies and sluggish trade. Sub-Sa- sury bonds. The fiscal deficit rose to 2.0 percent haran Africa (SSA), however, experienced an in- of GDP in 2024, due to elevated security spending crease in growth to 3.5 percent, fueled by public and public investment. Revenues held steady at investment and commodity exports, particularly 14 percent of GDP, aided by tax reforms and high in countries like Ethiopia, Nigeria, and Ghana. De- mining royalties. Public debt remains low at 22.5 spite this positive momentum, global growth is percent of GDP, with prudent borrowing policies projected to decline to 2.0 percent in 2025 due to and transparency reforms. heightened policy uncertainty, before recovering gradually. Commodity prices are also expected to vi. Inflation, although elevated, has moderated. decline, with gold being a rare exception, while Headline inflation declined to 11.7 percent by end- agriculture prices are projected to remain rela- 2024 and 10.1 percent by March 2025, owing to tively stable. tight monetary policy and a stable exchange rate. The central bank maintained a high policy rate (25 ii. The Democratic Republic of Congo (DRC) sus- percent) and intervened to manage liquidity and tained strong growth in 2024, driven mainly foreign exchange reserves. Nonetheless, inflation by the mining sector, particularly copper and remains above the 7 percent mid-term target. cobalt. GDP in DRC grew by 6.5 percent in 2024, slightly below the 2021–2023 average of 7.9 vii. The financial sector is growing but remains percent, positioning the country among Africa’s small and underdeveloped. While banking as- fastest-growing economies. However, growth sets are increasing, financial inclusion is low, and remains fragile, heavily dependent on the ex- credit is concentrated in mining. Lending is ex- tractive sector and hampered by poor infrastruc- pensive, and most loans are dollarized, reflecting ture, weak institutions, and a high fertility rate, limited monetary transmission due to high dol- which limits per capita income growth and pov- larization. erty reduction. Despite progress, an estimated viii. Looking ahead, growth is expected to remain 72.9 percent of the population continues to live robust in the medium-term, though it may dip below the poverty line. slightly in 2025 due to lower extractive out- iii. While the mining sector powered growth, its put and conflict. Given the worsening security capital-intensive nature limited job creation. situation in eastern DRC, GDP growth is expect- Employment has not matched GDP growth, with ed to slow to 4.8 percent in 2025 as expansion job creation averaging only 3 percent per year. in mining production decelerates. By 2027, GDP Most youth employment remains informal and growth is projected to rebound to 5.3 percent, vulnerable. The lack of inclusive job opportuni- fueled by mining expansions and infrastructure ties, especially for the youth, hampers poverty investment. Inflation is expected to decline fur- reduction and poses a risk of social instability. ther, supporting household purchasing power and poverty reduction. iv. On the external front, exports—especially cop- per and cobalt—rose sharply. Exports reached ix. However, internal, geo-political and global 57 percent of GDP, helping narrow the current risks persist. Risks include volatile commodity account deficit to 3.4 percent of GDP. Increased prices, slower growth in some developed coun- foreign direct investment (FDI), particularly in the tries, regional insecurity, and potential donor mining sector, also contributed to reserve accu- funding cuts. Structural weaknesses—like limit- mulation, improving the country’s external posi- ed fiscal space, low domestic revenue mobiliza- tion. tion, and poor job creation—may continue to con- strain long-term inclusive growth. Nevertheless, with continued reforms and investment, DRC’s economic outlook remains cautiously optimistic. Reassessing Tax Incentives: | vii Falling Short of Promised Growth and Equity Section 2: Tax Expenditures i. Domestic revenue, volatile and dependent on FDI, though these may discourage long-term mining, is undercut by tax expenditures. DRC’s investment. Depreciation allowances are below fiscal space is constrained by underperform- economic depreciation, reducing capital recovery ing revenue systems and high tax expenditures, for investors. The PIT structure is progressive but which have consumed up to 5 percent of GDP or riddled with exemptions and caps that dilute its about one-third of total tax revenue and 3 times effectiveness and create loopholes. Meanwhile, the health sector budget. Tax revenue remains exemptions, particularly on fuel, promote over- below regional averages, hindered by a complex, consumption and benefit wealthier households, fragmented system and weak administration. while uneven alcohol tax rates fail to properly tax Revenue is also highly volatile, fluctuating with high-alcohol products, undermining their role in global copper prices. Mining alone contributes addressing negative externalities. about one-third of revenues, leaving the system vulnerable to commodity price shifts. While cor- iv. Administration of tax expenditures could ben- porate income tax (CIT) represents a large por- efit from consolidation under the Ministry of tion of revenues, the base is narrow—personal Finance. While all tax expenditures are legally income tax (PIT), VAT, and turnover taxes contrib- grounded, many are influenced by agencies out- ute less than regional norms, reflecting a reliance side the Ministry of Finance, limiting oversight. on extractive industries and a lack of diversified Consolidating authority within the Ministry could tax sources. improve coherence and fiscal management. Re- porting of tax expenditures has improved, but ii. DRC’s system of tax expenditures is complex gaps in coverage and methodology remain—es- and expensive. Tax expenditures in the DRC pecially in PIT exemptions and VAT estimates, arise mainly from CIT and VAT concessions that which rely on import data and omit domestic are highly concentrated in industrial, mining, and and informal sector transactions. Capacity con- oil sectors, accounting for over 75 percent of to- straints limit the depth of current analyses, but tal foregone revenue. These sectors benefit from future plans include developing input-output better assessment and reporting than social or models and enhancing data collection. Though a nonprofit-related expenditures, which remain formal cost-benefit evaluation framework is not poorly quantified. The main objective of these tax in place, some measures have been eliminated, concessions is to boost investment by reducing signaling progress toward greater scrutiny. In- the tax burden, but there is minimal data on their troducing sunset clauses and regular policy re- effectiveness. Socially oriented tax breaks re- views would further institutionalize effective tax ceive negligible attention. A better understanding expenditure management. and targeting of these measures are essential to improving fiscal efficiency and equity. v. Recommendations reach across policy and ad- ministrative actions. To improve efficiency and iii. New estimates of the impact of tax expendi- equity, DRC should rationalize tax expenditures, tures provide important information for poli- broaden the tax base, harmonize the tax rates, cymakers. The VAT system is poorly aligned with and strengthen institutional capacity for fiscal social equity goals. While reduced rates are meant analysis. Simplifying tax policy and enhancing to support low-income households, wealthier the evaluation of tax concessions would support households capture the majority of these bene- better decision-making and enhance their effec- fits. Over 38 percent of household food spending tiveness. These reforms could also enable future is still taxed at the full 16 percent VAT rate, and tax rate reductions while ensuring adequate rev- the poor benefit minimally from reduced rates. A enue for development and social spending. Im- uniform VAT could raise revenues and fund bet- proving data quality and analytic capacity is criti- ter-targeted social programs. Similarly, high CIT cal for sustainable tax policy design. rates are eased through tax holidays to attract viii | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity SECTION 1: THE STATE OF THE ECONOMY AND OUTLOOK 1.1 Recent economic developments 1.1.1 Global and regional trends 1. Global growth remained steady in 2024 while 2. While global growth cools down, Sub-Saharan Sub-Saharan Africa saw some strengthening. Africa is expected to register continued but Global growth of 2.8 percent in 2024 was simi- modest upticks in growth over the next few lar to the previous year, reflecting the ongoing years. Going forward, global growth is forecast to effects of tight monetary policies, restrictive drop to 2.0 percent in 2025, due to policy uncer- financial conditions, and sluggish global trade tainties but then recovering in subsequent years. and investment (GEP, 2025). In faster-growing GDP growth in EMDE economies is also expected emerging markets and developing economies to slow in 2025 (to 3.6 percent) before edging up (EMDEs), growth slowed only slightly from 2023 over 2026-27, driven by weakening investment to 2024, buoyed by trade improvements and a and global supply chains disruptions, which are recovery in domestic demand as inflation and in- likely to more than offset any possible short- terest rates fell. In contrast, growth in Sub-Saha- term benefits from trade diversion. Growth in ran Africa (SSA) picked up to 3.5 percent in 2024, SSA is expected to continue to strengthen going largely owing to increased public investment and forward, assuming inflation eases as anticipated, a surge in commodity exports, improving exter- and providing conflict de-escalates. Despite this nal imbalances, amid a backdrop of macroeco- pick-up, however, economic expansion in SSA is nomic stabilization reform implemented in some expected to fall short of its long-term average of countries as Ethiopia, Nigeria, Ghana(Figure 1). the past two decades pre-COVID as well as the pace needed to make strides in reducing extreme poverty (Figure 1). Global growth is slowing, and emerging markets and Sub-Saharan Africa are following suit. Figure 1: Global and regional GDP growth (in %), 2022–2027 5,0 4,0 3,0 2,0 1,0 0,0 2022 2023 2024 2025 2026 2027 Advanced economies EMDEs Sub-Saharan africa World Source: June 2025 Global Economic Prospects database. Reassessing Tax Incentives: | 1 Falling Short of Promised Growth and Equity 3. Global commodity prices are declining signifi- as Botswana, Zambia, South Africa, Mauritania, cantly amid rising trade tensions and policy Liberia, and Niger (Figure 2 and Figure 3). DRC’s uncertainty from the peaks observed during non-mining growth continues to be sluggish, yet 2022. Commodity prices are expected to de- it is gradually aligning with the growth observed cline in 2025—by 12 percent compared to last in non-resource-rich countries within SSA (Fig- year—and soften by another 5 percent in 2026, ure 4). However, DRC’s heavy reliance on mining reflecting subdued industrial and consumer de- heightens the economy’s volatility, and economic mand against a backdrop of expanding supplies. growth continues to be held back by structural Although copper and aluminum prices rose ear- factors such as inadequate human capital, poor lier this year, metals prices are expected to fall infrastructure, weak institutions, and an un- in 2025 and continue declining in 2026-27 due to friendly business environment. sluggish demand, which remains a key consum- er of global metal. In contrast, gold prices are 5. Despite recent growth, DRC’s income per cap- forecast to reach record highs in 2025, driven by ita remains well below levels recorded at the policy uncertainty and safe haven flows, but will dawn of independence in 1960, and its pover- likely plateau in 2026-27. Agricultural commodity ty rate remains exceedingly high. DRC is one of prices are expected to remain relatively stable in the few developing countries that has not seen 2025 and decrease slightly in 2026-27. Weath- significant per-capita income growth since gain- er-related supply shocks to coffee and cocoa are ing independence in the 1960s. A collapse in per expected to lead to a temporary surge in bever- capita GDP, which reached its nadir in 2002, was age prices in 2025 while food commodity prices driven by political turmoil and war, poor econom- may decline due to increased rice stocks and re- ic management, and pervasive corruption. More- duced demand for soybeans. over, the country’s heavy dependence on mining left it vulnerable to economic cycles of boom and bust. Finally, a high fertility rate has led to popu- lation growth levels that exceed the average in 1.1.2 Growth in the Democratic SSA, challenging the efforts to achieve per cap- Republic of Congo (DRC) ita income growth and poverty reduction. For example, sustained positive (although variable) GDP growth during 2020-24 (averaging over 6.4 4. DRC’s strong economic performance starting percent) was insufficient to deliver significant in 2021 was maintained in 2024, buoyed by the improvements in per capita income. Similarly, mining sector. Annual GDP growth more than although poverty (based on the international doubled in 2021-23 compared to 2016-20, aver- poverty line of USD 2.15 per day1) has declined aging 7.9 percent before dropping slightly to 6.5 from 78.9 percent of Congolese in 2020 (the last percent in 2024. This performance positioned year with data availability) to an estimated 72.9 DRC among the fastest growing economies on percent in 2024, the figure remains exceedingly the African continent, with only Cabo Verde and high. This outcome underscores the challenge of Rwanda registering higher growth in 2022- converting natural resource-driven growth into 2024. DRC’s growth, driven by its mining sector, widespread improvements in living standards exceeded that of resource-rich countries such (Figure 3 and Figure 5). DRC’s growth has consistently outpaced the SSA regional average. Figure 2: Real GDP growth (in %), DRC and SSA, 2010-2024 10 8 6 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 -2 DRC SSA -4 Source: World Bank, Global Economic Prospects, 2025 1 Using 2017 purchasing power parity exchange rates. 2 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity | 3 Sudan Falling Short of Promised Growth and Equity Reassessing Tax Incentives: South Sudan 3 São Tomé and Príncipe Central African Republic Equatorial Guinea South Africa Malawi Lesotho Figure 3: Real GDP growth (in %), various SSA countries, 2022-2024 Congo, Rep. Burundi Angola Eritrea DRC was among the fastest growing SSA economies last year. Burkina Faso Source: World Bank, Global Economic Prospects, 2025 Gabon Comoros Botswana Nigeria Chad Cameroon Mali Ghana Somalia Zambia Madagascar Namibia Zimbabwe Mozambique Guinea-Bissau Senegal Liberia Tanzania Kenya Sierra Leone Gambia, The Uganda 3 Guinea Togo Côte d'Ivoire Benin Niger Ethiopia 3 Mauritania Seychelles DRC Rwanda Cabo Verde 8,0 6,0 4,0 2,0 0,0 -10,0 -12,0 10,0 -2,0 -4,0 -6,0 -8,0 Non-mining growth in DRC mirrors growth trends in SSA non-resources rich countries Figure 4: Non-Resources GDP growth (in %), DRC and SSA, 2010-2024 9 7 5 3 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 -1 -3 DRC non mining Non-Resource Rich SSA Countries Source: World Bank, Global Economic Prospects, 2025 As a result, the incidence of poverty remains elevated. Figure 5: Poverty rates and GDP per capita (in % and constant local currency units), 2012-2027 Poverty rate (%) Real GDP per capita (constant LCU) 80 180000 78 160000 76 140000 120000 74 100000 72 80000 70 60000 68 40000 66 20000 64 0 2012 2014 2016 2018 2020 2022 2024 2026 International poverty rate Real GDP pc Notes: The International Poverty Line is defined as $2.15 per day (in 2017 purchasing power parity - PPP). This line represents the threshold for extreme poverty, meaning individuals living below this level are considered to be in extreme poverty. The gap in the poverty chart is due to changes in methodology between the latest household surveys conducted in 2012 and 2020. Source: World Bank staff calculations 4 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity 6. The authorities have shown strong commit- for a stable currency and overall macroeconomic ment to maintaining macroeconomic stability stability. despite multiple shocks. Over the last decade, macroeconomic stability has been reestablished 7. Private investment and exports have contrib- in the DRC. Monetization of the fiscal deficit by uted substantially to overall growth on the the Central Bank (Banque Centrale du Congo, demand side thanks to higher foreign demand. BCC) that resumed in 2020 due to the COVID-19 Private investment—largely in the mining sector pandemic has been stopped. A “Stability Pact,” for export production—continues as the most banning BCC’s monetization of the deficit, was important driver of growth on the demand side officially signed between the BCC, the Ministry as financial conditions (both domestic and glob- of Budget, and the Ministry of Finance in August al) have eased. Furthermore, the Government im- 2020. Moreover, to deepen domestic government plemented a series of reforms in 2024 aimed at debt markets, increase the options for deficit fi- improving the business environment to protect nancing, and relax cash-based management of property rights and develop financial and labor the budget, the BCC launched local currency-de- markets. The second most important contributor nominated Treasury bonds in late 2019. Finally, to growth in 2024 was exports. This good per- the fiscal deficit has been kept at sustainable formance has come from significant increases levels, not exceeding 3.0 percent of GDP since in mining production and favorable internation- 2021, despite recent slippages due to exceptional al prices. As a result, the relative contribution of security-related expenditures. The BCC has been foreign demand to overall growth increased in pursuing adequate monetary policy that has 2024 (Figure 6 and Figure 7). helped anchor inflation expectations, allowing From the demand side, private investment and … and the share of foreign demand has been grow- exports were the key drivers … ing. Figure 6: Demand side contribution to GDP growth Figure 7: Demand contribution to growth (in %), (in percentage points of GDP), 2010-2024 2010-2024 10 5 5 4 3 0 2 -5 1 2010-2015 2016-2020 2021-2023 2024 0 Public consumption Private consumption 2010-2015 2016-2020 2021-2023 2024 Public investment Private investment Foreign demand Exports GDP Notes: Each demand component is net of its import content Source: Statistical Authorities and World Bank staff calcula- so demand components with high import content (e.g., pri- tions. vate investment) have a lower impact on growth, and those with low import content (e.g., exports) have a higher impact. Source: Statistical Authorities and World Bank staff calcula- tions. 8. On the supply side, growth was driven by ex- by almost half in 2024 from the previous year.2 tractives in 2024, with output bolstered by In contrast, non-extractive GDP growth slowed foreign investment in copper and cobalt. The to 2.6 percent in 2024, reflecting a widespread mining sector was the key driver of GDP, grow- slowdown across sectors. Notably, the construc- ing by 12.8 percent in 2024 and contributing tion sector reverted to its historical growth levels three-quarters of overall growth. Copper pro- following a period of strong expansion in 2023 duction remained dominant, accounting for 80 (Figure 8 and Figure 9). percent of extractive GDP. Cobalt extraction, im- portant for global battery production, increased 2 Despite considerable potential, hydrocarbon sector performance remains modest, with an average production of 25,000 barrels of crude oil per day in the coastal basin. Reassessing Tax Incentives: | 5 Falling Short of Promised Growth and Equity From the supply side, mining sector output grew … and contributed the most to growth. rapidly in 2024… Figure 8: Growth in value-added by sector (in %), Figure 9: Supply side contribution to growth (in 2024 percentage points of GDP), 2010-2024 14 9 12 7 10 5 8 6 3 4 1 2 -1 2010-2015 2016-2020 2021-2023 2024 0 Mining Services Other industry Agriculture Agriculture Mining Other industry Services Net taxes GDP Source: Statistical Authorities and World Bank staff calcula- Source: Statistical Authorities and World Bank staff calcula- tions. tions. 1.1.3 Impact of unbalanced growth during the same period. DRC’s employment elas- ticity of economic growth of around 0.5 is low, on job creation especially for a developing country, but the cause of this slow employment growth is the concen- tration of recent output expansion in the mining 9. Despite sustained overall economic expansion, sector, an industry with high labor productivity job creation has been slow to respond since driving a sectoral employment elasticity of 0.21. growth has been concentrated in capital-in- By contrast, the labor-intensive service, trade, tensive mining. During 2010-23, job creation and transport sectors have shown much higher was slower than overall economic growth: the potential to absorb employment (Figure 10 and average rate of job creation reached 3 percent, Figure 11). about half of the average economic growth rate Overall job creation has lagged GDP growth in . . . since low employment elasticity sectors have recent years. . . dominated growth. Figure 10: GDP growth and employment growth (in Figure 11: Elasticity of employment to output %), 2010-2023 growth, by sub-sector, 2010-2023 1,4 10 1,2 8 1,0 0,8 6 0,6 0,4 4 0,2 2 0,0 Machinery, equipment and… Accommodation and food… Mining Real estate activities Crop Cattle Forestry Information and communication Chemicals and petroleum Health and social work Construction Non-metal minerals Beverage & Tobacco Finance and insurance Textiles, clothing and footwear Other manufacturing Wholesale and retail trade Metals and metal products Wood and paper products Electricity, gas and steam Public administration Education Business services Other services Transportation and storage Water supply and sewage 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 -2 Employment growth (%) GDP growth (%) Source: World Bank staff calculations. Source: World Bank staff calculations. 6 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity 10. Impressive headline growth has not translat- little access to benefits and social protection). ed into benefits for the poor because of slow Youth jobs tend to be in the primary sector and in job growth. Poverty incidence3 (that is, the pop- the private sector. Nearly seven out of 10 workers ulation’s share of poor people) is declining, but work longer hours than a normal work week. still remains high at 72.9 percent in 2024. Fast population growth driven by a high fertility rate (of 6.1 births per woman as of 2022) has result- ed in an increase in the number of poor and has 1.1.4 DRC’s external balance added pressure on the DRC’s already low human development. If current demographic and eco- nomic trends continue, the number of poor may 12. Rising copper exports dominate DRC’s exter- increase by eight million by 2030. Insufficient nal trade and continue as a major contributor formal sector job opportunities—particularly to the economy. In 2024, copper exports rose to for youth—has been one of the factors contrib- 38 percent of GDP and nearly 80 percent of total uting to the slow pace of poverty reduction and goods exports, driven by both higher world pric- undermining the inclusivity of growth in the DRC. es and rising production. Mining output volume in Moreover, a lack of job opportunities for youth 2024 was nearly double its level in 2020, as do- may create fertile ground for social unrest, par- mestic production capacity has steadily expand- ticularly in a conflict-affected and fragile state ed from the Kamoa-Kakula mining project (the like DRC. World Bank estimates suggest that the third largest copper mining complex in the world) DRC needs to create two to four million jobs every launched in mid-2021. Other metals exports, year to absorb new entrants into the labor mar- especially cobalt, are also expanding quickly, ket and reduce poverty. together pushing goods exports to 57 percent of GDP in 2024. As a result, the downward drift 11. The quality of youth employment is poor. Youth of Congolese exports’ share in global trade has employment is almost entirely informal, usually recently been reversed (Figure 12, Figure 13 and low-wage, and almost always vulnerable (with Figure 14). Exports are dominated by copper… …in a context of favorable commodity prices… Figure 12: Exports of copper, cobalt, gold, and other Figure 13: International prices of copper, gold, exports (in % GDP), 2018-23 cobalt, and oil (in USD per unit) 50 12 000 140 10 000 120 40 100 8 000 80 30 6 000 60 4 000 40 20 2 000 20 0 0 10 Aug-18 Dec-20 Feb-22 Sep-22 Mar-19 May-20 Apr-23 Nov-23 Jan-18 Jul-21 Jun-24 Jan-25 Oct-19 0 Copper price Gold price 2018 2019 2020 2021 2022 2023 2024 Cobalt price Oil price Copper Cobalt Gold Other exports Source: BCC. Source: BCC. 13. Export growth helped narrow the current ac- percent in 2020. This increase was primarily driv- count deficit significantly in 2024. The sub- en by imported capital goods, essential to sup- stantial rise in merchandise exports in 2024 sig- port mining investments, and also by consumer nificantly offset a larger import bill, reducing the goods, particularly food (Figure 15 and Figure 16). current account deficit to 3.4 percent of GDP. The value of imported goods has been accelerating, reaching 42 percent of GDP in 2024, up from 24 3 Based on the international poverty line of USD 2.15 per day. Reassessing Tax Incentives: | 7 Falling Short of Promised Growth and Equity . . . helping the share of DRC exports in global trade to rise in recent years. Figure 14: Share of DRC exports in world exports (in %), 1994-2024 0,12 0,1 0,08 0,06 0,04 0,02 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: WDI … offset by high import growth. . . but still the current account deficit has narrowed. Figure 15: Imports of energy, intermediate goods, Figure 16: Current account deficit and components and consumption goods (in % GDP), 2018-24 (in % GDP), 2018-24 45 10 8 40 6 35 4 30 2 25 0 -2 20 -4 15 -6 10 -8 -10 5 -12 0 2018 2019 2020 2021 2022 2023 2024 2018 2019 2020 2021 2022 2023 2024 Net current tranfers Energy imports Trade in goods Intermediate goods imports Net income receipts Consumption goods imports Bal. of services Capital goods imports CAB Source: BCC. Note: CAB is current account balance. Source: BCC. 8 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity 14. The current account deficit has been financed relaunch the Kipushi zinc mines. Concurrently, by foreign direct investment (FDI) and external external financing, such as IMF Extended Credit financing, allowing accumulation of foreign Facility program disbursements,4 played a pivot- reserves. After a decline in 2022, FDI increased al role in bolstering foreign reserves, which rose to 4.1 percent of GDP in 2024, reflecting dynamic to cover 10 weeks of imports by the end of 2024. growth in the mining sector. Notable investments This increase signifies enhanced fiscal stability included Canadian Ivanhoe Mines’ initiatives to and an improved capacity to manage external expand the Kamoa-Kakula copper mines and to shocks (Figure 17 and Figure 18). Rising FDI continues to be a primary financing …allowing official reserves to increase. source for the current account deficit… Figure 17: Foreign direct investment (% GDP), 2018- Figure 18: Official reserves (USD millions and weeks 24 of imports), 2015-24 7 000 10,0 4,0 In US$ million 6 000 3,5 8,0 Weeks of imports 3,0 5 000 (Right) 2,5 4 000 6,0 2,0 3 000 4,0 1,5 2 000 1,0 2,0 0,5 10 00 0,0 0 0,0 2018 2019 2020 2021 2022 2023 2024 FDI (% of GDP) Source: BCC. Source: BCC. 1.1.6 Fiscal balance and public debt (LOGIRAD) within some key government services. The undergoing tax policy and administration re- forms have not yet led to substantial increases in revenue. 15. Higher copper and cobalt exports have main- tained steady revenue collection throughout the year, but tax reforms have yet to produce 16. The domestic revenue system is underper- tangible fiscal gains. Domestic revenues held forming and further exacerbated by substan- steady at 14 percent of GDP in 2024, supported tial tax expenditures. Tax revenue remains be- by favorable commodity prices. Direct taxes (cor- low regional averages, impeded by a complex, porate and personal income taxes), non-tax rev- fragmented system and weak administrative enue such as mining royalties, and value-added capacity. Furthermore, DRC’s fiscal space is con- tax (VAT) constituted the major sources of rev- strained by high tax expenditures, which ac- enue in 2024 (Figure 19). Dynamism in the min- counted for up to 5 percent of GDP, representing ing sector helped overall revenues from the ex- approximately one-third of the total tax revenue tractive sector5 reach nearly 6 percent of GDP. and equivalent to 3 times the health sector bud- Reforms to improve compliance included imple- get. Although the primary goal of tax exemptions mentation of the standardized VAT billing sys- is to reduce tax burdens and thereby encourage tem for companies, and institution of the excise investment, there is a lack of comprehensive duty traceability system (Système de traçabilité data on their effectiveness. Additionally, social- des droits d’accise, STDA) on tobacco, telecom- ly oriented tax breaks receive limited attention, munications, and beverages. Revenue collection underscoring the necessity for a more thorough is being modernized with the deployment of in- understanding and a targeted approach to these tegrated public financial management software measures to improve fiscal efficiency and equity. 4 The 2021-2024 IMF program was completed in July 2024. 5 Extractive revenue is revenue from the mining and petroleum sectors from personal and corporate income taxes, the tax on exceptional profits, royalties, excise duties, VAT, state-owned enterprise dividends, and other taxes and fees. Reassessing Tax Incentives: | 9 Falling Short of Promised Growth and Equity 17. Overall public expenditure drifted upward salary adjustments for teachers and the army, across most categories, but security spending has moderated slightly since 2022. Transfers and through exceptional procedures undermined subsidies rose, partly due to increased subsi- standard processes, weakening fiscal poli- dies to oil producers as the government worked cy credibility. Military expenditures, executed to reduce liabilities toward oil companies and to through exceptional procedures in response rationalize the oil subsidy (Box 1). Higher capital to ongoing instability in the eastern part of the spending supported the public investment pro- country, remained elevated at more than 2 per- gram including road rehabilitation,6 acquisition cent of GDP in 2024. Spending through emer- of medical equipment for general hospitals in gency procedures (of almost 15 percent of total Kalemie, purchase of chemical fertilizers, and spending in 2024) bypassed the commitment, airport rehabilitation in Kavumu, Kananga, and verification, and authorization steps in the ex- Goma. Some spending was driven by social and penditure chain to allow the ministers of finance infrastructure investments funded by external and budget to authorize payments directly. At the resources such as the World Bank Group and Af- same time, the wage bill, having risen because of rican Development Bank (Figure 20). Revenue remained steady … ... but expenditures rose modestly. Figure 19: Revenue, total and by component (in % Figure 20: Public expenditure composition GDP), 2018-24 (in % GDP), 2018-24 15 18 16 15 14 12 5 10 8 0 6 2018 2019 2020 2021 2022 2023 2024 4 2 Non-Taxe revenue Taxes on International trade 0 Excises 2018 2019 2020 2021 2022 2023 2024 VAT Income tax Wages Security Spending Others exp. CapEx Domestic revenues Source: DRC Ministry of Finance. Source: DRC Ministry of Finance. 6 Rehabilitation and modernization of the Kalamba Mbuji–Kananga provincial road, of routes nationales (trunk roads), and of Kinshasa bypasses. 10 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity Box 1: Fuel price subsidies are fiscally costly, but the pace of reforms has been uneven Fuel subsidies aimed at keeping fuel prices low for consumers have substantial fiscal implications and are subject to reform efforts to phase them out. The DRC has a regulatory framework for fuel pricing that in- cludes a formula to adjust retail petroleum product prices to reflect import and domestic production costs. The Ministry of Economy sets fuel prices, following proposals of a monitoring committee (Comité de Suivi des Prix des Carburants Terrestres, Land Fuel Price Monitoring Committee). Prices are to change as soon as one of the following parameters varies by more than 5 percent: (i) the CDF/USD exchange rate, (ii) the Prix Moyen Frontière (average border price), and/or (iii) the fuel sales volume. However, this framework has not been fully applied, leading to continued low retail prices and high fiscal costs. The fiscal cost of fuel price subsidies is high. In 2024, direct subsidies amounted to about USD 305.3 million (0.4 percent of GDP) including arrears payment to the oil companies. In addition, foregone tax revenues are estimated by the authorities to total as much as USD 86.8 million per year or 0.1 percent of GDP. Moreover, transparency in the process of setting fuel subsidies is lacking. The committee’s discussions are not pub- lished, and the process to make the related liabilities to oil companies payable is extended and uncertain. A November 2023 roadmap sets out the government’s plan to lower fuel subsidies and arrears. Enacted re- forms include removing international airlines and mining companies from access to subsidized fuel prices. Nevertheless, 2024 saw uneven implementation with fuel prices increased in April 2024, reducing subsidy costs, but then reduced in May and October, in response to high inflation and rising global oil prices, push- ing up direct transfers and the accumulation of arrears to oil suppliers. 18. In 2024, the central government’s fiscal bal- BCC in 2020 banning BCC’s monetization of the ance deteriorated. Despite steady revenue col- deficit (Figure 21). Nevertheless, the manage- lection efforts, the fiscal deficit widened to 2.0 ment of public finances in DRC faces significant percent of GDP in 2024. This deficit was primarily challenges, including inefficient cash manage- financed by treasury bills and bonds amounting ment, poor budget execution, weak control sys- to nearly 1 percent of GDP and external conces- tems, and limited fiscal space (Box 2). Important- sional borrowing from donors, including the IMF ly, DRC’s narrow fiscal space, which constrains and World Bank, for about 1.7 percent of GDP. De- public services and investments, is partly due to spite the deterioration of the fiscal stance, the high levels of tax expenditures (or tax breaks), an government has maintained discipline in financ- issue explored in detail in Section 2. ing in line with the “Stability Pact” signed with the The fiscal deficit has worsened. Figure 21: Revenue, expenditures, and fiscal balance, (% GDP), 2018-24 18 16 14 12 10 8 6 4 2 0 -2 -4 2018 2019 2020 2021 2022 2023 2024 Revenue and grants Expenditures overall balance Source: DRC Ministry of Finance. Reassessing Tax Incentives: | 11 Falling Short of Promised Growth and Equity Box 2: Public financial management challenges and reforms Public financial management in DRC faces significant challenges, including inefficient cash management, poor budget execution, weak control systems, weak oversight and compliance institutions, and sub-na- tional public administration inefficiencies. These issues are exacerbated by the absence of a centralized and transparent mechanism for managing public funds. Budget execution is characterized by excessive use of emergency procedures which allow the ministers of finance and budget to directly authorize pay- ment, bypassing the commitment, verification, and authorization steps in the expenditure chain, hence undermining the integrity of the budget execution process. Spending through emergency procedures was almost 15 percent of total spending in 2024. The excessive centralization of budget commitment authority in the Ministry of Finance and the Ministry of Budget leads to inefficiencies and delays. DRC’s Public Financial Management reforms are pivotal for enhancing fiscal stability and governance. Key initiatives include operationalizing the Directorate General of the Treasury and Public Accounting, es- tablished in March 2022, and implementing the Single Treasury Account. Strengthening the capacity of oversight institutions such as the Inspection Générale des Finances (General Inspectorate of Finance) and the Supreme Audit Institution is essential for ensuring their oversight functions. Moreover, improving the provinces’ revenue collection and decentralizing territorial entities’ local financial management through participatory budgeting will further bolster fiscal management. These reforms, focusing on better budget execution, transparency, and accountability, aim to increase resources available for sectoral and provincial spending, thus supporting broader fiscal decentralization and public financial management improvements. Enhanced cash flow management is also a critical aspect of these reforms, ensuring effective allocation of financial resources. 19. DRC’s debt burden continues to improve. The 20. The cost of government securities increased country has relatively low public debt, which significantly in 2024. Over the past two years, declined to an estimated 22.5 percent of GDP the level of outstanding public domestic secu- in 2024 (Table 1). This total included about USD rities has risen significantly due to a higher de- 10.7 billion (equivalent to 14.5 percent of GDP) of mand for liquidity. Initially denominated in CDF external public debt, comprised mostly of obli- and then indexed to the US dollar, dollar-denom- gations to the IMF and World Bank and to China. inated securities were issued starting in 2023 The servicing of this debt is very modest when to enhance their appeal and meet public deficit measured against exports, revenues, or reserves. financing needs. Consequently, the weighted av- The smaller stock of domestic public debt, most- erage interest rate for Treasury bills in the DRC ly reflecting domestic arrears and short-term averaged 26.9 percent in 2024, approximately T-bills, fell to 8 percent of GDP in 2024. The gov- 850 basis points higher than in 2023, reflecting ernment has demonstrated strong discipline in the high policy rate (25 percent) and a decline in containing borrowing and following a prudent attractiveness. debt management strategy. Reforms supported by the World Bank’s Sustainable Development Fi- nancing Policy have been successful in both debt management and debt transparency since 2021. The repayment of domestic arrears is guided by the Government’s clearance strategy (with a roadmap updated in December 2024). Commer- cial public debt largely consists of a guaranteed loan signed in 2008 to finance infrastructure.7 7 This loan funds SICOMINES (La Sino-Congolaise des Mines SA), a mining-for-infrastructure joint venture between the Congolese government and Chinese investors, and has disbursed gradually to reach USD 888 million as of 2022. The government guarantee that can only be called after 2050. The debt is expected to be repaid by 2027 and is collateralized by SICOMINES’ earnings. 12 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity Table 1 : Public debt and debt service (% GDP, unless otherwise indicated), 2020-2024 2020 2021 2022 2023 2024 Est. Est. Est. Est. Prel. Public debt 23.7 25.3 23.8 27.0 22.5 External debt 15.8 16.5 14.9 17.8 14.5 Domestic debt 7.9 8.8 8.9 9.1 8.0 Public external debt service In % of exports 4.0 2.3 2.4 2.4 1.8 in % of revenues 13.1 8.1 6.5 7.6 6.1 In % of gross reserves 49.7 20.9 15.2 13.0 9.4 Source: DSA, June 2025 (Preliminary). 1.1.7 Monetary Policy and Inflation tainty, until inflation hits the medium-term target of 7 percent. However, the effectiveness of mon- etary policy remains limited due to the country’s high rate of dollarization, which weakens the 21. The BCC maintained tight monetary policy monetary transmission mechanisms (Box 3). In measures to anchor inflationary expectations parallel, BCC pursued efforts to absorb excess at lower levels. The BCC tightened the mone- CDF liquidity in the system by issuing its own tary policy stance, holding the policy rate at 25.0 local-currency bonds. As a result, base money percent, along with sizable BCC interventions, in and broad money (M2) grew by 32 percent and a move to tame inflation (Figure 22). The Central 22 percent year-on-year, respectively, by end- Bank has maintained the policy rate unchanged 2024, with net foreign assets driving much of this since August 2023 as part of a strategic decision growth. to anchor inflation expectations, amid unprece- dented levels of inflation and economic uncer- Reassessing Tax Incentives: | 13 Falling Short of Promised Growth and Equity Box 3: De-dollarization progress in DRC In 2012, the Democratic Republic of Congo (DRC) started a strategy to reduce reliance on the US dollar, and boost the use of the Congolese Franc (CDF). The strategy delignated a market-based approach to promote the use of the Congolese Franc (CDF) in the economy. The strategy included: (1) eliminating administrative caps on interest rates for domestic currency deposits and loans; (2) reducing the non-remunerated re- serve requirement on local currency deposits; (3) adopting an inflation targeting policy and a more flexible exchange rate regime; (4) developing the money market for government securities denominated in local currency; and (5) increasing the efficiency of the national payment system. Yet, the implementation of the strategy had a marginal impact and dollarization remains very high. It was only in 2021 that the country began issuing government securities in local currency. The Stability Pact, signed by the Government and the Central Bank of Congo (BCC) in August 2020, effectively halted the Central Bank’s monetization of the fiscal deficit. Since January 2022, the reserve requirement on foreign exchange deposits has been estab- lished in foreign exchange for deposits exceeding their end-2021 level, hence reducing the advantage of holding deposits in forex. Several countries have embarked on the journey of de-dollarization with varying degrees of success, showcasing a range of strategies and outcomes. For instance, Peru has emerged as a model for the imple- mentation of inflation targeting and the establishment of robust monetary policies, which have collectively diminished its reliance on the U.S. dollar, with 82 percent of foreign exchange denominated loans in total loans in the early 1999 to 24 percent in 2024 (IMF Articles IV). This approach has facilitated a marked reduc- tion in both domestic and external financial dollarization, thereby bolstering Peru’s economic resilience. Similarly, Bolivia has made noteworthy strides by enacting policies that promote the usage of its local currency, successfully mitigating the dollar’s dominance within its economy. Thus, loans denominated in foreign currency dropped from 96.3 percent in 1999 to 0.6 percent in 2024 (IMF Articles IV). In the SSA re- gion, Angola, Mozambique, and São Tomé and Príncipe have similarly limited the use of foreign currencies through consistent policy initiatives, demonstrating that significant reductions in dollar usage are possible with suitable economic reforms. 22. The official exchange rate showed relative crease in 2023, inflation subdued to 11.7 percent stability, depreciating at a slower rate with by December 2024 and stood at 10.1 percent in minimal spread between official and parallel March 2025, primarily due to a drop in food prices market rates. Exchange rate policy played a cru- (Figure 22 and Figure 23), which account for over cial role in inflationary dynamics in the context of two-thirds of headline inflation. Lower global a dollarized economy with high exposure to vol- prices for food and oil, which are significant im- atile global commodity prices. The official CDF/ ports for the DRC’s household consumer basket, USD exchange rate recorded relative stability, have helped lessen pressure on the CPI. Despite depreciating at a slower rate in 2024 in the offi- this progress, inflation remains well above the cial market, supported by coordinated measures BCC mid-term target of 7 percent. In response to to absorb excess liquidity. The parallel exchange the high cost of living, the government exempt- rate followed the same trend, resulting in a nar- ed some food goods from tax for twelve months rowing and negligible spread between the official and lowered fuel prices at the pump in November and the parallel exchange rates. The BCC has in- 2024. tervened to sterilize forex and actively managed reserve requirements on US dollar liabilities. The 24. In 2024, subnational inflation rates aligned increase in reserve requirements on US dollar li- with the national trend of decline. Prominent abilities helped create a liquidity buffer in foreign urban centers, including Kinshasa (12.5 percent), currencies in the BCC, helping to mitigate foreign Lubumbashi (10.8 percent), and Goma (11.9 per- exchange market fluctuations. cent), have all witnessed a slowdown in inflation. This downward trajectory continues into 2025, 23. Despite government efforts, inflation remains notwithstanding the worsening security con- above the BCC’s mid-term target of 7 percent, ditions in Goma and Bukavu. Collectively, these undercutting household purchasing power. A regions account for less than 15 percent of the stable Congolese franc and tight monetary pol- national inflation rate. icy helped to restrain inflation. After a sharp in- 14 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity Inflation moderated as the BCC maintained a Food prices remain the primary driver of headline tightened policy stance. inflation. Figure 22: Central bank policy rate and CPI year-on- Figure 23: Consumer price index and food inflation, year inflation (%) year-on-year (%) 25 25 20 20 15 15 10 10 5 5 0 0 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23 Jun-24 Dec-24 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Jun-20 Jun-21 Jun-22 Jun-23 Jun-24 BCC Policy Rate Overall inflation (y-o-y, %) Headline Food Source: BCC. Source: World Bank staff calculations using BCC data. 1.1.8 Financial sector ever, the capital adequacy ratio (in percent of risk-weighted assets) declined to under 15 per- cent in December 2024. Both deposits and credit 25. The Congolese financial system is growing but are almost completely dollarized, with foreign remains small and concentrated, and financial currency (FX) accounting for 91.6 percent and 91.9 inclusion is low. Financial assets totaled just percent of the total, respectively. Asset quality one-quarter of GDP in August 2024, dominated has improved, as non-performing loans dropped by externally owned banks. The top three banks to 6.3 percent by the end of 2024. controlled about two-thirds of assets and credits and more than half of total deposits in the bank- 27. Credit has been increasing but remains scarce, ing sector.8 The non-bank financial market is de- expensive, and highly concentrated. The bank- veloping at a slow pace. According to the World ing sector finances the DRC economy marginal- Bank Global Findex, 27 percent of adults in the ly, with credit to the private sector representing DRC had a bank account in 2022, compared to about 12 percent of GDP in 2024, only half the 55 percent across SSA. Financial inclusion in the SSA average (Figure 26), while deposits reached DRC stands at approximately 6 percent, which only 20 percent of GDP. It is estimated that credit is significantly lower than the SSA average of 25 to the private sector in DRC was primarily allo- percent. cated to the extractive sector, which accounted for one-third of total credit in 2024, followed by 26. Despite structural vulnerabilities, the banking trade and other services. Moreover, the cost of sector showed progress in 2024. Although the credit in DRC remains among the highest in Af- DRC banking sector remains undercapitalized, it rica (Figure 25). Bank lending-deposit spread for has significantly strengthened its capital base. loans denominated in local currency exceeded 20 Following the BCC’s decision to increase mini- percent on average in 2024, while the spread for mum capital requirements to USD 50 million (by loans denominated in USD was over 8 percent July 2025), aggregate capital is on the rise. How- (Figure 24). 8 There are a total of 15 banks in DRC include four local banks, nine regional pan-African banks and two banks owned by inter- national banking groups. Reassessing Tax Incentives: | 15 Falling Short of Promised Growth and Equity 0 5 10 15 20 25 30 0,00 5,00 10,00 15,00 20,00 25,00 30,00 Dec-19 Zimbabwe Ghana Mar-20 Nigeria Malawi DRC Jun-20 Sierra Leone Egypt Sep-20 Source: Trading Economics Angola Gambia Dec-20 Source: DRC Central Bank (BCC) Liberia 16 | Reassessing Tax Incentives: Ethiopia BCC Policy Rate Zambia Mar-21 Burundi Madagascar Jun-21 Interest rate remains high… South Sudan Mozambique Sep-21 Guinea Falling Short of Promised Growth and Equity STP Kenya Dec-21 Uganda Tunisia Mar-22 Lesotho South Africa Jun-22 Mauritania Namibia Swaziland Sep-22 Rwanda Tanzania Dec-22 Benin Bank debit interest rate Burkina Faso Guinea Bissau Mar-23 Ivory Coast Mali Jun-23 Niger Senegal Sep-23 Togo CAR Chad Dec-23 Cameroon Figure 25: Monetary Policy Rate (in %, December 2024-May 2025) Eq. Guinea Mar-24 Gabon Jun-24 Figure 24: BCC policy rate, bank debit rate, and bank credit rate (in %) Congo, Rep. Algeria Libya Sep-24 Cape Verde Morocco Dec-24 Botswana Bank credit interest rate Seychelles Mar-25 0 10 20 30 40 50 60 70 South Africa Cabo Verde Namibia Burundi Seychelles Eritrea Botswana Source: IMF WEO April 2025 Senegal Burkina Faso Togo Mali Côte d'Ivoire Lesotho Kenya Rwanda SSA Nigeria Benin Tanzania Comoros … and credit to the private sector is low. Liberia Mozambique Gabon Madagascar Cameroon Guinea-Bissau Congo, Rep. Zambia CAR Uganda DRC Ethiopia Niger Guinea Equatorial Guinea Chad Gambia, The Ghana Malawi Angola STP Zimbabwe Reassessing Tax Incentives: Falling Short of Promised Growth and Equity Sierra Leone Figure 26: Credit to the private sector in SSA (in % GDP), various countries, 2024 South Sudan | 17 1.2 Growth outlook 28. Economic prospects are mixed and contingent and the Congolese franc remains stable. In the on ongoing reforms and external develop- medium term, inflation is projected to recede as ments. Economic growth is expected to remain global prices stabilize and the Congolese franc strong, reaching 5.3 percent by 2027, despite a strengthen. A robust external position and the projected slowdown to 4.8 percent in 2025 from absence of BCC’s financing of the budget deficit a high base (7.6 percent in 2021-24) due to re- will support a stable currency and help contain duced extractive output and conflict-related dis- inflation within the medium-term target of 7 ruptions. Growth will be driven primarily by the percent. Trends in global commodity prices, par- mining sector, with expanded production at the ticularly those related to food and energy, will Kamoa-Kakula, Tenke Fungurume, and KFM cop- continue to play a significant role in influencing per and cobalt mines. A temporary cobalt export domestic headline inflation. suspension in early 2025 may lead to storage and cost issues – as the mining companies continue 31. Fiscal consolidation is expected to continue production— but could be offset by future prob- in the DRC, though revenue mobilization and able price gains. Zinc production will rise with the expenditure control remain challenging. In Kipushi mine reopening. Non-mining sectors like 2025, the fiscal deficit is projected to widen to services, manufacturing, and construction will 3.7 percent of GDP, driven by increased security also support growth, aided by the World Bank- spending and high public-sector wages. Security backed INGA 3 development project. Construction expenditure may exceed 2.4 percent of GDP due and infrastructure sectors (in particular, roads to conflict and the withdrawal of regional forc- and electricity) will be boosted as the country es, potentially limiting social spending (Box 4). readies for dramatic expansion of hydropower on In addition, the DRC is grappling with substantial the Congo River to increase electricity access and financial burdens due to security escalation, with promote economic development. losses in government revenue estimated at ap- proximately USD320 million (0.4 percent of GDP) 29. Exports - particularly from extractives - would in 2025. However, the deficit is expected to nar- remain a key growth driver in the medium term, row below 2 percent by 2027 through digital tax with strong investments providing additional reforms and tighter expenditure controls. Fiscal support. On the demand side, growth would be strategy emphasizes avoiding monetary financ- led by private investment and exports. A favor- ing and adhering to legal fiscal limits. Alongside able outlook for commodity prices would contin- reforms under the World Bank budget support, ue to stimulate investment in the mining sector, the IMF is supporting reform through a 38-month mostly through capacity expansion in existing Extended Credit Facility and a Resilience and Sus- projects as global financial conditions continue tainability Facility. The sudden suspension of US- to improve following the easing of a tighter mon- AID programs will further strain resources, cut- etary policy stance in advanced economies. In ting over USD 1 billion in annual aid. Public debt tandem, mining activities will buoy exports in the is expected to moderate to 22 percent in the me- medium term. dium term, and the overall risk of debt distress is projected to remain moderate. However, despite the country’s relatively low total public debt, lim- 30. Domestic inflation is expected to ease gradu- ited repayment capacity remains a significant ally as global inflationary pressures moderate, vulnerability.9 9 The most recent Debt Sustainability Analysis prepared in December 2024 projects that the external and overall risk of debt distress will remain moderate, but DRC’s vulnerability to commodity price volatility is reflected in the breaching of thresholds by two external debt ratios under the most extreme shock of lower nominal exports. The present-value of debt-to-GDP and the debt-to-exports ratios as well as two debt service indicators breach their thresholds in the export shock scenario in which nominal exports decline by 16.5 percent in 2025 and 2026. 18 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity Box 4: Amendment to the 2025 Budget The security situation in Eastern DRC deteriorated significantly in January 2025, exerting additional pres- sure on public finances. In response, the Government has amended the 2025 budget. Total expenditure as a percentage of GDP have decreased, influenced by the denominator effect of an upward adjustment of GDP, as well as a substantial reduction in capital expenditure. However, the wage bill is expected to increase by 0.5 percent of GDP, driven by the authorities’ decision to double the salaries of military and police per- sonnel. Interest payments are projected to rise by 0.4 percent of GDP, addressing a previous underestima- tion. Additionally, exceptional security spending is anticipated to increase by 0.6 percent of GDP, based on spending trends observed since the escalation of the conflict. On the revenue side, tax collections are expected to decline due to the closure of revenue administration offices in the North and South Kivu provinces, along with the broader impact of the conflict, which affects taxes from Kinshasa-based firms and financial institutions operating in the East. As result, the headline fiscal deficit is projected to widen, reaching 2.6 percent of GDP in 2025, compared to the initially projected 2.3 percent. In percent In million USD Change in of GDP ppt of GDP Initial Revised Initial Revised Total expenditure 16,982.7 17,201.4 21.3 20.5 -0.8 Current expenditure 8,807.5 9,181.9 11.1 11.0 -0.1 Wages and salaries 3,429.6 4,014.7 4.3 4.8 0.5 Interest due 112.2 411.1 0.1 0.5 0.4 External 37.0 57.0 0.0 0.1 0.0 Domestic 75.2 354.1 0.1 0.4 0.3 Goods and services 1,727.8 1,787.9 2.2 2.1 0.0 Subsidies and current transfers 3,538.0 2,968.3 4.4 3.5 -0.9 Capital expenditure 7,669.8 5,983.9 9.6 7.1 -2.5 Externally financed 4,107.9 4,244.6 5.2 5.1 -0.1 Domestically financed 3,561.9 1,739.3 4.5 2.1 -2.4 Exceptional expenditure 505.3 2,035.5 0.6 2.4 1.8 Revenue and grants 15,500.9 15,350.7 19.5 18.3 -1.1 Revenue 12,513.4 12,206.2 15.7 14.6 -1.1 Tax revenues 8,230.8 8,079.5 10.3 9.6 -0.7 Income tax and VAT 5,601.1 5,738.5 7.0 6.9 -0.2 Customs and excise 2,629.7 2,340.9 3.3 2.8 -0.5 Non-tax revenues 4,282.5 4,126.8 5.4 4.9 -0.4 Grants 2,987.5 3,144.5 3.8 3.8 0.0 Overall balance (commitment basis) -1,481.8 -1,850.7 -1.9 -2.2 -0.3 Change in domestic arrears -331.6 -351.3 -0.4 -0.4 0.0 Overall balance -1,813.3 -2,202.0 -2.3 -2.6 -0.4 (cash basis) Financing 1,813.3 2,202.0 2.3 2.6 0.4 External financing (net) 1,499.8 1,960.7 1.9 2.3 0.5 Project/budget loans 1,635.4 2,137.3 2.1 2.6 0.5 Amortization of external debt -135.5 -176.6 -0.2 -0.2 0.0 Domestic financing (net)* 313.5 241.3 0.4 0.3 -0.1 Financing gap 0.0 0.0 0.0 0.0 0.0 GDP in billions CDF 235,338.9 239,489.7 Exchange rate 2,954.4 2,859.2 (CDF/USD, average) * T-Bills and T-Bonds Note: The revised budget is related to the version submitted by the government to the Parliament. Reassessing Tax Incentives: | 19 Falling Short of Promised Growth and Equity 32. The DRC’s external position is expected to particularly services, will further enhance the improve in the near to medium term, driv- positive spillover effects on households. en by higher export earnings and increased FDI, contributing to foreign exchange reserve 34. The impact of global trade uncertainty on the growth. Mining sector reforms and expansions DRC is mixed. The economic slowdown of key at Kamoa-Kakula and Kipushi mines will support trading partners may reduce demand for DRC’s strong export performance. The terms of trade mineral exports, decreasing revenues and in- will continue to improve but more slowly due to creasing volatility. Additionally, rising global food uncertainty around sustained high copper prices. and oil prices can worsen the trade balance, el- Lower food and energy prices and increased do- evate inflation, and strain household consump- mestic production should reduce the import bill. tion. The DRC’s reliance on imports for essential However, slow growth in advanced economies goods exposes it to domestic shortages and price may limit export demand. The current account increases, disproportionately impacting vulnera- deficit is projected to narrow to 2.7 percent of ble populations. GDP by 2027. FDI and project financing will further help build reserves, which are expected to cover 35. Growth prospects face significant downside three months of imports by 2027, though this re- risks from fluctuating commodity prices, slow- mains below the four-month threshold, leaving ing growth in key trade partners and ongoing the external position vulnerable to shocks. conflicts in eastern DRC. A decline in copper pric- es could reduce export revenues and undermine 33. The pace of poverty reduction is projected economic stability. Abrupt growth slowdown in to accelerate as inflation eases in the me- DRC’s main trade partners--coupled with great- dium-term. Although persistent inflation has er-than-expected economic disruptions from ris- weakened consumers’ purchasing power, poverty ing geopolitical tensions, could further damage estimates suggest a gradual decline as inflation investment and confidence. Additionally, reduced moderates. The poverty rate, measured using the donor funding due to fiscal constraints in partner international poverty line of USD 2.15 per person countries, combined with domestic insecurity, per day (2017 PPP), is expected to fall to 70.7 per- may exacerbate the situation. Inflationary pres- cent by 2027. Moderating inflationary pressures sures, climate shocks, health crises, and political should help alleviate food insecurity and restore unrest could also strain resources, disrupt policy household purchasing power. Strengthening implementation, and hamper growth, while tight- linkages between the mining sector and others, er monetary policy may limit economic support. 1.3 Macroeconomic recommendations 36. The DRC must prioritize actions across dif- dential and countercyclical policies in good times, ferent time horizons to address current chal- while continuously strengthening the domestic lenges and build future resilience. Short-term, financial system. further macroeconomic policy and structural re- forms are crucial for maintaining a resilient and 37. In the medium term, policies should encourage credible macroeconomic framework. Reinforcing economic diversification, sustainable growth, stability and sustainability in the macroeconom- and better fiscal management. The Country ic framework is essential for reducing risks and Economic Memorandum (CEM, 2023) discussed encouraging investment and growth. To achieve ambitious economic reforms essential for posi- this, the DRC should: i) prioritize expenditure on tioning the country on a diversified growth path essential services and infrastructure invest- conducive to middle-income country status. ments; ii) broaden the tax base and improve tax These reforms include:  i) improving business collection efficiency through the implementa- regulation; ii) enhancing access to finance for tion of modern tax administration systems and small and medium enterprises; iii) investing in reduce tax exemptions; iii) encourage fiscal de- human capital development to boost productivity centralization; iv) strengthen BCC credibility, in- and innovation; and iv) attracting value chain de- troduce greater exchange rate flexibility and pur- velopment, particularly in the agribusiness and sue efforts to de-dollarize the economy in order mining sectors. to deliver price stability and restore confidence in the local currency, and v) pursue macro-pru- 20 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity SECTION 2: AN ANALYSIS OF DRC’S TAX EXPENDITURES 2.1 Tax revenue trend and composition 38. The government’s capacity to invest and push system along with weak tax administration. In the economy to its full potential is constrained particular, “tax expenditures” have cost the gov- by DRC’s narrow fiscal space, partly due to rev- ernment up to 5.0 percent of GDP in recent years enue foregone from tax expenditures. Despite (equivalent to one-third of tax revenue). These recent improvements, DRC’s revenue collection revenue losses arise from special legal provi- remains well below that of regional peers. Do- sions such as exemptions, deductions, credits, mestic revenues – both tax and non-tax – are and preferential tax rates. While their impact is still significantly lower than the SSA average of difficult to track, understanding their purpose 18 percent of GDP (Figure 27). The public reve- and effects can help address gaps in the revenue nue system is underperforming due to a com- system and better support DRC’s public service plex, fragmented and unfriendly-to-business tax delivery and investment needs. DRC revenues remain below the SSA average. Figure 27: Revenue in SSA by country (in % GDP), 2024 60 50 40 30 20 10 0 Malawi Gambia, The Guinea Nigeria Madagascar Guinea-Bissau Seychelles Botswana South Sudan SSA Rwanda Kenya Togo Zimbabwe Angola Côte d'Ivoire Burundi DRC Benin STP Liberia Uganda Comoros CAR Sierra Leone Niger Ethiopia Lesotho Namibia Eritrea South Africa Congo, Rep. of Mozambique Cabo Verde SADC Mali Zambia Gabon Burkina Faso Resource countries Senegal Equatorial Guinea Cameroon Chad Tanzania Ghana Note: excluding grants. SADC is Southern African Development Community (Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Tanzania, Zambia, Zimbabwe, South Africa). Source: IMF WEO April 2025. Reassessing Tax Incentives: | 21 Falling Short of Promised Growth and Equity 39. DRC’s tax collection during the last decade has income tax (CIT); trade taxes; personal income been variable, linked to the volatility of world tax (PIT) and excise revenues. Some of the up- copper prices. DRC’s tax‑to‑GDP ratio fell sharp- swing in recent years reflects stronger tax mo- ly from 2015 to 2020 and then recovered, with its bilization in the mining sector, which contributes movement closely correlated with the price of about a third of revenues (Figure 28). The distri- copper in international markets.10 This variability bution of tax revenue highlights the importance affected every major revenue source: value-add- of the mining industry, which accounts for 40 ed tax (VAT), sales, and turnover taxes; corporate percent of GDP. Tax revenue has been variable, although stronger in recent years. Figure 28: Tax revenue by type (in % GDP), 2015–24 12.5% Other Taxes Trade Taxes Excise 10.0% VAT, Sales and Turnover Taxes Tax Revenue as a % of GDP PIT 7.5% CIT 5.0% 2.5% 0.0% 15 16 17 18 19 20 21 22 23 24 20 20 20 20 20 20 20 20 20 20 Source: World Bank calculations using revenue data from Ministry of Finance and GDP data and forecasts from the World Economic Outlook (IMF, 2024). 40. DRC’s tax collection during the last decade elevated CIT receipts from the extractive sector, has been volatile and consistently lower than reflecting high international copper and cobalt 15 percent of GDP, a critical tipping point11 prices rather than broad-based tax capacity. In for economies to accelerate their economic contrast, the contribution from PIT and VAT re- growth and development. The DRC’s overall mains notably low. This pattern reflects the nar- tax‑to‑GDP ratio of 12.5 percent in 2022 is close rowness of the country’s non‑extractive base. to its aspirational peer group but trails the struc- Absent the recent boost from the mining sector, tural average (Figure 29). A distinctive feature the DRC’s overall tax performance would lag of DRC’s tax revenue composition is its increas- further behind its comparators. Overall tax reve- ingly heavy reliance on corporate income tax nue consistently falls below 15 percent of GDP, a (CIT) since 2022, which significantly exceeds the threshold widely viewed as critical for sustaining levels observed in both aspirational and struc- economic growth and development.12 tural peers. This recent shift is largely driven by 10 IMF, 2024. 11 Using historical data from 139 countries, IMF research (Gaspar, Jaramillo, & Wingender, 2016) estimates that over 10 years, per capita GDP is 7.5 percent larger than would otherwise be expected in countries with tax revenues above the 15 percent “tipping point. 12 Using historical data from 139 countries, IMF research (Gaspar, Jaramillo, & Wingender, 2016) estimates that over 10 years, per capita GDP is 7.5 percent larger than would otherwise be expected in countries with tax revenues above the 15 percent “tipping point.” 22 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity DRC collects about as much tax revenue as peers. Figure 29: Tax revenue and components, DRC and peer countries (in % GDP), 2022 25% Other Taxes Property 20% SSC Trade Taxes Excise 15% VAT, Sales and Turnover Taxes 10% PIT and Payroll CIT 5% 0% C am r ia n sia a e da a l al na oz sca ny bi qu DR oo ur liv an ne m tio Ke bi er ct Bo a Ug Za ag do ra ru m ad pi In St Ca As M M Note: DRC’s aspirational peer group is Bolivia, Cameroon, Indonesia and Kenya. Its structural peer group is Mada- gascar, Mozambique, Uganda and Zambia. Source: World Bank calculations using data from the (OECD, 2024). 41. Low and volatile tax collection is exacerbated revenues were calculated (the blue line in Fig- by high levels of pro-cyclical13 tax expendi- ure 30) increased significantly, as the reporting tures, which pose risks to DRC’s macro-fiscal framework was broadened to cover a wider array stability. Tax expenditures follow tax revenues of measures.14 As the analysis became more com- so in periods when revenues are rising as a share prehensive, total revenues identified as foregone of GDP, tax expenditures will follow (Figure 30). In climbed in tandem—from approximately under 2 2022, the increase in tax expenditures mirrored percent of GDP in 2017 to about 5 percent in 2022. the boom in overall tax collections driven by the In 2021, the count of tax‑expenditure measures mining sector, with VAT and excise exemptions dipped, largely among those not estimated (the accounting for much of the increase. Losses were red line in Figure 30), reflecting a methodological augmented during 2017 through 2019 when the consolidation that combined similar exemptions number of tax expenditure provisions in the law and deductions into fewer, better‑defined cate- expanded. Further, some tax expenditures ap- gories.15 pear to be pro-cyclical, claiming a higher share of the underlying tax when tax revenues are high- er. At the same time, DRC has been improving its methodology for assessing tax expenditures, capturing a rising number of provisions in its es- timates. Between 2017 and 2019, the number of distinct tax expenditure items for which foregone 13 Procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession 14 The classification of tax expenditures as “estimated” or “not estimated” is determined by the team conducting the tax expenditure analysis. While each additional tax expenditure that is estimated typically shifts from the “not estimated” to the “estimated” category, the team also regularly reviews how tax expenditures are classified and grouped. This methodological refinement—such as consolidating overlapping provi- sions or redefining categories—can affect the overall count in both categories independently of changes in estimation coverage. 15 Abbott, 2013. Reassessing Tax Incentives: | 23 Falling Short of Promised Growth and Equity Losses from tax expenditures are rising. Figure 30: Revenue lost to tax expenditure, by tax type (in % GDP), 2017–23 5% 150 Count TE Not Estimated (shaded area) Count TE Estimated 4% (shaded area) Othre Taxes Count of Tax Expenditures Revenue Foregone % of GDP 100 Custom Duties 3% Excise VAT PIT 2% CIT 50 1% 0% 0 2017 2019 2020 2021 2022 2023 Notes: The number of tax expenditure measures (Count TE) varies based on identification of measures and their consolidation and as measures shift from “Not Estimated” to “Estimated”. Source: World Bank calculations using data from the tax expenditure reports. 42. Although cross-country comparisons are chal- cross‐country comparisons of tax‐expenditure lenging, DRC’s reported tax expenditures of 4.5 ratios must be treated with caution: much of the percent of GDP in 2022 are significantly more variation reflects differences in how comprehen- than most comparator economies. Both DRC’s sively exemptions and deductions are identified, aspirational and structural peer groups report the methodologies used to quantify foregone tax expenditure costs at below 2 percent of GDP revenues, and the choice of the benchmark tax (Figure 31). Compared to other economies in its system. In other words, differences in tax‐ex- peer group, DRC’s levels of tax expenditures are penditure burdens may owe as much to reporting higher in CIT, excise taxes, and VAT. On the oth- scope and definitional choices as to actual differ- er hand, PIT-related tax expenditures, which are ences in the policy gap. commonly used by countries to complement social welfare policies, are very low. However, 24 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity DRC’s estimated tax expenditure costs appear to be higher than peers. Figure 31: Cost of tax expenditures, DRC and peers (in % GDP), 2022 5% Other Taxes Trade Taxes 4% Excise VAT Income Taxes (PIT 3% and CIT aggregated) PIT 2% CIT 1% 0% l na a r da al n ca C sia ny ur oo DR tio an as Ke ne ct er Ug ra ag ru do m pi ad St Ca As In M Source: World Bank calculations using data from GTED (2024) for 2019 (Cameroon), 2021 (Madagascar), 2022 (In- donesia, Kenya and Uganda) and 2023 (DRC). Reassessing Tax Incentives: | 25 Falling Short of Promised Growth and Equity 2.2 Sectoral Composition and Policy Objectives 43. DRC tax expenditures are concentrated in a ability to quantify benefits in the industrial and few sectors, mainly industrial, mining, and oil. extractive industries. By contrast, exemptions The industrial, mining and oil (tanker) sectors to- granted under social and non‑profit headings— gether represent over three quarters of total rev- and in miscellaneous “other” categories—are nu- enue foregone from tax expenditures (Figure 32). merous but much less well quantified, reflecting Moreover, virtually all the identified measures in persistent data gaps and methodological chal- these three sectors have been fully costed, un- lenges in valuing these incentives. derscoring both their scale and the authorities’ Oil, mining, and industrial sectors claim most tax expenditures. Figure 32 : Tax expenditure estimates by sector (in % GDP and number of measures), 2023 5.0% 50 4.0% 40 30 Revenues Foregone (% of GDP) 3.0% 2.0% 1.5% 1.6% 20 Count of TEs 0.7% 1.0% 0.4% 10 0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.1% 0.0% 0 za nt na y En al plo fens nst cial Oi ons l l ed or op g di l m ce c a nd s on Fin gy r sp er In lth uf rial np l d M r al cia cia t Au ura n ke re fit el in int uri ga me tic tio Un th er Co en ifi a ucti a ro ev in r tu So an an t ti De C me t He ec M dus O eu ec ul ac lt r ric ni ac er m Ag an o ar nd e Ph a No on ati ti Na m Di Count of TEs Evaluated Count of TEs Not Evaluated Revenues Foregone Source: World Bank calculations using data from the tax expenditure reports. 44. Through tax expenditures, DRC aims to boost and other policy objectives yield negligible esti- investment and reduce the tax burden on tar- mates of revenue foregone because of a lack of geted sectors Revenues foregone are over- evaluation due to persistent data gaps. The six whelmingly concentrated in measures designed largest tax expenditures in the DRC (as reported to “lower taxes” and “boost investment” (Figure in the 2023 budget annex) are described in Ap- 33). By contrast, tax expenditures granted for so- pendix 2. cial goals, ease of inspections, local promotion 26 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity DRC’s tax expenditures aim to boost investment and lower taxes. Figure 33: Tax expenditure estimates by policy objective (in % GDP and number of measures), 2023 5.0% 50 4.0% 40 3.0% 30 Revenues Foregone (% of GDP) 2.4% 2.2% Count of TEs 2.0% 20 1.0% 10 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0 t ds s y g t ns g ls en xe efi or vin in oa o tio ta rit tm en go m sa lg ec r ar r lb es te l we cia ge ca sp tf nv ua d lo ra Lo in So or n ti ut u fe e pp e os co ot M s De Ea Su Bo En om Pr Count of TEs Evaluated Count of TEs Not Evaluated Revenues Foregone Source: World Bank calculations using data from the tax expenditure reports. Box 5: Tax incentives in the amended Finance Law 2025 The incentive structure remains mostly unchanged, but two specific policy modifications are included in the 2025 amended Finance Law. Firstly, Article 12 of the 2025 Finance law removes the temporary tariff-re- lief mechanism related to VAT exemption on goods for the official use of foreign diplomatic and consular missions, as well as the CKD (Completely Knocked Down) - MKD (Medium Knocked Down) assembly system for goods imported in the form of detached pieces that were previously in place. Secondly, Article 13 ad- dresses a loophole by prohibiting the combination of incentives provided under the Investment Code, the Agriculture Law, or other regimes with additional customs or tax benefits. Article 4 maintains that any new exemption must be established by law, thus upholding the existing ban on ad-hoc incentives. Aside from these changes, all tax-expenditure provisions from the 2024 Finance Law remain in effect. Reassessing Tax Incentives: | 27 Falling Short of Promised Growth and Equity 2.3 Estimates of the impact of tax expenditures 2.3.1 Distributional impact of VAT salt, locally produced rice, and dairy products, and some goods with zero rate. The latter include tax expenditures palm oil, maize and maize flour that, according to the household survey analysis for the year 2020, are primarily consumed by lower-income 45. Although intended to protect low-income households together with cassava flour and lo- households, reduced VAT rates disproportion- cal rice. Other essential food items are subject ally benefit high-income households. Govern- to the standard rate of 16 percent. Low-income ments often apply reduced VAT rates for equi- households (the bottom four deciles) capture ty reasons—primarily to support low-income about 9 percent of the benefit of reduced rates, households—and are generally willing to forgo while high income households capture about 62 the associated tax revenue. DRC applies a stan- percent (Figure 34). This regressive distribution dard Value-Added Tax (VAT) rate of 16 percent on of benefits reveals that the poor design of VAT most goods and services, with a reduced rate of tax expenditures is undermining the equity ob- 8 percent for essential items such as meat, fish, jectives of the tax system. Most VAT tax expenditures benefit high income households. Figure 34: Spending on food and beverage items with reduced VAT rates, by in- come group (in % of VAT tax expenditures), 2020 Share of Reduced VAT Spending on Food and Beverage by Income Group 40 Income Group High (90-100%) 35 Low (0-40%) Middle (50-80%) Share of Exempt and Reduced VAT Expenses (%) 30 25 23.2% 20 15 14.6% 13.5% 10 5.2% 5 3.6% 0 0.0% 0.0 8.0 VAT Rate (%) Source: Staff calculations based on 2020 Household Survey data. 28 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity 46. Variations in VAT rates across consumer ex- 2.3.2 Tax holidays and effective penditures lead to substantial revenue losses, estimated at around 0.82 percent of GDP. Given corporate taxation the regressive impact of the current VAT design, a uniform approach to VAT taxation would instead allow government to maximize revenue collec- 47. DRC has a standard corporate tax rate of 30 tion while minimizing distortions in the tax sys- percent, which is one of the highest in the tem. This involves transitioning to a VAT system world, but offers exemptions to attract FDI. with a single rate and broad base, minimizing ex- DRC’s CIT rate is higher than the Sub-Saharan Af- emptions. The Public Expenditure Review (2024) rica average rate of 28 percent, and the average also suggested adhering to the ECF commitment CIT rate of its structural and aspirational peers. of zero VAT tax exemptions. Broadening the base Similarly, firms consider the tax system in the could lead to increased revenue, which could be DRC as challenging for business development significant in supporting low-income households (see Box 6). However, the investment Code of- through redistribution. By allocating these funds fers customs and tax exemptions to attract FDI in through public services, including social safety various sectors (excluding mining, hydrocarbons, net and direct cash transfers to the most vul- which have their own codes, as well as banking nerable, the government can strengthen social and trade). Investors need to obtain approval welfare and promote development. A data-driv- from the government for their projects and then en approach to VAT policy can improve resource they can benefit from CIT exemption for three, allocation, enhance economic sustainability, and four, or five years depending on the economic re- contribute to broader efforts aimed at reducing gion where the investment is located: three years income inequality. in Kinshasa (region A), four years in Congo Central and the cities of Lubumbashi, Likasi, and Kolwezi (region B), and five years elsewhere (region C).16 DRC’s corporate tax rate is high by global norms. Figure 35: Corporate tax rates, DRC and comparators (in %) 35% 30% 25% 20% 15% 10% 5% 0% Source: Staff calculations based on KPMG data 16 The mining sector is taxed at a standard CIT rate but receives certain tax benefits like lower rate of tax (10 percent) on dividends, 0 percent withholding tax on interest paid on foreign loans, and tax deduction of 10 percent exceptional tax on renumeration paid to expatriates. It also benefits from accelerated depreciation. Reassessing Tax Incentives: | 29 Falling Short of Promised Growth and Equity Box 6: Firms perceptions on the tax system in DRC (2024) Firms in the DRC encounter substantial challenges related to the taxation system, which is perceived as a significant impediment to business operations. The statutory tax rate in the DRC is notably high, identified as a severe constraint by 37 percent of surveyed firms, surpassing the 27 percent reported in the Sub-Sa- haran Africa (SSA) region (World Bank Enterprise Surveys, 2025). This burden is particularly pronounced for exporting, medium-sized, and foreign enterprises. The complexity and multiplicity of taxes, duties, and fees further exacerbates the situation, increasing compliance costs and creating uncertainty regarding the tax regime. Such complexity opens avenues for abuse and contributes to a lack of transparency. Conse- quently, operators may seek tax incentives as a legal means to mitigate their tax burden, while also poten- tially engaging in tax evasion. On the administrative front, 39.4 percent of firms perceive tax administration as a major obstacle. The fre- quency of interactions with tax officials is notably higher in the DRC, with 68 percent of firms being visited or required to engage with tax officials, while only 7.6 percent of businesses process taxes electronically, compared to 52.9 percent on average in SSA. Despite the expedited VAT refund timeline—where the median time to obtain a VAT refund is 3 weeks in the DRC, compared to 8.4 weeks in SSA—a substantial proportion of firms in the DRC (91 percent) express that the refund process is excessively lengthy or complex, serving as a primary deterrent from applying for a VAT refund. This figure is considerably higher than the 65 per- cent reported in SSA. The taxation system can hinder the honest declaration of revenues, investment, firm performance, and economic growth. Overall, the tax system in the DRC is perceived as burdensome and a significant obstacle to business growth. DRC SSA Percent of firms identifying tax rates as a major or very severe constraint 37.1 27.4 Percent of firms identifying tax administration as a major or very severe constraint 39.4 22.5 Percent of firms visited or required to meet with tax officials 68.2 59.9 Hours spent on tax compliance annually [median] 48.0 51.9 Percent of firms filing taxes electronically 7.6 52.9 Percent of firms paying taxes electronically 5.7 52.6 Weeks until the final tax audit report [median] 3.0 3.1 Weeks to receive VAT refund [median] 3.0 8.4 Percent of firms reporting too long or complicated refund process as the main reason for not 91.4 65 applying for a VAT refund, among those providing a reason other than no need Reported effective income-based tax rate 11.7 17.4 Source: The World Bank Enterprise Surveys 48. Rates at which capital investment is allowed 49. DRC offers tax holidays and similar incentives to be deducted as per tax law in DRC are low- to compensate businesses in certain sectors er than the actual rate of wear and tear or re- for the delayed capital cost recovery, which, placement, which creates high tax burdens for however, distorts investment decisions. Tax some capital investments. Investment in cap- holidays are profit-based incentives, which are ital assets can be recovered under the tax law poorly targeted and may not incentivize addi- through deduction of depreciated allowances tional investment (please refer Box 7). Such in- that vary by type of asset. Generally, tax depre- centives are offered to attract investment by ciation rates should mimic the economic depreci- lowering the high effective tax rates (refer Box ation rates, which represent the true annual cost 7). DRC can lower effective tax rates by lowering of wear and tear, obsolescence, and increase in the overall corporate tax rate or by offering cost- prices. However, in DRC, tax depreciation rates based incentives such as accelerated depreci- do not fully compensate for the loss in econom- ation, which allows faster capital cost recovery. ic value of capital assets. As a result, under the Such incentives are better targeted and therefore standard CIT regime, businesses are not able to more effective in boosting investment. fully recover the cost of capital investment. Be- cause of the gap between tax depreciation and economic depreciation rates, capital cost recov- ery varies from 70 percent for equipment and ve- hicles to only 27 percent for buildings. 30 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity Box 7: Effective tax rates measures Calculations of effective tax rates reveal that different types of capital investments face very different tax burdens. The effective average tax rate (EATR) calculates the pre-tax economic rent for a project while the marginal effective tax rate (METR) measures the wedge between the before-tax rate of return and the after-tax rate of return (see Appendix 4 for technical details). When the EATR is higher than the statutory CIT rate of 30 percent, then with a pre-tax return of 20 percent, projects are expected to face an additional tax burden. Higher EATR discourages FDI and fresh domestic investment in sectors subject to the standard CIT regime. The EATR and METR for debt-financed investment is lower due to the deductibility of interest paid on loans (Table 2). Table 2: EATR and METR for investment in various assets under different financing scenarios (%) EATR METR Capital asset Retained earnings Debt Retained earnings Debt Buildings 31 21 33 -11 Equipment, vehicles 33 22 37 0 Computers, software 28 18 24 -40 Goodwill (intangibles) 53 42 63 53 Source: World Bank staff calculations. Tax holidays help in lowering effective tax tive for highly profitable FDI. However, de- rates but may distort investment decisions preciation allowances on investments made and discourage incremental investment during the tax holiday period are not deferred towards the end of the tax holiday period. and are foregone by firms. Consequently, for a Under the concessionary regime, firms can firm enjoying a five-year tax holiday, the METR benefit from tax exemption based on sector, on investment is very high in the fifth year just scale of investment, and location. Once the tax before the holiday ends due to the high oppor- holidays end, they are subject to the standard tunity cost of the foregone depreciation allow- regime. During the tax holiday period, EATR is ance (Figure 36). zero, which could make such a regime attrac- Figure 36: METR for investment during and at the end of tax holiday in DRC 60 50 40 30 METR (%) 20 10 5-Year tax holiday ends 0 -10 -20 0 1 2 3 4 5 6 7 8 Years Source: World Bank staff calculations. Reassessing Tax Incentives: | 31 Falling Short of Promised Growth and Equity 2.3.3 PIT deductions and sonably high basic exemption threshold (below which the marginal rate is zero). However, DRC exemptions does not provide a basic exemption threshold as the lowest marginal rate is 3 percent up to the in- come of CDF1,944,000 (USD 670) per annum. 50. Personal income is taxed at progressive rates, with a range of deductions. Income from sala- ries as well as business or self-employment in- 53. Taxation of dividends at the rate of 20 percent come is taxed at rates from 3 to 40 percent. The creates a bias against corporatization. Since tax code offers family allowance, housing al- dividends are distributed by a company out of lowance, and transport allowance, which can be profits that have already undergone corporate deducted from personal income. Individuals are taxes at the rate of 30 percent (assuming the exempt from tax on capital gains, which is only company is subject to the standard regime), the paid by companies at the rate of 30 percent. Div- effective tax paid by an individual shareholder idends are taxed at the rate of 20 percent, which who receives dividends is 44 percent,17 which is withheld at source by companies. Tax liability may discourage corporatization. is capped at 30 percent of taxable salary income (as opposed to business income). However, there is no major relief or incentives for self-employed individual taxpayers. 2.3.4 Excise tax expenditures and negative externalities 51. Exemption of individual capital gains from tax- ation dilutes the progressivity of the personal income tax structure. Generally, most capital 54. The excise duty exemption on fuel accounts income is earned by taxpayers in the higher in- for one of the largest tax expenditures in DRC. come bracket. Exempting such income dispro- The mining sector, which is the largest consumer portionately benefits the rich and reduces the of fuels in DRC, enjoys significant excise exemp- progressivity of the tax system. The inequity be- tions. Excise exemptions on fuels lowers gas- comes even more striking due to weak property oline and diesel prices, which do not internalize or wealth taxation. the social cost of carbon emissions, local pollu- tion, and traffic congestion. Such exemptions are also regressive since richer households consume 52. Various exceptions in the PIT create distor- far more gasoline and diesel in absolute terms. tions, which could be addressed by replace- ment with a basic exemption. Capping the tax rate applicable to salary income at 30 percent, 55. Ad valorem excise rates applicable to various below the top marginal rate provides an incen- alcoholic products do not tax the alcohol con- tive to camouflage income from business as sal- tent at a uniform rate. For example, malt beer ary income. Similar incentive is provided through with an average alcohol content of 3 percent is preferential taxation at 15 percent of income taxed at the rate of 30 percent, whereas whiskey earned by casual employees, which could en- and spirits with average alcohol content of 40 courage employers to show regular workers as percent are taxed at the rate of 80 percent. A unit casual employees. Thus, the policy objective to of pure alcohol in malt beer is taxed at five times reduce the tax burden on casual workers may the rate at which it is taxed in whiskey. Conse- work against the interest of employees. Instead, quently, negative externalities caused by con- the tax burden can be reduced by providing a rea- sumption of whiskey are implicitly undertaxed (Table 3). Table 3 : Implicit excise rate on consumption of select alcoholic products in DRC (in %) Alcoholic product Unit Price (CDF) Excise per Unit Pure alcohol per Excise per unit of unit pure alcohol Malt beer Kg 2,500 30% 3% 10% Whiskey Kg 28,000 80% 40% 2% Source: Finance Law 2025, Appendix XVIII. 17 Suppose profit before tax is 100 out of which 30 is paid as corporate tax at the rate of 30 percent. On the remaining amount of 70, dividend tax of 14 is paid at the rate of 20 percent. Thus, the investor effectively pays 30+14=44 as taxes. 32 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity 2.4 Administration of tax expenditures: challenges and opportunities 56. While tax expenditures in the DRC have a clear downstream firms and understate cascading ef- legal basis, the Ministry of Finance (MoF) does fects from informal sectors, but it is a pragmatic not exercise full control over their design and starting point as MoF analytical capacity contin- approval. These incentives are typically em- ues to develop. bedded in the legislation aiming to encourage investments in general or in specific sectors. In 59. Over time, a complementary Input-Output (IO) some cases, they are grounded in decrees, con- model could be developed in parallel to en- ventions, or other regulatory instruments. Dis- hance VAT expenditure estimation and build cretionary or ad-hoc incentives are generally not institutional capacity. Such a model—drawing part of the system, as all tax relief must be root- on resources like the 2018 IFPRI social account- ed in some formal legal instrument. However, the ing matrix—would capture upstream and down- MoF does not exercise full control over all tax stream interactions and allow a more nuanced expenditures. Other entities, such as the minis- analysis of VAT incidence and exemptions. While try of mining, the national investment promotion not intended to replace the current method in the agency (ANAPI, under the Investment Code), Spe- near term, an IO framework could serve as a sec- cial Economic Zone authorities, and their respec- ond lens to validate results, expand scope, and tive supervising ministries, play a prominent role. progressively shift toward more comprehensive While the Ministry of Planning may be involved modeling without disrupting current workflows. in externally funded projects, it is not necessarily The World Bank had supported VAT gap analysis the central actor in the proliferation of incentives. based on such an approach in 2017, which can be Consolidating the authority within the MoF to in- replicated and institutionalized to regularly mon- troduce or streamline tax expenditures would itor the scale and impact of VAT policy and com- improve oversight and management of their fis- pliance gaps. cal impact. This consolidation would also allow for more effective utilization of fiscal policies by the government to meet distributional objectives 60. While a formal cost-benefit analysis of tax in- while considering fiscal limitations. centives is not yet standard practice, efforts to strengthen evaluation mechanisms are under- way. The DRC continues to forgo significant reve- 57. DRC has made significant progress in regularly nue due to preferential VAT rates and exemptions and comprehensively reporting of tax expendi- under the corporate income tax. However, a com- tures, which are now included as an annex to prehensive framework to monitor and assess the the budget. However, certain gaps in coverage economic impact of these measures has not yet and methodology for estimation persist. While been adopted. Nonetheless, the authorities have the analysis of the identified exemption mea- taken initial steps toward rationalization: a tar- sures is generally rigorous, several significant geted plan has been developed, and several tax items remain uncosted because the underlying expenditures have already been eliminated. This data are not collected—for example, the PIT ex- indicates a growing recognition of the need for emption of family allowances and pensions is greater scrutiny, even if systematic evaluations likely omitted because these payments are not are still in early stages (refer to Box 8 on the in- reported to the revenue authority. Bridging such ternational experience on tax incentives mea- gaps will require, in the short run, exploring al- surement and reforms). ternative data sources and, in the medium term, amending filing requirements so that exempt payments are declared to the revenue authority. 61. The current legal framework lacks sunset clauses and does not require ex-ante or ex- post evaluations, aside from annual cost esti- 58. Methodological practices vary across tax mates. As analytical capacity grows, introducing types but are generally aligned with available more structured review processes could support administrative data and local capacity con- more transparent, targeted, and fiscally sustain- straints. PIT and CIT expenditures are costed us- able tax policy. These reviews include advance ing administrative micro-data, in line with inter- costing for new measures and eventual sunset national standards. For VAT, however, estimates clauses that prompt focused evaluations. Rather are currently based solely on import VAT decla- than aiming for immediate, across-the-board re- rations. While this method narrows the analyt- views, a gradual shift toward selective cost-ben- ical scope, it reflects the data available and the efit analysis and annual policy reflection could current analytical capacity constraints of MoF. provide a more feasible and sustainable path The approach may overstate revenue losses by forward. ignoring input-tax credits claimed by formal Reassessing Tax Incentives: | 33 Falling Short of Promised Growth and Equity Box 8: International Experience on Tax Incentives Countries use tax incentives to attract investment, stimulate economic growth, and promote specific sec- tors or activities. These incentives can take various forms, including tax holidays, reduced tax rates, in- vestment allowances, and accelerated depreciation. Despite their potential benefits, tax incentives have several limitations and adverse impacts. They can lead to significant revenue losses, create economic dis- tortions, and result in a lack of transparency and accountability. Additionally, poorly designed tax incen- tives may fail to attract the intended investments or may benefit only a few firms, leading to inequality. The latest GTED* data reveals that the revenue forgone resulting from tax expenditures averages 3.8 percent of GDP and 23 percent of tax revenue globally. As shown in the figures below, average tax expenditures are well above 2 percent of GDP and 15 percent of taxes in developing economies. Average Tax Expenditure, % of GDP (2021) Average Tax Expenditure, % of taxes collected (2021) 6 40 5 4 30 3 20 2 10 1 0 0 HICs (n=31) UMICs (n=23) LMICs (n=21) LICs (n=11) HICs (n=29) UMICs (n=22) LMICs (n=17) LICs (n=8) Source: Redonda, von Haldenwang et al. (2024) Over the past decade, over 100 countries have conducted some form of tax expenditure measurement and reported their fiscal impact through tax expenditure reports. Such reports are typically annexed to the an- nual budget and aim to inform policy discussions. However, the depth and frequency of these efforts vary significantly across countries. Several countries in Latin America like Chile, Peru, and Mexico have insti- tutionalized tax expenditure reporting, often supported by regional development partners such as ECLAC and GIZ. The World Bank along with other development partners has been supporting capacity building efforts in the SSA region to enhance the quality and frequency of tax expenditures reporting. Figure 37: Reporting of tax expenditures by region over the period 1990-2020 1990-2020 Countries Reporting (% of Total) 35 29 50 45.2% 47.5% 30 42.6% 41.7% 25 21 40 18 19 17 17 20 15 15 30 13 15 9 20 10 5 4 4 2 1 10 5 0 0 0 EAPE CA LACM ENAN AM SA SSAW ER LICs LMICs UMICs HICs TE non-reporting TE reporting [14] [20] [25] [38] Income Group Source: The GTED (2024) Fewer than 30 countries conduct systematic evaluations of the effectiveness and efficiency of tax incentives. They are more prevalent in developed economies like Ireland, Germany, Netherlands, and UK. Monitoring and evaluation of tax expenditures receives less attention in developing economies. Consequently, policy decisions are often devoid of evidence related to the effectiveness and economic impact of tax expenditures. Several countries have successfully reformed their tax expenditures in the last decade. Such reforms range from rationalization of tax incentives to improving the governance framework for their management. In the SSA region, many countries measure tax expenditures and have implemented comprehensive tax expenditure reporting and evaluation frameworks with the support of regional initiatives such as ECOWAS and ATI. Howev- er, only few countries (e.g., South Africa, Uganda, Rwanda and DRC) have moved toward regular reporting and publication leading to more transparent and accountable use of tax incentives. Rwanda managed to enhance its tax-to-GDP ratio from 8.1 pct in 2000 to 16.4 pct in 2019 through a series of reforms, including revision of the investment tax code to streamline several tax exemptions. Similarly, Uganda undertook VAT reform focused on eliminating numerous exemptions, which helped it raise tax-to-GDP ratio from 7.67 pct in 2000 to 11.85 pct in 2019. The DRC now regularly includes comprehensive tax expenditure reports as a budget annex. * The GTED collects all publicly available data on tax expenditures (TEs) published by national governments worldwide from 1990 onwards, covering a total of 218 jurisdictions. Source: World Bank staff illustrations. 34 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity 2.5 Policy recommendations 62. One of the key reforms to enhance control over DRC in October 2022. Such a plan is expected to tax expenditures would be to remove tax chapters amend/eliminate exceptional tax regimes and all from all sector codes and from the investment conventions, agreements, accords, letters or other code and consolidate them under the general tax documents allowing tax exemptions, except those code. Further, DRC could adopt policy reforms in set out in the prevailing administrative codes. In the short to medium term to enhance the efficien- this context, the Public Expenditure Review (2024) cy and equity of the tax system. Based on the anal- also emphasized completion of DRC’s plan to ra- ysis of major tax expenditures in VAT, CIT, PIT, and tionalize tax expenditures and their regular re- excise taxes, these reforms would help DRC align porting and monitoring. its tax expenditures policies with the best practic- es. Rationalization of tax expenditures would help broaden the tax base and create opportunities for lowering the tax rates. Under the third review of the ECF (2021-2024) by the IMF, a plan to gradual- ly streamline tax expenditure was adopted by the Policy reforms Short-term (1-2 years) Medium-term (3-5 years) VAT • Strengthen public services and the direct cash • In line with ECF commitment to eliminate VAT ex- transfer system to compensate and protect the emptions, phase out exemption or reduced rate in low-income households from price shocks, in- a time-bound manner based on a review of items cluding phasing out of VAT exemptions. that are either exempt (such as fuels) or taxed at reduced rate (such as local rice). CIT • Phase out tax holidays or similar exemptions to • Replace tax exemptions with cost-based tax broaden the CIT base. incentives such as full expensing or invest- • Accompany base broadening with lowering of ment-linked allowances or credit. headline tax rate. PIT • Remove cap (of 30 percent) on PIT from salary • Harmonize top PIT rate with the rate of CIT and • Introduce capital gains tax. dividends to eliminate bias against corporatiza- • Eliminate preferential rate for casual employees. tion. • Introduce basic exemption threshold. Excise • Harmonize excise rate per unit of externality • Phase out excise exemption on fuels, including to across various alcoholic, tobacco, and sug- the mining sector. ar-sweetened beverages. 63. Further, it is recommended that DRC strength- larly reporting its tax expenditures, there is po- ens its institutional capacity and coordination tential to enhance the quality of reporting and to assess both the fiscal and economic impact strengthen the underlying methodologies for es- of tax expenditures. While DRC has been regu- timation of fiscal costs. Administrative reforms Short-term (1-2 years) Medium-term (3-5 years) Monitoring and • Set up a program to regularly monitor and evalu- • Undertake cost-benefit analysis of major tax evaluation ate (M&E) the fiscal impact of tax expenditures. incentives every 2-3 years and publish results to inform stakeholders and policymakers. Data environ- • Identify data requirements to support M&E of tax • Regularly review and strengthen data environ- ment expenditures and establish institutional process- ment by expanding the scope of data sources es to collect data. Methodolog- • Adopt international best practices for measure- • Adopt a suite of automated models that support ical enhance- ment of fiscal costs. For instance, complement estimation of fiscal costs based on micro and ments bottom-up VAT expenditures estimation with a macro data. standard top-down methodology that considers economy-wide intermediate and final consump- tion. Quality of • Enhance the level of disaggregation in tax ex- • Incorporate tax expenditure projections based on reporting penditures reporting by separately showing the expected growth in tax base, number of taxpay- associated revenue loss for each provision in the ers and relevant economic factors. law. • Incorporate gender-specific analysis and climate impact of tax expenditures Reassessing Tax Incentives: | 35 Falling Short of Promised Growth and Equity APPENDIX 1: DATA Table 4: Selected macro indicators, 2022-2027 2022 2023 2024 e 2025 f 2026 f 2027 f Real GDP growth, at constant market prices 8.9 8.6 6.5 4.8 5.0 5.3 Private consumption 3.1 3.5 3.7 3.8 3.9 4.0 Government consumption 22.2 -12.9 9.1 9.2 5.0 4.5 Gross fixed capital investment 27.7 98.0 11.3 5.5 5.6 6.0 Exports, goods and services 18.9 15.7 12.9 4.6 5.4 6.0 Imports, goods and services 24.9 85.6 11.6 5.2 5.2 5.6 Real GDP growth, at constant factor prices 8.9 8.6 6.5 4.8 5.0 5.3 Agriculture 2.4 2.2 2.3 2.5 2.5 2.5 Industry 15.7 14.6 10.2 6.0 6.1 6.0 Services 3.3 3.0 2.6 3.8 4.3 5.4 Employment rate (% of working-age population, 15 years+) 62.7 62.8 62.8 62.8 62.8 62.8 Inflation (consumer price index) 9.3 19.9 17.7 8.9 7.5 7.0 Current account balance (% of GDP) -4.9 -6.3 -3.4 -4.2 -4.0 -3.5 Fiscal balance (% of GDP) -0.9 -1.7 -2.0 -3.8 -2.4 -1.9 Revenues (% of GDP) 16.6 15.1 15.0 14.5 15.9 16.5 Debt (% of GDP) 23.8 27.0 22.5 26.0 25.3 24.2 Primary balance (% of GDP) -0.5 -1.3 -1.6 -3.5 -1.8 -1.3 International poverty rate ($2.15 in 2017 PPP) 76.0 74.3 72.9 72.5 71.8 70.9 Sources: DRC authorities; and IMF staff estimates Notes: e = estimate, f = forecast. 36 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity APPENDIX 2: MAJOR TAX EXPENDITURES 1. Detailed descriptions of the six largest tax expenditures in the DRC (as reported in the 2023 budget an- nex), their intended sectors and objectives, and their likely impacts, are below. i. DA11 – Excise‑duty exemption on fuel (CDF 2.62 trn ≈ USD 900 m): This blanket relief removes the specific excise that should internalize congestion, pollution and climate externalities. Because richer households consume far more gasoline and diesel in absolute terms, the measure is highly regressive: the top decile captures the bulk of the benefit while the bottom deciles see little relief. It also weakens incentives for energy efficiency and undercuts any future green‑tax agenda. Phasing the exemption out through small, predict- able rate increases—announced well in advance—would restore a buoyant revenue source and align the tax system with climate commitments, while giving the authorities time to scale up targeted compensation for vulnerable groups. ii. TVA16 – VAT exemption for mining and petroleum companies (CDF 1.42 trn ≈ USD 500 m): Although this amount is recorded as a tax expenditure, it is mostly an accounting artefact. For exports, the sector’s output is zero‑rated, so any VAT paid on imported machinery and consumables would be refunded through input‑tax credits if the refund system functions properly. Even when these firms sell into the domestic market, they are large, formal taxpayers that charge the standard VAT on their outputs; the input VAT can therefore be offset against the VAT they collect from customers rather than refunded in cash. In both cases the net tax burden should be nil, provided the credit mechanism works efficiently. The fiscal priority is therefore to modernize refund administration—clear statutory deadlines, electronic filing and risk‑based audits—rather than to claw back the exemption itself. iii. IBP11 – Tax concessions granted under the 2008 Sino‑Congolese “infrastructure‑for‑minerals” conven- tion (CDF 0.73 trn ≈ USD 250 m): The convention provides a wide range of tax concessions—including in- come‑tax holidays and customs exemptions—to the joint venture established under the 2008 infrastruc- ture‑for‑minerals agreement between the DRC and China. A comprehensive cost‑benefit analysis would help assess whether the scale of the concessions remains proportionate to the benefits received and could in- form any future adjustments needed to ensure the agreement continues to serve the country’s development objectives effectively. iv. TVA31 – VAT exemption on fuel (CDF 0.43 trn ≈ USD 150 m): Like the excise relief, this measure lowers fuel prices across the board, disproportionately benefiting higher‑income urban motorists and subsidising car- bon emissions. Rolling back the exemption in tandem with the excise reform under DA11 would re‑establish a coherent price signal for energy use and free up resources that could be used for more targeted relief. v. TVA19 – 5 percent reduced VAT rate for mining equipment during the exploitation phase (CDF 0.42 trn ≈ USD 145 m): Like TVA16, this provision merely accelerates the recovery of input VAT that would ultimately be refunded. Once refund performance improves, the preferential rate can be eliminated without raising the effective tax burden on miners, simplifying administration and protecting the integrity of the standard 16 percent VAT rate. vi. TVA27 – VAT exemption of basic consumer goods (CDF 0.20 trn ≈ USD 70 m): Removing VAT on staple foods lowers consumer prices but remains a blunt instrument: the richest quintile typically captures a larger share of the overall benefit because they spend more on these goods. In the short run, it fills a gap created by lim- ited institutional capacity; over time, narrowing the product list and eventually replacing the exemption with well‑targeted cash transfers—as the institutional capacity grows—would achieve the same equity goals at lower fiscal cost. Reassessing Tax Incentives: | 37 Falling Short of Promised Growth and Equity APPENDIX 3: DETAILS ON DISTRIBUTIONAL IMPACT OF VAT EXPENDITURES 2. The household survey analysis for the year 2020 throws some valuable insights into the VAT structure and consumption patterns of households. Lower-income households allocate a larger share of their total expen- diture to essential items such as food and basic household goods. In contrast, higher-income households devote a smaller proportion of their income to these taxed essentials and more to savings or services viz., transportation. This means that, relative to their income, poorer households end up paying a larger share of their earnings in food and non-alcoholic beverages compared to wealthier ones (Figure 38).18 Figure 38: Households expenditure by category Percentage of Expenditure by Item Across Deciles Expense Category Food and non-alcoholic beverages Alcoholic beverages, tobacco, and narcotics Clothing and footwear Housing, water, electricity, gas, and other fuels Furniture, household goods, and maintenance Health Transports Communications Recreation and culture Percentage of Expenditure (%) Education Restaurants and hotels Miscellaneous goods and services Source: Staff Calculations based on 2020 Household Survey data 3. An in-depth analysis of household expenditure data by food and beverage items reveals that a significant share of food-related spending falls under the standard 16% VAT rate (Figure 39). Despite food being a ne- cessity, most items commonly consumed by households—such as cereals except maize, cooking oils (except palm oil), and locally produced foods—are taxed at the standard VAT rate of 16%. An examination of the top five products consumed across income groups shows that the one of them is still subject to the standard 16% VAT rate, with four products—typically staples like locally produced rice and maize—benefiting from a reduced VAT rate of 8% and 0%, respectively (Figure 40). Other items such as palm oil and cassava also dom- inate household spending and attract the higher VAT rate. This concentration of taxed essentials under the full rate further increases the effective tax burden, especially on low- and middle-income households, who allocate a significant share of their budget to these products. 18 One factor that reduces VAT’s regressivity is that low-income households typically purchase goods from the informal economy. In this version of the report, we do not control the location of purchases. 38 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity Figure 39: Household food expenses Figure 40: Households consumption by VAT rate (top five products consumed across income groups Source: Staff Calculations based on 2020 Household Survey data for consumption of food 4. An analysis of the top five food items consumed by different income groups reveals distinct patterns shaped by affordability and dietary preferences. Lower-income households primarily allocate their food expenditures to staple items such as palm oil, cassava flour, and maize flour (Figure 41). These locally available, cost-effective staples form the backbone of their diets, reflecting both financial constraints and accessibility. In contrast, higher-income households exhibit a more diversified consumption pattern, purchasing both lower-cost staples and more expensive food items. Their reliance on staples like palm oil and cassava is comparatively lower than that of lower-income households, indicating greater flexibility in food choices. This variation in consumption underscores disparities in food access and purchasing power across income levels. From a VAT policy perspective, these differences are particularly significant. Poorer households tend to allocate a substantial portion of their income to essential food items, some of which are taxed at a lower rate—such as local rice—while others are subject to the standard VAT rate of 16 percent. Meanwhile, higher-income households distribute their expenditures across both low- and high-cost items, resulting in a more balanced tax burden. These findings highlight the need for careful consideration of VAT policies to ensure that tax structures do not disproportionately impact lower-income groups, thereby pre- serving affordability and equity in food access. Reassessing Tax Incentives: | 39 Falling Short of Promised Growth and Equity Figure 41: Household food expenses with VAT rates by income group Source: Staff Calculations based on 2020 Household Survey data for consumption of food 40 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity 5. Further, Low-income households allocate about 41 percent of their total consumption to goods subject to the standard VAT rate of 16 percent, while the remaining 59 percent goes to items with reduced rates (Figure 42). In contrast, high-income households spend 36 percent of their consumption on goods taxed at the standard rate but dedicate a larger share of the remainder to items benefiting from reduced rates. This asymmetry in consumption patterns suggests that a substantial portion of the benefit from reduced VAT rates is captured by high-income households. This raises the question of whether some goods and services currently benefiting from reduced rates could instead be taxed at the standard rate—potentially increasing government revenue for redistribution and development financing. 6. Interestingly, when accounting for the location where items are purchased, the regressivity of the VAT is less pronounced (Figure 43). For example, low-income households devote 40.8 percent of their total con- sumption to goods and services subject to the 16 percent rate. Still, once we control for location and remove the consumption in the informal sector, they devote only 11.9 percent of their total consumption to goods at the 16 percent rate. This suggests that the locations where items are purchased play a role in shaping the ob- served distributional effects, potentially influencing expenditure patterns and mitigating the overall impact on lower-income groups. Figure 42: Household food Figure 43: Household food expenditure expenditure composition by income composition by income group while group controlling the location Source: Staff Calculations based on 2020 Household Survey data for consumption of food Reassessing Tax Incentives: | 41 Falling Short of Promised Growth and Equity APPENDIX 4: METR METHODOLOGY 7. Taxes hinder investment in machinery, buildings, and other fixed assets because capital expenses are treated differently from routine business costs. Instead of immediate deductions, firms must depreciate capital expenditure over time through various capital allowances. This delayed write-off reduces the value of investments, especially when considering inflation and the time value of money, leading businesses to recover less than their initial investment (Figure 44). This design creates a distortion in the corporate tax system, lowering returns on capital and deterring business investment, particularly during periods of high inflation. Depreciation rules lower returns on capital in an inflationary environment. Figure 44: Effect of capital allowances on tax burden Assumes an investment in a $10,000 machine, 10-year straight line depreciation, 5.5 % real discount rate, 2% inflation rate, and 20% corporate income tax rate In real terms and considering time value of $10,000 money, out of $10,000 investment, a business x 20 % $524 $9,000 can deduct $7,379 as As a result, business depreciation allowances $2,621 pays taxes on income $8,000 from its revenue that effectively does not exist $7,000 $6,000 This means that 52,621 $10,000 $7,379 of that $10,000 does not $5,000 count as a business cost. This understates costs $4,000 and thus overstates business profits $3,000 $2,000 $1,000 $10,000 investment Net Present Value Net Present Value of Tax on Disallowed in 10-Year machinery of Deductions Disallowed Deductions Deductions Source: (Tax Foundation, 2023). 8. We examine DRC’s corporate tax policies, including tax incentives, and assess their likely impact on tax burden and investment behavior of firms. Traditional measures of tax burden encompass both back- ward-looking indicators, such as the Average Tax Rate (ATR), and forward-looking indicators, including Mar- ginal Effective Tax Rates (METR) and Effective Average Tax Rates (EATR). Backward-looking measures like ATR are based on aggregate data are often used to assess the impact of corporate income taxes on an econ- omy and to compare tax burdens across countries. They reflect ‘implicit corporate tax rates’ – calculated as the ratio of corporate tax payments divided by some measure of pre-tax corporate profit. Conversely, forward-looking EATR (Devereux & Griffith, 1999) (Devereux & Griffith, 2003) and METR (King, 1984) measure distortions caused by the tax system, like reduced investment or misallocation across sectors and firm sizes. These metrics use tax rules (such as statutory tax rates, deductions, credits, special tax regimes, and financ- ing cost deductions) in an investment model without needing taxpayer data. 42 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity distortions caused by the tax system, like reduced investment or misallocation across sectors and firm sizes. These metrics use tax rules (such as statutory tax rates, deductions, credits, special taxcaused distortions regimes,by and the tax system, financing like cost reduced investment deductions) or misallocation in an investment across sectors model without needing and firm taxpayer sizes. data. These metrics use tax rules (such as statutory tax rates, deductions, credits, distortions caused by the tax system, like reduced investment or misallocation across sectors special tax regimes, and financing cost deductions) in an investment model without needing and firm sizes. These metrics use tax rules (such as statutory tax rates, deductions, credits, taxpayer data. special Box Box 9: METR 9: and METRtax regimes, and EATR EATR asand financing measures as measures of of cost tax tax deductions) burden in an investment model without needing on investment burden on investment taxpayer EATR data.used measure of tax burden on infra-marginal investment, i.e. an investment that is a widely EATR is Box a 9: METR earns widelya net and EATR present used as measures value measure ofofmore tax of than taxzero burden burden (Devereux on on investment infra-marginal 1999). Its advantages & Griffith, investment, i.e. an includeinvestment being that forward-looking, earns a EATR net present is a widely value based used of on measure tax more of laws, than tax and zero burden applicable on (Devereux to any infra-marginal pre-tax & Griffith, profit 1999)level investment, . Its (Klemm i.e. an investment advantages A. , 2008). that include By being Box 9: METR and EATR as measures of tax burden on investment indicating earns forward-looking, a net the proportion present based onvalue tax laws, of ofmore pre-tax and than economic zero applicable (Devereux rentpre-tax to any &taken Griffith,by taxes, 1999) profit . Its level helps investors it advantages (Klemm A. include , 2008). compare being By indicat- EATR is exclusive mutually forward-looking, ing the proportion a of widelybased pre-tax used projects on measure taxexpected economic laws, ofand rent tax to burden earn applicable taken on bymore toinfra-marginal taxes, anythan it pre-tax helps investment, the investors minimum profit level i.e. anrate required (Klemm compare investment A. , 2008). mutually of return.By that exclusive earns Consider expectedthe projectsindicating a net an present investment proportion to earn value more than of $1of inmore of pre-tax a than capital the minimum zero asset economic (Devereux thatrent taken requiredearns & a Griffith, pre-tax rate by of return. 1999) rate taxes, it of . Its return advantages of helps investors Consider and an investment include depreciates being compareof $1 in atforward-looking, the that a capitalmutually asset rate of exclusive earns based . Assume aprojects pre-tax on that taxthe expected rate laws, cash of and to flows return earnapplicable ofare more and to any discounted than depreciates thepre-tax at minimum the at profit rate the rate , level which required of (Klemm .is the opportunity rate Assume A. 2008). of ,that return. the Bycash flows are indicating cost Considerof capital. discounted theIf proportion an investment at theis the of net rate $1 , inof present which pre-tax a capitalis value asset the economic of that depreciation opportunity rentacost earns taken by allowances pre-tax of ratetaxes, allowed of capital. it helps return If isunder ofthe investors andtaxdepreciates net law and present compare is value of at depreciation mutually the thestatutory rate of allowances exclusive CIT rate, . Assume allowed projects EATRthat is the defined under expected tax as cash to follows. flows law andearn are is more discounted than the statutory atthe the minimum CITraterate, , which required EATR is is the rate defined of as return. opportunity follows. costConsider of capital. investment an If is the net $1 in a capital ofpresent value of asset that earns depreciation a pre-tax rate allowances allowedof returnunder oftaxand lawdepreciates and is theat the rateCIT statutory . Assume of rate, EATR is that defined the cash as follows.flows are discounted at the rate , which is the opportunity cost of capital. If is the net present value of depreciation allowances allowed under tax law and is the statutory CIT rate, EATR is defined as follows. METR measures the wedge between the before-tax rate of return and the after-tax rate of return on marginal investments, i.e. an investment that earns a net present value of zero. Lower METRs METR measures encourage METR the measures morewedge the wedge between investment, betweenwhichthe can thebefore-tax potentially before-tax rate ratelead of of to return higher return andand growth the the after-tax and after-tax might rate rate offset of of returnthe return on marginal investments, on marginal investments, i.e. an investment that earns a net present value of zero. Lower METRs en- decrease in revenue. i.e.A an tax investment system can yieldthat earns positive a net revenues present with an value METR of of zero. zero, Lower supporting METRs all METR courageencourage more viable measures investment, investments. the more investment,which Such wedgea can between system which canthe potentially taxes onlybefore-tax lead potentially to lead rate higher above-normal toof returngrowth growth returns, higher and and leaving the might after-tax marginal and might rate offset theof investments offset return in decrease the revenue. A on tax marginal untaxed.systemMETR investments, can yield helps in i.e. positive assessing an investment revenues the tax with that system's an earns METR impact decrease in revenue. A tax system can yield positive revenues with an METR of zero, supporting all a net ofon present zero, real value supporting investment of zero. all viable decisions Lower investments. and METRs the encourage economy’s Such a system taxes more optimal only investment, capital above-normal stock. which In the can returns,above potentially example, leaving viable investments. Such a system taxes only above-normal returns, leaving marginal investments lead if marginalthe to higher investment investments growth of $1 and is untaxed. might marginal, offset METR METR the in is helps assessing decrease defined the untaxed. tax as follows. system’s METRin revenue. helps in Aassessing taxnoted It impact may be onsystem real that the can METR investment tax yield ispositive system'szero when decisions revenues impact onand with the real an METR of economy’s investment zero, optimal decisions supporting capital and the allstock. In the above viable example, economy’s investments. optimalif the investment capital Such a system stock. Inof the $1taxes only is marginal, above above-normal example, METRif theis returns,as defined investment leaving$1 is marginal offollows. It may marginal, investments be noted METR is that untaxed. zero METR is defined when METR It as follows. helps may be in noted assessing thatthe METR taxissystem's zero when impact on real investment decisions and the economy’s optimal capital stock. In the above example, if the investment of $1 is marginal, METR is EATR encompasses the METR as a special case when the post-tax economic rent is exactly zero. defined as follows. It may be noted that METR is zero when EATR can be expressed as a weighted average of corporate tax rate and the METR (Devereux & Griffith, EATR 2003). In the encompasses the case METR ofas investments a special case thatwhen generate above-normal the post-tax economic after-tax rent is returns, exactly EATR zero.is closer EATR to the can corporate tax be expressed as a rate. This is because weighted average investments of corporate generating tax rate and above-normal the METR returns (Devereux are, & by EATR 2003). definition, Griffith, encompasses profitable, In the the therefore METR and case of as a investmentsnotspecial likelythatcase bewhen to generatedeterred the post-tax by the tax above-normal economic system after-tax rent unless returns,is the exactly tax EATR zero. rates is EATR encompasses EATR the METR asas a special case when the post-tax economic and rent is exactly zero. EATR are closer can be expressed to can egregiously theas be expressed high. corporate a weighted Intaxthe case rate. average weighted aThis of marginal is of because average corporate of investments, investments tax corporate rate EATR and tax equals generating the rate above-normal METR METR. the METR This (Devereux can be (Devereux returns& seen are, from Griffith, & by 2003). Griffith, the following definition, 2003). profitable, In equation, the and case where therefore of investments denotes not the pre-tax likely that generate return on to be deterred above-normal by the tax investment. marginal system after-tax unless returns, the EATR is In the case of investments closer corporate to the high. that generate tax rate. above-normal This is because after-tax investments returns, generating EATR is above-normal closer totax returnsthe rates corporate are, by are tax rate. Thisegregiously is because In the investments case of marginal generating investments, above-normal EATR equals returns METR. are, by This can definition, be seen from profitable, and the definition, followingto profitable, equation, and where therefore denotes not the likely pre-tax to be return deterred on tax by the tax marginal investment. system unless the tax rates therefore are likely not egregiously deterred be high. In the by theof case tax system marginal ( unless ) investments, the ( rates EATR ) are equals METR.egregiously This can high. be seen In the from case of marginal investments, the following equation,EATR equals where METR. denotes This thecan be seen pre-tax return from on the following marginal investment.equation, where denotes the pre-tax return on marginal investment. ( ) ( ) 9. Forward-looking analysis is frequently ( ) by policy used ( ) institutions to determine how heavily and uniformly the government taxes capital income and how that taxation would be 9. Forward-looking affected analysis under several is frequently scenarios usedSuch for reform. by policy institutions analysis has been to determineby undertaken how the heavily and uniformly Congressional Budget the government Office (CBO, taxes 2017) capital (CBO, income 2014), and how Department that oftaxation the would Treasury be (US 9. 9. Forward-looking Forward-looking analysis is frequently frequently analysis is used used by policy by policy institutions institutions to determine determine to how heavily how and uni- affected under Department of several the scenarios Treasury, 2018), for reform. Organisation Such for analysis has Economic been undertaken Co-operation by the formly theheavily and government uniformly taxes the government capital income taxes and capital how that income and taxation would be and how that Development taxation affected would under beseveral Congressional scenarios for reform. Budget Such Office (CBO, analysis 2017) has been (CBO, 2014), Department of the Treasury (US affected under several scenarios forundertaken reform. Such by the Congressional analysis has beenBudget Officeby undertaken (CBO, the2017) Department (CBO, 2014), Treasury, of the of Department 2018),(US the Treasury Organisation Department for of Economic Co-operation the Treasury, and Development 2018), Organisation for Econom- Congressional ic Co-operation Budget Office and Development (CBO, 2018), (Hanappi, 2017)and(CBO, 2014), Oxford Department Centre of the for Business Treasury Taxation (US (Egger, 2009) Department of the Treasury, 2018), Organisation for Economic Co-operation and Development (Cobham, et al., 2022). It has also been used to assess the impact of tax incentives in the contextOfficial of Global Use Only Minimum Tax (OECD, 2022). Official Use Only 10. Box 9 shows the equations for EATR and METR under a simplified scenario. It considers an investment of Official $1 in a capital asset that earns a pre-tax rate of return of and depreciates at the rate of . It is assumed Use Only that the investment must earn a minimum rate of return to cover the return expected by investors and economic depreciation . In the presence of corporate tax , the statutory CIT rate, the minimum rate of return increases. Consequently, the investment now must earn a higher pre-tax rate of return to cover the corporate taxes. Since the investment can be deducted from the profits at the rate of depreciation allowed under the tax law, the net present value of depreciation allowances is generally less than $1 when time value of money and inflation are considered. To assess the impact of DRC’s tax policies (including tax incentives) on investment, Devereaux-Griffith methodology (Devereux & Griffith, 1999) has been used. Capital cost recovery (as a per- centage of investment) is computed based on the depreciation method and depreciation rates allowed under the DRC’s tax law for various assets. Ignoring the impact of personal income tax, METR and EATR are then estimated for the standard and concessionary regimes to show how the tax burden varies across sectors or location based on investment incentives. It is assumed that the investment is either financed by retained earnings or debt. The values of macroeconomic parameters assumed in the estimation are shown in Table 5. Reassessing Tax Incentives: | 43 Falling Short of Promised Growth and Equity Table 5: Macroeconomic parameters assumed in estimation of EATR and METR Parameter Value Pre-tax rate of return net of depreciation 20 percent Real interest rate 5 percent Inflation rate 2 percent Economic depreciation – Equipment 17.5 percent Economic depreciation – Buildings 3.29 percent Economic depreciation – IT 15 percent Economic depreciation – Intangibles 15.35 percent 11. It may be noted that the EATR / METR estimates should be interpreted as a tool for understanding the incentive effects of the business tax system in a country, rather than as precise values. Tax evasion, in- formality and unfair practices in tax administration can undermine policymaker intentions, resulting in a sig- nificantly different actual tax burden for firms. Further, their analysis depends on some simplifying assump- tions and abstracts from certain nuances of the tax code that cannot be readily captured in the calculations. Table 6: Tax and economic depreciation rates for various assets in DRC (in %) Economic depreciation rate Asset Tax depreciation rate (%) (%) 2 to 5 (based on material Buildings 3.3 used) Machinery and equipment 10 17.5 20 to 25 (depending on its Vehicles 17.5 use) Fixtures and facilities 10 17.5 Computer equipment, soft- 1 20 to 33 3 15 ware Goodwill (intangibles) 0 15.35 Table 7: Capital cost recovery for various assets in DRC Capital asset Capital recovery Buildings 27% Machinery and equipment 70% Vehicles 70% Fixtures and facilities 70% Computer equipment, software 82% Goodwill (intangibles) 0% 44 | Reassessing Tax Incentives: Falling Short of Promised Growth and Equity REFERENCES Abbott, A. a. (2013). Procyclical government spending: a public choice analysis. Public Choice, 154, pp.243-258. CBO. (2014). Taxing Capital Income: Effective Marginal Tax Rates Under 2014 Law and Selected Policy. Washington DC: Congressional Budget Office, Congress of the United States. CBO. (2017). 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