By Sahar Mechmech Special thanks to all those who contribute to the making of this report, namely, Nabil Abdo, Oumaima Jegham from Oxfam, Selim Kharrat, and Amine Bouzaiene from Al Bawsala The recent coronavirus crisis has put public finances at the forefront of popular discourse. Though most of the discussions revolve around the resources allocated to health sector, the scarcity of public funds can equally be felt across all sectors. Through this, it is important to find out whether this scarcity in resources is an inevitability of our current economic context, or merely an outcome of decades of harmful public policies. This paper aims to dissect one aspect of public finances: tax expenditure. It evaluates whether policy-makers are making adequate use of this tool to encourage inclusive growth and increase public funds, or a burden on tax payers and a waste of public resources. Tax incentives or tax expenditures essentially preferential treatments afforded to entities by the state in matters of tax and fiscal responsibility, usually to encourage a certain economic or social behavior. Because these tax incentives associated with lower tax rates or postponed tax collection, they lead to a loss of revenue for the government, which is why they considered indirect public spending, hence the name tax expenditure. They come in different forms and can target different actors. In Tunisia, almost all tax incentives are directed towards businesses, not people. The types of incentives include: e Exonerations: a total suppression of taxation, usually limited in time. ¢ Reduced tax rates: companies might benefit from a lower corporate income tax rate than the general one, which in Tunisia, stands at 25%. e Exemptions: companies not subject to specific taxes. ¢ Deductions: amount that companies can deduct from their taxable base. ¢ Credits: amount that tax payers can deduct from their tax due. This public policy tool is rather popular among law-makers who use It to accomplish diverse objectives. For instance, incentives given to the agricultural sector considered necessary for Tunisia to achieve self-sufficiency in terms of food'. Other incentives relate to encouraging renewable energy to promote a healthier, safer environment for citizens and future generations. Others still aim incentives for investors that supposedly aim at addressing crucial issues such as unemployment through encouraging job creation by offering tax incentives to investors. They can also be given for social reasons such as narrowing down economic inequalities, as is the case for the incentives given to encourage regional development in under-privileged areas, or the exonerations offered to new companies set up by young college-graduates. All these objectives fit well with the successive governments’ vision of Tunisia’s future. Nonetheless, it remains a question, whether these policies have achieved their announced objectives, considering their cost to the taxpayer. One perceived advantage is that tax incentives can be used to encourage actors to follow a certain behavior while minimizing public administrative costs, especially when compared with financial incentives”. In terms of implementation, tax incentives cheaper than other types of incentives such as financial incentives. For the latter, the administration has to assess the company soliciting the incentive, the requested amount, and annually renew it. It also involves the redundancy of first collecting tax revenue then giving it back to the taxpayers after going through all the aforementioned procedures. However, for tax expenditures, one-time processing of the incentive is enough for that company to benefit from it for whatever period the incentive is valid for. At least theoretically, this allows the state to accomplish specific objectives with minimal costs, e.g. ' Chebbi, Houssem Eddine, J-P Pellissier, W. Khechimi, and J-P Rolland. "Rapport de synthése sur l’agriculture en Tunisie." (2019). P 10 2 International Budget Partnership, Guide to Transparency in Public Finances Looking Beyond the Core Budget: Tax Expenditure, Page 5changing behavior and encouraging investment in a certain sector that is emerging, in difficulty, or that is seen as critical to the Tunisian economy. In Tunisia, this policy tool dates back to well before the country’s independence. In September 1946 for example, an incentive was passed through decree to exonerate capital gains coming from concessions from tax*. Since then, this tool was increasingly used to guide economic behavior. The number of fiscal incentive measures rose steadily through the 60s and 70s, notably with the passing of the law 72. This law was aimed at inciting foreign direct investment by exonerating them from corporate tax and was supposed to be slowly rolled back as investors entered and settled in Tunisia. Except that over 45 years, it was rarely reviewed. Tax incentives increased dramatically during the 1980s as Tunisia enrolled in Structural Adjustment Programs (SAP), notably the one of 1986, led by international financial institutions, Tunisia constructed its 1993 Investment Code that solidified and fortified incentives within the Tunisian fiscal system, specifically those intended to promote investment. The new Investment Code adopted by the Tunisian parliament in 2016 continues in the same vein as its predecessor, by using tax incentives as the preferred method for attracting investment to achieve such goals as regional development, promoting exports, helping agricultural development, job creation, etc. In all of the decades of their use in Tunisia, tax incentives have never been re-evaluated. This is a dangerous oversight, especially considering that their impact on investment is unclear and their cost in terms of lost revenue for the state, as will be demonstrate, is quite significant. This lapse led to the passing of a particular article in the new Ordinary Budget Law ° (Article 46) that obliges the government to prepare a yearly report on the cost of these measures and to annex it to the yearly Finance law. This report was further detailed in Article 18 of the recent law on reviewing tax incentives (Law 2017-8) that explicitly states that this report should include a cost benefit analysis of these expenditures and that it should be made available to the public through the website of the Finance Ministry. Additionally, the article requires that the report present the method used in the calculations, the loss of revenue for the state analyzed by economic sector, governorate, and delegation, the number of jobs created, revenue from exports coming from companies benefitting from tax incentives, as well as the state of business continuity within these companies.°® This paper comes to support the elaboration of this report by evaluating the current situation of tax incentives in Tunisia and discussing whether or not the measures taken recently to increase their transparency and accountability enough and what they should include. To achieve this, the paper will first offer an overview on the cost of tax expenditures. Second, it will look into their efficiency and whether or not they reach their declared objectives and at what cost. The paper will then discuss how they fit into the scope of fiscal justice and the vision of an inclusive economy, especially in light of the Sustainable Development Goals’, and finally, evaluating the accountability and transparency measures that surround this fiscal policy.