US embassy cable - 05LILONGWE507

UNCLAS LILONGWE 000507 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/S ADRIENNE GALANEK AND BRUCE NEULING 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
STATE FOR EB/IFD/ODF LINDA SPECHT 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
TREASURY FOR OTA/BOB WARFIELD 
JOHANNESBURG FOR FCS 
MCC FOR KEVIN SABA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, EAID, MI, BUD FIN 
SUBJECT: MALAWI ADOPTS U.S. TAX RECOMMENDATIONS IN BUDGET 
 
REF: LILONGWE 409 
 
This message is sensitive but unclassified-not for Internet 
distribution. 
 
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SUMMARY 
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1. (SBU) In presenting the draft budget to Parliament on 10 
June, Malawi's finance minister proposed several tax reforms 
which follow recommendations made by U.S. Treasury experts. 
The changes include a higher floor and simpler structure for 
personal income tax, lower excise rates on most imports, 
creation of commercial courts, and exemptions for capital 
gains and capital equipment depreciation.  The reforms 
generally aim for a more regular and business-friendly tax 
environment in Malawi.  End summary. 
 
2. (U) Following on an assessment from U.S. Treasury's Office 
of Technical Assistance, the GOM appears to be ready to adopt 
a number of tax reforms that Treasury had earlier 
recommended.  The principal reforms are: 
 
- Resetting the personal income tax floor from MK36,000 
($302) per year to MK60,000 ($504) 
- Reducing most excise duties by 50 percent 
- Changing the refund mechanism to enable prompt VAT and 
witholding refunds 
- Raising depreciation allowances for buildings and computer 
equipment 
- Raising the capital gains exclusion for personal income tax 
- Removing a number of discretionary powers from the Ministry 
of Finance 
- Establishing a system of commercial courts for tax cases 
- Restructuring the revenue authority's incentives system to 
expand the tax base rather than maximize revenue 
- Enhancing the revenue authority's public image with changes 
in its customer service organization 
 
3. (SBU) Finance Minister Goodall Gondwe had set revenue 
neutrality as a priority objective in his tax reform scheme, 
but the local IMF representative has described the program to 
us as slightly revenue negative.  However, Gondwe's speech 
indicated that the GOM would finally allow retail fuel prices 
to rise this year, which may generate enough revenue to 
offset the cost of the reforms. 
 
4. (SBU) COMMENT: Gondwe's program is evidence that the GOM 
is taking the challenge of tax reform seriously.  While the 
private sector's complaints of an arbitrary and dysfunctional 
tax system are the immediate incentive for this effort, the 
finance ministry has taken a thoroughgoing approach to the 
problem.  The GOM has consulted very widely with the private 
sector and civil society to garner suggested reforms, but it 
appears to be following most closely the advice from the U.S. 
Treasury and the Malawian society of accountants.  That 
Malawi has opted for a systematic reform rather than a system 
of patches may be an indication that the government is 
actually listening to private investors. 
GILMOUR