CIRAD-Reduction of Forest Taxation for Certified Concessions with Compensation to States
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The Compensated Reduction of Forest Taxation mechanism (CRTF) only deals with forest taxation, which is mainly made up of three royalties or taxes: the area royalties, the felling tax and the export tax. The hypothesis underlying this study is that responsible forest management certification (FSC or PAFC type) is today one of the best guarantees of compliance with existing regulations, while at the same time encouraging companies not to limit their efforts to legal/administrative requirements in the social and ecological fields. Despite its expansion in tropical areas, FSC certification of natural forests in Central Africa has stagnated since 2014 and declined in 2017-2018 with 1.2 million hectares less. One of the reasons for this slowdown is the increasingly important share taken by Asian markets and other emerging countries in the timber exports of African countries, to the detriment in particular of the European market, which is the most sensitive to certification.
The "business model" of certification depends on "price premiums", which are not always existing or sufficient. If market incentives are insufficient, incentives could be designed upstream, at the production level. In Central Africa, reducing costs through taxation is one of the only costs items that can be modified by a policy decision. As countries are unlikely to forego revenue without compensation, it will be necessary to compensate them for the revenue shortfall. Reducing costs through fee reductions would not only complement the commercial incentive of certification, but would also potentially attract a new category of concessionaires, namely those whose market outlets are not very sensitive to certification. A coalition of donors could propose agreements to producer countries to compensate national budgets for the reduction of taxation for FSC-certified concessions (or those adopting the new PAFC label). Compensation should be maintained over a minimum period, ideally 7 to 10 years, to allow currently uncertified concessionaires to become certified. The fiscal compensation period would be fixed (and not "à la carte" for each company), with an initial and a closing year, with interested concessionaires having to seize the temporal window of opportunity, otherwise they will lose the potential fiscal benefits of the mechanism.
Another hypothesis underlying this option is that, once certified, companies will have access to new markets, usually more lucrative, without this being at the expense of their traditional markets. Furthermore, experience shows that in order to achieve certification, and once certified, companies streamline their forest management, which leads to cost savings and improved productivity. A new corporate culture is developing and it is therefore unlikely that companies will revert to their old practices and abandon certification even after the end of tax benefits.
Results and recommendations:
While the three countries concerned by the study, Cameroon, Congo and Gabon, have fairly comparable forest areas, forest taxation generates very different levels of revenue. In countries that still have significant volumes of log exports, the majority of revenues are derived from this raw timber export stream. For example, in Cameroon log exports represent 25% of the volume of roundwood equivalent exported, but generate 84% of export tax revenues.Cameroon is characterized by a very high tax burden, both in terms of area royalties and log exports. Conversely, forestry taxation generates relatively little revenue in Gabon, following the log export ban, the disappearance of a genuine felling tax and the absence of export taxes on exported timber. Nevertheless, companies pay significant amounts for parafiscal levies. Congo is in an intermediate position, but the importance of the parafiscal levies that weigh on companies must be stressed.
Various tax abatement scenarios have been carried out. If donors are willing to finance it, an agreement for a compensated reduction of forest taxation should be sought as a priority with Cameroon. Compensated reductions should be significant, of the order of 50%, in the first two years of the agreement, which would correspond to limited sums since there is only one certified concession, and this situation should change little in the first two years following the introduction of the CRFT measure (time needed for companies to prepare for certification). The rate could then stabilize at 30% for the following years. If the certified area is around 350,000 ha for years 1 and 2, the sum to be compensated will be around €2.44 million (50% cut). A principle of "overcompensation" for the loss of tax revenue for the State could be adopted in order to encourage the government to conclude an agreement.
For Congo, it seems necessary to know the modalities and the consequences on taxation of the principle of "production sharing" which should be included in the new forestry law. The Ministry in charge of forests indicated that once the law is adopted, a study would be launched to consider the modalities for implementing this measure, so it will be necessary to wait for the conclusions of this study and the law enforcement texts before considering a dialogue on the CRFT mechanism.
In Gabon too, forest taxation is likely to be modified very soon, justifying waiting to learn about the new tax regime before proposing the mechanism. The principle of differentiating tax rates for certified companies could be adopted in a new tax regime and result in an increase in certain taxes for non-certified companies. While this principle is in line with the incentive logic of the CFRT mechanism, it remains to be seen whether the tax differentiation to be proposed will provide a sufficient incentive for new companies to follow the three already certified companies. If the level of incentive is considered insufficient, the use of the RCF mechanism could be justified. Of course, the implementation of the obligation to certify forest concessions as early as 2022 would render the CFRT mechanism irrelevant. If, however, this measure did not come into force in 2022, but at a later date, the CFRT mechanism could be used in the meantime to facilitate the transition.
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