There is widespread concern in the business community in Mozambique that the tax system is a serious impediment to private investment and business expansion, particularly for companies that do not benefit from special fiscal incentives. Under the standard fiscal regime, the combination of corporate profits and tax on dividend income creates an onerous combined tax rate of 53.8 percent on profits that are distributed to shareholders. At the same time, investors who qualify for fiscal incentives face much lower effective tax rates, varying by sector and region. By narrowing the tax base, these preferences necessitate higher tax rates on other activities. In addition, many local businesses find the income tax code too complex.

To remedy these problems, some stakeholders have expressed a keen interest in following the lead of a growing number of countries that have adopted a flat tax in place of a traditional income tax. The basic proposition is that a simple, uniform income tax with low tax rates could generate more revenue and stimulate more investment and faster growth.

Is the flat tax right for Mozambique? To help answer this question, this note explains the flat tax concept and presents observations on its suitability for Mozambique.