Promoting better tax systems

The Vision of International Organizations

blog-Promoviendo mejores sistemas tributariosThe mobilization of new fiscal resources is permanently cited in international tax forums as one of the requirements for developing countries to achieve strong, sustained and inclusive growth.

However, more than half of sub-Saharan African countries and not a few of Asia and Latin America show tax revenues below the minimum level of 20% of GDP considered by the UN as necessary to achieve the Millennium Development Objectives. (1).

This situation has motivated for several decades an active participation by the international organizations and the donors’ community in technical assistance projects aimed at strengthening the policy and tax administration in developing countries (2).

This concern has recently regained importance following the launch of the Multi-year Action Plan on Development agreed by the G-20, which required organizations like OECD, UN, IMF, WB, CIAT and ATAF to identify the tax system limitations in these countries and make recommendations to strengthen the fight against tax evasion and improve the effectiveness of tax administrations.

Even though the collection should be the main objective of these reforms, it is equally necessary to increase the redistributive capacity of the main taxes (3).

Trade liberalization and the tendency to reduce the tax burden applicable to capital are limiting the possibilities of reforms to taxes on relatively immobile bases such as work, consumption and assets.

If a hierarchy should be established, the recent tax reforms are those that should appear first. In Latin America, for example, only Colombia, Argentina and Uruguay have real taxes on personal wealth. The rest is taxed only on some forms of property (real estate and vehicles, mainly).

How  to  increase taxes or create new taxes is increasingly difficult, (4) it is necessary to expand the coverage to those already existing, rationalizing incentives and tax benefits of high fiscal costs and reduced effectiveness. Therefore, not only reports of tax expenditures are necessary as many countries do, but their own cost-benefit analysis.

For equity issues, as it is already well accepted that VAT is regressive by the proliferation of exemptions, exclusions and reduced tax rates to improve their effectiveness, it would not be superfluous to reconsider the alternative to generalize their tax bases and use conditional transfers to relieve the poorest sectors of the population (5).

It also begins to be clearer than the schedular schemes or expressly dual schemes of Personal Income Tax – which there is no doubt that legally, are progressive – have provided more collections than global schemes and; therefore, are a better alternative to reduce the levels of inequality after taxes.

Finally, although most economists criticize them in terms of efficiency, heterodox taxes such as those that tax financial transactions or exports – resurgent in many parts of the world – have served to finance social policies, which is the purpose of mobilizing new fiscal resources.

No doubt the design and implementation of tax reforms are closely linked, especially in developing countries. In this regard, as previously noted, it is necessary to support the fight against tax evasion and improve the effectiveness of tax administrations.

This is where international cooperation is more relevant to expand the best practices and develop skills. Platforms such as the Forum on Tax Administration and regional organizations such as CIAT and ATAF are evidence of this.

The weaknesses of the tax administrations determine the results of tax reforms. After 2 decades of reforms in this matter, although management improvements are evident, there are still challenges to face especially in the segmentation of control policies, risk management and reducing compliance costs.

Control on higher income individuals should be strengthened to increase the contribution of the Personal Income Tax. The success of these efforts would reduce the pressure on the usual group of taxpayers, which by the way will improve the perceived fairness of the tax system.

We know the power of good use of the information, but a good risk management also requires the creation of tax intelligence units and the strengthening of presumptive controls, such as VAT withholding systems. Of course, all these provisions must maintain a proper balance between creditor and tax debtor.

Finally, simplifications in the legislation and intensive use of technology are the keys for making procedures more efficient and; therefore, less costly to taxpayers, which has a positive effect on voluntary compliance. The World Bank through the IFC has been working for quite a while on the topic.

At the international level, the fight against bad tax planning requires strengthening transfer pricing regulations applicable to multinational companies and, above all, to achieve their effective implementation. It would help in this area, to achieve a greater transparency and disclosure of payments made to the State by the extractive industries in resource-rich countries, and even move towards presenting reports country by country (6).

It is increasingly necessary to promote an active exchange of information between countries, whether in the context of bilateral or multilateral agreements. The most ambitious of the latter is currently promoted by the Global Forum on Transparency and Exchange of Information for Tax Purposes that has already been signed by 15 countries in America, Asia and Europe (7).

The role of regional organizations such as CIAT is essential to implement many of the recommendations discussed here. Since its creation in 1967, our organization has promoted cooperation and exchange of experiences of the America and the Caribbean Tax Administrations, and has provided specialized technical assistance for their modernization and strengthening.(8).

For proper monitoring of the tax systems since 2009, we publish a quarterly publication about collection and, in partnership with ECLAC and OECD, we are about to publish a version of the well-known Revenue Statistics for Latin America. Also, with the support of IDB and IMF CAPTAC-DR, we are conducting a diagnosis of the tax administrations of member countries, starting with Latin America, which will set foundations and guide future technical assistance.

Through a network of areas of tax studies and researches, we promote discussion in politics and tax administration. We have just released, for example, a Handbook of Best Practices on Tax Expenditure Measurements and we have been making comparative studies as one that for the first time will include effective tax burden on investment (9) for Latin American countries. Also at our next network meeting, tax reform options in the design and management of Personal Income Tax will be discussed.

In terms of support for tax administration, we have participated in more than 70 projects of modernization and strengthening of tax administrations of our member countries mainly with IDB and the IMF. Currently, we have been actively promoting the implementation of tax intelligence units with the support of the Finance Guard of Italy and we have taken the lead in implementing electronic invoice in the region. In addition, through our General Assemblies and Technical Conferences we expand the best existing practices on this issue in the countries (10).

To improve competences, we have a long tradition in the training of tax administrators, even at a master level, with the support of the IEF and the AEAT. Also, thanks to the support of the CRA of Canada, a permanent committee on ethic promotion has been making recommendations in various member countries. Do not forget that we also manage one of the largest specialized databases in tax related matters in the region, through a virtual library which includes models, manuals, reviews, monographs, research documents, statistics, comparative series, and thesis among others.

Finally, through our permanent committee against bad international tax planning we promote seminars, technical assistance, training and internships in the field of Transfer Pricing, information exchange and control of multinational enterprises, mainly in partnership with the OECD and now GIZ / ITC.  One topic in our agenda at this level is the development of a multilateral tax information exchange based on our previous 1999 model.

In short, although there is no single recipe that applies to all developing countries, it is possible to draw guidelines to guide the work of countries, international organizations and donor community, in pursuit of a common agenda to fight against tax evasion and improve the effectiveness of tax administrations.

(1)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref1 When comparing tax burdens is necessary to consider collection at all levels of government as well as the social contributions. Even if pension systems have been privatized, it would be recommended to adjust the results to add the mandatory contributions made to such plans.
(2)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref2 Despite this, the aid is still small. According to the WB and DFID from US$7.1 million spent in 2005 on bilateral aid for the administration, economic policy and financial management of the public sector, only 1.7% was allocated to technical assistance in tax matters. Similarly, OECD notes that in 2009 donors spent US$1.276 billion for nontaxable public financial management and only US$45.7 million for tax activities.
(3)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref3 While certainly, the redistributive effects of spending policies are higher.
(4)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref4″>[4] Logically, the countries that have more collection have a lot of taxes.
(5)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref5 The latest proposal is the Personalized VAT. See Barreix, Alberto, Bés, Martin and Roca, Jeronimo (2010), Personalized VAT: Increase Tax Collection and Compensating the Poorest.
(6)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref6″>[6] See EITI Initiative and the Dodd-Frank Act in the U.S.
(7)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref7 Multilateral Convention on Administrative Assistance in Tax Matters.
(8)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref8 Today, in addition to the 31 countries in these regions (including USA and Canada), 6 European countries are full or associate members (Spain, Portugal, France, Netherlands, Italy and Czech Republic), 2 African countries (Kenya and South Africa) and one Asian country (India).
(9)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref9 The already known METR and AETR.
(10)/2011/08/29/promoviendo-mejores-sistemas-tributarios/#_ftnref10 Recent topics covered include tax morale and enforced collection, respectively.

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