Transcript REVENUE MOBILIZATION and DEVELOPMENT PITAA 2011

Graeme Ludlow
IMF Fiscal Affairs Department
Washington DC
Session overview
 An introduction to FAD, Revenue Administration
 Revenue Mobilization in Developing Countries
- key points from the IMF Policy Paper
 Revenue Mobilization and Development Conference
- April 2011
FAD Revenue Administration Division
Provides technical assistance in tax and customs
administration on request by IMF member states:
- missions to about 80 countries in fiscal 2012
- over 200 targeted assignments by technical experts
- resident advisors in an increasing number of countries
- supports 8 regional TA centers, similar to PFTAC
- about 60 percent of TA is externally financed – under
regional & country-specific programs , and
two multi-donor trust funds
FAD Revenue Administration Division
Technical Notes:
 Developing a Compliance program
 Performance Measurement in Tax Administration
 Autonomy and the Revenue Authority Model
Toolkit for Implementing a Revenue Authority
 Functionally Organized Tax Administration
 Managing the Shadow Economy
 Tax Administration in Small Economies
 Taxpayer Audit – Use of Indirect Methods
 Taxpayer Audit – Development of Effective Plans
 Designing and Developing a Domestic Law to
Implement a Tax Treaty
http://www.imf.org/external/pubind.htm
Revenue Mobilization in Developing Countries
- IMF Policy Paper, March 2011
“Improving revenue administration is essential for enhanced
and fairer revenue mobilization and for wider governance
improvement; though success is hard to evaluate”
Success with wide ranging administration reforms has
been mixed:
Examples –
Impressive
Mozambique
Peru
Rwanda
Tanzania
Limited
DR Congo
Haiti
Nicaragua
Sierra Leone
Sustained
Bolivia
Ghana
Uganda
Stagnated
Guatemala
Honduras
Zambia
Revenue Mobilization in Developing Countries
- IMF Policy Paper, March 2011
Many organizational changes have been constructive .........
 Functional structures
 Strengthened headquarters
 Merged direct and indirect tax management
But others not so successful..............
 Revenue authorities often have not met expectations:
 Can divert attention from function to structure
 Have had limited impact on reducing corruption
 Often have delayed substantive procedural reforms
Revenue Mobilization in Developing Countries
- IMF Policy Paper, March 2011
Segmentation has enabled better resource allocation and risk
management, for some...............
 Large taxpayer functions (up to 70–80% tax revenues)
 Medium, small, micro taxpayers – different levels of revenue risk
and therefore different approaches
 High wealth individuals
 Specialist resource tax functions in some countries
Patchy and often disappointing IT system development.....
 More successful in routine business processes
 Less successful in ex post controls (audit, enforcement, appeals)
 Limited connectivity /interface with customs systems
 Limited connectivity/interface with Treasury/PFM systems
Revenue Mobilization in Developing Countries
- IMF Policy Paper, March 2011
Compliance costs remain high in many developing countries.........
(Doing Business, 2011)
Income group
Payments/ year
Hours/year
Low
38
295
Lower middle
35
359
Upper middle
31
272
High
15
172
............but many still suffer from under-resourcing, misallocation , and
weak mid level managerial skills...........
 Inadequate budgets, staff shortages, low technical capacity
 Low management skills, inadequate management systems
 Resources misapplied to low yield activities
Revenue Mobilization in Developing Countries
- IMF Policy Paper, March 2011
Most developing countries have developed a VAT
140
120
Number of countries
100
80
60
40
20
0
1980
1985
1990
1995
High Income
Other Countries
2000
2005
2009
Revenue Mobilization in Developing Countries
- IMF Policy Paper, March 2011
A VAT can catalyze improvements in broader tax administration BUT
flawed design and implementation can undermine effectiveness
Examples  Low (or no, eg Nigeria) threshold
 Extensive exemptions and zero rating
 Inadequate/rushed preparations – not enough public
sensitization
 Weak compliance and enforcement (eg, registration, audit)
 Refunds a particular problem:
 Processing delays, including for corrupt purposes
 High risk of fraud, but under-developed detection
Resulting in low VAT productivity , despite relatively high rates
Revenue Mobilization for Development Conference
Taxation as “state building” and the quality of revenue management
are now prominent in the debate on development cooperation, eg:
Doha Declaration on Financing for Development (2008):
“........enhance tax revenues through modernized tax systems, more
efficient tax collection, broadening the tax base and effectively
combating tax evasion............”
OECD Informal Task Force on Tax and Development (2010):
“.......the central role taxation plays in development and poverty
reduction, a strong tax system is the heart of a country’s financial
independence, its revenues are the lifeblood of the state itself.........”
“.......taxation is more than just about revenue mobilization. The way in
which revenues are collected and spent defines the symbiotic
relationship between the state and its citizens, strengthening the
former and making it more accountable to the latter....”
Revenue Mobilization for Development Conference
The challenges ahead –
 Consolidation (eg, structure, segmentation, self assessment)
 Continued fundamental process improvement
 Resources, managerial and technical skills
 Inter-agency coordination (customs, ministries, others)
 Compliance strategies – risk based, results measured
 Corruption – political and institutional leadership is critical
 Greater capacity – risk assessment, revenue analysis
 Stronger legal powers and the confidence to use them
 Political support – an holistic view (eg, fewer exemptions,
incentives, amnesties; and reduced complexity)
J. Toro, Division Chief, Revenue Administration Division
Revenue Mobilization for Development Conference
The political economy of tax reform –
Traditional advice
Alternative vision
Strategic, opportunistic:
Mobilize public support:
- Avoid powerful interests and
- Envision equity,
political controversy
transparency,
inclusiveness
W. Prichard, International Center for Tax and Development
Tax
reform
Equity
Transparency
Inclusiveness
Increased
revenue
Improved
governance
Revenue Mobilization for Development Conference
Kenya: a developing country perspective –
 Revenue mobilization is crucial for creating fiscal space to
finance important priority developments
 But creating fiscal space from revenue effort is a challenge in
a number of developing countries because:
 Structures of economies can affect revenue efforts
 Increasing complexity of tax codes: many amendments
 Narrow tax bases: large informal sector, wide tax evasion
 Tax policy design: many exemptions & incentive regimes
 Institutional constraints : resources, capacity, etc
Revenue Mobilization for Development Conference
Kenya : a developing country perspective on policy design –
Need innovative/new sources of additional revenues , eg –
 Simplified regime for small taxpayers & informal sector
 Expanded urban property and capital gains taxes
 Land taxes to raise revenue, discourage speculation &
enhance economic productivity
 Investment in environmental conservation, carbon credit
financing as a revenue source
“ There is more scope to raise revenue but political
commitment to tax policy reforms is imperative “
H. Rotich, Deputy Director Economic Affairs, Ministry of Finance
Revenue Mobilization for Development Conference
Georgia: a case study in tax reforms –
Phase I: 2004-2007
Fight against corruption
Eliminating red tape
Deep cuts
Basic institutional changes
Phase II: 2007-2009
Improving institutional capacity
Collection enforcement reforms
Further reduction of tax burden
Phase III: 2010-2011
Deep and comprehensive policy reform
Finishing customs reforms
Prioritizing services
Sharply reduced compliance costs through IT
enhancements
Revenue Mobilization for Development Conference
Georgia: a case study in tax reforms –
Before
Number of taxes
22
Potential tax revenue % GDP 40-45%
Actual tax revenue % GDP
15.6%
Compliance Rate
35%
After
6
28-30%
23.4%
78-85%
“ Effectively functioning public institutions and rule of
law led to a dramatic reduction of informal activities “
R. Kemularia, Deputy Minister of Finance
Revenue Mobilization for Development Conference
Tax reforms for small and medium businesses -
 Tax rates and tax administration consistently ranked in the top 5
constraints to businesses, across all regions
 The cost of compliance is higher for small firms than larger
 Informal payments impact more heavily on small firms
 Which encourages them to stay in the informal sector
 And thereby impacts on their growth......and government revenues.....and
transfers the economic costs to compliers
But an SME tax regime can have benefits, eg:
 small business access to formal (bank) finance
 opportunities to bid for government contracts
 sales to purchasers who prefer VAT registered suppliers
 limit the need to artificially (illegally?) stay “small”
Revenue Mobilization for Development Conference
General guidelines for SME tax design –
 Compliance costs must be low
 Administration costs must not be excessive: the revenue
potential is low
 Ideally based on self assessment & risk-based verification
 Needs to encourage business growth & therefore increased
economic impact
 But need safeguards against abuses
 And distinguish between formal SMEs and subsistence
enterprises (micro businesses)
Revenue Mobilization for Development Conference
Some key issues in SME tax design –
 What is “small” ?
 What safeguards will deter larger enterprises in disguise?
 How much compliance activity, given low revenue?
 How should the system align with the standard tax regime?
 How can it be demonstrated to be fair and transparent?
 What incentives will encourage book and record keeping?
 How to avoid under and over taxing SMEs?
Segmentation
Training
Simplification
SME tax
reform
Compliance
mngt
Rules & Regs
Outreach
Monitoring
Revenue Mobilization for Development Conference
Lessons learned –
 Mostly MoFs pushing SME regimes but tax dept. must be
involved
 Abuse by larger firms in many countries – countermeasures
required
 Lack of reliable data complicates system design
 Learning from other country successes is helpful – not only
what they did but why they did it
 Estimate turnover based on indicators, and profit margins
based on turnover, in presumptive regimes
 Develop guidelines for tax accounting rules design
R. Awasthi, Investment Climate Advisory Services, IFC
THANK YOU