Transcript Turkey: Challenges in tax reform in an international

Turkey: Challenges in tax
reform in an international
perspective
Presentation by Teresa Ter-Minassian at the MoF-UNDP seminar on
“Tax Policy Options for Turkey in the wake of EU accession”
Ankara, Jan. 12-13, 2009
The views expressed are those of the author and not necessarily of
the IMF
Overview of presentation
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Revenue trends and composition in
Turkey in an international
perspective
Recent reforms
Main remaining challenges for tax
policy and administration
Overall revenue trends
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Turkey increased its overall tax revenue to GDP ratio
significantly between 1995 and 2001, by more than the OECD
average and most emerging markets (EM) countries, but
progress has stalled in recent years
The revenue ratio remains significantly below the OECD
and EU averages, albeit slightly above the EM average
In a medium-term perspective, a gradual further rise in the
revenue ratio may be needed, together with expenditure
reforms, to create sustainable fiscal space for new priority
spending.
Revenue trends in the OECD
Changes in tax to GDP ratio (percentage points), 1995-2006
Turkey
Korea
Spain
Portugal
Mexico
Norway
United Kingdom
Greece
Italy
Switzerland
Sweden
France
Japan
Belgium
Aus tria
Denmark
United States
Ireland
Czech Republic
Luxembourg
Germany
Netherlands
Canada
Finland
Poland
Hungary
Slovak Republic
OECD - Total
OECD - Europe
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
Revenue trends in Turkey
General government tax revenue in selected OECD countries,
1998-2006
P ercen t of G D P
4 0 .0
3 5 .0
3 0 .0
2 5 .0
2 0 .0
1 5 .0
1998
1999
2000
T urk e y
2001
2002
K o re a
2003
2004
M e xic o
2005
2006
O E C D a ve ra ge
2007
Tax ratios in the OECD
Tax revenue to GDP ratio in OECD countries, 2006
Mexico
Turkey
Korea
Japan
United States
Switzerland
Slovak Republic
Greece
Ireland
Canada
Poland
Germany
Portugal
Luxembourg
Spain
Czech Republic
Hungary
United
Netherlands
Austria
Italy
Finland
Norway
France
Belgium
Sweden
Denmark
OECD - Total
OECD - Europe
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Revenue composition
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The share of taxes on goods and services in general government
revenues, albeit declining in the more recent years, is significantly
higher in Turkey than in the rest of the OECD
The share of excises (Special Consumption Tax, SCT) is especially
high (about 20%, compared with less than 8% on average in the
OECD), reflecting:
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Very high rates (as much as 275%) on some products; and
The relative ease of collection of these taxes
The revenue productivity of the VAT remains relatively low (around
30%, compared to the 40% more typical in better-performing VATs).
This reflects broader than average range of exemptions and coverage
of reduced rates, as well as weaknesses in the administration of the tax
Revenue composition
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Since the PIT and CIT rates are not substantially lower than OECD
averages, the relatively low share of income taxes in total
revenues (21.5% vs over 36% on average in the OECD) reflects:
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Leakages from the base (significant exemptions and other preferential
treatments); and
Weak compliance and enforcement.
Despite relatively high rates, revenue from social security
contributions is also below the OECD average, reflecting the high
degree of labor market informality and enforcement weaknesses
The small weight of property taxes (less than 1% of GDP) mainly
reflects inadequacies in property valuation
Revenue composition in
Turkey and the OECD
Turkey: General government tax revenue, 2006
Excises,
19.9%
Others,
14.0%
VAT, 22.2%
Income
taxes, 21.6%
Social
security,
22.4%
OECD: General government tax revenue, 2006
Others,
10.6%
Income taxes,
36.3%
Excises, 7.8%
VAT, 19.0%
Social
security,
26.3%
Recent tax reforms in
Turkey
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Main steps taken in recent years to rationalize the tax system
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Move towards a modern dual PIT:
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A design of the CIT (including a rate cut, and rules on transfer pricing and
thin capitalization) more in line with the growing internationalization of the
Turkish economy
Tax administration reforms
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Some simplification of the PIT structure
A more uniform taxation of financial income
Establishment of a semi-autonomous, functionally organized Revenue
Administration (RA) and a large taxpayer office (LTO)
Strengthened IT infrastructure for the RA
But, also some retrogression:
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Introduction of new special treatments and tax incentives
Repeated tax amnesties, weakening compliance morale
Agenda for further reforms
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Additional efforts to mobilize revenue over the medium term
should be consistent with efficiency and equity objectives, and take
into account Turkey’s growing trade and financial integration into the
global economy, and in particular Europe
These considerations argue for focusing further tax reform efforts
on:
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Broadening the bases of the major taxes
Reducing those rates that are relatively high in an international perspective
Continuing to strengthen the tax administration, facilitating voluntary tax
compliance and making enforcement more effective; and
Seeking to expand own revenue-raising capacity of local governments
Broadening the tax base:
Income taxes
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PIT
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Subjecting public pensions to the PIT, with (possibly partial)
offsetting adjustment in value of pensions, and reducing
generosity of treatment of private ones
Eliminating current exemption of certain types of
employment income
Reducing threshold for agricultural incomes
Capping all deductions
Subjecting all financial income to uniform final withholding
CIT
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Significantly reducing existing incentives (with respect of
acquired rights), and refraining from introducing new ones
Broadening the tax base:
VAT and property taxes
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VAT:
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Reducing the coverage of exemptions
Eliminating the 1% rate (not consistent with the EU acquis
communautaire):
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Exempting wholesale sales of unprocessed agricultural foods
Moving other categories to 8% or standard rate
Moving some categories of goods and services (e.g. textiles; entertainment
tickets; restaurants; tailoring; and hotel services) to the standard rate, in
line with international experience
Limiting scope of free trade zones, especially in view of likelihood of
leakages
Property tax
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Potentially important source of own revenue for local governments
Local governments should be given limited authority to set rates of the tax
Ensuring up-to-date valuation of properties through development of modern
national cadaster
Reducing high rates and
distortive taxes
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SCT
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Very high rates on some products may promote smuggling
and other forms of evasion.
The rate structure for certain products (e.g. alcoholic
beverages and tobacco) favors domestic production over
imports, and will need to be modified to adjust to EU
requirements on accession
To the extent that some of the taxed goods are used as
inputs into production, and the SCT cannot be rebated for
exports, it reduces competitiveness
The fiscal dividends of base broadening for other taxes, and
of improved compliance could be used for selective
reductions in the SCT rates
Reducing high-rate and
distortive taxes
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Financial intermediation taxes (BITT and RUSF)
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While for the most part acting as substitutes for the VAT on
financial services, in some cases (e.g. purchases of foreign
exchange and financing of imports) they represent actual turnover
taxes, with distortive effects.
Even as substitutes for the VAT, these taxes may be incompatible
with the EU Sixth Directive
Social security contributions
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Relatively high social security contributions rates promote labor
market informality, and reduce employment, as well as
competitiveness (since they are not eligible for border tax
adjustment). Improved enforcement of their collection (including
through avoiding further amnesties) would open space for some
reduction in the rates.
Promoting voluntary
taxpayer compliance
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Effectively promoting voluntary tax compliance requires both facilitating the
latter and increasing enforcement deterrence. Possible actions to facilitate
compliance include:
 Firmly and publicly committing to not introducing new tax amnesties
 Streamlining taxation of small businesses
 Introducing a threshold for VAT payers (aligned with the simplified PIT regime ceiling)
 Eliminating the rental ceiling for application of the simplified PIT regime. Developing and
announcing industry-specific standards for input credits and sales for the regime, to guide audit
efforts in this area.
 Continuing to improve taxpayer services, in particular by developing a national
outreach service for new businesses
 Implementing a risk-based and timely export refund system, to promote VAT
compliance and export competitiveness
Strengthening tax
enforcement
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Vigorously pursuing implementation of RA-led multi-agency Action Plan to
Reduce Informality
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Substantially strengthening the audit function
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Consolidating the audit function under the RA
Increasing the number and capacity of RA auditors
Developing improved, risk-based audit selection strategies (including with respect to
employers and high net-wealth individuals)
Better exploiting data matching and cross checking IT capabilities in audits
Allowing indirect determination of tax liability, based on clearly specified criteria
Establishing a specialist investigation unit for criminal tax frauds, and publicizing
results of successful prosecutions
Developing and implementing modern approach to tax arrears management
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Focusing on larger, more recent debt
Establishing automated debt collection procedures
Introducing clear criteria for debt write-offs
Concluding remarks
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Turkey has already made significant progress in
establishing a modern tax system and tax
administration
Although the overall tax burden is not out of line with those
of many countries at a comparable level of development, it may
well have to rise further over the medium term, as the
economy integrates further into the OECD and ultimately the EU
Tax and tax administration reforms to mobilize additional
revenue should also pursue other important objectives:
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Efficiency (reduction of distortions) and international
competitiveness
Reduction of incentives to informality
Horizontal and vertical equity
Facilitation of voluntary tax compliance; and
More effective deterrence of non-compliance
Concluding remarks
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In my view, the reforms advocated in this
presentation would support these objectives,
in as far as:
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Effectively broadening the bases of the VAT, PIT and CIT would
enhance horizontal equity and reduce distortions
The additional revenue generated by these reforms could be
used to reduce certain rates (of e.g. employers’ contributions,
certain excises and the financial intermediation taxes), with
favorable impact on growth and competitiveness, and to fund
additional targeted spending for the poor
A significantly strengthened tax administration would certainly
enhance both equity and economic efficiency
I look forward to a lively discussion of these and
other possible reforms in the course of the seminar
Thank you!