Graeme Ludlow IMF Fiscal Affairs Department Washington DC Session overview An introduction to FAD, Revenue Administration Revenue Mobilization in Developing

REVENUE MOBILIZATION and DEVELOPMENTPITAA 2011

Graeme LudlowIMF 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 , andtwo multi-donor trust funds

FAD Revenue Administration Division

Technical Notes: Developing a Compliance program Performance Measurement in Tax Administration Autonomy and the Revenue Authority ModelToolkit 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

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 Limited Sustained Stagnated Mozambique DR Congo Bolivia Guatemala Peru Haiti Ghana Honduras Rwanda Nicaragua Uganda Zambia Tanzania Sierra Leone


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


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


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


Most developing countries have developed a VAT

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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....”


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


The political economy of tax reform – Traditional advice Alternative vision

Strategic, opportunistic: Mobilize public support:- Avoid powerful interests and - Envision equity, political controversy transparency,

inclusivenessW. Prichard, International Center for Tax and Development

Tax reform

EquityTransparencyInclusiveness

Increasedrevenue

Improvedgovernance


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


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


Georgia: a case study in tax reforms –

Phase I: 2004-2007 Phase II: 2007-2009 Fight against corruption Improving institutional capacity Eliminating red tape Collection enforcement reforms Deep cuts Further reduction of tax burden Basic institutional changes

Phase III: 2010-2011 Deep and comprehensive policy reform Finishing customs reforms Prioritizing services

Sharply reduced compliance costs through IT enhancements


Georgia: a case study in tax reforms –

Before After Number of taxes 22 6 Potential tax revenue % GDP 40-45% 28-30% Actual tax revenue % GDP 15.6% 23.4% Compliance Rate 35% 78-85%

“ Effectively functioning public institutions and rule of law led to a dramatic reduction of informal activities “

R. Kemularia, Deputy Minister of Finance


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”


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)


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?

Training

Segmentation

Compliancemngt

Outreach Monitoring

Rules & Regs

SimplificationSME tax reform


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

Documents

Graeme Ludlow IMF Fiscal Affairs Department Washington DC Session overview An introduction to FAD, Revenue Administration Revenue Mobilization in Developing