assessment of tax expenditure, transparency and control of exemptions jean-françois brun gérard...
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Assessment of tax expenditure, transparency and control of exemptions
Jean-François Brun Gérard Chambas CERDI
Module 6
Budget subsidies versus tax exemptions
• Budget subsidies : transparent expenditure through the budget
• Exemptions • Lack of transparency concerning the amount of
benefit granted• Lack of transparency concerning the beneficiaries
• Hence the need for an evaluation of tax expenditure
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Assessment of tax expenditure in developing countries
• Many development economies: scepticism regarding feasibility but generalisation/poor control of tax
• Purpose of the module: to demonstrate the benefit of assessing tax expenditure
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Outline
I - Definition of tax expenditure
II - Method of evaluating tax
III - How can the concept of tax expenditure be made operational?
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1 Tax expenditure: definition
• Loss of revenue due to total or partial tax exemption measures
• Tax expenditure assessed in relation to a benchmarked tax legislation
Why the denomination of “tax expenditure”?
• If the exemption measures were removed, additional revenue would be produced
• Exemption has a similar effect to a subsidy (i.e. budgetary expenditure) granted to a tax-payer benefiting from the exemption measure.
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Subsidies versus tax expenditure
• Subsidies: spending a given amount to the profit of a beneficiary in principle identified with a stated target
• Evaluation of the social effectiveness of subsidies (transparency)
• Targeting easier than in the case of exemption
• Arbitration to even out the social usefulness of different categories of spending
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Subsidies versus tax expenditure
Tax exemptions
•Objectives not always explicit; often “incentives” for a (productive) activity or for “basic” consumption (social products as remedies, education, social housing, even fuel).• •Loss of revenue : not well known
•Few ex post assessments, often incomplete, rough estimates
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Why assess tax expenditure?
• Basic principles: transparency, exhaustiveness and quantified measurement of cash flows
• The detailed and public assessment of tax expenditure is one of the prerequisites for a democratic and transparent debate on all public finance choices
• Evaluate the characteristics of all budgetary operations to equalise costs or marginal benefits
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Why assess tax expenditure?
• Need to assess the economic and social effects of the most significant tax expenditures
• Compare the effectiveness of exemption measures with subsidies to retain optimum combinations of expenditure in the broad sense
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Dissemination of tax exemption assessments
• Similar status to that of other expenditures
• Clear document for all stakeholders (opinion, Parliament, etc.)
• The case of Morocco • Appendix to the Finance Act• Website of the Ministry of Finance
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International practice for assessing tax expenditure
• Developed countries: systematic assessment of tax expenditure, particularly in OECD countries: Germany, Austria, Belgium, Canada, France, the Netherlands, UK and USA
• Developing countries, tax expenditure assessment, particularly in Latin America (Argentina, Brazil, Chile, Colombia, Guatemala, Mexico, Peru, Uruguay). In Africa: Morocco since 2005; Benin under way, Gabon, Senegal since 2008
Assessment of tax expenditure in developing countries (Source: M. Mansour)
% GDP Percentage of total revenue Year
Direct taxes Indirect taxes Miscellaneous
Argentina 3.1 29 64 7 2002
Brazil 1.5 66 17 17 2001
Chile 4.4 71 29 0 2001
Colombia 7.4 35 65 0 1998
Guatemala 2.0 n.a n.a n.a. 2001
Mexico 5.3 51 49 0 2002
Peru 1.9 10 90 0 2003
Uruguay 6.6 20 76 4 1999
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II. The estimation of tax expenditure
• A benchmark is defined.
• The tax expenditure is assessed, i.e. the difference between tax revenue obtained by implementation of the common regime (benchmark) and by implementation of the derogative regime.
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Questions of method
• What are the criteria for determining a benchmark tax legislation ?
• What are the taxes concerned?
• Which kind of data are necessary for the evaluations?
• What are the methods for estimation?
What scope?
• In general, initially, the local taxation system and social levies are not included within the scope of tax expenditure.
• Starting point: concentrate on major taxes (VAT, profit tax, tariffs)
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Operational orientation
Four courses of action
• Implement the evaluation of tax expenditure administratively
• Integrate tax expenditure into the budgetary framework with an optimization process
• Publish tax expenditure to encourage transparency
• Implement a plan of action
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What operational procedure?
• Define a method of estimation for each measure on the basis of the data available
• Make the method explicit via a report distributed within the services concerned
• The reports will provide a methodological guide for all assessments
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Assessing tax expenditure
• Numerous administrations involved, in particular, Tax administration, Customs, Treasury, Budget, Department of Forecasting
• Risk of blocking attributable to the partitioning of administrations or departments and the stakes; steering is necessary
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Assessing tax expenditure
• Central role of a structure for monitoring tax expenditure involving the departments concerned to promote assessments of tax expenditure
• Appoint a lead manager (specific case of the Tax administration in Morocco)
• Supporting role of a development partner (EU)
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Publish the results of the assessment
• Annual synthesis report of the assessment of tax expenditure (legible and accessible)
• Annex to the Finance Act
• Placing on-line on the Tax administration website
• This does not exclude more in-depth documents for the authorities
Action Plan based on the assessment • The results of the assessment must lead to a debate and
the definition of an action plan in order to correct inefficiency of the policy of tax exemption
• The central objective is the optimization of all public finances
• Integral part of the policy of public finances (overall optimisation)
• Role of national authorities
• Importance of communication
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