INTERGOVERNMENTAL GROUP OF EXPERTS ON FINANCING FOR

DEVELOPMENT Domestic resource mobilization:

Fiscal policy challenges

The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.

Daniel Titelman Director

Economic Development Division UN-ECLAC

LATIN AMERICA: CENTRAL GOVERNMENT TOTAL REVENUES, 2000-2017 a

(Percentages of GDP)

Public revenues have stagnated in the post-crisis period…

13.8

16.4 15.6

16.4 15.7

18.4 18.0 18.1 17.8

20.8 20.7 20.1

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Centroamérica, Haití, Rep. Dominicana y México América Latina (17 países) América del Sur (8 países)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official information. a Simple averages.

… reflecting in large part the evolution of fiscal revenues derived from commodities

5.1

8.1

7.3

2.6

0.3

1.6

1.3

0.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

1

2

3

4

5

6

7

8

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Hydrocarbons (10 countries) Mining (10 countries) (right axis)

LATIN AMERICA AND THE CARIBBEAN: FISCAL REVENUES FROM NON-RENEWABLE NATURAL RESOURCES, 2000-2016 a

(In percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official information. a Simple averages.

Dependency on commodities related revenues has important implications for domestic resource

mobilization

• High volatility creates significant constraints on long-term planning

– Movements in international prices lead to overall revenues surging or plummeting

– Volatility reinforces typically pro-cyclical nature of fiscal policies in commodities exporting countries

• Dependence on revenues from commodities has also been associated with weaker mobilization of public revenues from other sources

– For each additional percentage point increase in revenues from natural resources there is a 0.3 percentage point decline in other revenues (Crivelli and Gupta, 2014)

Key domestic resource mobilization concerns

• Increase tax burden and change tax structure

• Weak direct taxation, high (income/wealth) inequality, and achieving sustained inclusive economic growth – Limited automatic stabilizer – Negligible redistributive power, allowing inequality to remain entrenched

• Tax evasion, tax avoidance and illicit financial flows

– Widespread in the region among individuals and corporations – Growing importance of international taxation concerns:

• Base erosion and profit shifting (BEPS) • Illicit financial flows • Undeclared offshore wealth and the income it generates

• Harmful tax competition – Widespread use of fiscal incentives, often with little follow-up to determine

their cost effectiveness

LATIN AMERICA: CHANGE IN GENERAL GOVERNMENT TAX REVENUES, 2010 AND 2015 (Percentage points of GDP)

Efforts to increase tax burden: A wave of reforms increased the tax burden by 2.2 percentage points of GDP on average

between 2010 and 2015

Source: Revenue Statistics in Latin America and the Caribbean (OECD/ECLAC/CIAT/IDB 2017).

Between 2010 and 2015, 15 countries implemented substantial tax reforms: Brazil (2015), Chile (2014), Colombia (2010, 2012, 2014), Ecuador (2011), El Salvador (2011), Honduras (2010, 2013), Guatemala (2012), Nicaragua (2012), Mexico (2013), Panama (2010), Paraguay (2012), Peru (2012), Dominican Rep. (2012), Venezuela (2014).

-2

-1

0

1

2

3

4

5

Pan

amá

Per

u

Bra

zil

Gu

atem

ala

Uru

guay

Ch

ile

Do

min

ican

Rep

.

Par

agu

ay

El S

alva

do

r

Co

lom

bia

Co

sta

Ric

a

Nic

arag

ua

Arg

enti

na

Ho

nd

ura

s

Mex

ico

Ecu

ado

r

Bo

livia

AL-

18

Direct taxation remains very weak in Latin America and in other developing regions

4031

23

39 38 33

27

1923

5 4

1

32

4850 56

54

58

1 2 4 4 8

0

10

20

30

40

50

60

70

80

90

100

OECD (34countries)

Latin America (18countries)

Transitioneconomies

Northern Africaand Western Asia

Developing Asia Sub-SaharanAfrica

Direct taxes Social contributions Indirect taxes Other taxes

67% 49% 46% 44% 42% 35%

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from World Revenue Longitudinal Dataset (WoRLD) (IMF), OECD/ECLAC/CIAT/IDB (2017) and OECD.Stat. a Simple averages. Values may not sum due to rounding.

SELECTED REGIONS: STRUCTURE OF TAX REVENUES, AROUND 2014 a

(Percentages of GDP)

Income taxes are particularly weak; taxation of consumption approaches OECD levels

5

4

1

10

1

12

9

2

11

1

Income and profits Social securitycontributions

Property Goods and services Others

Latin America (18 countries) OECD (34 countries)

Gap

TAX STRUCTURE, LATIN AMERICA AND THE OECD, AROUND 2015 a

(In percentages of GDP)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from OECD/ECLAC/CIAT/IDB (2017) and OECD.Stat. a Simple averages. Data for the OECD refer to 2014 due to data availability.

A low average effective personal tax rate results in a mere 2% decrease in the Gini coefficient in Latin

America

LATIN AMERICA AND EUROPEAN UNION: PERCENTAGE REDUCTION IN THE GINI INDEX DUE TO THE PERSONAL INCOME

TAX, AROUND 2014

(In percentages)

0 0 1 1 1 1 1 1 2 2 2 2 2 3

3 3 4

6

2

12

0

2

4

6

8

10

12

14

PR

Y

BO

L

GTM RD

O

VEN CO

L

HN

D

ECU

CR

I

NIC

PER

PA

N

CH

L

BR

A

SLV

UR

Y

AR

G

MEX

AL-

18

UE-

28

LATIN AMERICA AND EUROPEAN UNION: AVERAGE EFFECTIVE PERSONAL INCOME TAX RATE OF THE 10TH DECILE,

AROUND 2014

(In percentages)

1 1 2

2 3 3 3 4 4 4

5 6 6 7

7 8

9

12

5

21

0

5

10

15

20

25

PR

Y

BO

L

GTM VEN

RD

O

CO

L

ECU

HN

D

NIC

CR

I

PER

CH

L

PA

N

UR

Y

SLV

BR

A

AR

G

MEX

AL-

18

UE-

28

Source: ECLAC and EuroMod G4.0+.

Rampant tax evasion is a key barrier to achieving greater domestic resource mobilization in the region

Source: ECLAC, on the basis of official figures. a Effective collection and estimated evasion are calculated on the basis of the take for the two taxes expressed in dollars; the sum of this value is presented as a percentage of the GDP of the reporting countries (weighted average). Finally, these percentages are applied to the GDP of Latin America to calculate the regional value in dollars. b Estimate on the basis of data from Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico and Peru. c Estimate on the basis of data from Argentina, Bolivia (Plurinational State of), Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Peru and Uruguay.

Estimated evasion: US$ 340 billion (6.7% of GDP)

6.8 6.8

4.3

(~ 220) 2.4(~ 120)

11.1

9.2

Personal income tax and corporate income tax b/

VAT c/

Effective collection Estimated evasion

LATIN AMERICA: TAX REVENUES AND ESTIMATED EVASION, 2015 a

(In percentages of GDP and billons of dollars)

Vast undeclared offshore holdings, and the income they generate, have also limited tax revenues

Country / Year(s) Declarations Undeclared assets registered

Taxes / fines paid

Argentina (2016-2017)

254,700 (96% natural persons, 4% corporations)

US$ 116.8 billion (21% of GDP) (80% of declared assets were held abroad)

US$ 10.2 billion (1.8% of GDP)

Brazil (2016)

25,114 (99.6% natural persons, 0.4% corporations)

US$ 53.4 billion (3% of GDP)

US$ 16.0 billion (0.8% of GDP)

Chile (2015)

7,832 US$ 19.0 billion (8% of GDP)

US$ 1.5 billion (0.6% of GDP)

RESULTS OF RECENT TAX AMNESTIES IN LATIN AMERICA (In billons of dollars)

ECLAC’s work in illicit financial flows flags concerns in the area of tax avoidance by MNEs…

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Under-invoicing of exports Over-invoicing of imports

LATIN AMERICA AND THE CARIBBEAN: GROSS TRADE MISINVOICING OUTFLOWS, 2004-2013 (In billons of dollars)

Source: ECLAC, Economic Survey of Latin America and the Caribbean 2015.

Harmful tax competition undermines domestic resource mobilization

LATIN AMERICA (10 COUNTRIES): NUMBER OF FISCAL INCENTIVES FOR INVESTMENT BY TAX INSTRUMENT

AND TYPE OF INCENTIVE

Source: Agostini and Jorrat (2013). Note: Covers Argentina, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua and Peru.

Type of incentive

Tariffs CIT VAT Other Total

Credit 12 12

Deduction 24 24

Deferral 16 7 23

Stability 3 6 2 3 14

Exemption (Tax holiday)

62 102 63 29 256

Reduced rate

7 1 8

Total 65 167 73 32 337

• Tax incentives for investment are widespread in the region and cover a multitude of sectors and instruments

• Estimates of foregone revenues suggest they come at a considerable cost: – Argentina (1.1% of GDP),

Colombia (0.8% of GDP), Chile (2.2% of GDP), Ecuador (1.6% of GDP) and Guatemala (0.9% of GDP)

Tackling these challenges will require a level of international cooperation in the area of fiscal

affairs that currently does not exist

Global

• Create an intergovernmental organ within the United Nations with a strong mandate in the area of international fiscal cooperation

• Promote the rapid adoption transparency measures such as automatic exchange of financial and fiscal information

• Push for the adoption of multilateral instruments to tackle double no taxation and aggressive tax planning in developing countries (including a review of all tax related provisions in double taxation treaties and bilateral investment treaties)

Regional

• Across the board review of the use of fiscal incentives for investment

• Explore other manners to reduce harmful fiscal competition (for example, harmonization of CIT rates/systems)

• Create a regional working group on international taxation issues to facilitate the exchange of information and best practices

• Create regional tools to facilitate analysis of international transactions (a regional database of arm’s length pricing information, etc)

Country

• Raise awareness among all relevant economic authorities of the crucial importance of greater cooperation in tax affairs, including between countries as well as between ministries in countries

• Adapt tax frameworks to incorporate newly established best practices in international taxation (BEPS)

• Strengthen tax administrations, especially in the area of international taxation

• Adopt continuous processes of cost-benefit analysis for all fiscal incentives