Taxation plays a fundamental role in effectively raising and allocating domestic resources for governments to deliver essential public services and achieve broader development goals.
Economists tend to agree on the importance of competition for a sound market economy. So what’s the problem when it comes to governments competing to attract investors through the tax treatment they provide? The trouble is that by competing with one another and eroding each other’s revenues, countries end up having to rely on other—typically more distortive—sources of financing or reduce much-needed public spending, or both.
All this has serious implications for developing countries because they are especially reliant on the corporate income tax for revenues. The risk that tax competition will pressure them into tax policies that endanger this key revenue source is therefore particularly worrisome.
India is the fastest-growing major economy in the world with significant Government investments in infrastructure. According to estimates by WTO and OECD, as quoted in a report from the United Nations Office on Drugs and Crime, India: Probity in Public Procurement, the estimated public procurement in India is between 20 and 30 percent of GDP.
This translates to Indian government agencies issuing contracts worth an estimated US$ 419 billion to US$ 628 billion each year for various aspects of infrastructure projects. Ideally, in contractual agreements no disputes would arise and both sides would benefit from the outcome. However, unexpected events occur and many contracts end in dispute. Contractual legal disputes devoid project benefits to the public as time and resources are spent in expensive arbitration and litigation. As a result, India’s development goals are impacted.
Countries with large nonrenewable resources can benefit significantly from them, but reliance on revenues from these sources poses major challenges for policy makers. If you are a senior ministry of finance official in a resource-rich country, what are the challenges that you would face and Consider some of the issues that you would likely encounter:
For many resource abundant countries, large and unpredictable fluctuations in fiscal revenues are a fact of life. Resource revenues are highly volatile and subject to uncertainty. Fiscal policies will need to be framed to support macroeconomic stability and sustainable growth, while sensibly managing fiscal risks. Also, there is a question of how to decouple public spending (which should be relatively stable) from the short-run volatility of resource prices.
In today’s globalized world, a corporation might have a retail store in one country, a factory in another, and financial services provider in yet a third.
Corporate interconnectedness has brought investment and growth, to be sure, but it has also added complexity to the work of tax authorities. Increasingly, developing-economy governments come face-to-face with corporations that employ sophisticated strategies with the aim of paying fewer taxes. With our recently published handbook, "Transfer Pricing and Developing Economies: A Handbook for Policy Makers and Practitioners,” we hope to support efforts to protect countries’ corporate tax bases.
Tax administrations in developing countries are increasingly concerned about the persistent problem of loss of tax revenues to the shadow economy, and they often deploy a range of strategies to plug tax leaks and augment revenues. The erosion of the tax base prevents governments from collecting the revenue it needs to provide essential services, such as healthcare, road construction, and education. Nonetheless, it’s a sticky problem: how do you convince business owners to pay taxes?
Some possible answers, bolstered by evidence, include: simplify tax payment and provide incentives to formalize businesses. The World Bank’s Governance Global Practice will hold a conference between June 27-29 in St Petersburg, Russia, to bring together participants from almost 25 countries of the Europe and Central Asia region to discuss these issues under the aegis of the Tax Administrators eXchange of Global Innovative Practices, a peer-learning network of tax administrators. The event will be hosted by experts from the Public Sector Performance division of the practice.
Finance ministers, auditors-general, and leaders of professional accounting organizations are meeting Tuesday in Nassau to discuss a topic that is often hidden from view, but is critical to quality of life in the Caribbean: Capacity and standards in public financial management.
How governments manage taxes, borrowing and spending is essential to economic growth, to poverty-reduction, and to ensuring that the region’s poorest can improve their lives. It is a core function of accountability in government. Improvements in this area could increase the health of small and medium-sized enterprises, create jobs, and bring in additional government revenues to spend on essential public services. Residents of Caribbean nations: this strategic dialogue will be about how the government manages your money.
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Note from the editors: The following is an interview with Patricia Arriagada, former acting Comptroller General of Chile, and Patricio Barra Aeloiza, Head of Accounting Analysis Division of the Comptroller General Office, who have been instrumental in recent reforms of public financial management systems in Chile.
Starting in 2010, Chile embarked on a journey to improve public sector accounting by converging to an international standard of financial reporting by 2016. The country expects to produce its first fully compliant financial statements in 2019. One main objective of this reform is to ensure that financial information generated by the government accounting system is comprehensive, reliable, and useful for decision-making. Another is to increase the levels of fiscal and financial transparency and accountability in the public sector.
These reforms were driven by the Comptroller General office, is what is known as a “Supreme Audit Institution,” and is responsible for monitoring revenues and expenditures in all parts of the government – in particular, ensuring the quality and credibility of financial management and financial reporting.
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They spend hours waiting in line at tax offices.
In March 2014, with support of the World Bank, a Delivery Unit (DU) was set up in the Romanian Prime Minister’s Chancellery. Its mission: Get better results quicker for the PM in four priority areas.
Tax administration was one of them. The PM’s concern was the pain of paying taxes. Offering online services, for the first time, was one of the ways to decrease the cost of compliance. The DU estimated that they could save the taxpayer up to 12 days a year of waiting at the tax office.
The DU’s role was to plan for these improvements together with the Romanian Ministry of Public Finance and the Tax Administration Agency (NAFA). In a Delivery Agreement, the specific targets, metrics, activities, deadlines and responsibilities were spelled out. The DU was to then monitor the progress monthly against an agreed trajectory and help unblock problems in implementation.
In September 2014, the NAFA launched the online taxpayer platform called Private Virtual Space (PVS). It allows taxpayers to file their tax returns, get their tax bills and see their payments. The target was to enroll 30% of the eligible taxpayers by December 2015. Though the DU tracked progress monthly, the enrollment rate was still at 0.6% in June 2015. Clearly, the monitoring on its own did not help.