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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Thank you for your attention