Tax revenue and Tax credits (issue 35)

UNSD/NA/GS

1

Gulab Singh

UN STATISTICS DIVISION Economic Statistics Branch

National Accounts Section

Background and main reasons for change

It is necessary to: Clarify the SNA principles Provide more guidance on: The coverage of tax (borderline cases) The acceptable methods for

implementing accruals The recording of tax credits, in

particular the case of payable tax credits

1. Definition and coverage of tax

No major change: SNA93 (§7.48 and 8.43): compulsory, unrequited

payments to government“(…) Taxes are usually described as unrequited because, in most cases the government provides nothing directly in exchange to the individual unit making the payment, or nothing commensurate.“

However, in certain cases, the government provides something to an individual unit against the payment, in the form of the direct granting of a permit or authorisation.

1. Definition and coverage of tax-contd.

Taxes versus fees (no change in existing principle)

Record as purchase of Service: if the issuance of the licence/permit implies the exercise of a proper regulatory function of the government, and when a service is provided in return to the payment, unless the payment is clearly out of proportion to the costs of producing the service for all or any of the entities benefiting from the services. »

Record as Tax: if the fee paid is much higher than the amount of work for the government to issue the permit or provide services.

2. Accrual recording of taxes

Time of recording In general taxes are to be recorded as accruing

when the taxable event to which the tax relates occurs (accrual recording)

Some flexibility is allowed in order to ensure that uncollectible taxes are not shown in the total revenue of the general government as accruing.

Greater precision required about the degree of flexibility that is acceptable in relation to:

- time accrual is deemed to take place, and- amount to be shown as accruing

2. Accrual recording of taxes - contd

Time of recordingThis is when the activities, transactions or other events occur which create the liability to pay taxes – in other words, when the taxable event occur – and not when the payments are actually made. This time is usually when income is earned or when a transaction (such as the purchase of goods and services etc.) generating the liability occurs, to the extent that the tax liability can reliably be measured. 

2. Accrual recording of taxes - contd

In practice, some flexibility is permitted in two cases:

1. Taxes on income: time of recording to be when the tax liability is assessed with some measure of certainty, and

2. Taxes arising from activities in the Parallel economy: when the timing of the taxable event is unlikely to be known. In this case also the time of recording will be the time of assessment.

2. Accrual recording of taxes - contd

Amount of taxes accruing In assessing the amount of taxes

accruing, care must be taken not to include tax unlikely ever to be collected.

Three methods to eliminate the effect of taxes unlikely to be collected on these assessments:

(a) The time-adjusted cash basis(b) Net recording of taxes, and(c) Gross recording of taxes

2. Accrual recording of taxes - contd

(a) Time-adjusted cash basis: amounts are initially recorded when actually paid and then adjusted to the time the liability to pay tax was incurred (not the time the payment was actually made).

2. Accrual recording of taxes - contd

(b) Net recording of taxes: adjusts the initial estimate of tax accruing by a coefficient reflecting the degree of non-collection in the recent past. Thus, the amounts of accrued tax are written down according to this adjustment (…)

(c) Gross recording of taxes: records realistic estimates of total tax accruing but records the difference between the accruals estimate and the actual receipts as a capital transfer (in favour of defaulting payers).

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3. Tax credits

1993 SNA93 does not give guidance on treatment of tax credits

GFSM2001 does give guidance:- Amounts deductible from tax due are

recorded as reducing taxes- Net payments by GG are expenses

3. Tax credits – contd.

Definition: Tax relief and tax credit “Most tax systems include elements of social

redistribution, through the tax schedule (increasing tax rate), the choice of tax unit (individual or family taxation) and tax relief. Tax relief aimed at redistribution may be designed to reduce the amount of tax that households pay according to certain characteristics, such as the number of children. Moreover, tax relief may also be designed to encourage certain activities, such as participation in the labour force or investment in R & D.”

3. Tax credits: Illustration

+ Gross income- Tax exemptions= Net income tax

base- Tax allowances= Taxable income* tax rate= Tax claim/liability

(otherwise due)- Tax credits= Tax revenue

Tax relief refers to all forms of exemptions, allowances and credits

3. Tax credits – contd.

AEG Recommendations: A tax relief that is embedded in the tax

system should be recorded as reducing tax revenue. This is the case of tax allowances, exemptions and deductions, as they enter directly into the calculation of the tax liability.

However, tax credit can result in the government making a net payment to the taxpayer - payable tax credit.

3. Tax credits – contd.

Payable tax credits: Relief is greater than the amount of tax liability so the element of the credit in excess is paid by the government to the taxpayer. In such a case:

The whole amount of tax credit be recorded as government

expenditure as well as noting the amount of the tax credit drawn back in tax paid.

Thank You