Juan Pablo Jiménez Economic Commission for Latin America and the Caribbean

ITC-Workshop “How to Operationalize the International Tax and Development Agenda”

12-14 September 2011 Bonn, Germany

I.  Introduction  

II.  Estimating  income  tax  gap  

III.  Strategies  to  improve  tax  compliance  in  the  region  

IV.  Evaluating  the  performance  of  tax  administrations  

V.  Conclusions  and  final  results  

VI.  Future  challenges  

  It  is  an  obstacle  to  development,  balanced  growth,  and  in  general,  for  the  justice  of  the  tax  system.  

  Reduce  the  fiscal  space  available  and  modify  the  distributional  impact  of  tax  legislation  as  it  affects  both  the  horizontal  and  vertical  equity.  

  Negative  impact  on  social  cohesion,  weakening  the  confidence  of  society  in  the  State.  

  Limit  tax  collection  instruments,  determining  the  tax  structure  

  Few  studies  and  non-­‐comparable  methodologies.  

 Only  two  countries  have  to  calculate  tax  evasion  by  law  

  Significant  difference  in  quantity  and  quality  of  tax  gap  estimation  between  different  group  of  taxes:    Several  tax  gap  estimation  in  VAT  

  Lack  of  tax  gap  estimation  in  income  tax  

 Result:  the  tax  gap  is  higher  in  income  tax  than  in  VAT  

Method Main characteristics

i) Method of national accounts

Compares the tax base according to national accounts with the base calculated from tax statistics, after some adjustments.

ii) Method of sampling or direct control

The evasion rate is calculated for a random sample of taxpayers, and the results are extended to the total population.

iii) Methods based on household budget surveys

Analyzes the relationship between the family expenditure and the income declared. If the expenditure is significantly superior than the income declared is more probable that evasion exists (except in the case where there is disaccumulation of assets or indebtedness). Results are not fully reliable.

iv) Taxpayer’s behavior survey

A survey is taken to a random sample of taxpayers, where they describe their behavior when declaring income taxes. These results usually underestimate the rate of fiscal evasion.

Source: own elaboration based on Tanzi and Shome (1993).

 Tax  Gap  =  Theoretical  Tax  Revenue  –  Effective  Tax  Revenue  

   Theoretical  tax  revenue  =  Theoretical  tax  base  *  Tax  Rate  -­‐    Tax  Credit  

 Corporate  Income  Tax  Gap  

   Theoretical  tax  base  =  Operating  surplus  of  national  accounts  +/-­‐  Adjustments      

 Personal  Income  Tax  Gap  

   Potential  tax  base  =  Income  from  household  surveys  (adjusted  by  non-­‐reporting  and  income  underreporting)    

   Theoretical  tax  base  =  Potential  tax  base  -­‐  Loss  -­‐  Personal  Deductions  

Value-Added Tax Income Tax

Tax Gap Year of estimation

Tax Gap

Total Individuals Companies Year of estimation

Argentina 21.2% 2006 49.7% … … 2005

Bolivia 29.0% 2004 … … … …

Chile 10.0% 2006 47.4% 46.0% 48.4% 2003

Costa Rica 28.7% 2002 … … … …

Colombia 23.5% 2006 … … … …

Ecuador 21.2% 2001 63.8% 58.1% 65.3% 2005

El Salvador 27.8% 2006 45.3% 36.3% 51.0% 2005

Guatemala 37.5% 2006 63.7% 69.9% 62.8% 2006

Mexico 20.0% 2006 41.6% 38.0% 46.2% 2004

Nicaragua 26.0% 2006 … … … …

Panama 33.8% 2006 … … … …

Peru … … 48.5% 32.6% 51.3% 2006

Dominican Republic 31.2% 2006 … … … …

Uruguay 26.3% 2006 … … … …

  The  effective  tax  burden  is  below  the  potential  tax  burden,  the  structure  is  very  biased  towards  indirect  taxation,  the  income  tax  is  sustained  by  corporations,  and  the  personal  income  tax  falls  almost  exclusively  on  formal  salaries.  

  The  income  tax  gap  is  far  superior  than  the  VAT  gap.  

  Corporations  evade  percentually  more  than  individuals.  

  The  personal  income  tax  gap  is  larger  in  the  case  of  non-­‐salary  income,  which  escapes  from  authority  regulation.    

  This  situation  further  deteriorates  the  already  insufficient  distributive  weight  of  the  tax  and  of  the  tax  system.  

  Tax  evasion  damages  the  stability  and  legitimacy  of  the  tax  system    and  limits  the  tax  collection  instruments,  determining  the  tax  structure  

  Lack  of  studies  on  tax  evasion  

  Encourage  authorities  to  systematize  tax  gap  estimation  

 A  deeper  analysis  on  tax  evasion  and  the  possibility  of  improving  tax  compliance  requires  progress  in  performance  indicators  of  the  TA.  

  This  requires:  technical  tools,  human  and  financial  resources  

  Statistical  limitations    Fiscal  statistics  

 National  accounts    

  Household  surveys  

 We  also  have  to  make  progress  in:  

  Improving  the  statistics  for  the  calculation  of  tax  evasion  

  Implementation  of  a  common  methodology  

  The  role  of  international  or  regional  organizations:  

  Exchange  of  experiences  

  Discuss  different  methodologies  

  Collection  and  homogenization  of  national  accounts,  tax  statistics  and  household  surveys  on  income  and  expenses.  

Juan Pablo Jiménez juanpablo.jimenez@cepal.org

ITC-Workshop “How to Operationalize the International Tax and Development Agenda”

12-14 September 2011 Bonn, Germany

  Latin  America  is  the  region  which  has  made  the  least  progress  in  income  distribution  over  the  last  twenty  years.  

  There  is  a  high  share  of  income  concentrated  in  the  hands  of  the  highest  stratum.  

  A  comparison  of  inequality  levels  before  to  State  intervention  in  LA  and  developed  countries  shows  that  inequality  was  similar  

  LA  is  characterized  by  high  income  gaps  between  regions  within  the  same  country.  

  There  are  high  levels  of  poverty  in  the  region,  but  it  is  a  highly  diverse  phenomenon.  

  LA  possesses  the  largest  shadow  economy  in  the  world,  surpassing  even  other  regions  of  the  developing  world.  

Three  essential  instruments:    Increase  the  level  of  revenue:  genuine  financing  

of  the  social  expenditure.    Modify  the  composition  of  the  tax  structure:  in  

order  to  affect  the  secondary  distribution.    Improve  the  degree  of  compliance:  perfect  

impact  of  the  sanctioned  norms.  

Unfortunately,  the  vast  majority  of  the  Latin-­‐American  countries  suffer  from  significant  weaknesses  in  these  

three  keys  factors  

  Argentina:  Oscar  Cetrángolo  y    J.  C.  Gómez  Sabaini    Chile:  Michael  Jorratt  De  Luis    Ecuador:  Jerónimo  Roca    El  Salvador:  Maynor  Cabrera  y  Vivian  Guzmán    Guatemala:  Maynor  Cabrera    Mexico:  Daniel  Álvarez  Estrada    Peru:  Luis  Alberto  Arias  Minaya  

1.  Move  from  a  "tax  on  tax  or  object"  to  a  management  strategy  of  a  functional  nature.  

2.  Segment  taxpayers    More  control  of  large  taxpayers.    Special  tax  treatment  for  small  taxpayers,  both  

individuals  and  companies.  

3.  Integrate  into  one  centralized  unit  all  agencies  with  collection  responsibilities    

Greater  autonomy  

4.  Moving  many  of  the  collection  responsibilities  to  financial  institutions.  

a)  Incorporation  of  new  technologies  of  information  and  communication  with  the  taxpayers.  

b)  Changing  focus  on  the  relationship  Tax  Office-­‐taxpayer      "customers"  

c)  Expansion  of  tax  frontiers              ITUs    Signature  of  agreements  to  avoid  double  

taxation.    Facilitate  the  exchange  of  information  between  

countries.  

SELECTED LATIN AMERICAN COUNTRIES: EXISTING AGREEMENTS TO AVOID DOUBLE TAXATION, 2007

Source: CIAT (2011).

Country

Signed existing conventions with

Total LAC countries

OECD countries (1)

Other countries/ blocks of

countries (2) Mexico 6 28 7 41 Venezuela (3) 5 17 11 33 Brazil 5 19 6 30 Chile 7 14 3 24 Argentina 3 14 0 17 Ecuador (3) 7 7 1 15 Bolivia (3) 5 5 0 10 Peru (3) 6 1 0 7 Colombia (3) 5 1 0 6 Uruguay 1 2 0 3 Paraguay 1 0 1 2 Costa Rica 0 1 0 1 El Salvador 0 1 0 1 Panama 1 0 0 1 Dominicana Rep. 0 1 0 1

Guatemala 0 0 0 0 Honduras 0 0 0 0 Nicaragua 0 0 0 0 Total LAC 52 111 29 192

  Related  to  efficiency:  

  Cost  of  collection  

  Size  of  administrative  expenditure  

  Related  to  effectively:    Rate  of  tax  evasion  

  Indicators  of  operational  processes  

  Related  to  human  resources  employees:  

  Relationship  between  the  number  of  staff  and  the  tax  burden  

  Percentage  point  of  tax  burden  to  GDP  

OECD AND LATIN AMERICA: SELECTED COUNTRIES COLLECTION COSTS AS A PERCENTAGE OF TAX COLLECTION, 2009

(per 100 currency units of recovery)

Source: CIAT y Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series 2010 (OECD, 2011).

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LAC Average= 1,66

OECD Average = 1,10

LATIN AMERICA: SELECTED COUNTRIES EVOLUTION OF THE COST OF REVENUES AS A PERCENTAGE OF TAX COLLECTION

(Index year 2003 = 100)

Source: Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series 2010 (OECD, 2011).

LATIN AMERICA AND OECD : SELECTED COUNTRIES TOTAL EXPENSES OF TAX ADMINISTRATIONS, 2009

(Percent of GDP)

Fuente: CIAT (para América Latina) y del Tax Administration in OECD and Selected Non-OECD Countries: Comparative Information Series 2010 (OECD, 2011).

  The  rate  of  tax  evasion.    Indicators  related  to  operational  processes  for  

both  tax  collection  and  auditing  of  taxpayers    Returns  of  credits.    Revenues  for  control  actions  with  respect  to  total  tax  collections.  

LATIN AMERICA AND OECD NUMBER OF OFFICERS FOR EACH

PERCENTAGE POINT OF TAX BURDEN, 2009

Source: CIAT y OCDE.

Fuente: CEPAL, CIAT Y OCDE