The IMF issued a press release on 11 November 2016 commenting on Egypt’s reform program following the approval of an extended fund facility (EFF) for Egypt.
Egypt has developed a program of structural reform supported by the EFF to boost growth and create employment while protecting vulnerable parts of society. The program aims to restore macroeconomic stability and support inclusive growth. Policies will be introduced to restore competitiveness, reduce the budget deficit and public debt, increase economic growth and boost employment.
As part of reducing the fiscal deficit and bringing down public debt key policy measures include the introduction of a value added tax (VAT) in addition to the reduction of subsidies and rationalizing the public sector wage bill. Tax revenues are projected to increase by 2.5% during the progam, mainly due to the implementation of the VAT which was approved by parliament in August.
The program aims to create an environment that facilitates private sector development. Measures are to include streamlined industrial licensing for businesses; greater access to finance for small and medium enterprises; and new procedures relating to insolvency and bankruptcy. Measures will also be introduced to encourage training schemes for youth and to increase the participation by women in the labor force.
On 23 September 2016 the IMF issued a concluding statement following a staff visit to Greece for consultations under Article IV of the IMF’s articles of agreement.
Greece has reduced its fiscal primary and current account deficits to around zero over the past six years. The fiscal adjustment was originally based on important reforms but has increasingly relied on one-off and ad hoc adjustments that cannot be sustained. Society has borne a high cost, with output down by 25% and still stagnating and unemployment and poverty rates much higher than before the crisis. Growth prospects remain weak and subject to high downside risks.
The IMF considers that deeper reforms must be undertaken in key areas to increase the resilience of the economy. Greece must address the vulnerability of public finances resulting from high pension spending financed by high tax rates on narrow bases. In addition to this Greece must address impaired bank and private sector balance sheets; structural obstacles to investment and growth; and the public debt burden.
A fiscally neutral rebalancing of policy in the medium term towards lower pensions and a fairer distribution of the tax burden are essential for maintenance of adequate services and social assistance to vulnerable groups and for creating conditions for investment and growth.
The income tax reform has harmonized tax rates and the value added tax (VAT) reform has simplified the VAT system. The reforms have however relied on increasing tax rates and this creates disincentives to work in the formal economy. The reform has not changed the tax credit which permits more than half of all wage earners to be exempt from income taxes. The IMF considers that Greece should reduce tax and social security contribution rates while also lowering the income tax credit and removing remaining exemptions that benefit higher income groups. This could ensure the tax burden is distributed more equitably.
The IMF considers that Greece should send a signal that it can no longer tolerate tax evasion. The high tax rates have led to the introduction of a proliferation of installment and deferral schemes but the failure to enforce them has suggested that they are in effect schemes for tax forgiveness. As a result there is accelerating tax and social security debt of around 70% of GDP. Around half of all taxpayers owe money on tax and social security.
Tax collection rates have fallen from a low level of 75% in 2010 to an even lower level of less than 50% currently. The problem is made worse by tax evasion by high income groups and the self-employed combined with ineffective tax administration. The IMF therefore considers that Greece should not adopt any further installment schemes but should put in place restructuring solutions for debtors in line with their capacity to pay.
Tax audits should concentrate on large taxpayers and high net wealth individuals. The use of enforcement tools against those who can but do not pay should be strengthened. Also the recently legislated independent revenue agency should be insulated from political interference.
On 23 September 2016 the IMF issued a press release following the conclusion of a staff visit to Sri Lanka to discuss the progress of the economic reform program.
Sri Lanka’s economic performance in the first half of 2016 shows an improved balance of payments. Economic growth has been reduced mainly owing to the impact of floods and the effect of slightly higher inflation. The IMF considers that the tighter fiscal and monetary policy has improved market confidence.
The IMF takes the view that aspects of the economic reform program relating to implementation of the tax reform package must be quickly addressed. This includes carrying out the value added tax (VAT) changes to support revenue targets for the years 2016 and 2017. The budget for 2017 requires the support of a high quality tax policy strategy so the currently low tax to revenue ratio can be increased.
If Sri Lanka begins the process of legislation to introduce a new Inland Revenue Act this can lead to a rebalancing of the tax system and a more efficient tax structure. This could raise the tax revenue resources that are necessary for the country’s social and development objectives.
The IMF also considers that Sri Lanka should make further efforts to achieve greater integration into regional and global supply chains; higher levels of foreign direct investment and more prospects for private sector investment. Growth potential will also be supported by greater competitiveness to increase trade and private sector development.
On 25 July 2016 the Platform for Collaboration on Tax made available a report on enhancing the effectiveness of external support in building tax capacity in developing countries. The report was written for the meeting of the G20 finance ministers and central bank governors in July 2016. The Platform for Collaboration on Tax is a cooperative platform for the OECD, IMF, UN and World Bank group to work together on tax issues.
There has been increasing recognition that a well designed tax system is central to economic development and that outside help is required with capacity building. Although there has been progress in the past twenty years on increasing the tax collected by developing countries the collection levels are still too low in many countries to achieve the 2030 Sustainable Development Goals and secure growth. Objectives of equity in the tax system and enhancing state building are also seen as important.
The report sets out certain key enablers for building tax capacity:
- A coherent revenue strategy set out in the development financing plan;
- Efficient coordination between the providers of capacity building;
- A strong knowledge and evidence base;
- Regional cooperation and support; and
- More participation by developing countries in setting international tax rules.
The report makes recommendations on how to achieve or improve these important enablers in the provision of tax capacity building support.
The report recommends that the international organizations and development partners need to encourage political support for the development of efficient tax systems. Countries should develop medium term revenue strategies with a view to launching pilot strategies by July 2017. This would also enable the international organizations to draw lessons for developing further strategies and reform plans. The G20 countries and other donors should facilitate capacity building of local stakeholders such as business and media to engage in reforms and development of medium term revenue strategies.
The problems and options for revenue strategy development need to be diagnosed with the help of an appropriate diagnostic framework. This would assess cross-border tax issues and include a strategy for tackling tax avoidance, evasion and tax crimes. Agencies dealing with taxation should develop high quality technical and management skills as part of their organization capacity. The international organizations will then review the use of diagnostic tools in assessing the priority of reforms as part of the medium term tax strategies and reform programs. The reviews will lead to the design of further useful tools if necessary.
Collaboration among the providers of tax capacity building and other stakeholders should be a central part of the pilot tax strategies. There should be coordination within each developing country between the international organizations and their counterparts within the country. The international organizations involved in the Platform for Collaboration on Tax will develop a manual for good practices and set up a voluntary peer review mechanism among the development partners. The manual would set out ways of facilitating coordination between providers of capacity building and the stakeholders within each developing country including business and community organizations. The Platform should also devise methods of supporting the development of coordinated plans for the work of development providers in implementing the OECD/G20 recommendations on base erosion and profit shifting and on other international tax issues.
There should be coordination among the different agencies involved in tax reform in developing countries and the providers of capacity building using a “whole of government” approach. Where the international organizations are providing support in different areas that affect the tax system they should ensure there is internal coordination (a “whole of institutions” approach). The organizations need to ensure their tax people are made available in a timely and efficient way for participation in capacity building efforts. The Platform recommends that the range of indicators of results currently used should be reviewed so that progress in tax system reform can be tracked against a wide range of indicators.
The report recommends that collaborative work among providers of capacity building should provide comparable, reliable data on revenue and tax policy. Statistical capacity should be developed for tax, including capacity within revenue administrations. This should include encouragement by the G20 for full participation in the International Survey of Revenue Administrations (ISORA).
There should also be close cooperation between G20 countries, development partners and regional tax organizations. The regional organizations should be supported in increasing their coverage, developing local networks and influencing the process of setting international rules. The developing countries themselves should also participate in discussion of international tax policy with the support of regional organizations.
The report also recommends that the Platform should collect and share experiences on what methods are effective in tax development programs. In this connection the impact of various interventions could be measured. The international organizations are to prepare a follow-up report after three years incorporating the lessons learned on support for tax capacity building and the implementation of the current proposals.
On 13 July 2016 the IMF published a report following the conclusion of talks with the Philippines under Article IV of the IMF’s articles of agreement.
After slowing down in mid-2015 the Philippines economy grew at an annual rate of 6.9% in the first quarter of 2016. Consumption and investment have grown quickly but net exports have been held back by weak external demand. However the benefits of the strong growth and improved governance still need to reach the broader population.
The IMF proposes a comprehensive tax reform package for the Philippines. This could raise revenue to cover productive spending to “crowd in” private investment. The suggested reforms could raise economic growth to 7%-8% in the medium term.
The reforms could include simplification of the personal income tax rate structure; the indexation of tax brackets for inflation; and elimination of exemptions. The relatively low revenue ratio could be increased by higher excises on fuel; rationalization of the value added tax (VAT) exemptions; and imposition of excise tax on sweetened beverages. The tax reform could also include simplification and reduction of the corporate income tax rate structure and the rationalization of tax incentives.
Non-tax measures in the reform package could include enhanced infrastructure investment; liberalization of foreign investment and land use; and effective implementation of the competition law. The report also notes that the Philippines should tighten the anti-money laundering legislation and procedures, ease banking secrecy and make tax evasion a predicate crime.
On 6 July 2016 the IMF released a staff report following consultations with Italy under Article IV of the IMF’s articles of agreement.
Italy’s economy is recovering from a deep recession and growth was 0.8% in 2015 with continued expansion in the first quarter of 2016. Growth is expected to be around 1% in 2016 and to remain around 1% in 2017. Labor market conditions have gradually improved and non-performing loans have stabilized at an estimated 18% of total loans. However productivity and investment remain low and public debt is around 133% of GDP, a level that restricts the fiscal space to respond to economic shocks.
Owing to high youth unemployment and low female participation in the labor force the IMF report calls for the implementation of active labor market policies. The IMF report calls for ambitious product and service market reforms including measures to strengthen the Annual Competition Law and implementation of public administration reforms to lower the cost of doing business and improve the investment climate. The IMF recommends further pro-growth reforms with less distortive taxation, including broadening the tax base and introducing a modern real estate tax.
On 27 June 2016 the IMF published a report following the conclusion of consultations under Article IV of the IMF’s articles of agreement.
Poland’s economy has been performing strongly. Growth in 2016 remains strong and is projected to accelerate to 3.7% in 2017 with strong private consumption supported by the new child benefit scheme. More moderate growth is expected in the medium term.
The IMF is concerned that the new bank asset tax could affect credit expansion and growth. The report encourages the government to assess the effectiveness of the new tax and make adjustments to its design where necessary. The IMF also considers that the government should consider a more growth-friendly tax.
The IMF recommends maintaining the value added tax (VAT) increase implemented in 2011 and reducing the gaps in VAT policy and compliance. The government’s plan to strengthen the tax administration is therefore welcomed.
The government is also encouraged to put through structural reforms with the objective of boosting productivity and inclusive growth. Plans to increase access to vocational training and promote innovation, with tax incentives targeted at start-up businesses, are therefore welcomed.