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Tax transition in the context of EPAs Jean-François Brun Gérard Chambas CERDI Module 4 Outline I - ACP: impact of agreements with the EU II - Tax transition: ACP, focus on Morocco and Senegal EU workshop Brussels 2014 2 Impact of EPA agreements: assessing the difficulties • Partial equilibrium approaches: fail to take the complexity of interrelations into account • Approaches based on Computable General Equilibrium models (CGE): • Make it possible to understand interactions • However, they produce results that are highly dependent on the assumptions made and the quality of the statistics • Results not clear: the case of the EPA assessment of Senegal EU workshop Brussels 2014 3 Impact of EPA agreements: excessive focus on tax revenue • Reduction in tariff revenue - first and immediate adjustment at the beginning of liberalisation process • Reduction of overall tax revenue often avoided despite the significant initial losses of tariff revenue • Reduction in tax revenue in the poorest, most vulnerable, and mining countries EU workshop Brussels 2014 4 Tariff, instrument of economic protection Tariff: base limited to tradable commodities the domestic price of tradable commodities is increased • The consequences of tariffs: • Increase in the price of tradable commodities • Loss of consumer purchasing power • “Artificial” increase in the added value of the protected (domestic) activities • Loss of competitiveness EU workshop Brussels 2014 5 130 = 100 (1 + 0,3) ) Vad = 37 VA : + 85% 100 Va in t = 20 33 = 30 (1 + 0,1) Autres CI : + 10% 30 Intrants : + 20% 60 = 50 (1 + 0,2) 50 Valeu r ajoutée Autres cons ommation s intermédiaires Intrants Avan t protection Après pro tection Effective protection: effect of a differentiated tariff on pipe production. EU workshop Brussels 2014 6 Impact often in the background of EPAs on economic activities • Significant effect on manufacturing activities that are frequently non competitive (Sénégal) • But under-estimation of capacity of existing activities to adapt, or new activities to develop, especially in MICs (Tunisia, Morocco and also Senegal) • Social cost of economic reforms in developing countries: little compensation • Additional factor of instability (Tunisia, Egypt)? EU workshop Brussels 2014 7 II Definition of tax transition Narrow acceptance Reduction of the relative contribution of tariffs (causing distortion) and increase in domestic taxation (VAT + excise duties) that is believed to be more neutral Increase or stabilization of government revenue (fuzzy criteria) EU workshop Brussels 2014 8 Evolution of the rate of government levies in Senegal since 1970 (Unit expressed as a percentage of the GDP) EU workshop Brussels 2014 9 Tax transition in Senegal Unit: %GDP EU workshop Brussels 2014 10 I Definition of tax transition Broad acceptance Reduction of all tax distortions and therefore of the social cost of the government levies Attenuation of the instability of revenue to avoid Dutch desease (the case of mining revenue). Future generation funds Convergence of the level of tax revenue towards an optimum: the structural tax potential (Attila, Chambas, Combes, 2008) EU workshop Brussels 2014 11 Instruments of tax transition. What legislation? • Modern single-rate VAT with the effective refund of VAT credits and control of fraud • Modernized excise duties • Direct taxation system with specific treatment of natural resource extraction activities (telecommunications, mining activities) and dual tax • Reduction of tax exemptions EU workshop Brussels 2014 12 Tax administration: essential mechanisms Ultimate objective: to promote tax compliance Modernization of customs •DG: steering structures •Automated processing of information (SYDONIA) • Customs facilitation • Risk analysis for controls •Reduction of time frames and costs related to customs intervention EU workshop Brussels 2014 13 Tax administration: essential mechanisms Modernization of tax administrations •Steering structures •Operational services organized in accordance with taxpayer segmentation (LTU, MTU, …) •Selection of collectors on the basis of (high) VAT thresholds EU workshop Brussels 2014 14 Tax administration: essential mechanisms • Integrated computerization • Systematic registration (Tax Identification Number) • Renewal of tax administration-taxpayer relations: online procedures (facilitation) • Audit procedures: risk analysis for scheduling; ad hoc versus exhaustive audit • Modern cross-checks (with custom, budget, central bank) EU workshop Brussels 2014 15 Tax administration: essential mechanisms Revenue authorities and tax transition •Objective of autonomy versus performance contract •Ambiguity relating to the development of legislation •Mixed conclusion of scientific work EU workshop Brussels 2014 16 Assessment of constraints on government revenue during tax transition • Provided the environment is not too hostile, the major difficulty is not the level of public revenue • The main challenge for the taxation system is economic neutrality and the management of shocks EU workshop Brussels 2014 17 Thank you for your attention EU workshop Brussels 2014 18