Taxation in Developing Countries: Six Case Studies and Policy Implications Page 4 (18 of 320)

Previous Page Next Page

(c)  2025 Columbia University Press. All Rights reserved.

Taxation in Developing Countries: Six Case Studies and Policy Implications resources

Extracted Text (may have errors)

4 TAXATION IN DEVELOPING COUNTRIES economies, is much greater diﬃ culties in tax administration and enforce- ment. Part of the problem is that many fi rms can evade tax entirely, oper- ating in the informal economy. Table I.1 reports estimates presented by Schneider (2005) on the size of the shadow economy in these six econo- mies, as a fraction of GDP.8 Th e estimated size of the informal economy ranges from a quarter to a half of GDP. Even fi rms that are part of the formal economy can easily understate their tax base. Th e chapters in this volume provide many examples of such techniques. Among them is that sales can occur in cash, leaving no paper trail. Under the VAT system, fi rms can claim that goods were exported (in order to qualify for a zero tax rate) even if the goods never left the country or were quickly smuggled back into the country for resale. Firms can also exaggerate expenses using fake invoices. Firms can use transfer prices to shift profi rm, which then disappears ts or value- added into a fi without paying the associated taxes, or at least shift profi rm ts into a fi subject to a lower tax rate. As a result, eff ective tax rates can be much be- low the statutory tax rates9 and can vary dramatically by industry10 and by size of fi rm. Government attempts to aid certain sectors have in practice opened up further evasion opportunities. Th e Rus sian government, given its lack of direct assistance to the disabled, tried to provide indirect aid by granting a tax exemption to fi rms in which the disabled constituted at least 50 per- cent of the workforce. Th table capital- is encouraged some of the most profi intensive fi rms to put just enough disabled on the books to qualify for this tax exemption. Both India and Rus sia grant tax preferences to fi rms lo- cated in par tic u lar regions. In response, fi rms can set up a subsidiary in such regions and use transfer pricing to report most of its profi ts (or value- added) there.11 It is perhaps surprising that none of the chapters in the present volume mentions capital fl ection of this threat, many of ight. Perhaps as a refl these countries have very low eff nancial ective tax rates on income from fi assets. With evasion being such a dominant issue, countries face additional pressures to lower tax rates in order to draw fi rms into the formal econ- omy and to reduce the incentives on those already in the formal economy to underreport their income or value- added. For example, several of these countries use presumptive taxes for smaller fi ective tax rms, with the eff rate much lower than for larger fi rms. With lower tax rates reducing eva- sion as well as increasing overall economic activity, it is much more likely

Help

Previous Page Next Page

(c)  2025 Columbia University Press. All Rights reserved.

Taxation in Developing Countries: Six Case Studies and Policy Implications resources

Extracted Text (may have errors)

INTRODUCTION 5 that countries have the opportunity to reduce tax rates and yet gain reve- nue on net. For example, India has reduced its personal and corporate in- come tax rates dramatically in recent years, yet its income tax revenue has doubled as a fraction of GDP. Similarly, Korea reduced its eff ective corpo- rate tax rate from 53 to 27 percent, while corporate tax receipts doubled as a fraction of GDP. Th ese governments have also pursued a variety of other means to deal with enforcement problems. To limit the revenue loss from fi rms under- reporting sales under the VAT, for example, several chapters emphasize that governments are not willing to provide cash rebates to fi rms report- ing negative value- added and instead require fi rms to carry forward these credits to use against future tax liabilities. Yet fi rms that export a sizeable fraction of their output, as well as fi rms that have large new investments, would legitimately have negative value- added. Th e restriction preventing rebates then leads to an eff rms exceeding the ective tax rate for these fi statutory tax rate. According to the chapter on Kenya (Chapter 6), when fi rms sell to the government the government directly withholds the VAT due on these sales, and yet is very slow (at best) to rebate the VAT already paid by these fi ective tax rate rms on inputs they purchased, yielding an eff much above the statutory tax rate. To reduce the attractiveness of using cash as a means of tax evasion, several of these countries (Argentina, Brazil, India, and Korea) impose a tax on bank debits.12 In part, information on these withdrawals also pro- vides information that is helpful in locating evading fi rms. In addition, Korea has created a subsidy to use credit cards, presumably hoping to shift transactions to a form that can be monitored and taxed more easily. Another approach for lowering tax evasion, emphasized by the chapter on India, is government control over key fi e chapter reports that rms. Th 38 percent of the income tax revenue and 42 percent of VAT payments come from public enterprises. Similarly, in Korea a large fraction of reve- nue originates from a few large fi rms, which have incentives to cooperate with the government in exchange for easy access to credit and implicit loan guarantees. Eff ective tax rates can also vary from statutory tax rates due to un- checked enforcement powers of the tax authorities. When tax oﬃ cials are given incentives simply to collect more revenue, it is not surprising that they do so even beyond what the statutes would allow. When oﬃ cials have such unchecked powers, of course, corruption is inevitable. Several

Help

Previous Page Next Page

(c)  2025 Columbia University Press. All Rights reserved.

Taxation in Developing Countries: Six Case Studies and Policy Implications resources

Extracted Text (may have errors)

INTRODUCTION 3 thereby imposing a larger tax burden on the poor than is the case with an income tax. Th e optimal taxation literature also recommends equal tax rates on all forms of consumption, as seen, for example, in Atkinson and Stiglitz (1976).3 Over time, developing countries have been replacing excise taxes, through which rates often vary dramatically by good, with a VAT having one rate or at least only a few rates. Th ective rates, though, are low due e eff to a combination of exempt (or zero- rated) goods and evasion. As can be calculated from the fi 4 for example, the eff ective VAT gures in Table I.1, rate (VAT revenue as a fraction of consumption) varies from 4 percent in Rus sia to 12 percent in Brazil. Th e optimal tax literature shows that a small open economy should take full advantage of any gains from trade, and not distort trade patterns. As Table I.1 shows, tariff cant source of revenue in all the six coun- s are a signifi tries except Brazil and Korea. However, these tariff set s may be serving to off diff rates in erential tax rates across domestic industries, with higher tariff industries where domestic fi rms face higher domestic tax rates. To this ex- tent, these tariff s may lessen rather than exacerbate trade distortions. Th e chapters on optimal taxation also conclude that a country that is small relative to the world capital market should not distort international fl ows of capital. Yet we see in these countries that the corporate income tax is an important source of tax revenue, collecting on average even more than do personal income taxes.5 Another striking characteristic of the tax structures in these six coun- tries is the low tax revenue relative to GDP. Here, Brazil is an outlier, with government revenue equal to 35 percent of GDP, a fi gure approaching those seen among some richer countries. Th e next highest among this group of countries is Korea with revenue equal to 25 percent of GDP, while India collects only 16.4 percent of GDP in tax revenue. Although the revenue fi gures for Brazil (and to some extent Argentina) have been growing over time, in most of these countries tax revenue has not changed much as a fraction of GDP during the past 20 years. Th gures do not seem to refl ect countries choosing ese low tax revenue fi relatively low tax rates.6 For example, top personal tax rates are now around 30 percent in these countries, VAT rates range from 10 percent in Korea to around 27 percent in Brazil, while corporate tax rates among these coun- tries range from 25 percent in Brazil to 35 percent in Argentina.7 Th erence in the fi scal situation faced in these and other de- e key diff veloping economies, compared with the situation among developed

Taxation in Developing Countries: Six Case Studies and Policy Implications resources

All section downloads (PDF) click to expand contents

Extracted Text (may have errors)

Help

loading

Taxation in Developing Countries: Six Case Studies and Policy Implications resources

All section downloads (PDF) click to expand contents

Extracted Text (may have errors)

Help

Taxation in Developing Countries: Six Case Studies and Policy Implications resources

Extracted Text (may have errors)