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A background history of the ITD

(China Daily)
Updated: 2009-10-26 07:31

On March 15 and 16, 2005, in Rome, Italy, the International Tax Dialogue (ITD) - a joint initiative of the IMF, the OECD, the World Bank with the UN as an active observer - convened the first global tax conference to examine the experiences of countries that have value added taxes (VAT).

VAT is a general consumption tax assessed on the value added to goods and services as they pass through the supply chain.

The conference was opened by Italian Minister of Economy and Finance, Domenico Siniscalco, and drew participants from about 100 countries, as well as representatives from international and regional tax organizations.

Around 135 countries utilize VAT while a number of countries - notably the US - operate sales taxes, usually single-stage taxes at retail. In almost all countries these taxes are either the largest or second largest source of tax revenues.

The two-day discussion examined the policy and administrative challenges of using VAT systems in a rapidly changing economic and business environment. The issues discussed included the tax treatment of financial services, the operation of VAT in small island economies, the application of VAT to the public sector and electronic commerce as well as compliance and audit issues, and the growing incidence of tax fraud.

In his opening speech, the Italian Minister of Economy and Finance Domenico Siniscalco underlined that the conference offered an important opportunity to analyze the pros and cons of VAT, a tax that is now largely applied at global level and a considerable source of tax yield.

Although some problems were specific to the different national contexts in which VAT is applied, there are certain issues that are common to all countries.

For example, as Siniscalco has noted, the coverage of the taxable base, which was necessary to ensure effectiveness and neutrality of the tax, clashes with problems in its application to the public sector, the financial sector, as well as to specific sectors, such as agriculture.

The risks in applying differential rates are market distortions and increase in both administrative and compliance costs that would be borne, respectively, by administrations and traders.

Siniscalco added that the increasing international VAT fraud and evasion calls for prompt and effective measures on part of the States and, above all, for closer cooperation that, at the international level, is currently based on instruments and systems for exchanging information that are still inappropriate and insufficient.

Danny Leipziger, vice president of the World Bank's Poverty Reduction and Economic Management Network, stressed that "In just 50 years, value added taxes have become a major source of revenue in many countries. The VAT constitutes a large portion of the total government revenues generated by developed and developing countries alike.

Tax performance directly affects countries' ability to meet the Millennium Development Goals (MDGs), as well as public perceptions of the effectiveness of government. It is, therefore, a key policy area for all concerned with revenue mobilization."

On Oct 17 to 19, 2007, in Buenos Aires, Argentina, the ITD convened a global tax conference to examine the experiences of countries in the taxation of small- and medium-sized enterprises (SMEs).

The conference, hosted by AFIP and opened by the Argentine Minister of Economy and Production, Miguel Peirano, has drawn approximately 250 high level participants representing 80 countries and several international and regional tax organizations.

It is well recognized that SMEs play a prominent role in all economies.

They are a driving force for job creation and innovation. They are also the dominant form of business organization, accounting for between 90-95 percent of the business population worldwide. They are important to the economy and they are important to tax policymakers and administrators.

Assessing the impact of tax systems on SMEs is not simply a matter of looking at tax rates. Tax systems play an important role in encouraging growth, investment and innovation and facilitating international trade and mobility.

For SMEs key considerations are to minimize administrative burden while ensuring compliance.

The two-and-a-half-day discussion provides a unique opportunity for senior tax policymakers and administrators to consider these issues and exchange experiences on a global basis.

Minister Peirano indicated that "SMEs were the most dynamic sector in the current Argentine recovery. SMEs' capacity to generate jobs and adapt to a complex and changing context was supported by government policies designed to enhance their participation in international trade. At the same time, tax policy and administration measures helped SMEs to comply at a lower cost."

SMEs operating in the informal economy are a concern for all countries.

Maximo Jeria, vice president of the IDB, stressed that "SMEs operating in the informal economy may have limited access to development opportunities, but at the same time may have an unfair competitive advantage over those who do fully comply. The right mix of reform can achieve remarkable results. Some recent experiences show that strong revenue performance does not necessarily mean high tax rates. Simplicity and fairness are key. Complicated tax systems lead to high levels of informality and evasion, even when rates are low."

Careful consideration needs to be given to whether special tax policy arrangements are appropriate for SMEs.

Teresa Ter-Minassian, director of the Fiscal Affairs Department at the IMF, noted that "proper design of the tax system, and its administration, are critical to supporting the development of the SME sector, and reducing the extent of the shadow economy. That does not necessarily mean the provision of special tax incentives for smaller enterprises. What it does mean is avoiding disincentives for start up and growth, and providing tax treatment that is simple and fair."

To find out more about the ITD, and to access an extensive range of online resources, please visit www.itdweb.org.

(China Daily 10/26/2009 page6)