Tax credits in ESA 2010 1 ESA 2010 course January 2014 Cecilia Pop Eurostat D2 Cecilia.Pop@ec.europa.eu estat-d2-secretariat@ec.europa.eu 1

Reminder of recording in ESA95 Tax credits not explicitly covered in ESA95 Heterogeneity of treatment among Member States Lack of comparability of tax burden measures Tax credits in ESA 2010

Recording in ESA2010 SNA2008 § 8.62; § 22.95 and § 22.97 replicated by ESA2010 § 4.81 and § 20.167 – distinction non-payable/payable § 20.168 – rationale of the distinction between the treatment of non-payable and payable tax credits Tax credits in ESA 2010

Recording in ESA2010 SNA2008 (§ 22.95) defines tax credits: " …a tax credit is an amount subtracted directly from the tax liability due by the beneficiary household or corporation after the liability has been computed…" ESA2010 (§4.81 and §20.167) specify: "… tax credits represent tax relief and so reduce the tax liability of the beneficiary…"; "… subtracted directly from the tax liability otherwise due by the beneficiary household or corporation…" Tax credits in ESA 2010

Recording in ESA2010 ESA2010 follows SNA2008 on the treatment of tax credits and distinguishes: Non-payable (wastable/ non-refundable) tax credits Payable (non-wastable/refundable) tax credits MGDD (II.2 §7) sixth edition explains further the recording in government accounts – will be updated following discussions at the FAWG Tax credits in ESA 2010

Recording in ESA2010 Non-payable (wastable) tax credits ESA2010 §4.81: “…some tax credit systems are non-payable tax credits systems, where the tax credits are limited to the size of the tax liability. Under a non-payable tax credits system, all the tax credits ……… reduce the government tax revenue.” Tax credits in ESA 2010

Recording in ESA2010 Non-payable (wastable) tax credits: - are those which can only be used to decrease a tax liability during the same fiscal year or several years when the carry over is allowed - are limited to the tax liability (all amounts in excess to the tax liability are lost) - are not paid to the tax payers or non-tax payers as a benefit After the period in which itcan be claimed, if not used, the amount is lost Tax credits in ESA 2010

Recording in ESA2010 Non-payable (wastable) tax credits: - are the most common cases of tax credits have to be recorded net in the tax revenue (reduce the tax revenue and the tax burden ratios) Tax credits in ESA 2010

Recording in ESA2010 Non-payable (wastable) tax credits – time of recording: - the time of recording is similar to the time of recording of the tax to which they relate (for both TAC or AD) Deleted from slide "- when the liability is determined (e.g. when the tax payer presents the tax declaration)" The time of recording is normally similar to the one of the tax on which they are imputed, both for recording based on assessment method or on time-adjusted cash, Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits ESA2010 §4.81: “…If the tax credit system results in the beneficiary receiving the excess when the relief is greater than the liability, the tax credits system is a payable tax credit system… " Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits ESA2010 §4.81: “…Under a payable tax credits system, the whole amount of tax credits is recorded as government expenditure, and not as a reduction of tax revenue.” SNA2008 and ESA95 diverges form OECD requirements where payable tax credits are imputed negatively up to the amount of the tax liability and as expenditure for the excess. Independently of conceptual perspective, this is generally considered as rather difficult in practice by compilers. Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits (§20.167 and §20.168): - can be credited against tax liabilities - are paid to the beneficiaries (tax payers and non-tax payers) if the amount is more than the tax liability Deleted from slide "- can be in two parts: one to decrease the tax liability; another paid directly to the recipients" If the time expires – the beneficiary gets the money Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits: the total amount of the tax credit should be registered as an expense/expenditure are recorded for their total amount should not be recorded as a negative revenue Deleted from slide " - , irrespective of how much was used to reduce tax liability and how much paid to the beneficiary" Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits: the recording has no impact on the net borrowing/net lending of government over time it has an impact on the level of government expenditure and revenue and the tax burden While this is true over time, differences in the time of recording of taxes and relevant expenditure items may lead to an impact on net lending (+)/ net borrowing in specific years. Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits can be recorded, depending on the purpose and the beneficiary: as subsidies (D.39, other subsidies on production) as social benefits (D.623, social assistance benefits in cash) also, in some cases as investment grants (D.92) Or D,99 according to the paper at the FAWG Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits – time of recording: Regardless of the expenditure category chosen, the time of recording is when the liability is recognised by government   Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits – time of recording for D.39: ESA 2010 §4.39 specifies that “Subsidies are recorded when the transaction or the event (production, sale, import, etc.) which gives rise to the subsidy occurs.”   Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits – time of recording for D.39: In practice, when the right to the subsidy should be controlled or certified, the time of recording is when the right is assessed and the amount is certain Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits – time of recording for D. 623: ESA 2010 §4.106 specifies that “time of recording of social benefits other than social transfers in kind (D.62) : a) in cash, they are recorded when the claims on the benefits are established.”   Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits – time of recording for D. 623:  - should be the time when recognised as a liability by government Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits – time of recording for D. 92: ESA 2010 §4.162 specifies that "…investment grants in cash are recorded when the payment is due to be made….” Tax credits in ESA 2010

Recording in ESA2010 Payable (non-wastable) tax credits – time of recording for D. 92: when the payment is due to be made, should be when recognised as a government liability Tax credits in ESA 2010

Recording in ESA2010 Conclusion for payable (non-wastable) tax credits: For the government accounts the impact on expenditure is the time when the liability is recognised and not the time of effective payment Any time difference between the recording of expenditure and the payment (or imputation) should be recorded as "other accounts" – F.8 For payable tax credits, it does not matter the exact time when the credit is used as a reduction of the tax liability and/or paid in totality or for the excess of the tax liability, Tax credits in ESA 2010

Recording in ESA2010 – practical aspects - GFS Task Force Allocation of tax credits by sub-sectors (ESA 2010(§1.78, replicating SNA2008 § 3.70): " … A tax is attributed to the government unit that a) exercises the authority to impose the tax (either as a principal or through delegated authority of the principal), and b) has final discretion to set and vary the rate of the tax Tax credits in ESA 2010

Recording in ESA2010 – practical aspects - GFS Task Force Allocation of tax credits by sub-sectors: For tax credits granted by one sub-sector - the tax credit should be attributed to the sub-sector granting the tax credit For tax credits granted by several sub-sectors - the impact could be shared between the sub-sectors both regarding revenue and expenditure Tax credits in ESA 2010

Recording in ESA2010 – practical aspects - GFS Task Force Allocation of tax credits by sub-sectors: If a sub-sector recorded the revenue (in line with ESA2010 §1.78) and another one granted the tax credit, the tax credit may be considered a payable tax credit and recorded by the sub-sector granting the tax credit except if a current transfer is recorded because part of the tax revenue is allocated to the sub-sector allocating the tax credit Only the sub-sector recording the revenue could record a non-payable tax credit of a particular tax liability Att: clarify this!!! Tax credits in ESA 2010

Recording in ESA2010 – practical aspects - GFS Task Force Allocation of tax credits to a specific/several taxes, in case of being granted on tax liabilities resulting from several taxes: Attribute the amounts of payable tax credits proportionally to (netted) tax receipts of the different taxes except When the tax credit relates only to one tax, but established on the tax liability of several taxes Tax credits in ESA 2010

Recording in ESA2010 – Eurostat questionnaires Currently Eurostat collects information about tax credits: Eurostat Questionnaire on taxes and social contributions (Part 3, questions 34-44) – due end December 2013 Eurostat Questionnaire on payable tax credits – due end January 2014 From September 2014, ESA2010 transmission programme, table 2 (total payable tax credits; payable tax credits that exceed the taxpayer's liability) Tax credits in ESA 2010

Recording in ESA2010 – Eurostat Task Forces GFS Task Force dealing with compilation issues + Specific Task Force in February 2014 for some issues related to the implementation of ESA2010, including deferred tax assets (linked with tax credits) Tax credits in ESA 2010

Recording in ESA2010 – other practical aspects Please share with us any practical aspects of the recording of tax credits following the implementation of ESA2010 Tax credits in ESA 2010