-1- INTERNATIONAL MONETARY FUN D INTERNATIONAL MONETARY FUN D Tax Revenues Uncollectible Taxes Tax Credits Adriaan Bloem Assistant Director Real Sector Division

CONTENT Background and context Tax revenues (definition and coverage)  Issues  Advisory Expert Group (AEG) recommendation Accrual basis of recording of tax revenue (including uncollectible taxes issue)  Issues  AEG recommendation Tax credits  Issues  AEG recommendation

Background And Context Review of SNA 1993 Paper prepared by Task Force on the Harmonization of Public Sector Accounting (TFHPSA) Considered by AEG at its July 2005 Bangkok meeting

Tax Revenue Definition And Coverage Current SNA definition of taxes –‘Compulsory, unrequited payments to government.’ Issues related to the borderline between taxes, fees, licenses and permits are significant

Taxes Versus Fees, Licenses And Permits Fees, licenses and permits can be:  Unrequited transactions (usually a tax)  Requited transactions  Purchase of a service  Acquisition of an asset The label (tax, fee etc) is not determinant of classification, but  Whether a service is received by the payer approximately commensurate with the amount paid determines whether it is a fee or tax.

AEG’s Recommendation The AEG supported the general definition of tax revenue. Examples should be provided to illustrate the underlying concepts (particularly on the issue of fees, licenses and permits).  But these should not be seen as exhaustive or prescriptive.  Discussions on distinction taxes-licenses are still ongoing.

Tax – Accrual Recording General principle of accrual recording ‘Flows are recorded when economic value is created, transformed, exchanged or extinguished and not when cash payments are made.’ Flexibility is permitted in practice for taxes because reliable estimates of the amount of tax may not be known until time of tax assessment  Time-adjusted cash method  Assessment of due taxes

Tax – Accrual Recording Unresolved issue: prepaid taxes  Accrue over reference period or  Record in period of payment

Uncollectible Tax Uncollectible tax is the difference between what is actually collected and what has theoretically accrued Two methods of accounting  Net – only record as tax the amount that is realistically expected to be collected  Gross – record all tax that has theoretically accrued and record a transfer for the amount not collected

AEG’s Recommendation AEG reaffirmed the accrual basis for recording tax revenue The principle of not including uncollectible taxes (net recording method) was agreed

Tax Credits 1993 SNA does not make recommendations on treatment of tax credits Two types of tax credits  Payable – if the tax credit owed to a taxpayer exceeds his/her tax liability, the difference is paid out  Non-payable – the tax credit to an individual is limited to his/her tax liability.

Tax Credits Continued Non-payable tax credits are recorded as reducing tax revenue Payable tax credits – debate about how to record  Net – amount of tax credit up to a taxpayers tax liability recorded as reducing tax revenue, and amount paid out in excess recorded as government expenditure  Gross – tax revenue not reduced, and full amount of tax credit (not just the excess over the tax liability) recorded as tax expense

AEG’s Recommendation The AEG recommended that payable tax credits should be recorded on a gross basis.  With the presentation being such that it would permit the derivation of tax credits on a net basis as well