SNA REVIEW General government accounts Tax revenue, accrual recording of tax, Tax credits (J-P Dupuis) OECD Working Party on National Accounts (Paris, 13 October 2004)

Definition of tax revenue Reminder: SNA93 (§7.48 and 8.43): compulsory, unrequited payments to government (“nothing in return”) SNA93 (§7.48 and 8.43): compulsory, unrequited payments to government (“nothing in return”) GFSM 2001 (§4.21): compulsory transfers received by the government sector GFSM 2001 (§4.21): compulsory transfers received by the government sector IFAC – PSC: (§2.8) non- exchange transaction and (§3.1) same def. as GFS IFAC – PSC: (§2.8) non- exchange transaction and (§3.1) same def. as GFS (government exercises sovereign powers)

Proposal for the new SNA: core definition of tax revenue “Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units. They are described as unrequited because the government provides nothing directly in exchange to the individual unit making the payment, although governments may use the funds raised in taxes to provide goods and services to other units, either individually or collectively, or to the community as a whole “ “Taxes are compulsory, unrequited payments, in cash or in kind, made by institutional units to government units. They are described as unrequited because the government provides nothing directly in exchange to the individual unit making the payment, although governments may use the funds raised in taxes to provide goods and services to other units, either individually or collectively, or to the community as a whole “ This should be followed by the presentation of the 3 categories of taxes (D.2, D.5, D.91). This should be followed by the presentation of the 3 categories of taxes (D.2, D.5, D.91).

Further guidance/borderline issues Tax versus Fees (SNA, §7.55) Tax versus Fees (SNA, §7.55) - If a licence/certificate is automatically granted on payment: Tax - If the licence implies a regulatory function of government: purchase of a service Tax revenue vs sale of asset Tax revenue vs sale of asset A licence as asset: tradability, market value Some “taxes”/revenue may be part of sale of assets (financial or non- financial); see cases of indirect privatisation or sale of licences Some “taxes”/revenue may be part of sale of assets (financial or non- financial); see cases of indirect privatisation or sale of licences

Accrual recording of taxes Does the implementation of the accrual principle for tax raise only the issue of time? Does the implementation of the accrual principle for tax raise only the issue of time? Or is there also an issue with the amounts of tax to be recorded? (in parallel with accrued interest?) Or is there also an issue with the amounts of tax to be recorded? (in parallel with accrued interest?) In practice, there is an issue! Need for a pragmatic approach.

Accrual recording of taxes Time of recording (present guidance) SNA93, ESA95, GFSM2001 and IFAC-PSC refer to the same general principle: “When the taxable event occurs” SNA93, ESA95, GFSM2001 and IFAC-PSC refer to the same general principle: “When the taxable event occurs” Practical flexibility (SNA, and GFS): income tax deducted at source and regular prepayments when they are assessed or paid (SNA93 is ambiguous). ESA (§4.82) and EMGDD (Eurostat) extends to income tax due when assessed with certainty by tax authorities. Practical flexibility (SNA, and GFS): income tax deducted at source and regular prepayments when they are assessed or paid (SNA93 is ambiguous). ESA (§4.82) and EMGDD (Eurostat) extends to income tax due when assessed with certainty by tax authorities.

Accrual recording of taxes Amounts to be recorded (present guidance) General principle (SNA, ESA, GFSM2001): amounts due, but… General principle (SNA, ESA, GFSM2001): amounts due, but… - SNA: cash is allowed in some cases - GFSM2001: only record amounts expected to be collected + EMGDD (Eurostat): 3 options allowed: 1. Assessed amounts adjusted by a coefficient 2. (Full) amounts due, but corrected by a capital transfer 3. (Time-adjusted) cash

Accrued taxes (for the new SNA) Time of recording: Time of recording: General principle, and some flexibility is permitted in two cases (time of the tax assessment): 1. Parallel economy 2. Taxes on income (when it is assessable) Amounts to be recorded: Amounts to be recorded: No inclusion of amounts unlikely to be collected. Possible options: 1. Amounts assessed as due adjusted by a coefficient 2. (Full) due amounts but capital transfer 3. Time-adjusted cash.

Accrued taxes: proposal for new SNA General principle : “Like most transactions in the SNA, taxes and social contributions are to be recorded on an accrual basis. Accrual recording means basically that flows are not recorded when cash payments are made, but when economic value is created, transformed, exchanged or extinguished”. General principle : “Like most transactions in the SNA, taxes and social contributions are to be recorded on an accrual basis. Accrual recording means basically that flows are not recorded when cash payments are made, but when economic value is created, transformed, exchanged or extinguished”. Controversial issue: Controversial issue: “When economic value is created” implies – like for accrued interest – that the flows recorded at this time are amounts due as the consequence of the underlying economic event, under the tax law.

Accrued taxes: proposal for SNA Time of recording Time of recording « This is when the activities, transactions or other events occur which create the liability to pay taxes – in other words, when the taxable event occur – and not when the payments are made. In the case of taxes, this usually means when income is paid or when a transaction (purchase of goods and services etc.) generating the liability is made »

Accrued taxes: proposal for SNA (Time of recording, continued) « Some flexibility is permitted in two cases: 1. Parallel economy: some activities, transactions or events escape the attention of the tax authorities. Notwithstanding the fact that the amounts to be recorded can be determined only when the tax assessment is made, some flexibility should be accepted concerning the time of recording in the system. »

Accrued taxes: proposal for SNA (Time of recording, continued) « 2. Taxes on income: in some cases, depending on the tax system, the liability to pay taxes can only be determined in a later accounting period than that in which the income accrues and becomes taxable. This is the case when amounts due are evidenced and known with sufficient certainty only through tax assessments, declarations etc. »

Accrued taxes: proposal for SNA (Time of recording, continued) « Therefore, in these two cases, an acceptable time of recording taxes may not be the time when they accrued (when the economic event generated the obligation to pay taxes), but the time when they were assessable, known as due to be paid with sufficient certainty. This is not necessarily similar to the accounting period of the payment. »

Accrued taxes: proposal for SNA « Amounts to be recorded « Amounts to be recorded Like other transactions, accrued taxes are often understood as due amounts of taxes, as generated by the economic event. However, recording accrued amounts of taxes and social contributions – at the time they are due or generated – should not lead to record amounts known to be uncollectible, or unlikely to be collected. The revenue and net borrowing / net lending of the GG sector should not be artificially improved by the recording of amounts unlikely to be collected. »

Accrued taxes: proposal for SNA (Amounts to be recorded, cont.) « The amounts of taxes to be recorded are: « The amounts of taxes to be recorded are: - Either, amounts assessed as due.adjusted by a coefficient reflecting the assessments never collected in the recent past..adjusted by a capital transfer Is an adjustment on the revenue side preferable to an adjustment on the expenditure side? - Or amounts actually paid (time-adjusted cash) »

Tax credits SNA93 and ESA95: no provision ar present SNA93 and ESA95: no provision ar present GFSM2001 (chap 5 and 6): GFSM2001 (chap 5 and 6): - Amounts deductible from tax due are negative taxes - Net payments by GG are expenses OECD Revenue statistics: any amount exceeding tax liability and paid by GG is expenditure OECD Revenue statistics: any amount exceeding tax liability and paid by GG is expenditure IFAC-PSC: distinguish “tax expenditure” and “expenses paid through the tax system”. IFAC-PSC: distinguish “tax expenditure” and “expenses paid through the tax system”. The latter should be expensed (majority view).

Tax credits: proposal for new SNA Definition: “a tax credit is a reduction of tax – usually of tax on income - offered to households or other entities which is embedded in the tax system. Definition: “a tax credit is a reduction of tax – usually of tax on income - offered to households or other entities which is embedded in the tax system. It is common that tax systems comprise elements of social redistribution (tax scales, marginal tax, impact of the size of the household, of the number of children…). This does not influence the recording of taxes in national accounts. Tax credits may be one element of such redistribution.”

Tax credits: proposal for new SNA Non-payable tax credits: “(usually a strong indication of tax-reducing operation) they are to be recorded in deduction of due taxes” Non-payable tax credits: “(usually a strong indication of tax-reducing operation) they are to be recorded in deduction of due taxes” Payable tax credits: more questionable. “When a tax credit is embedded in the tax system, the element exceeding the tax liability and paid out by the government is to be recorded as an expenditure (most of the time, a social benefit)” Payable tax credits: more questionable. “When a tax credit is embedded in the tax system, the element exceeding the tax liability and paid out by the government is to be recorded as an expenditure (most of the time, a social benefit)”