1. Assessment of tax expenditure, transparency and control of exemptions Jean-François Brun Gérard Chambas CERDI Module 6

2. Budget subsidies versus tax exemptions Budget subsidies : transparent expenditure through the budget Exemptions Lack of transparency concerning the amount of benefit granted Lack of transparency concerning the beneficiaries Hence the need for an evaluation of tax expenditure EU workshop Brussels 20142

3. Assessment of tax expenditure in developing countries Many development economies: scepticism regarding feasibility but generalisation/poor control of tax Purpose of the module: to demonstrate the benefit of assessing tax expenditure EU workshop Brussels 20143

4. 4 Outline I - Definition of tax expenditure II - Method of evaluating tax III - How can the concept of tax expenditure be made operational?

5. EU workshop Brussels 20145 1 Tax expenditure: definition Loss of revenue due to total or partial tax exemption measures Tax expenditure assessed in relation to a benchmarked tax legislation

6. Why the denomination of “tax expenditure”? If the exemption measures were removed, additional revenue would be produced Exemption has a similar effect to a subsidy (i.e. budgetary expenditure) granted to a tax- payer benefiting from the exemption measure. EU workshop Brussels 20146

7. 7 Subsidies versus tax expenditure Subsidies: spending a given amount to the profit of a beneficiary in principle identified with a stated target Evaluation of the social effectiveness of subsidies (transparency) Targeting easier than in the case of exemption Arbitration to even out the social usefulness of different categories of spending

8. EU workshop Brussels 20148 Subsidies versus tax expenditure Tax exemptions Objectives not always explicit; often “incentives” for a (productive) activity or for “basic” consumption (social products as remedies, education, social housing, even fuel). Loss of revenue : not well known Few ex post assessments, often incomplete, rough estimates

9. EU workshop Brussels 20149 Why assess tax expenditure? Basic principles: transparency, exhaustiveness and quantified measurement of cash flows The detailed and public assessment of tax expenditure is one of the prerequisites for a democratic and transparent debate on all public finance choices Evaluate the characteristics of all budgetary operations to equalise costs or marginal benefits

10. EU workshop Brussels 201410 Why assess tax expenditure? Need to assess the economic and social effects of the most significant tax expenditures Compare the effectiveness of exemption measures with subsidies to retain optimum combinations of expenditure in the broad sense

11. EU workshop Brussels 201411 Dissemination of tax exemption assessments Similar status to that of other expenditures Clear document for all stakeholders (opinion, Parliament, etc.) The case of Morocco Appendix to the Finance Act Website of the Ministry of Finance

12. EU workshop Brussels 201412 International practice for assessing tax expenditure Developed countries: systematic assessment of tax expenditure, particularly in OECD countries: Germany, Austria, Belgium, Canada, France, the Netherlands, UK and USA Developing countries, tax expenditure assessment, particularly in Latin America (Argentina, Brazil, Chile, Colombia, Guatemala, Mexico, Peru, Uruguay). In Africa: Morocco since 2005; Benin under way, Gabon, Senegal since 2008

13. Assessment of tax expenditure in developing countries (Source: M. Mansour) % GDPPercentage of total revenueYear Direct taxesIndirect taxesMiscellaneous Argentina3.1296472002 Brazil1.56617 2001 Chile4.4712902001 Colombia7.4356501998 Guatemala2.0n.a n.a.2001 Mexico5.3514902002 Peru1.9109002003 Uruguay6.6207641999 13

14. EU workshop Brussels 201414 II. The estimation of tax expenditure A benchmark is defined. The tax expenditure is assessed, i.e. the difference between tax revenue obtained by implementation of the common regime (benchmark) and by implementation of the derogative regime.

15. EU workshop Brussels 201415 Questions of method What are the criteria for determining a benchmark tax legislation ? What are the taxes concerned? Which kind of data are necessary for the evaluations? What are the methods for estimation?

16. What scope? In general, initially, the local taxation system and social levies are not included within the scope of tax expenditure. Starting point: concentrate on major taxes (VAT, profit tax, tariffs) 16 EU workshop Brussels 2014

17. 17 Operational orientation Four courses of action Implement the evaluation of tax expenditure administratively Integrate tax expenditure into the budgetary framework with an optimization process Publish tax expenditure to encourage transparency Implement a plan of action EU workshop Brussels 2014

18. What operational procedure? Define a method of estimation for each measure on the basis of the data available Make the method explicit via a report distributed within the services concerned The reports will provide a methodological guide for all assessments EU workshop Brussels 201418

19. EU workshop Brussels 201419 Assessing tax expenditure Numerous administrations involved, in particular, Tax administration, Customs, Treasury, Budget, Department of Forecasting Risk of blocking attributable to the partitioning of administrations or departments and the stakes; steering is necessary

20. EU workshop Brussels 201420 Assessing tax expenditure Central role of a structure for monitoring tax expenditure involving the departments concerned to promote assessments of tax expenditure Appoint a lead manager (specific case of the Tax administration in Morocco) Supporting role of a development partner (EU)

21. EU workshop Brussels 201421 Publish the results of the assessment Annual synthesis report of the assessment of tax expenditure (legible and accessible) Annex to the Finance Act Placing on-line on the Tax administration website This does not exclude more in-depth documents for the authorities

22. Action Plan based on the assessment The results of the assessment must lead to a debate and the definition of an action plan in order to correct inefficiency of the policy of tax exemption The central objective is the optimization of all public finances Integral part of the policy of public finances (overall optimisation) Role of national authorities Importance of communication EU workshop Brussels 201422

23. Thank you for your attention