Outline of Presentation. I. Trends in Revenue Mobilization. II. Measuring Tax Gap. III. IMF s Approach RA-GAP

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2 Outline of Presentation I. Trends in Revenue Mobilization II. Measuring Tax Gap III. IMF s Approach RA-GAP 2

3 TRENDS IN REVENUE MOBILIZATION 3

4 I. Trends in Revenue Mobilization VAT revenues CIT Revenues Percent of GDP Low income Lower middle income Upper middle income High income Percent of GDP Low income Lower middle income Upper middle income High income PIT Revenues Trade Tax Revenues Percent of GDP Low income Lower middle income Upper middle income High income Percent of GDP Low income Lower middle income Upper middle income High income

5 I. Trends in Revenue Mobilization Average VAT/GDP ratios have improved but average c- efficiency ratio hasn t percent of GDP C-efficiency ratio VAT to GDP (percentage) VAT to GDP (percentage) C-Efficiency Ratio C-Efficiency Ratio C-efficiency Region Average Ratio C-efficiency Region Average Ratio

6 MEASURING TAX GAP 6

7 II. Measuring Tax Gap Tax gap is generally defined as the difference between potential revenues (inferred from macroeconomic data) and actual collections. Concepts of tax gap Potential Revenue (PV) Tax gap Actual Collection (AC) 7

8 II. Measuring Tax Gap Measuring tax gap for VAT Potential revenue for VAT (PV) is defined as the revenues from economic activities during a certain period - under a specific tax legislation - under full compliance 8

9 II. Measuring Tax Gap PV3: PV under conceptually ideal policy All final consumption are taxed at a current standard rate PV 3 = t FC ( ) = t FC AC C-efficiency Ratio (VAT Revenue Ratio): Ratio of actual VAT collection (AC) to PV3 * PV3 Concepts of tax gap Potential Revenue c-eff. ratio Actual Collection (AC) = AC PV 3 9

10 II. Measuring Tax Gap Compliance gap Difference between PV1 and AC Measured by the ratio to PV1 Concepts of tax gap Policy gap Policy gap Difference between PV3 and PV1 Measured by the ratio to PV3 PV3 PV1 Compliance gap AC 10

11 II. Measuring Tax Gap PV1: PV under current policy Reflecting current tax legislation, with (possibly multiple) statutory rates and exemptions Compliance gap: Ratio of actual VAT collection (AC) to PV1, measured by the ratio to PV1 Γ= PV1 AC PV1 11

12 II. Measuring Tax Gap Tax expenditures (expenditure gap) Concepts of tax gap Difference between PV2 and PV1 (a part of policy gap) PV3 Tax expenditure Policy gap Compliance gap PV2 PV1 AC 12

13 II. Measuring Tax Gap PV2: PV under feasibly normative policy Normative tax legislation, with standard rate and minimum exemptions, except for the supply generally regarded as difficult to be taxed (financial services, residential imputed rents, non-market government services.) VAT tax expenditure: Difference between PV2 and PV1, showing magnitude of actionable policy gap VAT tax exp. = PV 2 PV1 13

14 II. Measuring Tax Gap: Why important? 1. The tax gap measures scope for revenue mobilization and fiscal risk Identifying compliance gap and policy gap helps understand necessary actions for additional revenue mobilization. 14

15 II. Measuring Tax Gap Revenue Gain from Closing Half of Compliance Gap and Policy Gap (percent of GDP) Compliance Gap Policy Gap LUX ESP IRL DEU AUT NLD FIN DNK BEL GBR GRC FRA ADV ITA SWE PRT CHL PER COL MEX HUN LVA EME Source: IMF(2013) Fiscal Monitor, October

16 II. Measuring Tax Gap: Why important? 2. The compliance gap measures the overall effectiveness of a revenue administration It measures effectiveness in maximizing revenue collection within the given policy framework. The compliance gap can be a starting point for compliance risk management. 16

17 II. Measuring Tax Gap: Why important? 3. Measuring a time series of compliance gaps helps understand trends and changes of taxpayers compliance. It can provide a measure for result based management. 17

18 II. Measuring Tax Gap Several approaches to estimate PV1: Top-down approach consumption (demand side) approach CASE study of EU VAT Gaps Revenue Administrations (UK HMRC, Australia ATO, etc.) production (value-added) approach RA-GAP by IMF Bottom-up approach Random Audit/Enquiry Programs Various risk and intelligence assessments 18

19 II. Measuring Tax Gap % of potential revenues VAT compliance gaps in European countries (Unit: ratio to PV1) 0 Romania Lithuania Latvia Slovakia Greece Italy Malta Hungary Czech Republic Poland Bulgaria Spain EU-26 Estonia Ireland Belgium Portugal Austria United Kingdom Germany Slovenia France Denmark Netherlands Finland Luxembourg Sweden Source: CASE (2015) - Average between 2009 and

20 II. Measuring Tax Gap % of potential revenues (PV3) VAT policy gaps in European countries (Unit: ratio to PV3) 0 Portugal Finland Spain France Belgium Ireland Greece United Kingdom Italy Poland Netherlands Slovenia Denmark Sweden Germany Hungary Austria Malta Czech Republic Estonia Luxembourg Slovakia Bulgaria Latvia Lithuania Romania Source: CASE (2015) - Average between 2009 and

21 IMF S APPROACH RA-GAP 21

22 III. IMF s Approach RA-GAP RA-GAP: Revenue Administration Gap Analysis Program Estimate tax gap Identify underlying causes for the tax gap Compliance gap and policy gap Sector analysis of compliance gap Effects of tax expenditures Support compliance risk management 22

23 III. IMF s Approach RA-GAP The essence of RA-GAP: 1. Estimate PV1 and PV2 Map current tax policies into policy parameters Calculate potential revenues from statistical data on tax base and policy parameters 2. Clean AC data Purify actual collections excluding some effects irrelevant to taxpayers compliance Classify into sectors 23

24 III. IMF s Approach RA-GAP The RA-GAP focuses on estimating potential revenues from sector PV1 from statistical data (supply and use tables). The sector PV1 is calculated as the sum of sector import VAT, sector output VAT minus sector input VAT. (, ) (,, ) ( ) (,, ) PV1 = M τ + Y X τ 1 e N + I τ s s c c s c s c c s s c s c c c c c Import VAT Output VAT Input VAT [M: import, Y:output, X:export, N:input, I: investment, e s : exempted output ratio, τ c : statutory rate] The overall potential VAT is calculated as the total sum of sector PV1. PV1= PV1 s s 24

25 III. IMF s Approach RA-GAP Data requirements for PV1 estimation Supply and use tables (outputs and inputs according to national accounts system) Customs data (exports and imports of goods) BOP data (exports and imports of services) 25

26 III. IMF s Approach RA-GAP The RA-GAP tries to use ideal actual VAT collection for a particular year by net VAT collections for the period (year), derived from: 1. gross payment for the period: Total value of gross VAT actually paid by taxpayers (at certain cutoff date) to meet the liability arising from economic activities (transactions) during the period (year) Excluding interests and surcharges 2. minus refund (excess credit claim) for the period: Minus total value of VAT refund (credit) claims by taxpayers (at certain cutoff data) arising from economic activities (transactions) during the period (year) Including credit claims which have not been disbursed by the government 26

27 III. IMF s Approach RA-GAP Image of RA-GAP results Expenditure Gap Policy Gap % of GDP Compliance Gap PV3 PV2 PV1 AC (for period) AC (net cash) 27

28 III. IMF s Approach RA-GAP 4 RA-GAP analyses in FY 2014 (2013/14) 8 RA-GAP analyses in FY 2015 (2014/15) Published reports on the IMF website U.K. : Assessment of HMRC s Tax Gap Analysis Estonia: the Value-Added Tax Gap in Estonia South Africa: the Value-Added Tax Gap in South Africa 28

29 III. IMF s Approach RA-GAP Case study in South Africa: published in July 2015 Analysis from 2007 to 2012 (using SUT by StatsSA) VAT standard rate: 14% - no reduced rates A limited number of exemptions High threshold: R1 million (80,000 US dollar), 0.4 million active VAT vendors 29

30 III. IMF s Approach RA-GAP Case study in South Africa % of GDP PVs and AC Expenditure Gap Policy Gap Compliance Gap PV3 PV2 PV1 AC (for period) 30

31 III. IMF s Approach RA-GAP Case study in South Africa 12 Compliance gap % of potential VAT revenue

32 III. IMF s Approach RA-GAP Case study in South Africa 4 Compliance gap / Policy gap 3 % of GDP Policy gap Expenditure gap Compliance gap 32

33 III. IMF s Approach RA-GAP billion R Case study in South Africa Sector analysis (for 2012) Potential revenue Actual collection Sector number 1. Agriculture, forestry and fishery 6. Wholesale and retail trade, 2. Mining and quarrying catering and accom m odations 3. Manufacturing 7. Transport, storage and communications 4. Electricity, g as and water 8. Financial interm ediation, insurance, 5. C onstruction real estate and business services 9. C ommunity and social services 33

34 III. IMF s Approach RA-GAP Case study in South Africa 8.0 AC for the period and in the period % of GDP AC (for period) Cash collection 34

35 III. IMF s Approach RA-GAP Some observations: results Compliance gap would be affected by economic situations; worse in bad time, but not extremely. Actual Collections for period would be smoother than cash collections. Compliance gap would be affected by complexity and threshold of VAT regime. 35

36 Concluding Remarks Tax gap is a quantitative indicator showing efficiency of current tax system. Diagnosis and evaluation of efficiency are key for prioritization for allocation of scarce resources. Necessary data for tax gap analysis is in hands of tax administrations. 36

37 Appendix 1 VAT C-EFFICIENCY AND REVENUE PERFORMANCE 37

38 Appendix 1 Ratio of actual VAT collection (AC) to GDP can be explained by 3 factors: VAT Standard Rate AC AC FC * = GDP FC * GDP AC FC * = t t FC * GDP C-Efficiency Ratio Final Consumption Ratio 38

39 Appendix 1 C-efficiency ratio can be decomposed into compliance gap (Г) and policy gap (P). c-eff. ratio Showing difference between actual collection and potential revenue under full compliance of current policy AC AC PV1 = = PV 3 PV1 PV 3 PV1 AC PV 3 PV1 = 1 1 PV1 PV 3 [ 1 ] [ 1 P] = Γ Showing difference between potential revenue under current policy and theoretical revenue under normative policy 39

40 Appendix 2 CHANGES IN C-EFFICIENCY RATIOS 40

41 Appendix 2 Case study in South Africa C-efficiency ratio c-efficiency ratio (%) How can we understand the recent VAT c-efficiency performance?

42 Appendix 2 Case study in South Africa change from 2007 (% point) Decomposition of changes in c-efficiency ratio Changes in compliance gap Cash effect Changes in c-efficiency ratio Changes in expenditure gap Other effects 42

43 Appendix 3 TREND AND CHANGES IN COMPLIANCE GAPS 43

44 Appendix 3 60 Trend in Compliance gap Latin America ave (VAT) EU ave (VAT) Australia (GST) Japan (VAT) Colombia (CIT) Mexico (CIT) Mexico (Excise) UK (CIT) UK (Excise) Source: IMF(2015) Current challenges in revenue mobilization - improving tax compliance 44

45 Appendix 3 Change in compliance gap Changes in averages, vs LVA 0.25 ESP ROUCZE SVK PRT 0.1 POL SVN LTU EST IRL FRA NLD 0.05 GRC BGR LUX BEL HUN ITA DNK GBR FIN JPN DEU AUT SWE MLT Change in output gap 45

46 Appendix 3 Empirical analysis for VAT compliance gaps for 26 EU countries plus Japan, : Output declines significantly worsen compliance, but the effect seems fairly short-lived. Spending on tax administration has a significant long run effect in improving compliance. 46