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Tax policy effectiveness and transparency

The Addis Agenda emphasises that States should improve the fairness, transparency, efficiency and effectiveness of tax systems, including by broadening the tax base and continuing efforts to integrate the informal sector into the formal economy.

Tax policies

A country may broaden the tax base on two main fronts: broadening the base on which corporate or personal income taxes are applied or increasing the incidence of indirect taxation. In general, as shown in the figure, middle-income countries rely more heavily on indirect taxes (general goods and services taxes) and corporate income taxes, while LDCs and SIDS place more importance on indirect taxes and trade revenue. An increase in indirect taxation, for example through increasing value-added taxes or reducing exemptions, can provide scope to easily increase the revenue collected. However, indirect taxation can be regressive by taxing lower-income consumers proportionally more. The balance of the approach should depend on country circumstances, taking into account the specifics of the country’s economic and institutional framework.

Countries on every economic group have been increasing the indirect tax base and rate. The figure shows the increase in the revenue realized from on goods and services for various country groups. Countries in developed regions, middle-income countries and SIDS saw the overall trend increases interrupted only by the 2008 world financial and economic crises. LDC indirect tax revenue appears to have been largely unaffected by the crisis, showing gradual increases from 2005 onwards.

Additional types of taxes

Aside from changing the balance in taxation, new taxes can also be developed at both the national and subnational levels. New indirect taxes may be applied, for instance on digital activity, which would be a way to levy a tax on the transaction even when the entity providing the service does not have a fixed place of business in the country where the final sale takes place. Taxing digital activities either through the introduction of a new tax and taxable event, or by bringing to tax digital business models under the anti-avoidance regulations, has become a trend in several countries.

A number of countries amended their anti-avoidance regulations to capture transactions structured so as to avoid establishing a tax presence (i.e. permanent establishment) in the country concerned. One developing country introduced a new levy in 2016 aimed at taxing the profits of internet advertising providers that earn income through sales in that jurisdiction without having a permanent establishment for tax purposes. Two other countries introduced a diverted profits tax, whereby tax payers are charged a higher corporate tax rate on profits generated in that country but artificially shifted overseas. This tax is outside the income tax system and not covered by the terms of bilateral tax treaties, meaning there is no corresponding relief for the tax charged. Another country has introduced legislation on tax avoidance by MNEs, and has levied GST on offshore supplies of digital products and services. Another country introduced a consumption tax on digital transactions. It is applicable on distribution of e-books via the internet, downloading music or video, use of online software, e-commerce (online space to sell products), online advertisements, and consulting services rendered continuously through phone or email. 

Countries around the world have implemented or are considering the implementation of measures to collect the VAT on the ever-rising volume of internet sales, including sales of digital products, by overseas sellers. A number of European countries, as well as others, have adopted new regulations in order to better tax digital transactions from overseas sellers under their domestic VAT / GST laws. One has passed legislation that requires domestic companies to purchase their Internet ads only from locally registered companies. This rule would require foreign internet advertising providers to have a presence in country in order to sell advertising.

Environmental taxes, such as carbon taxes, can also be applied (see separate section on energy taxation). Excise taxes are another example of taxes that have been successfully applied in some countries with the intent of raising revenues. Governments may also choose to introduce a property tax if they do not already have one, or improve the effectiveness of existing property tax systems.

Tax Policy Assessment Framework

The Tax Policy Assessment Framework (TPAF) is being developed jointly by the World Bank and the IMF to assess the performance of tax policy in developing countries in a systematic and standardized manner. Through application of a comprehensive set of performance indicators, TPAF will allow the identification of relative strengths and weaknesses in tax policy-related systems, processes, and institutions. Based on the assessment, actionable reform programs can be designed, building a common understanding of a given country’s priorities in the tax policy area. TPAF’s aim is to identify tax policy bottlenecks, priorities, and sequencing of a reform, which can serve as valuable information for all stakeholders, including country authorities, international and regional organizations. TPAF is currently at a design stage and has yet to be implemented in the field.