INTERNATIONAL MONETARY FUND Tax Revenues Uncollectible Taxes Tax

INTERNATIONAL MONETARY FUND Tax Revenues Uncollectible Taxes Tax Credits Adriaan Bloem Assistant Director Real Sector Division 1

CONTENT • Background and context • Tax revenues (definition and coverage) Ø Issues Ø Advisory Expert Group (AEG) recommendation • Accrual basis of recording of tax revenue (including uncollectible taxes issue) Ø Issues Ø AEG recommendation • Tax credits Ø Issues Ø 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: Ø Unrequited transactions (usually a tax) Ø Requited transactions q Purchase of a service q Acquisition of an asset • The label (tax, fee etc) is not determinant of classification, but Ø 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). Ø But these should not be seen as exhaustive or prescriptive. Ø 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 Ø Time-adjusted cash method Ø Assessment of due taxes

Tax – Accrual Recording • Unresolved issue: prepaid taxes Ø Accrue over reference period or Ø 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 Ø Net – only record as tax the amount that is realistically expected to be collected Ø 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 Ø Payable – if the tax credit owed to a taxpayer exceeds his/her tax liability, the difference is paid out Ø 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 Ø 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 Ø 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. Ø With the presentation being such that it would permit the derivation of tax credits on a net basis as well