Tax Reform in Developing Countries

 

In 1985, the government of Jamaica (to embark) on a comprehensive tax reform. This reform (to include) changes in the personal income tax, the company tax, and indirect taxes. The reforms of the personal income tax were particularly profound. A complicated, narrowly-based individual income tax levied under a progressive statutory rate (to replace) by a broadly-based single-rate tax in 1986. Before the reform, the highest marginal tax rate of 60 per cent (including payroll taxes) was reached at the relatively low annual income level of less than three times per capita GDP. The provisions of the tax code were complicated, with no standard deduction and sixteen separate credits. In addition, employers could grant nontaxable allowances to employees. The resulting tax system was difficult and costly to administer and (to contain) important disincentives; evasion and avoidance all but negated the progressivity of the statutory rate structure.

Under the reformed system, the complex rate structure (to replace) with a single rate of 33 1/3 percent; the 16 tax credits were replaced with a standard deduction equal to two times per capita GDP; most non-taxable allowances (to incorporate) into the tax base; and interest income was included in the tax base. Initial results (to suggest) that the combination of a higher standard deduction, a broadened base, and a lower flat rate (to improve) administration, increased the progressivity of the tax system, and raised tax yields.

The government of Indonesia (to adopt) a major tax reform in late 1983. An important aspect of this reform was the wholesale elimination of tax incentives for investment. Before 1983, numerous incentives in the investment code (to design) to favor specific industries, promote exports, develop remote regions, promote technology transfers, strengthen the stock exchange, and even encourage firms to be audited by public accountants. The numerous, and often contradictory, tax incentives created a complicated system unable to fulfil its revenue function or to serve the special purposes originally intended. Further, such incentives (to create) effective tax rates that varied both between and within sectors and thus misallocated the capital stock. Tax reform (to eliminate) nearly all special tax incentives, allowing the company tax rate to be reduced. The simplified incentive system was intended to minimize tax-induced intersectoral preferences, while the lowered company tax rate provided more uniform benefit to all investors.

Words you may need:

embark (on) v приступать к чему-л.

comprehensive adj обширный; масштабный; всеобъемлющий

profound adj глубокий

disincentive n отрицательное воздействие

negate v сводить на нет

statutory adj основанный на законе

incorporate v включать

tax yield налоговый доход

Ex. 11. a) FIB each gap with a suitable word from the box.

b) Sum up the text in 5-7 sentences and present your summary in class.

 

over	major	taxes	present
intended	times	change	improve
system	businesses	enterprises	register
hampers

Tax Administration

 

The tax system in Russia has changed significantly_______the past five years. One of the_______ changes has occurred in the institutional structure of the country's tax administration. The Taxation Ministry, which is_______for the administration of all major taxes, was reorganized in 1991.

This institutional_______in the structure of the Ministry has been accompanied by numerous changes of the revenue structure of the_______. Not only have new_______been introduced (the value-added tax and the expanded property tax, among others), the revenue-sharing arrangements have also been adjusted a number of times over the last five years. Tax rates themselves have changed a number of _______ over the last five years. Additionally, the privatization of_______and the growth of new businesses have left the Ministry with an increased responsibility to locate and_______ taxpayers. The growth in the number of self-employed businesses is particularly problematic because these_______have a higher rate of non-compliance worldwide since locating evaders is difficult.

Computerization is not widespread, which _______ collection efficiency even more, and prosecution against evaders is difficult. Finally, the development of new systems of accounting and audit is necessary to_______the efficiency of tax collection.

Some of the problems in the area of tax administration are new to Russia, such as the development of new enterprises, the change in the structure of the Ministry, development of international systems of accounting, and increased commerce with foreign firms. These problems continue to exist under the_______system of taxation as well.

Words you may need:

tax administration система сбора налогов, налоговое ведомство

self-employed business самостоятельное, некорпоративное предприятие

to locate evaders обнаруживать, выявлять уклоняющихся от уплаты налогов

widespread adj широко распространенный

prosecution n преследование

DISCUSSION

Ex. 12. a) Read and discuss the text.

b) Sum up the text in 5-7 sentences and present your summary in class.

c) Give your opinion on "tax havens".

Tax Havens Explained

 

What do the Bahamas, Bermuda, Hong Kong, Liberia, the Netherlands, the New Hebrides, Panama, and Switzerland have in common? They are all "tax havens".

Essentially, a tax haven is a place where foreigners may receive income or own assets without paying high rates of tax upon them. Although, strictly speaking, not all tax havens are countries, we can refer to them as such here for the sake of convenience. In some havens the tax relief that foreigners enjoy stems from the absence of the chief forms of direct taxation – income, estate, and gift taxes; but in most countries the relief stems from special features of the tax system that result in a very low effective tax rate on certain forms of foreign investment.

Even though the list of tax havens includes several developed countries, most are developing countries. It is precisely their example that other developing countries are tempted to follow, in the hope that becoming a tax haven will help them solve some of their economic problems.

Tax haven operations consist fundamentally in establishing within a tax haven country one or more legal entities, such as trusts, personal holding companies, or corporate subsidiaries, and attributing to them income earned elsewhere in order that it should be taxed at the country's low rates-or perhaps not taxed at all. This objective is usually accomplished by either (1) accumulating income in the tax haven country at low rates of tax to be withdrawn later and invested elsewhere according to the investor's wishes; or (2) artificially shifting business profits from high-tax countries to a tax haven country.

Low tax rates are perhaps the principal attraction offered by tax havens. Usually these low rates are associated with income taxation; in fact, what springs to mind immediately upon hearing the words "tax haven" is the absence of income taxation that exempts foreign investors. Though it is true that many of the advantages offered by tax haven countries are income tax advantages, these are by no means the only benefit that these countries offer to foreign investors.

Within the tax field, the absence of other taxes such as estate, inheritance, and gift taxes may be as important to certain investors as the absence of an income tax. Bilateral tax treaties between a tax haven country and some of the major developed countries are another feature that may attract investors. The existence of a tax treaty allows third-country investors to base their holding companies in tax havens and obtain a reduction in withholding taxes applied to the dividends and interest they receive from developed countries with which the tax haven country has the tax treaty.

Strict and well-enforced rules of banking secrecy and, in general, the possibility of doing business without close supervision by government agencies are additional attractions usually offered by tax haven countries. Other factors, such as the low cost of doing business, the existence of liberal banking regulations, and the absence of exchange controls are also important. Finally, a good communications service, a well-developed legal system with an abundance of legal and accounting expertise, and, above all, a high degree of political and financial stability also help to make a country successful as a tax haven.

Words you may need:

tax haven налоговое убежище

strictly speaking строго говоря

for the sake of convenience из соображений удобства

tax relief налоговая льгота

enjoy v (зд.) пользоваться

to stem from происходить, проистекать из

estate tax налог на недвижимость

gift tax налог на дарение

to be tempted испытывать соблазн

trust n траст

holding company холдинговая компания

subsidiary n дочерняя компания

attribute v приписывать (кому-л.), относить (за счет/на счет чего-л.)

accomplish v осуществлять

accumulate v аккумулировать, накапливать

withdraw v (зд.) забирать, отбирать

artificially adv искусственно

shift v перемещать

to be associated (with) быть связанным (с)

what springs to mind первое, что приходит в голову

inheritance tax налог на наследство

exempt v освобождать от уплаты налогов

bilateral adj двусторонний

well-enforced (зд.) действенный

abundance n изобилие, избыток