84809 Tax at a Glance for ECA Countries THE WORLD BANK Tax at a Glance for ECA Countries THE WORLD BANK Contents Acknowledgments..........................................................................................................................................................v 1. Introduction................................................................................................................................................................1 2.  Methodology and Limitations...................................................................................................................................3 3.  Government Tax Revenue .........................................................................................................................................5 4.  Key Features of the Tax System.................................................................................................................................7 Value-added Tax (VAT).................................................................................................................................................7 Corporate Income Tax (CIT)..........................................................................................................................................8 Personal Income Tax (PIT).............................................................................................................................................8 The Ease of Paying Taxes..............................................................................................................................................8 Organizational Structure of Tax Administration....................................................................................................11 5.  6.  Typical Weaknesses in Tax Administration.............................................................................................................13 Tajikistan...................................................................................................................................................................13 Armenia.....................................................................................................................................................................13 7.  Challenges in Tax Policies in ECA Countries...........................................................................................................15 References.....................................................................................................................................................................75 Figures Figure 1  Tax Revenue and Per Capita Income in ECA Countries, 2011.......................................................................5 Figure 2 VAT Productivity and Per Capita Income in 2011 (Selected Countries)..........................................................7 Figure 3 Trend of the average time to comply 2007–2013 (Ukraine, Belarus, and Azerbaijan)..................................10 Figure 4 Selected Comparator Economies Rank on the Ease of Paying Taxes in 2013...............................................10 Tables Table 1  VAT Performance in 2011 (Selected Countries)..............................................................................................7 Table 2  CIT Performance in 2011 (Selected Countries)...............................................................................................8 Table 3  PIT Performance in 2011 (Selected Countries)................................................................................................9 Table 4  Paying Taxes (Doing Business 2013)..............................................................................................................9 TaaG Country Briefs Albania......................................................................................................................................................................19 Armenia.....................................................................................................................................................................21 Azerbaijan.................................................................................................................................................................23 Belarus.......................................................................................................................................................................25 Bosnia and Herzegovina.............................................................................................................................................27 Bulgaria.....................................................................................................................................................................29 Croatia......................................................................................................................................................................31 iii Czech Republic..........................................................................................................................................................33 Estonia.......................................................................................................................................................................35 Georgia.....................................................................................................................................................................37 Hungary.....................................................................................................................................................................39 Kazakhstan................................................................................................................................................................41 Kosovo......................................................................................................................................................................43 Kyrgyz Republic.........................................................................................................................................................45 Latvia ........................................................................................................................................................................47 Lithuania....................................................................................................................................................................49 Macedonia.................................................................................................................................................................51 Moldova....................................................................................................................................................................53 Montenegro..............................................................................................................................................................55 Poland.......................................................................................................................................................................57 Romania....................................................................................................................................................................59 Russian Federation.....................................................................................................................................................61 Serbia........................................................................................................................................................................63 Slovak Republic..........................................................................................................................................................65 Slovenia.....................................................................................................................................................................67 Tajikistan...................................................................................................................................................................69 Turkey.......................................................................................................................................................................71 Ukraine......................................................................................................................................................................73 Acknowledgments The “Tax-at-a-Glance”(TaaG) has been prepared under the We would like to acknowledge the significant contribution auspices of the TAXGIP (Tax Administrators Exchange for made to this brief by all the country economists in provid- Global Innovative Practices), which provides opportunities ing information on current reforms being undertaken in for peer learning and exchanging knowledge and experi- their respective countries and for verifying the accuracy of ence on good practices among tax officials and tax experts. data and other information. Special thanks are due to Xuan The TAXGIP activities are currently funded by the Russian Yang for her tireless work in compiling all the information Federation’s Ministry of Finance Trust Fund dedicated to and getting feedback from country economists and other public finance management reforms in the Europe and sources. We would also like to acknowledge the important Central Asia (ECA) region of the World Bank. We are grate- role of the ECA country directors and country managers ful to the Russian Ministry of Finance and the administra- who whole-heartedly backed this effort. We would like to tors of this Russian trust fund, Ivor Beazley, Maya Gusarova acknowledge the contribution made by Pankhuri Dutt and and Maria Ovchinnikova, for supporting TAXGIP, and TaaG Virginia Yates for providing editorial support. in particular. We would like to thank the following expert reviewers for The TaaG project was designed and directed by Munaw- their contribution in helping finalize the study: Raul Felix er Khwaja (ECSPE). Xuan Yang, consultant for the World Varela-Junquera (LCSPS), Edgardo Mosqueira (LCSPS), Bank, conducted the research on the various databases and Svetlana Budagovskaya (ECSPE), Sanja Madzarevic-Su- other country information and designed the layout for the jster (ECSPE), Lazar Sestovic (ECSPE), Kiryl Hajduk (ECSPE) TaaG brief. The TaaG brief gives a 2-page overview of the and Francis Rowe (ECSPE). Finally we would like to thank tax policy and tax administration system as well as main Yvonne Tsikata, Sector Director for ECA PREM, as well as trends in tax reform for each ECA country. The “Tax-at-a- Adrian Fozzard and William Dorotinsky, current and former Glance” has been compiled using data from the ECA Mac- Sector Managers, respectively, for ECA Public Sector and roeconomic database, Doing Business, BEEPS and country Institutional Reforms, for their guidance and encourage- project information as well as information supplied by the ment in this endeavor. respective country economists. v 1. Introduction The Tax-at-a-Glance provides a 2-page overview of the tax Formidable challenges existed in setting up an efficient and policy and tax administration system as well as main trends fair tax system in ECA. First, voluntary compliance and self- in tax reform for each ECA country. This Tax-at-a-Glance filing, two important pillars in a modern tax system, were is intended as a brief on current tax systems within ECA completely absent (Martinez-Vazquez & McNab, 2000). Sec- countries as they attempt to establish effective and fair tax ond, tax evasion reached a high level due to the inefficiency systems. It is also intended as a handbook for World Bank and weak management of the tax administration. Third, in- staff to evaluate tax systems, policy and administration is- come was unevenly distributed within ECA countries. The sues and serves a good guide for benchmarking tax rates economic and political power of rich taxpayers prevented and tax administrations. tax reforms and this partially led to inefficient and unfair tax systems. Fourth, tax administration was very inefficient, Governments need sustainable funding for social programs with a poorly educated and poorly trained staff. Modern and public investments to promote economic growth and technologies had not been fully deployed in tax offices. development.1 Taxation is an important practical tool used to raise revenue to finance government spending on goods Over the past fifteen years, many ECA countries have un- and services that its people need. Setting up an efficient dertaken structural and administrative reforms to be more and fair tax system is of great importance for a country to efficient in attracting investment and fostering economic raise revenue and enhance its economic performance. growth. This included cutting personal and corporate in- come tax rates, broadening tax bases, improving tax com- In the Eastern Europe and Central Asia (ECA) region, two pliances, introducing electronic filing systems to improve historic transitions since 1990 (a political transition from tax efficiency, as well as increasing tax revenues. Certain totalitarianism toward democracy and an economic transi- notable improvements had been shown but further and tion from socialism toward free market systems) required a better improvements were still needed. fundamental change in the role of the state, from control- ling virtually all major economic assets to providing public 1 See: http://doingbusiness.org/data/exploretopics/paying-taxes/why%20 goods and facilitating a largely privately-owned competi- matters. tive economy. This change in the role of the state required 2 See:http://siteresources.worldbank.org/INTECA/Resources/ a major downsizing and reorientation of public spending 257896182288383968/FiscalPolicy&EconomicGrowthinECA_Over- and a complete overhaul of tax policy and administration.2 view.pdf. 1 2.  Methodology and Limitations The data for Tax-at-a-Glance comes from various sources: sheet. The third source of data on VAT, CIP, and PIT perfor- IFC Doing Business, IMF Government Finance Statistics mance within 14 selected countries in ECA were collected 2012, and ECA Fiscal Database. The information for the from World Bank internal documents. The fourth source of ease of paying taxes in 2013 and datasheet on payments additional data on tax administration size and tax revenue (numbers per year), time (hours per year) and total tax rate components (as percentage of total revenue) within con- (percent profit) for Eastern Europe and Central Asia coun- solidated general government in 2011 was collected from tries from 2006 to 2013 were collected from the World World Bank country economists. Complimentary sources Bank Doing Business database. The second source of data are from individual MOF websites, IMF Fiscal Monitor 2012, on total revenues, tax revenues and budget balance (as per- and IMF Article IV 2012. centage of GDP) from 2006 to 2011 were collected from IMF Government Finance Statistics (GFS) 2012 and the ECA Due to administrative and financial limitations, statistical and Fiscal Database. GFS data was described and analyzed for tax offices have difficulty in providing reliable statistics. Fur- the years from 1995 through 2011 in five major categories thermore, low level of transparency in several tax adminis- within consolidated general government: (a) government trations in ECA countries makes it harder to collect accurate revenue and expenditure; (b) government deficit; (c) gov- information on tax performance. The poor quality of data ernment financing; (d) other economic flows in govern- often prevents policymakers and economists from assessing ment assets and liabilities; and (e) government balance potential problems and challenges to existing tax systems. 3 3. Government Tax Revenue In 2011, tax revenues (including so- Figure 1  Tax Revenue and Per Capita Income in ECA Countries, 2011 cial contributions) accounted for 45 over 76.8% of total general govern- ment revenue in Eastern Europe and 40 Bosnia and Herzegovina Ukraine Hungary Slovenia Tax revenue (% of GDP) Central Asia. Tax revenue made up 35 Serbia Estonia Poland Czech Republic 26.4% of GDP in 2011, following 30 Kyrgyz Bulgaria Romania Slovak Georgia Latvia three years of decline from 2008 to Republic Russia 25 Kazakhastan Belarus Lithuania 2010 (23.8%, 22.5% and 22.3%). Albania 20 Moldova Armenia Montenegro Turkey Croatia The ratio of tax revenue to GDP in Macedonia 15 Uzbekistan the Eastern Europe area (EU-11) was Azerbaijan slightly higher than the Central Asia 10 Tajikistan area, at 30.3%. As figure 1 shows, 5 countries with higher per capita in- 0 0 5,000 10,000 15,000 20,000 25,000 come tend to have larger tax to GDP ratio. In EU-11 the ratio of tax rev- GNI per capita Atlas method (Current US$) enue to GDP for 2011 was highest in Slovenia, Hungary and Czech Re- Source: World Bank ECA Fiscal Database 2011. public (37.5%, 37.1% and 34.5%, respectively), and lowest in Lithuania (26.4% of GDP) and Croatia (20.1% of GDP). In non-EU countries, the three highest were Bosnia tax than from corporate income tax. This disparity is mainly & Herzegovina, Ukraine, and Serbia (38.4%, 37.1% and due to differences in wage income, tax administration man- 34.3%, respectively in 2011). The lowest two were Azer- agement and the political power of the richest component baijan (12.8% of GDP in 2011) and Uzbekistan (17.0% of of the population between these two groups (Vito Tanzi & GDP in 2011). The most recent data shows that tax revenue Howell Zee, 2001). The prevalence of a very regressive flat in major industrialized countries (members of the Organiza- tax for personal income tax in most CIS countries is another tion for Economic Cooperation and Development or OECD) major reason. is about double the tax level in a representative sample of ECA countries.3 Although it is difficult to draw any accurate policy recom- mendations from global comparisons in terms of the in- When it comes to the composition of tax revenue, both ef- come tax-consumption tax mix, a relevant economic devel- ficiency (whether the tax increases or decreases the overall opment tendency can be seen by this comparison. There welfare of taxpayers) and equity (whether the tax is fair may be a shift in the composition of revenue from con- to every taxpayer) are of major concern. Data from OECD sumption taxes to personal income taxes. A good tax policy and ECA countries show that the ratio of income taxes to for ECA, however, should not only consider the shift in the consumption taxes in industrial countries has always been income tax-consumption tax mix, but also the economic more than double the ratio in ECA countries. An IMF study results (both efficiency and equity) from the shift. shows that there is a notable difference in the ratio of cor- porate income tax to personal income tax. OECD countries 3 Note: All data come from World Bank Database. raise more than three times as much from personal income 5 4.  Key Features of the Tax System A well-designed tax system can be Table 1  VAT Performance in 2011 (Selected Countries) most effective in financing needed VAT Revenue Yield public expenditures in a sustainable Statutory VAT Rate (% of GDP) VAT Productivity way. For the Tax-at-a-Glance we Albania 20% 9.1 0.46 have analyzed the productivities of Armenia 20% 8.1 0.41 the three main tax types generally Azerbaijan 18% 4.4 0.24 used in ECA: the Value-added Tax Belarus 20% 8.9 0.45 (VAT), Corporate Income Tax (CIT) Kazakhstan 12% 3.2 0.27 and Personal Income Tax (PIT). Tax Kosovo 16% 11.1 0.69 productivity is equal to the tax as a Kyrgyz Republic 12% 7.5 0.63 percent of the tax base (GDP or con- Macedonia 18% 9.1 0.51 sumption) divided by the standard Moldova 20% 12.7 0.64 tax rate. For VAT productivity, the Russia 18% 6.0 0.33 base used is total consumption. For Serbia 18% 10.4 0.58 PIT and CIT, the base used is GDP. Tajikistan 18% 9.3 0.52 In an ideal world, productivity will Turkey 18% 6.3 0.35 be 100 if the entire base is taxed, Ukraine 20% 9.0 0.45 there are no exemptions and there Source: World Bank staff calculations. is no leakage of revenue from tax evasion. Figure 2 VAT Productivity and Per Capita Income in 2011(Selected The analysis of productivities of the Countries) Value-added Tax (VAT), Corporate In- 0.8 come Tax (CIT) and Personal Income Kyrgyz 0.7 Republic Kosovo Tax (PIT) reveal some interesting re- Moldova sults and potential problems within 0.6 VAT Productivity Serbia the tax system. 0.5 Macedonia Tajikistan Belarus 0.4 Ukraine Albania Armenia Turkey Value-added Tax (VAT) 0.3 Russia Kazakhastan Azerbaijan In terms of VAT productivity, Azer- 0.2 baijan had a VAT productivity of 0.1 0.24 and Kazakhstan 0.27, and both 0 were among the lowest in Europe 0 5,000 10,000 15,000 20,000 25,000 and Central Asia. Both also have GNI per capita Atlas method (Current US$) large revenues from the petroleum sector which may reduce the incen- Source: World Bank Database 2011. tive to improve the productivity of VAT. Especially in Azerbaijan, its 4.4 percent revenue yield was relatively low from the standpoint of a statutory VAT rate of 18 per- for resource rich countries. A broadening of the tax base, cent. Figure 2 shows that in ECA, countries with lower better compliance rate and better VAT administrative per- per capita GDP tend to have higher productivity. This fur- formance will be areas on which countries with low VAT ther implies that there may be significant tax loopholes in productivity should focus (OECD, 2012, “Consumption resource rich countries. Improving the performance and Tax Trends 2012 VAT/GST and Excise Rates, Trends and administration of the VAT should be of great importance Administration Issue”, p104). 7 Corporate Income Tax Table 2  CIT Performance in 2011(Selected Countries) (CIT) Statutory CIT CIT Revenue Yield (% CIT Rate of GDP) Productivity In terms of CIT productivity, Kazakh- Albania 10% 1.5 0.15 stan was at 0.41, which was among Armenia 20% 2.6 0.13 the highest in Europe and Central Asia Azerbaijan 20% 4.3 0.22 (Table 2). This indicates that, contrary Belarus 24% 3.1 0.13 to VAT, its CIT was performing quite Kazakhstan 20% 8.2 0.41 well. Notably, Kazakhstan’s relatively Kosovo 10% 1.2 0.12 high CIT productivity was mainly due Kyrgyz Republic 10% 4.2 0.42 to its relatively high CIT revenue yield Macedonia 10% 0.8 0.08 (8.2% of GDP), which certainly ben- Moldova 12% 0.7 0.06 efited from large oil and gas compa- Russian Federation 20% 4.2 0.21 nies in Kazakhstan. The Extractive Serbia 10% 1.2 0.12 Industries Transparency Initiative (EITI) Tajikistan 25% 1.4 0.06 2011 report mentions that “revenues Turkey 20% 1.9 0.10 from Tengiz, the sixth largest oil field Ukraine 25% 4.1 0.16 in the world, and Karachaganak, Ka- Source: World Bank staff estimates. zakhstan’s largest gas condensate field, together generated 50% of the revenues from oil and gas in 2011.”4 Tajikistan (0.06), Moldova (0.06) and Macedonia (0.08) rate exceeds the corporate income tax rate by a significant however, were among the lowest in the region. Especially margin (See OECD Tax Database),8 and this leads to the in Tajikistan, the statutory CIT rate was 25 percent, which fact that many taxpayers will choose the corporate form was high relative to the 1.4 percent revenue yield. This was of doing business for tax savings and therefore escape the not only due to a very weak CIT tax administration, but also highest personal income tax. This can result in a tax evasion due to difficulties with collecting taxes from informal sec- problem, and thus, good tax policy should ensure that the tors as well as from small and medium-sized firms. top marginal personal income tax rate does not differ sig- nificantly from the corporate income tax rate. According to IFC Enterprise Surveys in 2011, 86 percent of firms in Tajikistan were small and medium-sized.5 Agricul- ture was the mainstay of Tajikistan’s economy, accounting The Ease of Paying Taxes for 24 percent of GDP, 66 percent of employment, 26 per- An efficient tax system is not just about setting appropri- cent of exports, and 39 percent of tax revenue.6 Also, in ate tax rates and higher tax productivity, but also tax rules Tajikistan, in the year 2011, a 15% CIT rate was set for the which are simple and easy to comply with. Thus, a compari- industry sector and 25% CIT rate for all others. This notable son of the ease of paying taxes in different countries, using difference in CIT rates may generate an inequality problem the World Bank’s Doing Business Indicators, would give us within the country. Along with a complex and non-trans- an overall picture of the tax performance in Eastern Europe parent tax system, it may increase the possibility of unfair- and Central Asia and encourage countries to learn from ness and corruption. Tax reform remains a high priority of each other’s best practices. the Government of Tajikistan. A US$ 18 million World Bank grant will support reforms aimed at improving the efficiency According to the Doing Business methodology, Paying and effectiveness of the tax system in Tajikistan.7 Taxes records the taxes and mandatory contributions that Personal Income Tax (PIT) 4 See: http://eiti.org/news/oil-and-gas-revenues-steadily-increasing- In terms of PIT productivity, it is noticeable that personal kazakhstan income tax revenue yield was generally low among coun- 5 See: http://www.enterprisesurveys.org/~/media/FPDKM/EnterpriseSur- tries in Eastern Europe and Central Asia. PIT, as a direct tax veys/Documents/Country%20Notes/Tajikistan-09.pdf on individual, rather than an indirect tax on transactions, 6 See:http://www1.ifc.org/wps/wcm/connect/region__ext_content/regions/ europe+middle+east+and+north+africa/ifc+in+europe+and+central+asia/ actually depends more on tax administration performance. countries/improving+business+environment+for+agribusiness+in+tajikistan Thus, many of these personal income tax problems are 7 See: http://www.worldbank.org/en/news/press-release/2013/02/07/world- mainly due to poor tax administration and corruption. Also, bank-launches-project-for-improvement-in-tajikistans-tax-administration. in some countries, the top marginal personal income tax 8 See: http://www.oecd.org/tax/tax-policy/oecdtaxdatabase.htm. 8 The Status of Contract Enforcement in Poland a medium-size company must pay Table 3  PIT Performance in 2011(Selected Countries) in a given year and also measures Statutory PIT PIT Revenue the administrative burden of pay- Rate Yield (% of GDP) PIT Productivity ing taxes and contributions. It does Albania 10% 2.1 0.21 this with three indicators: payments, Armenia 25% 2.2 0.09 time, and the total tax rate borne by Azerbaijan 30% 1.4 0.05 a case study firm in a given year. The Belarus 12% 3.2 0.27 number of payments indicates the Kazakhstan 10% 1.4 0.14 frequency with which the company Kosovo 10% 1.2 0.12 has to file and pay different types of Kyrgyz Republic 10% 2.0 0.20 taxes and contributions, adjusted for Macedonia 10% 2.1 0.21 the way in which those payments Moldova 7% 2.2 0.31 are made. Where full electronic fil- Russian Federation 13% 3.7 0.28 ing and payment is allowed and it is Serbia 15% 4.6 0.31 used by the majority of medium-size Tajikistan 13% 1.9 0.15 businesses, the tax is counted as paid Turkey 35% 3.6 0.10 once a year even if filings and pay- Ukraine 15% 4.7 0.31 ments are more frequent. The sparse Source: World Bank Staff Estimate use of e-filing in Serbia, Tajikistan and the Kyrgyz Republic gives rise to the high numbers of payments, (66, Table 4  Paying Taxes (Doing Business 2013) 69, and 51 payments respectively) Payments Time Total tax rate as payments are made manually for (number per year) (hours per year) (% profit) each tax.9 Albania 44 357 38.7 Armenia 13 380 38.8 The time indicator captures the num- Azerbaijan 18 214 40.0 ber of hours it takes to prepare, file Belarus 10 338 60.7 and pay the three major types of tax- Bosnia and Herzegovina 44 407 24.1 es: profit taxes, consumption taxes, Bulgaria 15 454 28.7 labor taxes and mandatory contribu- Croatia 18 196 32.8 tions. The total tax rate measures the Cyprus 28 147 23.0 tax cost borne by the standard firm.10 Georgia 5 280 16.5 Kazakhstan 7 188 28.6 Efforts to simplify the tax compliance Kosovo 33 164 15.4 process, mainly by the implementa- Kyrgyz Republic 51 210 68.9 tion of electronic filing and payment, Latvia 7 264 36.6 usually reduce the time required to Lithuania 11 175 43.7 comply taxes. Electronic systems for Macedonia, FYR 29 119 9.4 filing and paying taxes eliminate ex- Moldova 48 220 31.2 cessive paperwork and interaction Montenegro 29 320 22.3 with tax officers. They can reduce the Romania 41 216 44.2 time businesses spend on complying Russian Federation 7 177 54.1 with tax laws, increase tax compli- Serbia 66 279 34.0 ance and reduce the cost of revenue Tajikistan 69 224 84.5 administration.”11 Turkey 15 223 41.2 Ukraine 28 491 55.4 As shown in Figure 3, over the past Uzbekistan 41 205 98.5 seven years, the economies that have Source: IFC Doing Business 2013. reduced the compliance burden with the largest reduction in their time to comply were Ukraine, 9 See: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/ Belarus, and Azerbaijan. Documents/Special-Reports/Paying-Taxes-2013.pdf. 10 See: http://www.doingbusiness.org/data/exploretopics/paying-taxes/ In Ukraine the hours to comply fell to 491 in Paying Taxes what%20measured. 2011 from 2,085 in 2004. Paying Taxes 2013 report points 11 See: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/ out that “the main drivers for this fall were the increased Documents/Annual-Reports/English/DB13-Chapters/Paying-taxes.pdf 4.  Key Features of the Tax System 9 Figure 3 Trend of the average time to comply 2007–2013 (Ukraine, Belarus, and Azerbaijan) Time (hours per year) Time (hours per year) Time (hours per year) 2,100 1000 1,200 1,800 1,000 800 1,500 800 1,200 600 600 900 400 400 600 200 300 200 0 0 0 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 UA ECA EU-11 BY ECA EU-11 AZ ECA EU-11 Source: IFC Doing Business. use of both electronic filing and Figure 4 Selected Comparator Economies Rank on the Ease of electronic registers for various taxes. Paying Taxes in 2013 Belarus implemented electronic sys- tems in 2008 while an online tax KZ 17 portal became fully operational in 64 RU 2009, and by 2011, the majority of AZ 76 companies in Belarus were seen to ECA 95 be taking advantage of various elec- tronic facilities available for tax com- MD 109 pliance. In Azerbaijan, the introduc- UZ 161 tion to online filling and payment, UA 165 and the introduction of accounting KG 168 software to assist with the calcula- TJ 175 tion of payments had helped reduce 1 183 its total number of hours from 756 Rank in 2004 to 214 in 2013.”12 The rankings among countries on Source: IFC Doing Business 2013. the Ease of Paying Taxes are evalu- ated based on three indicators dis- cussed above. As shown in Figure 4, the Doing Business to improve the quality of taxpayer services, enhance the 2013 Report ranked Tajikistan only 175th with ECA av- level of voluntary compliance, and reduce the size of the eraging 95th out of 183 countries in terms of the ease shadow economy.13 of paying taxes. This very low ranking of Tajikistan once again indicates that tax reform is a high priority of the 12 See: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/ Government of Tajikistan. On the request of the Gov- Documents/Annual-Reports/English/DB13-Chapters/Paying-taxes.pdf ernment of Tajikistan, the World Bank is supporting the 13 See: http://www.worldbank.org/en/news/press-release/2013/02/07/world- Tajikistan Tax Administration Reform Project which aims bank-launches-project-for-improvement-in-tajikistans-tax-administration 10 The Status of Contract Enforcement in Poland Organizational Structure of Tax 5.  Administration In terms of organizational structure of tax administration per million) and Czech Republic (21 field offices per mil- in ECA, most of the countries now have Large Taxpayer lion), and the four lowest shares were recorded in Azerbai- Units. Also, eight countries—Serbia, Ukraine, Hungry, Slo- jan (2 field offices per million), Lithuania (3 field offices per venia, Slovak Republic, Bulgaria, Romania and Turkey— million), Latvia (4 field offices per million), and Bulgaria (4 have established semi-autonomous revenue authorities to field offices per million). In general, there is a trend moving administer tax collections while in other twenty countries, to virtual offices from traditional territory offices. This also tax administration is still part of the ministry of finance. helps reduce physical contact between the tax administra- Moreover, in terms of the ratio of number of field tax of- tion and taxpayers and thus reduces the avenues for cor- fices to population (million) in 2011, the three highest were ruption and collusion. Croatia (33 field offices per million), Serbia (24 field offices 11 6.  Typical Weaknesses in Tax Administration In 2012, the World Bank launched two new Tax Adminis- tax payments is being introduced and (viii) the system for tration Reform Projects separately in Tajikistan and Arme- the taxation of small enterprises has been simplified.”.15 nia. The diagnostics done for these projects highlight the A major overhaul of the Tax Code has reduced many nui- key problems in tax administration and show how the gov- sance taxes. ernments in both countries are addressing them. Armenia Tajikistan Tax administration—key problems: According to the Tax administration—key problems: The World Bank PAD for the Tax Administration Reform Project in Arme- project appraisal on Tajikistan (“Tax Administration Re- nia 2012, “the biggest problem within Armenia is the form Project in Tajikistan”, 2012) identified that, “ there high compliance costs for taxpayers. The IFC Paying Taxes are an excessive number of field offices with insufficient 2011 report ranked Armenia only 153rd out of 183 coun- staffing that creates problems for providing timely and tries with regard to the ease of paying taxes. Based on the professional processing of different types of taxes. The results of a recent compliance cost survey conducted by Tax Committee has a staff of 1,760, working in 79 of- the IFC, the aggregate cost of Armenia’s tax compliance is fices including the central headquarters, a large taxpayers equal to about 0.3 percent of GDP. While compliance costs inspectorate (LTI) with 4 sub-offices, Dushanbe city office account on average for about 5.4 percent of annual turn- with 4 district offices, Sogd regional office with 18 district over, small firms (with annual turnover of less than AMD offices, Khatlon regional office with 25 district offices, 5 Million) which are particularly vulnerable to informality Badakhshan regional office with 9 district offices and 13 are estimated to spend as much as 17.5 percent of their district offices reporting directly to the central headquar- turnover on tax compliance. Furthermore, business surveys ters. Notably, about a third of the offices do not have have regularly identified weaknesses in tax administration, their own premises and lack office equipment. Second, as well as arbitrary and corrupt behavior by tax officials, as due to the complexity of tax legislation, the demand for major impediments to the formation and success of small taxpayer services is high. Yet the provision of these ser- and medium enterprises.”16 vices is minimal. More than 75 percent of field tax offices lack skilled tax staff to satisfy growing taxpayers’ demand Government — reform efforts: The reform efforts aim to for services. Third, Tajikistan faces substantial challenges improve taxpayer compliance and broaden tax bases, while in revenue collection because of low capacity of the Tax enhancing the business climate through more efficient tax Committee (TC) to detect tax evasion and locate non- procedures that reduce compliance costs for taxpayers. filers and weak capacity of the MOF to do good qual- In 2011, the Government adopted a strategic document ity tax policy analysis, forecasting and policy formulation. to guide tax administration reforms from 2011–14. The A complex tax regime with a large number of nuisance key interrelated elements of this strategy are as follows: taxes and reportedly corrupt practices by tax officials raise (1) Removing barriers for taxpayers to fulfill their obliga- the compliance costs for taxpayers and undercut the busi- tions through simplified procedures, including e-filing, and ness climate and private sector growth. At the same time, enhanced taxpayer services; (2) Business process re-engi- there are tax privileges and exemptions for some favored neering and modernization of core information technology industry sectors.”14 IT systems, including integration of data bases, centralized data processing, back-up and business continuity capa- Government—reform efforts: Efforts include: (i) pay- ments through banks; (ii) introducing on-line reporting 14 Source: Document of the World Bank: Tax Administration Reform Proj- option for tax filings; (iii) business registration has been ect in Tajikistan (Report No: 71924-TJ), Oct 2, 2012 greatly simplified; (v) internal control has been improved 15 Source: Document of the World Bank: Tax Administration Reform Proj- and performance evaluation system of local inspectorates ect in Tajikistan (Report No: 71924-TJ), Oct 2, 2012 has been developed; (vi) development of communication 16 Source: Document of the World Bank: Tax Administration Reform Proj- networks is in progress; (vii) electronic kiosks to simplify ect in Armenia (Report No: 66710-AM), May 23, 2012 13 bilities; (3) Improved compliance management through ing skill development and introduction of internal control modern risk based and (computerized) audit selection and mechanisms.”17 targeted enforcement activities based on amount of rev- enue at stake and risk incurred; (4) Performance oriented management of human resources to improve efficiency 17 Source: Document of the World Bank: Tax Administration Reform Proj- and effectiveness of the State Revenue Committee, includ- ect in Armenia (Report No: 66710-AM), May 23, 2012. 14 The Status of Contract Enforcement in Poland Challenges in Tax Policies 7.  in ECA Countries Based on the challenges facing ECA countries, certain gen- filing and e-payment possibilities and undertaking perfor- eral policy recommendations should be considered to move mance feedback surveys of taxpayers. countries in the region toward more efficient and fairer tax systems. First, tax policies should be designed to address When it comes to tax administration, there is a need for polit- the tax compliance problem. In the last decade, several ECA ical will to accept reforms and recognize the challenges ECA countries have tried to simplify their tax systems, which countries face. To begin with, the problem of tax fraud and may have contributed to an increase in overall tax compli- corruption has to be recognized and effectively addressed. ance and reduction of the tax compliance costs (Hayoz & Also, governments have to adopt strategies of continuous Hug, 2007). As Casanegra de Jantscher et al. (1992) point- efficiency improvements, increasing resources dedicated to ed out several years ago, “a major challenge for countries planning, improvement on accountability and transparency. in transition will be to develop tax systems that facilitate, Besides, they need resources to invest in acquiring capable rather than complicate compliance” (p. 140).18 Tax compli- tax professionals and in modern technologies to make it eas- ance costs are still relatively high and the filings of various ier to file and pay taxes. Tax officials and taxpayers should be taxes and their processes are complicated in the region. exposed to modern computer systems and new web-based services, such as e-filing and taxpayer account. Moreover, Second, tax policies should be designed to address the they need to improve data exchange between the tax ad- problem of low productivity of Personal Income Tax in ECA ministration, government and other enforcement agencies countries. Therefore, rationalization of the personal income to ensure reliable and accurate third party information and tax structure is necessary. This includes moving it towards a MIS. The lack of a robust MIS prevents policymakers from more comprehensive broad-based income tax. Because of accurately evaluating the current tax system. the flat rates for personal income tax in many ECA coun- tries, the tax wedge at the lower income levels is excessively In order to address the tax administration challenges, three high, raising concerns of fairness and equity. The issue of major tax policy measures can be recommended. First, make fairness should also be taken into consideration (Richard compliance easier for the taxpayer by introducing an easy M. Bird, 2009). registration system and electronic filing process (Richard M. Bird, 2010). Second, control and minimize corruption among Third, skilled staff should be hired to provide better analy- tax officials by limiting direct contact and by enhancing man- sis, modeling, monitoring and forecasting. Training oppor- agerial supervision of tax officials. Third, provide a mecha- tunities should be given to tax professionals and institu- nism for detecting tax evasion and fraud by introducing a tional knowledge-sharing should be made available. This well-developed data mining information matching systems. would facilitate the exchange of experience and improve the implementation of best practices. Moreover, in order to improve voluntary compliance level, various options can 18 http://elibrary.worldbank.org/docserver/download/5911.pdf?expires=13 be adopted. For instance: introducing risk management, 66411774&id=id&accname=guest&checksum=A8922B8BAC2D97FE67 enhancing taxpayer education and services, expanding e- 7D7229AF1FC435. 15 TaaG Country Briefs 17 Tax at a Glance Population: 3.2 million (Year: 2011) GDP Per Capita (Current US$): 4,030 (Year: 2011) Upper middle income Country profile After successfully avoiding a serious decline in growth and financial instability since 2009, the economy is weakening and macroeconomic imbalances are elevated. Albania has largely avoided a sharp fall in output since the crisis broke, kept inflation low and stable, and maintained banking system stability, thanks to a fiscal stimulus and sound monetary policy. But today, policy buffers are exhausted, macroeconomic imbalances persist, and with the ongoing Eurozone prob- lems, the economy has slowed. The financial sector is exposed to domestic and external risks, and incomplete investment climate reforms constrain medium term growth. Its public finances are in need of adjustment. At nearly 60 percent of GDP, the debt-GDP ratio today has reached the statutory ceiling and is among the highest in the region. As a result, new debt-financed fiscal stimulus would be counterproductive. Looking toward the future, Albania is focused on supporting economic recovery and growth in a difficult external environment, broadening and sustaining the country‘s social gains and reducing vulnerability to climate change – particu- larly through improved water resource management. Key challenges for Albania going forward include early resumption of fiscal consolidation and strengthened public expenditure management, regulatory and institutional reform, reduction of infrastructure deficits, and improvement in the effectiveness of social protection systems and key health services. The World Bank and International Finance Corporation (IFC) continue to help to reduce the infrastructure deficit in a fiscally sustainable way, namely by increasing private investment and fostering public-private partnerships. Improving the effectiveness of social protection systems and health services in order to make economic growth inclusive to every- one continues to be a priority during a time of weaker economic outlook. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 23.1% Budget balance % of GDP: -3.4% VAT rate: 20% (Standard) Non-tax as % of GDP: 1.7% Primary balance % of GDP: -0.2% 10% (Reduced) VAT % in GDP: 9.1% Revenue potential: 25.23* VAT threshold: 50,000 (US$ equiv.) CIT % in GDP: 1.5% Size of shadow economy: 32.9% (2007) CIT rate: 10% PIT % in GDP: 2.1% ——ECA average (unweight): 37.5% (2007) PIT rate: 10% Excise % in GDP: 3.1% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 4.3% Source: Policy research working paper 5356, the World Bank 2010 Public debt % of GDP: 59.4% *Source: Munawer Sultan Khwaja & Indira Iyer, “Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis” (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 1,596 Number of taxpayers 87,195 Number of taxpayers to tax staff 55 Number of field offices 13 Large Taxpayer Unit 1 Organization Albanian Taxation Office Electronic filing Yes The tax administration is organized Function along functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Albania and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 19 The ease of paying taxes in Albania over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: The World Bank Regional Ranking of Problems Source: BEEPS Tax revenues continue their downward trend. The economic slowdown Rank in 2005 Rank in 2008 has affected tax revenues, but tax reform, motivated by the need to Tax rates 1 3 enhance competitiveness—such as the introduction of a flat personal income tax and a low corporate income tax in 2007–08—has also limited Corruption 2 2 the scope for additional revenues. Also, perceptions of corruption and Tax administration 3 6 weak governance affect the view of Albania as an investment destination. Arbitrariness of tax collection undermines the attractiveness of Albania‘s Customs and trade regulations 6 11 low tax rates for businesses. Note: measured by the mean score. The most severe problem ranks number 1, and so on. Moreover, Albania needs to increase tax rates and simplify the system. Albania‘s tax revenue and primary spending to GDP ratios are low, yet Productivity Indicators the country has significant medium-term development needs. Staff pro- posed that the burden of future fiscal adjustment should fall largely on revenues. With Albania‘s VAT rate already relatively high, increasing the personal and corporate income tax rates will be necessary. The proposed rate increase would likely not affect Albania‘s ability to attract invest- ment, particularly if arbitrariness in collection is reduced, local ―nuisance‖ taxes—which are inefficient and effectively add to the tax burden—are streamlined in a revenue neutral manner, and the priority business climate issues are addressed. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2010, implementation of ASYCUDA World and the purchase of scanners have reduced import customs clearance time. 20 Tax at a Glance Population: 3.1 million (Year: 2011) GDP Per Capita (Current US$): 3,305 (Year: 2011) Lower middle income Country profile In recent years (2003-2008), Armenia‘s development model was based on external financing (foreign direct investment and private transfers), the volume of which kept increasing from year to year. This led to an excessive growth of imports and non-tradable, reduced employment opportunities, and a relative and absolute reduction of exports and industry, in the context of a constant appreciation of the national currency. In the post crisis period Armenia's fiscal policy prioritizes fiscal consolidation to restore macro- economic stability and create conducive macro-environment for future growth. This policy was successful in 2010-11 and helped to sharply reduce the fiscal deficit from 7.8 percent of GDP in 2009 to -2.8 percent in 2011. Thus far this efforts have been supported mostly by public spending compression however moving forward the focus should be shifted towards improving tax performance as there is no scope of squeezing expenditures any further. The recent PER (2012) estimated Armenia's additional revenue potential in the range of 4-6 percent of GDP which could be materialized on account of combined tax policy and tax ad- ministration improvement. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2011 Tax as % of GDP: 19.9% Budget balance % of GDP: -2.8% VAT rate: 20% Non-tax as % of GDP: 1.2% Primary balance % of GDP: -1.9% VAT threshold: 140,737 (US$ equiv.) VAT % in GDP: 8.1% Revenue potential: 21.73* CIT rate: 20% CIT % in GDP: 2.6% Size of shadow economy: 41.1% (2007) PIT rate: 10% (up to 80,000 AMD) PIT % in GDP: 2.2% ——ECA average (unweight): 37.5% (2007) 20% (from 80,000 to 2,000,000 AMD) Excise % in GDP: 1.0% ——World average (unweight): 31.0% (2007) 25% (more than 2,000,000 AMD) Social contributions % of GDP: 3.3% Source: Policy research working paper 5356, the World Bank 2010 Public debt % of GDP: 42.6% *Source: Munawer Sultan Khwaja & Indira Iyer, “Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis” (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2010 Number of tax staff 2,084 Number of taxpayers 83,457 Number of taxpayers to tax staff 40 Number of field offices 27 Large Taxpayer Unit Yes State Revenue Committee of the Govern- Organization ment of the Republic of Armenia Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Armenia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 21 The ease of paying taxes in Armenia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: The World Bank Regional Ranking of Problems Source: BEEPS In the past, tax administration reform was slow compared to neighbor- Rank in 2005 Rank in 2008 ing and middle-income countries. As a result, tax evasion is high and Tax rates 2 1 voluntary compliance low because of the high compliance costs due to weaknesses in audit, processing third party information, and detecting Corruption 4 3 tax fraud. Improvement in revenue performance needs to be accom- Tax administration 1 7 plished by measures to encourage compliance and detect tax evasion. Business process reengineering exercise at State Revenue Committee Customs and trade regulations 5 8 had limited impact and will need further iterations. Large Taxpayer Unit still has not been able to overcome the challenges of taxation of oligar- Note: measured by the mean score. The most severe problem ranks number 1, and so on. chic structures and firms with strong political affiliations. Internal con- trols need strengthening to effectively mitigate integrity risks. Productivity Indicators On the positive note, tax administration reforms already resulted in operational improvements, in particular, around 14% reduction of time for compliance and reduced number of processes. The progress can be attributed to roll-out of Taxpayer3 information system, with some mod- ule development still in the pipeline. This enabled gradual movement to e-filing with currently 7000 taxpayers filing electronically. Tax appeals mechanism has been revised to equip with more checks and balances. There is need to streamline the tax policy through elimination of unnecessary tax expenditures. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2012, Armenia made tax compliance easier by reducing the number of payments for social security contributions, CIT, property taxes and by introducing mandatory e-filing and payment for major taxes. Risk- based audit and unified taxpayer registration have been introduced. Government continues to improve tax administration, which will in- crease possibilities for identifying new taxpayers. It has also focused on improving key tax policies, such as the taxation regime for the mining sector and the elimination of exemptions in excise. A Tax Administration Reform Project supported by the WB has recently been launched in 2013. 22 Tax at a Glance Population: 9.1 million (Year: 2011) GDP Per Capita (Current US$): 6,916 (Year: 2011) Upper middle income Country profile Thanks to the use of oil wealth, Azerbaijan has become one of the world‘s fastest growing economies over the last 10 years. Azerbaijan managed the global financial crisis well, though the weak places in the economy have begun to show. The experience during the global economic crisis has highlighted the importance of strengthening the non-oil economy, particularly in light of the projected stabilization and subsequent decline in oil and gas revenues. Creating a competitive non-oil economy will require deeper economic changes in a wide range of areas – in regulations and governance, infrastructure, skills, public institutions and in trade/FDI and macroeconomic policies. The financial sector needs to be strengthened to support economic diversification. The ongoing capitalization should be used to create a more viable and competitive banking sector. Initiatives to strengthen this sector should be supple- mented with supervisory safeguards to guide the capitalization process and contain risks in the system. The restructuring, then downsizing and transparent privatization, of the largest bank IBA will be crucial to contain risks to the stability and efficiency of the banking system. This would also reduce the potentially high costs for the shareholders, including the government. The long-run sustainability of the economy requires development of non-oil exports. To supplement the promising ―easy service center‖ (ASAN) and e-government initiatives, the government needs to implement the e-signature, approve a competition code endorsed by an independent international agency, implement the new customs code, and complete WTO accession. Source: The IMF Article IV Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 12.8% Budget balance % of GDP: 0.6% VAT rate: 18% Non-tax as % of GDP: 18.6% Non-oil fiscal deficit as % of non-oil GDP: -46.3% VAT threshold: 190,961 (US$ equiv.) VAT % in GDP: 4.4% Revenue potential: 22.40* CIT rate : 20% CIT % in GDP: 4.3% Size of shadow economy: 52.0% (2007) PIT rate: PIT % in GDP: 1.4% ——ECA average (unweight): 37.5% (2007) 30% (for the monthly income above 2000 AZN) Excise % in GDP: 1.0% ——World average (unweight): 31.0% (2007) 14% (for the monthly income below 2000 AZN) Social contributions % of GDP: 3.0% Source: Policy research working paper 5356, the World Bank 2010 Public debt % of GDP: 11.16% *Source: Munawer Sultan Khwaja & Indira Iyer, “Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Com- parative Analysis” (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Trends and Revenues (as% of GDP) 33 31.4 Number of tax staff 2,147 28 Number of taxpayers 481,710 Number of taxpayers to tax staff 225 23 Number of field offices 14 17.4 18 17.4 Ministry of Taxes of the Republic of 13 12.8 Organization Azerbaijan Electronic filing Yes 8 The tax administration is organized along 3 Function functional lines 0.6 -0.2 -2 2004 2005 2006 2007 2008 2009 2010 2011 The tax administration not established as Total Revenues Tax Revenues Budget deficit Relationship with MOF a (semi-) autonomous authority Azerbaijan and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 23 The ease of paying taxes in Azerbaijan over time Source: Doing Business Database 2013 BEEPS Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2011 A review of the performance and structure of non-oil tax revenue in Rank in 2005 Rank in 2008 Azerbaijan suggests there is room to advance a successful reform, while Tax rates 2 3 bringing the tax system closer to standards in other emerging market economies. Reforms should include broadening the tax base, reducing Corruption 3 1 compliance costs, and enhancing tax system transparency. Tax administration 1 5 The stability of the nonoil tax base has been compromised by discre- tionary actions. In contrast to good practices where exemptions are ap- Customs and trade regulations proved by parliament and included in the tax code, administrative discre- 5 10 tion of the cabinet of ministers is sometimes used in Azerbaijan. In addi- Note: measured by the mean score. The most severe problem ranks number 1, and so on. tion to threatening the stability of the tax base, this weakens the transpar- ency and accountability of tax policy decisions and undermines budget Productivity Indicators revenues. Weaknesses in tax and customs revenue collection processes are also a concern. Further modernizing the tax administration and customs sys- tems could enhance budget revenue, accelerate Azerbaijan's membership in the WTO and help combat corruption. Ongoing efforts in this direction focus on reinforcing the online IT systems for the registration and audit of taxpayers and on adopting a new customs code compliant with EU standards to strengthen customs offices, clarify methodologies for evalu- ating goods, and put in place a "single electronic window" for custom activities. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2009, the tax burden was reduced by introducing an online filing and payment system with advanced accounting software for calculating taxes due. This saves more than 500 hours a year on average in dealing with paperwork. In 2011, a revision of Azerbaijan‘s tax code lowered several tax rates, including the profit tax rate, and simplified the process of paying corpo- rate income tax and value added tax. 24 Tax at a Glance Population: 9.5 million (Year: 2011) GDP Per Capita (Current US$): 5,820 (Year: 2011) Upper middle income Country profile A high rate of economic growth in Belarus – an average of about 8 percent annually from 2001 to 2011 have helped reduce poverty almost seven-fold. A favorable external environment, expressed in terms of trade gains, underpriced energy from the Russian Federation, and strong economic growth among Belarus‘s main trading partners, supported economic growth. 2011 was marked by a severe balance of payments and foreign exchange crisis, accelerated inflation and loss of the previous year‘s income gains. Overall, the Belarusian ruble lost close to 70 percent of its value vis -à-vis the USD. Inflation soared to 109 percent (end-of-period). The poverty headcount ratio increased from 5.2 percent of population in 2010 to 7.3 percent in 2011. Some signs of stabilization started to emerge at the end of 2011, including decelerated inflation, foreign exchange mar- ket stabilization and narrowing of external imbalances. Inflation declined to 39 percent year-on-year in September 2012 as compared to almost 80 percent in September 2011. Preliminary data for the first six months of 2012 suggest a current account surplus of 1.7 percent of GDP, compared to a deficit of 7.3 percent of GDP in the first half of 2011. Official re- serves rose to $7.9 billion (or equivalent of two months of exports of goods and services) by the end of 2011 due to slower import growth, privatization proceeds and external financing. Macroeconomic stability continues to be fragile with significant risks, exacerbated by large external refinancing needs and uncertainties in the Euro Zone and Russia. The two recent macroeconomic crises have exposed the limitations in the country‘s development model and the need for comprehensive macroeconomic and structural reforms. Source: The World Bank Fiscal structure Source: World Bank—ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 24.7% Budget balance % of GDP: 2.8% VAT rate: 20% (Standard) Non-tax as % of GDP: 4.0% Primary balance % of GDP: 1.7% 10% (Reduced) VAT % in GDP: 8.9% Revenue potential: 30.45* VAT threshold: 606,510 (US$ equiv.) CIT % in GDP: 3.1% Size of shadow economy: 43.3% (2007) CIT rate: 24% PIT % in GDP: 3.1% ——ECA average (unweight): 37.5% (2007) PIT rate: 12% (Flat) Excise % in GDP: 2.0% ——World average (unweight): 31.0% (2007) 9% (Specific) Social contributions % of GDP: 10.0% Source: Policy research working paper 5356, the World Bank 15% (Specific) 2010 Public debt % of GDP: 31.6% *Source: Munawer Sultan Khwaja & Indira Iyer, “Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis” (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2010 Number of tax staff 9,100 Number of taxpayers 3,331,195 Number of taxpayers to tax staff 367 Number of field offices 157 Large Taxpayer Unit Yes Ministry of Taxes and Duties of the Organization Republic of Belarus Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Belarus and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 25 The ease of paying taxes in Belarus over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Regional Ranking of Problems Source: BEEPS Rank in 2005 Rank in 2008 In Belarus, there is still a relatively high tax burden on the business Tax rates 2 1 sector. Tax reform to attract investment and foster economic growth should be accompanied by reforms on the spending side in order not to widen the Corruption 8 10 budget deficit. Tax administration 4 9 The government is encouraged to streamline the business income taxa- Customs and trade regulations 6 12 tion, with a profit tax levied at an internationally competitive rate, com- bined with a favorable treatment of investment, including more generous Note: measured by the mean score. The most severe problem ranks number 1, and so on. depreciation provisions to bring depreciation rules in line with interna- tional standards on economic life of assets. Also, the simplification of the Productivity Indicators tax system should continue. Tax reform efforts In 2010, Tax payments were made more convenient through increased Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In use of electronic systems—reducing tax compliance times—while lower an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no ecological and turnover tax rates and a reduction in the number of pay- leakage. ments for property tax reduced the tax burden on businesses. In 2011, Reductions in the turnover tax, social security contributions and the base for property taxes along with continued efforts to encourage electronic filing made it easier and less costly for companies in Belarus to pay taxes. In 2012, Belarus abolished several taxes, including turnover and sales taxes, and simplified compliance with corporate income, value added and other taxes by reducing the frequency of filings and payments and facili- tating electronic filing and payment. 26 Tax at a Glance Population: 3.8 million (Year: 2011) GDP Per Capita (Current US$): 4,821 (Year: 2011) Upper middle income Country profile Like elsewhere in the region, Bosnia and Herzegovina‘s pre-crisis growth model relied on booming domestic demand financed from abroad. The BiH economy fell into recession in 2009. Following a stagnation in 2010, growth is expected to rebound. The post-crisis potential growth rate of the BiH economy is projected to be slightly below its pre-crisis value, resulting in domestic output remaining permanently below the prevailing pre-crisis trend. The growth of the BiH economy will likely become more dependent on gains in human capital and total factor pro- ductivity. Also, enhancing BiH‘s human capital and speeding-up the pace of technological change would require a renewed emphasis on structural reforms to unleash BiH‘s human capital and entrepreneurship potential. In sum, following a recession in 2009 and stagnation in 2010, the potential growth rate of the BiH econ- omy would likely stay slightly below its pre-crisis value, resulting in domestic output remaining perma- nently below the prevailing pre-crisis trend. Besides, enhancing BiH‘s human capital and speeding-up the pace of technological change requires a renewed emphasis on structural reforms to unleash BiH‘s human capital and entrepreneurship potential. Source: IMF Country Report Fiscal structure Source: IMF Article IV Year: 2010 Year: 2010 Year: 2010 Tax as % of GDP: 38.4% Budget balance % of GDP: -4.5% VAT rate: 17% Non-tax as % of GDP: 4.9% Primary balance % of GDP: -3.9% VAT threshold: (US$ equiv.) VAT % in GDP: 12.0% Revenue potential: 28.53* CIT rate: 10% Direct taxes % in GDP: 3.1% Size of shadow economy: 32.8% (2007) PIT rate: 10% Excise % in GDP: 5.8% ——ECA average (unweight): 37.5% (2007) Social contributions % of GDP: 15.6% ——World average (unweight): 31.0% (2007) Public debt % of GDP: 39.1% Source: Policy research working paper 5356, the World Bank 2010 *Source: Munawer Sultan Khwaja & Indira Iyer, “Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis” (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 2,425 Number of taxpayers 53,439 (VAT taxpayers) Number of taxpayers to tax staff 23 Number of field offices N/A Large Taxpayer Unit Yes Indirect Taxation Authority of Bosnia Organization and Herzegovina Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Bosnia and Herzegovina and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 27 The ease of paying taxes in Bosnia and Herzegovina over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2012 Regional Ranking of Problems Source: BEEPS Tax administration. Improvements in tax administration should aim Rank in 2005 Rank in 2008 at better control, improvements in cooperation as well as transparency Tax rates 1 1 across agencies and Entities, and a broadening of the tax base. It is cru- cial to maintain indirect tax collection at BiH level and maintain the Corruption 7 5 single account of the Indirect Tax Authority (ITA). Equally important is Tax administration 5 6 the maintenance of a cooperative work environment enabling fast solu- tions to contentious issues. Improvements are also needed in formalizing Customs and trade regulations 10 14 the grey economy, which has been undermining tax revenue collection while also placing an unequal burden on the formal sector. Note: measured by the mean score. The most severe problem ranks number 1, and so on. The Fund has technical assistance in the area of tax administration, including through a diagnostic mission in April 2011. This has been Productivity Indicators followed by regular visits by a peripatetic advisor. A follow-up mission to assess progress in various areas is scheduled for the Fall of 2012. . Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2009, The corporate income tax rate was reduced from 30 percent to 10 percent effective January 1, 2008. Profit distribution (including dividends) is now tax exempt, and tax losses can be carried forward for five years. In 2011, Bosnia and Herzegovina simplified its labor tax processes, reduced employer contribution rates for social security and abolished its payroll tax. 28 Tax at a Glance Population: 7.5 million (Year: 2011) GDP Per Capita (Current US$): 7,158 (Year: 2011) Upper middle income Country profile Bulgaria has come a long way from its turbulent political and economic transition in the 1990s to becoming a member of the European Union in January 2007. Today, Bulgaria remains among the most fiscally disciplined EU member states ─ an important feat in the context of global and European economic uncertainties. EU Structural and Cohesion Funds can play a critical role in Bulgaria‘s quest for growth. With the ob- jective of boosting EU funds absorption and supporting the National Reform Program, the Government of Bulgaria and the World Bank signed a Memorandum of Understanding (MoU) in January 2012, marking an important shift in the 20-year partnership from traditional lending operations to a greater focus on knowl- edge and advisory services. The evolving partnership represents an important step taken by the Govern- ment of Bulgaria to draw on World Bank‘s expertise to develop and implement strategies and programs in a range of sectors under Operational Programs financed by EU Structural Funds. The MoU is consistent with the World Bank Group‘s Country Partnership Strategy for Bulgaria for 2011-2013, aimed at supporting the Government in achieving smart, sustainable and inclusive growth – in line with the European Commission‘s Europe 2020 Strategy. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 27.2% Budget balance % of GDP: -2.0% VAT rate: 20% (Standard) Non-tax as % of GDP: 6.4% Primary balance % of GDP: -1.4% 9% (Reduced) VAT % in GDP: 8.7% Revenue potential: 31.13* VAT threshold: 32,675 (US$ equiv.) CIT % in GDP: 1.9% Size of shadow economy: 32.7% (2007) CIT rate : 10% PIT % in GDP: 2.9% ——ECA average (unweight): 37.5% (2007) PIT rate: 10% (Flat) Excise % in GDP: 5.1% ——World average (unweight): 31.0% (2007) 5% (Dividend income) Social contributions % of GDP: 7.3% Source: Policy research working paper 5356, the World Bank 15% (Sole entrepreneurs) 2010 Public debt % of GDP: 16.3% *Source: Munawer Sultan Khwaja & Indira Iyer, “Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Com- parative Analysis” (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 7,708 Number of taxpayers 408,524 Number of taxpayers to tax staff 53 Number of field offices 25 Large Taxpayer Unit 1 Organization National Revenue Agency Electronic filing Yes The tax administration is organized along Function functional lines The tax administration is established as a Relationship with MOF (semi-) autonomous authority Bulgaria and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 29 The ease of paying taxes in Bulgaria over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Regional Ranking of Problems Source: BEEPS Rank in 2005 Rank in 2008 The rates of direct taxes, which are among the lowest in the EU Tax rates 1 2 Member States, remain unchanged. The consistent shifting of the burden to indirect taxes continues through an increase of certain rates of excise Corruption 3 1 duty as from the beginning of 2011 in accordance with the arrangements Tax administration for reaching the Community minimum rates. 4 5 Customs and trade regulations Tax policy faces a challenge to improve the effectiveness of tax com- 10 14 pliance through a number of measures taken on the part of the revenue Note: measured by the mean score. The most severe problem ranks number 1, and so on. administrations. They include increasing the number of on-site inspections, improving the performance of mobile units, conducting Productivity Indicators more frequent and more thoroughgoing audits, as well as introducing more rigorous accounting rules and judicial prosecution of unlawful practices inflicting losses on the Exchequer. Corruption and tax compliance are becoming significant challenges to Bulgaria‘s tax policy and administration, and corruption ranks the No.1 problem in 2008 according to BEEPS. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2009, amendments to the civil procedural code have helped speed contract enforcement. They reformed rules for evidence and default judgments, raised the minimum threshold for cases in the lower courts, and empowered the civil court of last instance to decide which cases to hear, limiting abuse of the appeals process. 30 Tax at a Glance Population: 4.4 million (Year: 2011) GDP Per Capita (Current US$): 14,180 (Year: 2011) High income: non-OECD Country profile Like many other countries in the region, the global financial crisis impacted Croatia. In 2009-2010, the economy contracted by 9.2 percent. The fiscal deficit is widening and public debt is growing. The current account deficit declined to 1.0 percent of GDP in 2011, having reached nearly 9 percent three years earlier. Prospects for economic recovery remain fragile and the new administration faces the challenge of embracing deep reforms. Beyond ensuring macro stability and achieving smart, sustainable and inclusive growth to boost economic competitiveness, the Government faces the strategic challenge of maximizing the use of EU Structural Funds. To support recovery and mitigate social impacts, the former Croatian Government adopted the Economic Recovery Program (ERP) in April 2010. In May 2011, the World Bank supported the implemen- tation of the ERP through a EUR 150 million budget support loan (ERDPL). On July 1, 2013, Croatia is set to crown almost twenty years of economic and social progress, since declaring independence by becoming the 28th member state of the European Union. Throughout its engagement in Croatia, the World Bank has developed and maintains partnerships with key international institutions active in the country. Source: The World Bank Fiscal structure Source: IMF Database 2011 Year: 2012 Year: 2011 Year: 2012 Tax as % of GDP excluding social: 28.19% Budget balance % of GDP: -5.7% VAT rate: 25% (Standard) Non-tax as % of GDP: 1.09% Primary balance % of GDP: -3.7% 5% (Reduced rate) VAT % in GDP: 12.30% Revenue potential: 34.8% of GDP* VAT threshold: 14,697 (US$ equiv.) CIT % in GDP: 2.41% Size of shadow economy: 30.4% (2007) CIT rate: 20% PIT % in GDP: 3.47% ——ECA average (unweight): 37.5% (2007) PIT rate: 12% (Not exceeding HRK 26,400) Excise % in GDP: 3.4% ——World average (unweight): 31.0% (2007) 25% (Not exceeding HRK 105,600) Social contributions % of GDP: 11.46% Source: Policy research working paper 5356, the World Bank 40% (Exceeding HRK 105,600) 2010 Public debt % of GDP: 43.4% *Source: Munawer Sultan Khwaja & Indira Iyer, “Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Com- parative Analysis” (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2011 Number of tax staff 4,440 Number of taxpayers 4,879,121 Number of taxpayers to tax staff 1,098 Number of regional offices 20 + special office in Zagreb Number of local offices 122 Large Taxpayer Unit Yes Organization Ministry of Finance-Tax Administration Electronic filing Yes The tax administration is organized along Function functional lines The tax administration is established as a Relationship with MOF department of the MOF Croatia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 31 The ease of paying taxes in Croatia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Key issues Source: IMF Article IV 2012 IMF country report in 2012 mentioned that efforts were needed to Rank in 2005 Rank in 2008 rebalance the tax structure away from labor in a revenue-neutral way Tax rates 2 1 and encouraged the authorities to pursue them further. The 2012 health Corruption 3 5 contributions-VAT rebalancing, a.k.a. fiscal devaluation, should improve competitiveness and underpin demand for labor. To reduce the Tax administration 8 2 revenue loss from the intended further 1 percentage point cut in health contributions in 2013, staff recommended increasing the zero VAT rate Customs and trade regulations 7 10 on certain domestic sales to 10 percent rather than the minimum admissible 5 percent under EU requirements, with part of the additional Note: measured by the mean score. The most severe problem ranks number 1, and so on. revenue used to augment targeted social assistance. Furthermore, introducing a modern value-based property tax, accompanied by Productivity Indicators transferring additional spending responsibilities to local governments, would also help. However, the proceeds of such tax are likely to be low in the short term given the need to improve the land and property registers. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. There were several reforms undertaken in 2009 to 2012 period. They include: (i) PIT, CIT and VAT tax rate/rules changes; (ii) a withhold- ing tax on dividends (12%) has been introduced; (iii) establishment of the LTO; (iv) tax audit procedures to supervise cash transactions were introduced; (v) the Tax Identification Number has been rolled out to other public sector institutions for tax and other purposes. The country raised the VAT rate to 25% last year, abolished zero rate this year and introduced 5% rate for basic foodstuff, books, pharma- ceuticals. 32 Tax at a Glance Population: 10.5 million (Year: 2011) GDP Per Capita (Current US$): 20,579 ( Year: 2011) High income: OECD Country profile The Czech Republic is one of the most stable and prosperous nations among the post-Communist states of Eastern and Central Europe. After its transition from Communism it emerged as a functioning market economy, maintaining an open investment climate that was a key component for success. Its economy grew by more than six percent from 2005 to 2007, and even remained robust through the global economic crisis in 2009. The Czech Republic joined the World Bank in 1993 by joint succession with the Slovak Republic from the former Czechoslovakia and graduated from the Bank's financial assistance in Spring 2006. However, it still maintains an active partnership with the Bank on technical assistance and analytical work. The collaborative relationship between the Czech Republic and the World Bank has provided opportuni- ties to learn lessons and develop analytical instruments which also benefit other countries in the Region which started their transitions later. As a development partner, the Czech Republic contributes to the International Development Association (IDA), the Bank's concessional window, and plays an active role in regional and multilateral institutions. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 34.5% Budget balance % of GDP: -3.3% VAT rate: 20% (Standard) Non-tax as % of GDP: 5.3% Primary balance % of GDP: -1.9% 14% (Reduced) VAT % in GDP: 7.0% Revenue potential: 36.49* VAT threshold: 49,576 (US$ equiv.) CIT % in GDP: 3.4% Size of shadow economy: 17.0% (2007) CIT rate : 19% PIT % in GDP: 3.7% ——ECA average (unweight): 37.5% (2007) PIT rate: 15% Excise % in GDP: 2.2% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 15.4% Source: Policy research working paper 5356, the World Bank 2010 Public debt % of GDP: 40.8% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published) Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 14,710 Number of taxpayers 7,439,512 Number of taxpayers to tax staff 506 Number of regional offices 220 Large Taxpayer Unit No Financial Administration of the Czech Organization Republic Electronic filing Yes The tax administration is organized along Function functional lines The tax administration is not established Relationship with MOF as a (semi-) autonomous authority Czech Republic and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 33 The ease of paying taxes in Czech Republic over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Regional Ranking of Problems Source: BEEPS The Czech Republic‘s average effective tax rates are lower than in most Rank in 2005 Rank in 2008 other EU countries and its reform exacerbates this feature. The key Tax rates 1 3 distributional feature of its 2008 reform package is a substantial tax cut for low income working individuals and an even larger cut for high income Corruption 3 9 earners. Tax administration 2 7 The reform package includes welcome steps to move the tax burden to indirect taxation, including environmental taxes, and lowering taxation on Customs and trade regulations 8 14 capital income, while also reducing health spending and the generosity of some social benefit schemes. However, it does not seem to fully deliver on Note: measured by the mean score. The most severe problem ranks number 1, and so on. its objectives, and certainly not in a cost efficient way. The Czech Republic maintains government spending levels that are closer Productivity Indicators to the EU-15 average than to its regional peers. This leaves little or no room for tax cuts, since the burden of reducing spending would be further aggravated if taxes were reduced. For the Czech Republic going forward, the difficult—and delicate—policy task is to find an appropriate balance between tax increases and spending cuts that result in the required long-term improvement of the government balance. The 2008 reduction in the personal income tax, aimed at stimulating labor demand and supply, comes at the costs of untenable losses in government revenues. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2012, the Czech Republic revised its tax legislation to simplify provisions relating to administrative procedures and relationships between tax authorities and taxpayers. In 2011, the Czech Republic simplified its labor tax processes and reduced employer contribution rates for social security. In 2010, paying taxes was made easier with mandatory electronic filing for all taxes, a single tax institution, and unified filing. 34 Tax at a Glance Population: 1.3 million (Year: 2011) GDP Per Capita (Current US$): 16,533 (Year: 2011) High income: low income Country profile In 2012, Estonia‘s economy is set to slowdown in line with weakening export markets but the output gap will continue to close. With increased downside risks, Estonia faces the continuing challenge to implement policies preserving macroeconomic policy credibility, while enhancing sustainable growth. Estonia‘s enviable fiscal position will remain strong even though a deficit of about 2¼ percent of GDP will emerge in 2012. This will imply a fiscal stimulus at a time when a neutral stance would be appropriate. Adhering to the budgetary allocations would be appropriate. Should downside risks materialize, automatic stabilizers should be allowed to operate while preserving credibility. Looking forward, the authorities‘ medium -term target of a small surplus can be supported by a fully-fledged multi-year fiscal framework, which would allow fiscal buffers to be rebuilt. Estonia must stand ready to address short-term risks, while medium-term polices should focus on sustainable growth and increased employment. Besides safeguarding Estonia‘s competitiveness, increasing sustainable long -run growth will require moving up the value chain, addressing long-term unemployment, and enhancing human capital. Fostering a business-friendly environment by building R&D capability and enhancing cross-border infrastructure can attract tradable sector FDI. Further improvements in vocational training and higher education can alleviate long-run unemployment and boost human resources. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 33.3% Budget balance % of GDP: 1.1% VAT rate: 20% (Standard) Non-tax as % of GDP: 6.4% Primary balance % of GDP: 1.3% 9% (Reduced) VAT % in GDP: 8.5% Revenue potential: 35.23* VAT threshold: 20,440(US$ equiv.) CIT % in GDP: 1.3% Size of shadow economy: 29.5% (2007) CIT rate : 21% PIT % in GDP: 5.3% ——ECA average (unweight): 37.5% (2007) PIT rate: 21% Excise % in GDP: 4.3% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 12.1% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 6.1% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 1,555 Number of taxpayers 632,858 Number of taxpayers to tax staff 407 Number of field offices 16 Services Bureaus Large Taxpayer Unit Yes Organization Estonian Tax and Customs Board Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Estonia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 35 The ease of paying taxes in Estonia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2011 Regional Ranking of Problems Source: BEEPS To stabilize budget revenues in Estonian, government must increase Rank in 2005 Rank in 2008 the share of income taxation and reduce taxing consumption. As for social Tax rates 6 2 taxation, its share is more or less optimum and could be left unchanged. The key problems with the current proportional income tax system of Corruption 3 10 private persons is that it is inefficient in collecting tax, it increases the gap Tax administration 8 11 in income levels and, what's most important, it has low automatic stabilization effect on the economic cycle. Customs and trade regulations 5 14 An even bigger problem is related to the taxation of corporate profits. In no other EU state plays income tax such a small part in the government Note: measured by the mean score. The most severe problem ranks number 1, and so on. sector budget revenues as in Estonia. Also IMF recommended changing the current situation and restoring classic profit taxation principles. Productivity Indicators In order to bring more tax revenues to the local governments it is nec- essary to replace the land tax with real estate tax. IMF has a clear view with this regard – the current Estonian land tax is not a sufficient instrument for accumulating taxes and should be replaced with taxation of real estate. The tax system in Estonian must efficiently fulfill its functions, instead of being an object of national self-admiration. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage In 2011, Estonia increased the unemployment insurance contribution rate. In 2012, In Estonia a municipal sales tax introduced in Tallinn made paying taxes costlier for firms, though a later parliamentary measure abolished local sales taxes effective January 1, 2012. 36 Tax at a Glance Population: 4.5 million (Year: 2011) GDP Per Capita (Current US$): 3,203 (Year: 2011) Lower middle income Country profile The ―twin‖ crisis of 2008–09 brought about a marked shift in Georgia‘s external position. The period immediately preceding the crisis was characterized by a surge in private capital inflows—both in the form of FDI and of bank and corporate borrowing. The counterpart of these developments was a sharp widening of Georgia‘s current account deficit, bringing it at the very high end among comparator countries. Georgia‘s current account position on the eve of the crisis was widely viewed as unsustainable, and the lari exchange rate as substantially misaligned. Through a combination of current account adjustment and official financing mobilization, Georgia was able to limit the impact of these drains on its international reserves. In summary, Georgia‘s current level of reserves appears adequate. In the medium term, the challenge for the authorities will be to preserve reserve adequacy as the central bank meets its repayment obligations to the Fund. The medium-term framework presented in the staff report, which notably envisages a significant reduction of the current account and the external refinancing of the government‘s external debt obligations, is consistent with this objective. Source: IMF Country Report 2011 Fiscal structure Source: IMF and ECSPE Fiscal Database Year: 2010 Year: 2010 Year: 2012 Tax as % of GDP: 23.7% Budget balance % of GDP: -6.6% VAT rate: 18% Non-tax as % of GDP: 4.8% Revenue potential: 24.81* VAT threshold: 59,900 (US$ equiv.) VAT % in GDP: 10.7% Size of shadow economy: 62.1% (2007) CIT rate: 15% CIT % in GDP: 2.8% ——ECA average (unweight): 37.5% (2007) PIT rate: 20% PIT % in GDP: 5.9% ——World average (unweight): 31.0% (2007) Excise % in GDP: 2.8% Source: Policy research working paper 5356, the World Bank Public debt % of GDP: 39.0% 2010. *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 3,015 Number of taxpayers 186,130 Number of taxpayers to tax staff 62 Number of field offices 16 Large Taxpayer Unit Yes Organization Revenue Service of Georgia Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Georgia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 37 The ease of paying taxes in Georgia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2011 Regional Ranking of Problems Source: BEEPS Staff rightly identified ―the challenge of enhancing tax pro- Rank in 2005 Rank in 2008 ductivity in Georgia‖ as an important issue. Supplemental analy- Tax rates 1 3 sis of tax productivity is an important tool that should be used Corruption 3 9 more frequently by the staff in country reports. Indeed, tax col- lection in Georgia has improved significantly in recent years. Tax administration 10 10 Strong political will and a stream of measures aimed at improv- ing tax compliance have contributed to the enhancement of the Customs and trade regulations 6 12 tax base and minimize tax fraud. Driven by the desire to imple- Note: measured by the mean score. The most severe problem ranks number 1, and so on. ment a simple and business-friendly tax framework, the govern- ment seeks an appropriate balance between reasonable and con- Productivity Indicators text-specific containment measures on the expenditure side and thoughtful revenue-enhancing measures. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2010, the documentation requirements for import and ex- port were simplified, and there was a significant decrease in the cost of trade. 38 Tax at a Glance Population: 10.0 million (Year: 2011) GDP Per Capita (Current US$): 14,044 (Year: 2011) High income: OECD Country profile Hungary‘s rebound from the 2008–09 crisis has been modest. After contracting nearly 7 percent, real out- put rose only 1.3 percent in 2010. This already weak recovery is now faltering largely due to spillovers from the Eurozone crisis. The slower growth and recent government actions are weighing on the financial sector. Despite the slowing growth, the authorities have started to tighten fiscal and monetary policy. At the same time, the authorities have tried to support growth through a mix of well-received reforms and some more controversial policy steps. In this difficult environment, Hungary‘s financial market indicators are deteriorating. In the baseline scenario, staff expects a further slowdown in Europe, which causes the Hungarian econ- omy to stagnate in 2012 and recover only gradually thereafter. By contrast, in the adverse scenario, a wors- ening of the Eurozone crisis triggers a recession and the emergence of an external financing gap. The core policy challenge for Hungary going forward is addressing large debt burdens without choking already weak growth. Source: The 2011 Article IV consultation Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 37.1% Budget balance % of GDP: 4.3% VAT rate: 27% (Standard) Non-tax as % of GDP: 16.8% Primary balance % of GDP: 8.5% 5% (Reduced) VAT % in GDP: 8.5% Revenue potential: 37.19* 18% (Reduced) CIT % in GDP: 1.2% Size of shadow economy: 23.7% (2007) VAT threshold: 21,039 (US$ equiv.) PIT % in GDP: 4.9% ——ECA average (unweight): 37.5% (2007) CIT rate : 19% (Standard) Excise % in GDP: 3.3% ——World average (unweight): 31.0% (2007) 10%(First US$2,500,000 of taxable Social contributions % of GDP: 13.1% Source: Policy research working paper 5356, the World Bank income) 2010 . PIT rate: 16% Public debt % of GDP: 81.4% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 22,482 Number of taxpayers 5,357,479 Number of taxpayers to tax staff 239 Number of regional offices 8 Number of local offices Not available Large Taxpayer Unit Yes The National Tax and Customs Admini- Organization stration (NAV) Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF An independent government organ since 2011 Hungary and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 39 The ease of paying taxes in Hungary over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2013 Regional Ranking of Problems Source: BEEPS Tax policy aims at creating incentives for labor participation and SME Rank in 2005 Rank in 2008 development, at the same time securing the revenues needed to pursue Tax rates 1 1 the structural transformations while containing the fiscal deficit. The tax Corruption 8 3 burden was gradually shifted away from labor income, leaving the over- all burden on capital income unchanged at an already low level. Reve- Tax administration 3 2 nues were replaced by VAT hikes, excise duties, new consumption and turnover taxes based on a ―broad base–low rate‖ approach (financial Customs and trade regulations 6 13 transaction levy, telecommunication tax), taxes on negative externalities (tax on unhealthy food products, product fees, car accident tax), several Note: measured by the mean score. The most severe problem ranks number 1, and so on. tax base broadening measures (improving tax compliance, deleting tax reliefs, tax hikes on fringe benefits, stricter loss carry-forward rules) and Productivity Indicators the introduction/increase of taxes on businesses with excess market power (bank levy, tax on energy companies). Transient sectorial surcharges have now become a permanent feature of the tax system and new taxes, like the bank transaction tax, have been introduced to support an unsustainably high level of public spending. The authorities are encouraged to focus their efforts on achieving a dura- ble spending reduction that will pave the way to reduce the tax burden and improve the efficiency of the tax system over time. In addition, deci- sive steps should be taken to strengthen revenue administration, in par- ticular to combat VAT fraud. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2012, Hungary made paying taxes costlier for firms by introducing a sector-specific surtax. In 2011, Hungary simplified taxes and tax bases. 40 Tax at a Glance Population: 16.5 million (Year: 2011) GDP Per Capita (Current US$): 11,357 (Year: 2011) Upper middle income Country profile Kazakhstan has rebounded well from the economic recession that affected the country in the first half of 2009. During the crisis, GDP growth rate registered at just 1.2% and the country plunged into recession from the sharp fall of oil and commodity prices. With a growth rate of 7.5% in 2011, this oil-producing country ranks in the top 10 fastest growing countries. Rising commodity prices and the expansion of the oil industry have helped to revive the economy with continued growth predicted, barring a dramatic decline in oil prices. However, most non-resource sectors of the economy continue to suffer from low productivity and competitiveness, and the country remains vul- nerable to commodity price fluctuations. A customs union (CU) between Kazakhstan, Russia and Belarus was established in January 1, 2010 and marked a major change in the path of regional integration with important implications for Kazakhstan. In the past decade there has been a significant decrease in poverty rates, from 46.7% in 2001 to 6.5% in 2010. The gap between urban and rural living standards still remains - the poverty rate is under 5% in urban areas, while it is about 10% in rural locations. Overall, about 30% of the population receives some sort of social assistance. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 26.9% Budget balance % of GDP: 6.2% VAT rate: 12% Non-tax as % of GDP: 1.1% Non-oil deficit % of GDP: -7.9% VAT threshold: 295,330 (US$ equiv.) VAT % in GDP: 3.2% Revenue potential: 24.91* CIT rate: 20% CIT % in GDP: 8.2% Size of shadow economy: 38.4% (2007) PIT rate: 10% PIT % in GDP: 1.4% ——ECA average (unweight): 37.5% (2007) Excise % in GDP: 0.3% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 1.1% Source: Policy research working paper 5356, the World Bank 2010 . Public debt % of GDP: 10.5% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 9,280 Number of taxpayers 16,714,159 Number of taxpayers to tax staff 1,802 Number of field offices 231 Large Taxpayer Unit Yes Tax Committee of the Ministry of Fi- Organization nance of the Republic of Kazakhstan Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Kazakhstan and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 41 The ease of paying taxes in Kazakhstan over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Regional Ranking of Problems Source: BEEPS The size of the tax bureaucracy (9,000) is large relative to the amount of Rank in 2005 Rank in 2008 tax collected and the number of taxpayers, compared to many modern tax Tax rates 1 2 administrations. Instead of a modern, functional focus, tax administration has the old geographical focus with more than 200 tax offices located in all Corruption 5 3 rayons maintaining close contact with taxpayers. Consolidation of tax of- Tax administration 2 8 fices with the use of modern technology is an important reform goal that the Government plans to do as part of tax administration reform. Customs and trade regulations 7 13 The taxpayer services are underutilized, the audit system is weak, and the appeal mechanism lacks taxpayer confidence. To improve the confidence Note: measured by the mean score. The most severe problem ranks number 1, and so on. in the appellate system, there are plans to sent up independent tax courts directly under the jurisdiction of the Supreme Court. Productivity Indicators In terms of the effectiveness of the tax administration, the VAT productiv- ity of Kazakhstan at about 0.53 is much lower than the ECA average of 0.66. PIT productivity at 0.04 is particularly low. On the other hand, the corporate income tax (CIT) productivity is impressive, being the second highest in the region (at about 0.35). This shows that while CIT is per- forming well, there are serious problems with VAT administration . The introduction of universal filing, planned for 2015 is expected to raise the effectiveness of PIT. Reforms are also planned for excise taxation, field and desk audits. Business process reengineering (BPR), risk manage- ment, and institutional reforms are being undertaken. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leak- In 2008, Kazakhstan made paying taxes easier by lowering sanctions forage. late payments of taxes. In 2010, Kazakhstan reduced the tax burden on companies by reducing the social tax for 2008 and by reducing the corporate income tax rate from 30% to 10% for 2009. Kazakhstan and the World Bank embarked on a 5-year Tax Administra- tion Reform Project that aims at comprehensive reforms to improve the efficiency and effectiveness of tax administration. The project includes organizational restructuring, business process reengineering and ICT mod- ernization. 42 Tax at a Glance Population: 1.8 million (Year: 2011) GDP Per Capita (Current US$): 3,546 (Year: 2011) Lower middle income Country profile With a GDP per capita of €2,590, Kosovo is one of the poorest countries in Europe. Poverty remains persistent and widespread: accord- ing to the latest available data (from 2009) 37 percent of the population is living below the national poverty line, and an estimated 12 percent are extremely poor – i.e., unable to meet basic nutritional needs. Extreme poverty is disproportionately high among children, the elderly, households with disabled members and female-headed households. However, the narrowness of the poverty gap suggests that poverty is not deep. With a 45 percent unemployment rate and a very low employment rate (29 percent), Kosovo has the weakest employment track record in Europe, and Kosovo‘s 48 percent labor participation rate among the working age population is substantially below the avera ge among all transition economies (65 percent). In 2011, the economy grew at 5% rate according to the IMF. Kosovo has established the euro as the local currency, which has led to relatively low inflation. Inflation picked up in 2008, but prices began to fall again in 2009 (annual average inflation was -2.4 percent in 2009). Inflation was relatively high at 7.3% in 2011 but is expected to remain positive and low throughout 2012. The relatively small impact of the global financial and economic crisis on real growth up to this point reflects Kosovo‘s li mited interna- tional integration with the world economy. Given the lack of monetary policy instruments, fiscal policy is the main anchor for macroeco- nomic stability. Kosovo achieved early successes in fiscal policy, including reforms in tax policy and administration and the introduction of new taxes and collection methods that contributed to a five-fold increase in domestic revenues between 2000 and 2004. It managed to maintain a positive growth rate (both of the economy and the revenues) and a fiscal deficit below 3% in the last 7 years. Revenues grew by 18% in 2011 and are expected to grow by about 5% in 2012. Source: Country Economist Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2011 Tax as % of GDP: 23.1% Budget balance % of GDP: -1.9% VAT rate: 16% Non-tax as % of GDP: 4.8% Primary balance % of GDP: -1.8% VAT threshold: 63,355 (US$ equiv.) VAT % in GDP: 11.1% Size of shadow economy: 30%-40% CIT rate: 10% CIT % in GDP: 1.2% PIT rate: Progressive rates of 4%, 8% and 10% PIT % in GDP: 1.2% Excise % in GDP: 6.1% Public debt % of GDP: 5.6% Tax Administration Features Source: World Bank Database Trends and Revenues Indicator 2010 Number of tax staff 243 Number of taxpayers 62,881 Number of taxpayers to tax staff 259 Number of field offices 11 Large Taxpayer Unit Yes Organization Ministry of Finance Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Kosovo and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 43 The ease of paying taxes in Kosovo over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Key issues Regional Ranking of Problems Source: BEEPS The potential for fiscal expansion in Kosovo was constrained by limited administrative capacity, the narrow coverage of domestic tax instru- Rank in 2008 ments—especially direct taxes—and the government‘s inability to issue Tax rates 11 debt. The authorities and staff agreed that Kosovo‘s system of fiscal decen- Corruption 2 tralization needs amendments. A well-designed system of budgetary Tax administration 12 grants leaves adequate funds for municipalities, but there are little incen- tives for municipalities to raise own-source revenue, which results in ex- Customs and trade regulations 9 ceptionally low municipal tax rates. IMF Staff recommended raising the minimum rate on the property tax that is collected by municipalities, and Note: measured by the mean score. The most severe problem ranks number 1, and so on. reducing central government grants accordingly. The authorities agreed inProductivity Indicators principle, but noted that such a reform required careful preparation — notably a revision of the grants system. Also, there is a need to strengthen tax administration improvements in tax collection by broadening the tax base and enhancing collection efforts. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2010, the corporate income tax rate was cut from 20 percent to 10 percent in 2009. 44 Tax at a Glance Population: 5.5 million (Year: 2011) GDP Per Capita (Current US$): 1,070 (Year: 2011) Low income Country profile With improvements in the political and security situation, the Kyrgyz economy recovered from recession, experiencing broad-based growth of 5.7 percent in 2011. Strong revenue performance and lower than pro- jected expenditures resulted in a fiscal deficit of 4.6 percent in 2011 compared to an earlier projection of 8.3 percent. The current account deficit (CAD) narrowed from 6.8 to 4.4 percent of GDP on account of strong growth in exports and remittances. The Government‘s macro-fiscal framework is supported by an IMF 3-year Extended Credit Facility (ECF) approved in June 2011. The World Bank supports the Kyrgyz Republic in the area of macroeco- nomic and fiscal policy through several operations: the Emergency Recovery Project of 2010, the Economic Recovery Support Operation of 2011, the Additional Financing provided through the Health SWAP. The new Programmatic Development Policy Operations are currently under preparation and expected to provide support to the budget over the period 2012-14. Weak economic governance and a high level of perceived corruption have been seen as key hurdles to development in the Kyrgyz Republic. The new government has adopted improved governance and fight against corruption as a priority in its overall reform program. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2011 Tax as % of GDP: 24.2% Budget balance % of GDP: -4.8% VAT rate: 12% Non-tax as % of GDP: 5.7% Revenue potential: 17.93* VAT threshold: 84,473 (US$ equiv.) VAT % in GDP: 7.5% Size of shadow economy: 38.8% (2007) CIT rate: 10% CIT % in GDP: 4.2% ——ECA average (unweight): 37.5% (2007) PIT rate: 10% PIT % in GDP: 2.0% ——World average (unweight): 31.0% (2007) Excise % in GDP: 0.8% Source: Policy research working paper 5356, the World Bank Social contributions % of GDP: 4.8% 2010 . Public debt % of GDP: 52.4% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: World Bank Database Trends and Revenues Indicator 2012 Number of tax staff 2,256 Number of taxpayers 436,100 Number of taxpayers to tax staff 194 Number of field offices 61 Large Taxpayer Unit Yes Organization The State Tax Services (STS) Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Kyrgyz Republic and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 45 The ease of paying taxes in Kyrgyz Republic over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2011 Regional Ranking of Problems Source: BEEPS Reforming tax administration could yield significant additional reve- Rank in 2005 Rank in 2008 nue and help improve the business environment. In this context, the Tax rates 2 3 authorities believe that focusing on large taxpayers by expanding cov- Corruption 3 2 erage by the Large Taxpayers‘ Office would be particularly effective in achieving revenue gains. The government‘s efforts to improve the Tax administration 1 6 quality and reduce the frequency of tax audits will ease the administra- tive burden on businesses and limit opportunities for rent seeking. Customs and trade regulations 9 13 Regular communication with taxpayers and enhancing access to infor- mation will raise confidence in the tax authorities and encourage tax- Note: measured by the mean score. The most severe problem ranks number 1, and so on. payer self-compliance. Given that a large part of the domestic economy remains outside the Productivity Indicators tax system, the Kyrgyz government efforts will focus specifically on broadening the tax base, which should help improve the efficiency of the Kyrgyz tax system. The main elements of the reform will be to improve the customs valuation system, removing tax exemptions and reforming excise taxation on tobacco and alcohol. Such measures will encourage the formalization of the economy, limit tax evasion, spread the tax burden more evenly and simplify the tax system. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2012, The Kyrgyz Republic made paying taxes costlier for firms by introducing a real estate tax, though it also reduced the sales tax rate. Also, it has a significant reduction in VAT. In 2010, The tax burden on businesses was eased by reducing the rates for several taxes as well as the reduction of the number of pay- ments for several taxes. 46 Tax at a Glance Population: 2.2 million (Year: 2011) GDP Per Capita (Current US$): 12,726 (Year: 2011) Upper middle income Country profile Latvia‘s severe downturn from the global financial crisis may now be bottoming out. Strong policy actions have supported stabilization and the authorities‘ competitiveness strategy. Adjustment of 13 percent of GDP has counteracted massive fiscal deterioration due to the crisis and greatly enhanced the credibility of the authorities‘ strategy, although some measures were low-quality and not sustainable. Immediate risks are now much lower, but key challenges remain to strengthen the economy and enable euro adoption: boosting growth to reduce unemployment; accelerating the shift toward the tradable sector; undertaking substantial and durable further fiscal adjustment; ensuring that competitiveness is restored and maintained; and resolving the substantial private sector debt overhang that inhibits recovery. Despite substantial progress, risks remain. Sustained high unemployment would add to spending pressures, while not resolving bad loans and restoring financial sector health would also drag down growth. Failure to undertake structural reforms could undermine competitiveness under a fixed exchange rate. Additional risks include possible delays in euro adoption and spillovers from adverse developments in Western Europe. Source: the 2011 Article IV consultation Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 27.7% Budget balance % of GDP: -3.4% VAT rate: 22% (Standard) Non-tax as % of GDP: 7.3% Primary balance % of GDP: -2.0% 12% (Reduced) VAT % in GDP: 6.8% Revenue potential: 33.18* VAT threshold (Business established): 63,752 CIT % in GDP: 1.4% Size of shadow economy: 27.2% (2007) (US$ equiv.) PIT % in GDP: 5.6% ——ECA average (unweight): 37.5% (2007) CIT rate : 15% Excise % in GDP: 3.4% ——World average (unweight): 31.0% (2007) PIT rate: 25% Social contributions % of GDP: 8.6% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 42.2% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 4,069 Number of taxpayers 1,081,466 Number of taxpayers to tax staff 266 Number of field offices 7 Large Taxpayer Unit 1 Organization State Revenue Service Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Latvia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 47 The ease of paying taxes in Latvia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Regional Ranking of Problems Source: BEEPS Latvia has a tradition of very low taxation, which worked well when Rank in 2005 Rank in 2008 growth was high. But lower growth will require a tax system that brings Tax rates 2 1 revenues more in line with expenditures. As a first step in this direction, measures proposed for this year and next include improvements in tax ad- Corruption 4 3 ministration and a broadening of the real estate and personal income tax. Tax administration 1 4 Taking steps to raise revenues now will help avoid further cuts in spend- ing down the line. But we should make sure that tax reform—such as Customs and trade regulations 7 14 changes to the personal income tax—does not disproportionably fall on the poor. Latvia has had a flat tax in place since 1997. Making it more progres- Note: measured by the mean score. The most severe problem ranks number 1, and so on. sive would bring the country in line with most other countries in the EU and would reduce the tax burden on low-income groups. Productivity Indicators Tax laws need to be drafted more clearly and their application made more transparent. The mission recommended that the State Revenue Ser- vice publish tax rulings promptly to reduce taxpayers‘ uncertainties, publish answers to tax questions, and establish a provision for advance decisions on tax queries. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no There are no tax reforms in the recent four years, from year 2009 to leakage. year 2012. 48 Tax at a Glance Population: 3.2 million (Year: 2011) GDP Per Capita (Current US$): 13,339 (Year: 2011) Upper middle income Country profile Following a sharp output decline in 2008 and 2009, Lithuania has staged one of the strongest recoveries in Europe. Export growth has been the main driver of the recovery. Booming exports raised corporate profit- ability and improved the labor market. As a result, the recovery has broadened to domestic demand. Re- bounding domestic demand, import-intensive exports, and higher energy prices have boosted imports. The surge in food and energy prices raised headline inflation, but pressures are now abating. Growth is expected to slow sharply. Annual growth in 2012 is projected to be 3½ percent. As a result, the estimated negative output gap should narrow from 2.7 percent in 2011 to 1.4 percent in 2012 (compared to 6.1 percent in 2010). The external current account deficit should remain manageable, and the labor market should continue to improve. Besides, headline inflation is expected to moderate going forward. Its fiscal deficit has narrowed substantially since 2009, reflecting mainly expenditure restraint. Looking ahead, the government‘s 2012 deficit target of 2.8 percent of GDP and medium-term objective of a small surplus are appropriate. Source: the 2011 Article IV consultation Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 26.4% Budget balance % of GDP: -5.5% VAT rate: 21% (Standard) Non-tax as % of GDP: 5.5% Primary balance % of GDP: -3.7% 5% (Reduced) VAT % in GDP: 7.9% Revenue potential: 32.07* 9% (Reduced) CIT % in GDP: 0.8% Size of shadow economy: 29.7% (2007) VAT threshold (Businesses established): PIT % in GDP: 3.5% ——ECA average (unweight): 37.5% (2007) 57,346 (US$ equiv.) CIT rate : 15% Excise % in GDP: 3.0% ——World average (unweight): 31.0% (2007) PIT rate: 5%/15%/20% Social contributions % of GDP: 9.8% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 38.5% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 3,296 Number of taxpayers 367,902 Number of taxpayers to tax staff 112 Number of field offices 10 Large Taxpayer Unit Yes State Tax Inspectorate under the Ministry Organization of Finance of the Republic of Lithuania Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Lithuania and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 49 The ease of paying taxes in Lithuania over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Key issues Lithuania‘s tax system relies heavily on labor and consumption taxes, Rank in 2005 Rank in 2008 with low wealth taxes. Compared to the EU average, the share of taxes Tax rates 1 1 from consumption in total tax revenue is very high (42 percent in Lithua- nia, vs. 29 percent in the EU), and that of capital and wealth low (9 percent Corruption 7 5 in Lithuania, vs. 20 percent in the EU). The total share of taxes on labor Tax administration 5 6 income is close to the EU average (49 percent in Lithuania vs. 51 percent in the EU), but labor is also relatively more mobile in Lithuania and the Customs and trade regulations 10 14 grey economy is large. Besides, taxes in Lithuania appear to play a limited role in income redistribution. Recent Fund research suggests that societies Note: measured by the mean score. The most severe problem ranks number 1, and so on. with lower income inequality tend to experience more inclusive and sus- tainable growth. Productivity Indicators Hence, tax policy changes should usefully focus on wealth and capital taxation. These taxes raise revenue, are less distortionary than other taxes, provide a stable source of revenue that is less subject to cyclical changes, and are more progressive than some other taxes. That said, tax administra- tion improvements are important to ensure that tax changes yield their full potential. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no In 2011, Lithuania reduced corporate tax rates. leakage. In 2010, the corporate income tax was raised from 15 percent to 20 percent. 50 Tax at a Glance Population: 2.1 million (Year: 2011) GDP Per Capita (Current US$): 4,925 (Year: 2011) Upper middle income Country profile Economic activity has slowed down over the last few quarters amid increased uncertainty in the external environment. Still, growth is expected to be positive in 2012 at around 1.5% – 2.5%; the growth prospects over the medium-term are more favorable. The external current account remains moderate. Also, the finan- cial account performed well. Fiscal policy continues to be prudent. The fiscal deficit was maintained at 2.5 % of GDP in 2011, an appropriate stance reflecting the position of the economy in the business cycle. However, fiscal policy will need to remain cautious. Over the medium-term, the fiscal accounts would need to be gradually adjusted as the economy approaches the potential growth rates. The tax burden will remain modest, with relatively few taxes, moderate tax rates and improving admini- stration. Control of expenditures, but more importantly, a shift in their structure, will support economic growth. The objective of the World Bank‗s Country Partnership Strategy with FYR Macedonia for fiscal years 2011-2014 is to provide selective and targeted financial support and knowledge and advisory services in support of faster, more inclusive and greener economic growth. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 25.6% Budget balance % of GDP: -2.5% VAT rate: 18% (Standard) Non-tax as % of GDP: 3.8% Primary balance % of GDP: -1.7% 5% (Reduced) VAT % in GDP: 9.1% Revenue potential: 28.14* VAT threshold: 40,000 (US$ equiv.) CIT % in GDP: 0.8% Size of shadow economy: 34.9% (2007) CIT rate: 10% PIT % in GDP: 2.1% ——ECA average (unweight): 37.5% (2007) PIT rate: 10% Excise % in GDP: 3.3% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 8.6% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 27.7% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 1,302 Number of taxpayers 266,157 Number of taxpayers to tax staff 205 Number of field offices N/A Large Taxpayer Unit Yes Organization Public Revenue Office Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Macedonia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 51 The ease of paying taxes in Macedonia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Key issues Source: IMF Article IV 2011 Regional Ranking of Problems Source: BEEPS Tax administration. Continued reforms in this area will help to im- Rank in 2005 Rank in 2008 prove compliance and reduce informality, contributing to a broader and Tax rates 3 3 more stable tax base that allows lower tax rates and adequate fiscal fi- nancing. Macedonia has already achieved major gains by unifying the Corruption 1 4 collection of social contributions (pension, health and unemployment) Tax administration 5 6 and integrating them with personal income tax collection, resulting in significant improvement in compliance. Customs and trade regulations 7 11 The Fund will retain the lead in tax administration reform and the Bank will continue the dialogue with the Government in order to reas- Note: measured by the mean score. The most severe problem ranks number 1, and so on. sure the sustainability of the pension system and prevent a drain on gen- eral tax revenues. Productivity Indicators Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2009, the corporate income tax was reduced to 10 percent effective January 1, 2008. In 2010, Social security payments were classified in five groups, and social security contribution rates reduced. In 2011, FYR Macedonia lowered tax costs for businesses by requiring that corporate income tax be paid only on distributed profits. 52 Tax at a Glance Population: 3.6 million (Year: 2011) GDP Per Capita (Current US$): 1,967 (Year: 2011) Lower middle income Country profile Moldova is approaching middle-income status, and based on its growth rate of 6.8 percent in 2011, the economy has made a full recovery from the 2008-2009 global financial crisis. The massive inflow of remittances plays an important role in Moldova‘s economy due to a large share of the work force abroad. However, remittances are expected to decline and a second engine of growth based on exports and investment is needed to ensure that Moldova‘s economy continues to grow at a fast pace. To support private investment and export-led growth the ruling Alliance for European Integration (AEI) has pursued an ambitious program of structural reform, but political uncertainty has complicated its implemen- tation. Key challenges for structural reform include improving the investment climate, channeling remittances into productive investments, developing the financial sector, and creating fiscal space by improving the efficiency and quality of public services including education. Authorities are also seeking private invest- ment in strategic sectors. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 21.2% Budget balance % of GDP: -2.4% VAT rate: 20% (Standard) Non-tax as % of GDP: 3.8% Primary balance % of GDP: -1.6% 6% (Reduced) VAT % in GDP: 12.7% Revenue potential: 26.61* 8% (Reduced) CIT % in GDP: 0.7% Size of shadow economy: 25.50% VAT threshold: 50,000 (US$ equiv.) PIT % in GDP: 2.2% CIT rate: 12% Excise % in GDP: 3.2% PIT rate: 7% (Not exceeding 25,200 MDL) Social contributions % of GDP: 10.0% 18% (Exceeding 25,200 MDL) Public debt % of GDP: 29.3% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 1,779 Number of taxpayers 1,834,265 Number of taxpayers to tax staff 1,032 Number of field offices 35+LTO Large Taxpayer Unit Yes Main State Tax Inspectorate under the Organization Ministry of Finance of the Republic of Moldova Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Moldova and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 53 The ease of paying taxes in Moldova over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2012 Fiscal consolidation in 2010–11 has been strong, bringing the fiscal Rank in 2005 Rank in 2008 deficit down to2.4 percent of GDP at end-2011. However, revenue short- Tax rates 1 3 falls, due partly to the slowing economy and partly to increased losses from tax loopholes and collection problems, and new spending commit- Corruption 7 5 ments have slowed down fiscal adjustment. Thus, strong corrective meas- Tax administration 2 10 ures have been taken to close tax loopholes and offset unbudgeted expen- diture commitments that emerged in early 2012. Continued improve- Customs and trade regulations 4 11 ments in tax and customs administration, and reforms in the key areas of the pension system, education, and public administration will be needed Note: measured by the mean score. The most severe problem ranks number 1, and so on. to maintain fiscal sustainability in the medium term as foreign assistance declines. Productivity Indicators Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leak- age. In 2011, Moldova reduced employer contribution rates for social secu- rity. In 2010, the rates were lowered for social security contributions paid by employers. 54 Tax at a Glance Population: 0.6 million (Year: 2011) GDP Per Capita (Current US$): 7,111 (Year: 2011) Upper middle income Country profile Montenegro‘s economy has been broadly stable although fiscal and current account deficits remain unsus- tainably high. Today, based on its 5 percent simple average MFN applied tariff, Montenegro‘s economy is among the more liberal ones in the Europe and Central Asia (ECA) region and the upper-middle-income country group (averages of 6.8 and 9 percent, respectively). External indebtedness has been growing in recent years after significant write-off from main creditors such as London and Paris Club of creditors. Real growth of output was sluggish over the past couple of years and probably well below the potential and below the regional average. In the meantime, there were some important privatizations, as well as significant inflow of foreign invest- ments which are expected to enhance private sector led growth. This especially relates to service sectors (tourism, trade and transport) which have great potential. Its challenges ahead: on one hand, building a sustainable economic base—further reforms will strengthen the country as an independent state. On the other hand, Building a sustainable economic base —further re- forms will strengthen the country as an independent state. Source: The World Bank Fiscal structure Source: Annual Report of the Ministry of Finance 2011 Year: 2012 Year: 2012 Year: 2012 Tax % of GDP: 23.9% (excl. social contribu- Budget balance % of GDP: -4.0% VAT rate: 17% (to be increased to 19% in 2013) tions) Primary balance % of GDP: -2.2% VAT threshold: 25,092 (US$ equiv.) Non-tax as % of GDP: 4.4% Revenue potential: 27.8% of GDP* CIT rate: 9% VAT % in GDP: 10.8% PIT rate: 9% (from 2013 a higher rate of 15% has CIT % in GDP: 2.0% been introduced for income above 720 euros) PIT % in GDP: 3.3% Excise % in GDP: 4.6% Social contributions % of GDP: 11.1% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Public debt (+ guarantees) % of GDP: 65.3% Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 578 Number of taxpayers 76,526 Number of taxpayers to tax staff 133 Number of field offices N/A Large Taxpayer Unit No Government of Montenegro, Tax Ad- Organization ministration Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Montenegro and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 55 The ease of paying taxes in Montenegro over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Key issues Source: IMF Article IV 2012 Regional Ranking of Problems Source: BEEPS Tax administration problems became apparent when it was noticed that Rank in 2008 dated collection of income taxes and social contributions collection dropped far more than the PIT collection, despite being levied on largely Tax rates 2 the same tax base. Also, the liquidity squeeze was arguably affecting taxpayers‘ ability to pay, though there were no firm data on the evolu- Corruption 6 tion of tax arrears. The tax arrears stood at 8.1% of GDP at end-2012. Tax administration 4 There is scope to raise tax rates and strengthen tax administration. VAT Customs and trade regulations 11 and income tax rates are below levels in the region. The same is true for Note: measured by the mean score. The most severe problem ranks number 1, and so on. the tax wedge on labor. Limited rate increases would thus not signifi- cantly impede new employment, though care needs to be taken in raising Productivity Indicators indirect taxes in order not to heighten cost in the tourism sector. More- over, flanking any rate increases by reducing poverty traps—for exam- ple by introducing an Earned Income Tax Credit— would provide an important boost for formal employment and tax collection. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2010, the CIT rate was cut by half, to 9 percent, and social security tax rates to 12 percent for 2009 and 9 percent for 2010. In 2011, an amendment to Montenegro‘s CIT law removed the obligation for ad- vance payments and abolished the construction land charge. In 2012, Montenegro made paying taxes easier by reducing the social security contribution rate and merging several returns into a unified one. In 2013, the PIT higher marginal rate of 15% has been introduced on incomes above EUR720. The VAT rate is now proposed to be increased to 19%. 56 Tax at a Glance Population: 38.2 million (Year: 2011) GDP Per Capita (Current US$): 13,463 (Year: 2011) High income: OECD Country profile Poland was the only economy in the EU to avoid recession during the 2008-09 global financial crisis. In the current external environment, growth is projected to slow in 2012. However, due to its large and diversi- fied domestic economy, Poland is expected to be less affected than other economies in Central and Eastern Europe. Fiscal consolidation is among Poland‘s main economic policy priorities. The Government is set to con- tinue medium-term fiscal consolidation and pursue reforms to entrench the sustainability of social spending. The Government has taken significant steps to improve the public financial management system. The Bank supported the public financial management agenda in Poland through a Development Policy Loan (DPL) series as well as technical assistance projects. There are various dimensions of territorial inequality in Poland. The World Bank has been actively in- volved in the regional development agenda, including knowledge-based activities, as well as the planned financial support to municipalities. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 32.4% Budget balance % of GDP: -5.0% VAT rate: 23% (Standard) Non-tax as % of GDP: 6.1% Primary balance % of GDP: -2.3% 5% (Reduced) VAT % in GDP: 8.1% Revenue potential: 36.22* 8% (Reduced) CIT % in GDP: 2.1% Size of shadow economy: 26.0% (2007) VAT threshold: 45,810 (US$ equiv.) PIT % in GDP: 4.5% ——ECA average (unweight): 37.5% (2007) CIT rate: 19% Excise % in GDP: 3.9% ——World average (unweight): 31.0% (2007) PIT rate: 18% (Not exceeding 85,528 PLN) Social contributions % of GDP: 11.5% Source: Policy research working paper 5356, the World Bank 32% (Exceeding 85,528 PLN) 2010. Public debt % of GDP: 56.4% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2010 Number of tax staff 48,735 Number of taxpayers 19,814,575 Number of taxpayers to tax staff 407 Number of field offices 379 Large Taxpayer Unit Yes Organization Ministry of Finance Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Poland and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 57 The ease of paying taxes in Poland over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Regional Ranking of Problems Source: BEEPS Building on the reductions of the tax wedge from 2007 to 2009 through Rank in 2005 Rank in 2008 lowering disability contributions and personal income taxes, Poland has Tax rates 1 1 taken further measures to preserve employment and promote job creation. The key challenges now facing Poland will be to enhance the quality and Corruption 6 8 efficiency of public finances, increase the supply of relevant and skilled Tax administration 2 5 labor, and strengthen the business environment by strengthening tax collec- tion in efficient and equitable manner and further lowering the high tax Customs and trade regulations 7 14 burden, not least on labor. A lower tax burden and simpler tax system is needed to encourage formal private sector activity. Note: measured by the mean score. The most severe problem ranks number 1, and so on. This should include a simplification of Poland‘s onerous legal, tax and administrative environment for entrepreneurship and business develop- Productivity Indicators ment. Also, better tax compliance and broader tax base due to tax wedge reduction. The combination of lower expenditures, a lower overall tax burden, and a declining share of direct taxes in the structure of tax receipts, would en- hance long-term growth prospects although further budget neutral tax and expenditure cuts would be desirable given the still quite large public sector. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leak- In 2010, social security taxes were cut for businesses, and the value age. added tax (VAT) law was simplified. 58 Tax at a Glance Population: 21.4 million (Year: 2011) GDP Per Capita (Current US$): 8,405 (Year: 2011) Upper middle income Country profile Romania‘s prudent macroeconomic management has enabled it to recover quickly from the global fi- nancial crisis. There are risks to maintaining growth, and they include uncertainty in the Eurozone, exports markets, political developments in the context of elections, and low absorption of EU funds. Improvements in revenue collection, optimization of expenditures, better targeted assistance to the poor and vulnerable, stringent expenditure controls, and further measures will be critical to reach its deficit ob- jective. Romania‘s structural reform priorities in 2011-12 include public finance, energy and health. There are risks for the fiscal stability due to losses of potential revenue and arrears, risks to energy security and eco- nomic growth due to interruptions of supply, and risks to fair competition, due to distortion of competition in the downstream markets. Romania joined the International Bank for Reconstruction and Development (IBRD) in 1972, the Inter- national Finance Corporation (IFC) in 1991, and the Multilateral Investment Guarantee Agency (MIGA) in 1992. The World Bank has been active in Romania for almost 40 years. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 28.3% Budget balance % of GDP: -5.5% VAT rate: 24% (Standard) Non-tax as % of GDP: 4.0% Primary balance % of GDP: -4.0% 5% (Reduced) VAT % in GDP: 8.7% Revenue potential: 29.74* 9% (Reduced) CIT % in GDP: 2.2% Size of shadow economy: 30.2% (2007) VAT threshold: 44,713 (US$ equiv.) PIT % in GDP: 3.3% ——ECA average (unweight): 37.5% (2007) CIT rate: 16% Excise % in GDP: 3.1% ——World average (unweight): 31.0% (2007) PIT rate: 16% Social contributions % of GDP: 9.1% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 33.4% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2010 Number of tax staff 29,421 Number of taxpayers 7.7 million Number of taxpayers to tax staff 262 Number of regional offices 42 Number of local offices 368 Large Taxpayer Unit Yes Organization National Agency for Fiscal Administration Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is established as a (semi -) autonomous authority Romania and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 59 The ease of paying taxes in Romania over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2012 In Romania, the fight against tax evasion is a goal of ―national secu- Rank in 2005 Rank in 2008 rity‖, highlighting the ongoing problem of tax collection in Romania, Tax rates 1 1 Romanian Finance Minister Bogdan Dragoi explained that strengthening measures to combat tax evasion would enable the government to be Corruption 3 3 more flexible on investment spending, while strictly adhering to the Tax administration 2 2 budget deficit target in 2012 of 1.9% of GDP. The government is seeking to strengthen tax collections, mainly Customs and trade regulations 9 13 through improved administrative measures. Despite high rates for the VAT and social security contributions, the narrow tax base and weak Note: measured by the mean score. The most severe problem ranks number 1, and so on. compliance have reduced revenue yields in Romania compared to re- gional peers. The tax authority has begun integrating social contribu- Productivity Indicators tions with tax collections. Measures to streamline the tax system for capital gains and for the sale of bank receivables have been enacted. Additional measures will be undertaken, including moving VAT collec- tion onto a cash accounting basis for small businesses, revising the base for property taxes, and enlarging the tax base in agriculture and for the self-employed. Administrative measures will also be undertaken, with technical assistance from the IMF and the World Bank, to improve tax collection. The authorities agreed that new tax measures such as the possible introduction of a progressive tax regime will be discussed with the IMF and the EU prior to implementation. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2010, Labor taxes were increased. In 2011, Romania introduced tax changes, including a new minimum tax on profit, that made paying taxes more costly for companies. In 2012, Romania made paying taxes easier for companies by intro- ducing an electronic payment system and a unified return for social se- curity contributions. It also abolished the annual minimum tax. 60 Tax at a Glance Population: 141.9 million (Year: 2011) GDP Per Capita (Current US$): 13,089 (Year: 2011) Upper middle income Country profile Russia is an upper middle-income country that strives to move to a high-income status. In the period since 2005, the per capita GDP of Russia doubled to approximately US$ 10,360 in 2010. The poverty rate was at 12.6 percent at the end of 2010, and is projected to drop to 11.6 percent in 2012 as the economy continues to recover. The unemployment rate has also declined, reaching 6.6 percent on average in 2011. In 2011, the country recovered its pre-crisis output level and returned to a fiscal surplus. Russia is the top producer and number two exporter of oil, so when oil prices plummeted during the crisis it served as a stark reminder of the Gov- ernment‘s over-dependence on oil and gas and the need to diversify. Russia still faces some short-term challenges. It remains vulnerable to a prolonged recession in Europe that could trigger a global slowdown. Russia may also face fiscal pressure if the prices for its main commodity exports decline due to a slowdown in global demand. In the medium and long term, Russia‘s growth will depend on the success of establishing a new growth model that addresses two critical challenges: increasing the competitiveness of the economy and fostering innovation to diversify the economy; and coping with demographic change pertaining to Russia‘s declining and aging population. Russia‘s longer-term challenge is to sustain high rates of economic growth in spite of declining oil and gas production and a shrinking workforce. This calls for a policy of modernization across many areas: business environment, innovation, public administration, and social services. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 26.9% Budget balance % of GDP: 1.6% VAT rate: 18% (Standard) Non-tax as % of GDP: 11.3% Non-oil deficit % of GDP: -8.8% 10% (Reduced) VAT % in GDP: 6.0% Revenue potential: 30.34* VAT threshold: 64,000 (US$ equiv.) CIT % in GDP: 4.2% Size of shadow economy: 40.6% (2007) CIT rate: 20% PIT % in GDP: 3.7% ——ECA average (unweight): 37.5% (2007) PIT rate: 9%/13%/15%/30%/35% Excise % in GDP: 1.2% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 6.5% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 9.6% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 132,917 Number of taxpayers 147,264,700 Number of taxpayers to tax staff 1,108 Number of regional offices 90 Number of local offices 891 Large Taxpayer Unit 9 Organization Federal Tax Service (the FTS of Russia) Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is not established as a (semi-) autonomous authority Russian Federation and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 61 The ease of paying taxes in Russian Federation over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: Ernst & Young 2013 Regional Ranking of Problems Source: BEEPS Russia moved up 41 places in the tax administration ranking of the World Rank in 2005 Rank in 2008 Bank and IFC‘s report, Doing Business 2013: Smarter Regulations for Small- Tax rates 2 2 and Medium-Sized Enterprises, from 105th in 2011 to 64th in 2012, the fastest progress made by any country in the world over the course of the last year. Corruption 3 3 Despite the rapid gains Russia has made in the field of tax administration, the country still ranks 64th in the world–a sign that much remains to be done. Tax administration 1 10 In 2012, the most notable change in the area of tax administration was a shortening of the time period for VAT reimbursement. Ernst & Young survey Customs and trade regulations 9 13 noted a decrease in the number of respondents who waited more than one year to be reimbursed. While this is certainly a welcome development for companies Note: measured by the mean score. The most severe problem ranks number 1, and so on. doing business in Russia, further progress in improving the country‘s tax climate will depend more on the experience of business people on the local level. Productivity Indicators Taxpayers in Russia continue to experience a difference between the tax system on paper, which is comparatively favorable to doing business, and the tax system that they experience on a day-to-day basis. In order to improve the situation, the government will need to focus on bringing consistency to the tax code and achieving a better, more consistent, service experience for taxpayers on the local tax administration level. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2010, the corporate income tax rate was cut from 24 percent to 20 percent. In 2012, Russia increased the social security contribution rate for employers. 62 Tax at a Glance Population: 7.3 million (Year: 2011) GDP Per Capita (Current US$): 6,310 (Year: 2011) Upper middle income Country profile Serbia has passed through a period of dramatic change during the previous decade, managing a rapidly evolving politi- cal and economic environment. Today, Serbia is the EU candidate country, reflecting the significant progress made so far in structural and institutional reforms. Serbia has pursued these reforms while struggling not only with typical transitional issues (like privatization, restructuring of the real sector of economy, reconstruction of infrastructure etc) but also with the impact of the international financial crisis, which led to a 50 percent spike in poverty and doubling of unemployment in Serbia. As in many countries, the challenge is translating tenuous economic recovery into jobs and poverty reduction in a tight fiscal environment. Serbia needs to become more competitive and increase productivity. Serbia has sustained fiscal discipline, including implementing difficult measures like wage and pension freezes begin- ning in 2009, which was supported by a 15-month IMF Stand-by Arrangement (SBA). In September 2011, it secured IMF support for a new precautionary 18-month SBA with potential support of €1.45 billion. Growth in Serbia for 2011 is estimated at close to 2 percent, but is expected to go down to 0.5 percent in 2012, reflect- ing the recent deterioration of the economic outlook in the European Union. More robust growth rates of around 5 per- cent are forecasted over the medium term. Going forward, Serbia‘s main challenge is to improve standards of living and tie economic recovery into jobs in a tight fiscal environment. Increasing exports, productivity, and competitiveness are recommended to propel the country‘s economic growth. Source: The World Bank Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 34.3% Budget balance % of GDP: -4.7% VAT rate: 18% Non-tax as % of GDP: 5.1% Primary balance % of GDP: -3.5% VAT threshold: 46,500(US$ equiv.) VAT % in GDP: 10.4% Revenue potential: 25.33* CIT rate: 15% CIT % in GDP: 1.2% PIT rate: 10% (if all income earned exceed the PIT % in GDP: 4.6% threshold of 3 average annual wages) Excise % in GDP: 5.2% PIT rate: 15% (if all income earned exceed 6 Social contributions % of GDP: 10.5% annual average wages) Public debt % of GDP: 44.7% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 6,856 Number of taxpayers 424,652 Number of taxpayers to tax staff 62 Number of field offices 175 Large Taxpayer Unit Yes Ministry of Finance and Economy of the Organization Republic of Serbia Tax Administration Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is established as a (semi-) autonomous authority Serbia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 63 The ease of paying taxes in Serbia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2010 Regional Ranking of Problems Source: BEEPS IMF Country Report in 2010 mentioned that further changes to the Rank in 2005 Rank in 2008 tax system were needed, particularly in strengthening tax administra- Tax rates 2 3 tion. Based on these recommendations, CIT has been reformed by in- creasing the rate from 10 percent to 15 percent and removing many of Corruption 4 1 the tax privileges.. Tax administration 5 9 Tax administration reform. The risk management unit at the tax Customs and trade regulations 6 7 administration agency should adopt a fully integrated taxpayer compli- ance strategy that is based on the identification of the major risks to Note: measured by the mean score. The most severe problem ranks number 1, and so on. revenue and appropriate resource allocation to ensure the highest impact on collections. The strategy should focus on improving voluntary com- Productivity Indicators pliance and reducing noncompliance. E-filing has been introduced for all major taxes. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. 2012 has been a dynamic year. Some reforms in the tax policy has taken place in the last couple of years. VAT has been reformed in terms of payment frequency and rates. CIT rate was increased from 10 percent to 15 percent. E-filing has been introduced for all major taxes. 64 Tax at a Glance Population: 5.4 million (Year: 2011) GDP Per Capita (Current US$): 17,646 (Year: 2011) High income: OECD Country profile Following a deep but relatively short recession, Slovakia‘s economy is returning to robust growth. The strong economic rebound in 2010 and an upbeat outlook shift the policy focus from crisis prevention to normalization of policies with medium-term focus. Real GDP growth swung from a negative 4.7 percent in 2009 to 4 percent in 2010. Slovakia benefited from the surge in global demand for manufacturing goods. External competitiveness has remained robust and the exchange rate is broadly in equilibrium. Financial conditions and the situation of the financial sector have improved. CPI inflation dropped to among the lowest in the euro zone in 2010, but jumped in early 2011. Notwithstanding the robust GDP growth, the general government deficit remained high in 2010, at 7 ¾ percent of GDP. The outlook is for robust balanced growth, but significant risks remain. Notwithstanding, because Slova- kia‘s exports to Germany are largely intermediate products for goods with export destinations outside the EU, the impact of the projected slowdown in Germany would be limited. Overall, real GDP is projected to grow by about 3 ¾ percent in 2011 and by about 4 ¼ percent in 2012 –15, among the strongest perform- ances in the EU but still significantly below the pre-crisis rate of expansion. Source: the 2011 Article IV consultation Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 28.8% Budget balance % of GDP: -4.9% VAT rate: 23% (Standard) Non-tax as % of GDP: 4.4% Primary balance % of GDP: -3.4% 10% (Reduced) VAT % in GDP: 6.8% Revenue potential: 37.19* VAT threshold: 69,636 (US$ equiv.) CIT % in GDP: 2.4% Size of shadow economy: 16.8% (2007) CIT rate: 19% PIT % in GDP: 2.5% ——ECA average (unweight): 37.5% (2007) PIT rate: 19% Excise % in GDP: 2.9% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 12.3% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 43.3% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 8,781 Number of taxpayers 3,079,799 Number of taxpayers to tax staff 351 Number of field offices 102 Large Taxpayer Unit 1 Financial Directorate of the Slovak Re- Organization public Electronic filing No The tax administration is organized along Function functional lines Relationship with MOF The tax administration is established as a (semi-) autonomous authority Slovak Republic and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 65 The ease of paying taxes in Slovak Republic over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Key issues Regional Ranking of Problems Source: BEEPS Steps to harmonize and simplify social security contributions and to Rank in 2005 Rank in 2008 unify revenue collection could be complemented with efforts to broaden Tax rates 3 1 the tax base and improve the efficiency of VAT collection. Efforts to remove various tax deductions and exemptions should continue. Corruption 2 2 The VAT revenue, as percentage of GDP, is the lowest in the region, Tax administration 6 8 despite having comparable rates, indicating an implementation gap and the need for improving VAT administration and harmonizing tax collec- Customs and trade regulations 9 10 tions. Aligning the collection of income and social contributions could also help enhance the efficiency of tax collection. However, net revenue Note: measured by the mean score. The most severe problem ranks number 1, and so on. gains from harmonization, unified collection and improved VAT admini- stration would be slow to materialize and should not be expected to con- Productivity Indicators tribute to the 2012–13 consolidation effort. Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. There are no tax reforms in the recent four years, from year 2009 to year 2012. 66 Tax at a Glance Population: 2.1 million (Year: 2011) GDP Per Capita (Current US$): 24,142 (Year: 2011) High income: OECD Country profile Slovenia experienced one of the sharpest GDP declines in the euro area during the crisis. Economic growth has been slowly recovering on the back of external demand. Real GDP growth reached 1.2 percent in 2010. Weak domestic demand led to negative core inflation and greatly reduced the current account defi- cit. The current account deficit shrank from 6.7 percentage points of GDP in 2008 to 1.2 in 2010, reflecting mainly the end of the construction boom. The political context has not been favorable to the implementation of structural reforms. The political support for labor market and pension reforms is weak. Trade unions succeeded in holding a referendum on the recently approved revisions to pension and labor market legislations in spring. Upcoming elections in 2012 are also likely to complicate reform implementation. Policy discussions focused, for the short term, on the strength of the recovery in the context of delever- aging, bank vulnerabilities, and the fiscal exit strategy. For the medium term, the discussions were focused on pension reform and competitiveness. Source: the 2011 Article IV consultation Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 37.5% Budget balance % of GDP: -6.4% VAT rate: 20% (Standard) Non-tax as % of GDP: 6.8% Primary balance % of GDP: -4.5% 8.5% (Reduced) VAT % in GDP: 8.4% Revenue potential: 37.90* VAT threshold (Businesses established): 31,950 CIT % in GDP: 1.7% Size of shadow economy: 24.7% (2007) (US$ equiv.) PIT % in GDP: 5.6% ——ECA average (unweight): 37.5% (2007) CIT rate: 20% Excise % in GDP: 4.1% ——World average (unweight): 31.0% (2007) PIT rate: 16% (Not exceeding €7,841) Social contributions % of GDP: 15.0% Source: Policy research working paper 5356, the World Bank 27% (Not exceeding €18,534) 2010. Public debt % of GDP: 46.9% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue 41% (Exceeding €18,534) Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2012 Number of tax staff 2,330 Number of taxpayers 2,718,794 Number of taxpayers to tax staff 1,167 Number of field offices 15 Large Taxpayer Unit 1 Tax Administration of the Republic of Organization Slovenia Electronic filing Yes The tax administration is organized along Function functional lines The tax administration is established as a Relationship with MOF (semi-) autonomous authority Slovenia and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 67 The ease of paying taxes in Slovenia over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Working Paper 2006 Regional Ranking of Problems Source: BEEPS Labor taxation in Slovenia is among the highest and most progressive Rank in 2005 Rank in 2008 in Europe. Taxes include the progressive personal income tax and payroll Tax rates 2 1 tax—the latter paid by employers—and social security contributions. The tax wedge is high relative to the averages in the EU-15 and OECD. Fur- Corruption 8 13 thermore, the Slovene personal income tax system is very progressive, Tax administration 1 11 with the top rate, at 50 percent, among the highest in Central Europe. The Slovene authorities are planning a tax reform whose aims are Customs and trade regulations 10 14 broader than increasing labor participation. Their main objective is to decrease tax pressure, particularly for workers at the high end of the in- Note: measured by the mean score. The most severe problem ranks number 1, and so on. come distribution, in order to spur both labor supply and demand. This would be achieved by reducing tax rates and flattening the tax schedule. Productivity Indicators However, it is not clear that this reform would increase labor supply among low-wage earners as well. Such outcome would depend on how the reform affects the eligibility and amount of benefits, thereby high- lighting the importance of reforming the tax and benefit systems simulta- neously to create proper work incentives and boost labor participation. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no In 2011, Slovenia abolished its payroll tax and reduced its corporate leakage. income tax rate. 68 Tax at a Glance Population: 7.0 million (Year: 2011) GDP Per Capita (Current US$): 935 (Year: 2011) Low income Country profile Tajikistan continues to recover from the 2009–10 global economic crisis, which negatively affected in- ward remittances, exports of such key products as aluminum and cotton, and foreign direct investment. Despite significant external shocks during the first half of the year, real GDP growth reached 7.4 percent in 2011, up from 6.5 percent in 2010. A recovery of inward remittances has been key —fueling domestic de- mand and activity in services and construction. Agricultural production was also stronger than expected, despite low precipitation at the beginning of the year. However, in response to increased international food and fuel prices, headline inflation rose to a peak of 15 percent by May 2011, but declined to 9.3 percent by end-December, as international prices stabilized. Economic prospects in 2012 are good, but downside risks from a potential global or regional slowdown remain. Growth is projected to reach 6 percent and inflation is expected to decline gradually in line with global food prices. However, the systemic risks, together with potential for other chronic shocks (drought, natural disasters and regional trade disputes), argue for fiscal consolidation, a forward-looking monetary policy, exchange rate flexibility, and reforms to bolster competitiveness and investment. Vulnerabilities in the financial and state enterprise sectors could also pose a fiscal risk and be a drag on private-sector growth. Source: The IMF Fiscal structure Source: World Bank - ECA Fiscal Database Year: 2011 Year: 2011 Year: 2011 Tax as % of GDP: 19.5% Budget balance % of GDP: -2.5% VAT rate: 18% Non-tax as % of GDP: 1.7% Primary balance % of GDP: % VAT threshold: 11,000 (US$ equiv.) VAT % in GDP: 9.3% Revenue potential: 13.72* PIT rate: 13% CIT % in GDP: 1.4% Size of shadow economy: 41.0% (2007) CIT rate: 15% for industry sector PIT % in GDP: 1.9% ——ECA average (unweight): 37.5% (2007) 25% for all others Excise % in GDP: 0.6% ——World average (unweight): 31.0% (2007) Social contributions % of GDP: 2.5% Source: Policy research working paper 5356, the World Bank 2010. Public debt % of GDP: 34.3% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: World Bank Database Trends and Revenues Indicator 2012 Number of tax staff 79 Number of taxpayers 189,000 Number of taxpayers to tax staff 2392 Number of field offices 79 Large Taxpayer Unit 1 Organization The Tax Committee of the Government Electronic filing Yes - limited The tax administration HQ is organized Function along functional lines Relationship with MOF The tax administration reports directly to the Government Tajikistan and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 69 The ease of paying taxes in Tajikistan over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: World Bank 2012 Regional Ranking of Problems Source: BEEPS Tajikistan faces substantial challenges in revenue collection because of Rank in 2005 Rank in 2008 low capacity of the Tax Committee (TC) to detect tax evasion and locate Tax rates 1 1 non-filers and weak capacity of the MOF to do quality tax policy analysis and forecasting. Investment in the past to modernize the tax system has Corruption 4 3 been minimal. The low revenue performance is a huge concern and a Tax administration 2 9 major macroeconomic risk for an economy that is the world‘s most de- pendent on foreign remittances. Tajikistan needs to raise tax revenue to its Customs and trade regulations 7 8 full potential, improve the efficiency of tax collection and strengthen its tax administration. Indirect taxes generate two-thirds of revenues, pre- Note: measured by the mean score. The most severe problem ranks number 1, and so on. dominantly through the VAT which continues to be the main contributor to the growth in overall revenues (37 percent of total revenue) on the back Productivity Indicators of increased import. Government has taken significant steps to improve tax administration. Achievements include: (i) payments of taxes through banks; (ii) self-reporting system; (iii) the LTI is organized along func- tional lines; (iv) business registration has been greatly simplified; (v) internal control has been improved and performance evaluation system of local inspectorates has been developed; (vi) development of communica- tion networks is in progress; (vii) the functional reorganization has been piloted; (vii) the department of medium enterprises has been initiated. Progress has been made in developing software in-house for taxpayer registration and also for the management of taxpayer accounts. Additional IT applications are in the process of development. Note: in Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the Tax reform efforts standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. A major reform of the Tax Code was achieved in 2012 which eliminated a large number of nuisance taxes. A USD 18 million Tajikistan Tax Administration Reform Project (TARP) supported by the WB has been launched in 2013. This will support reforms to improve the effective- ness of the tax system, and help the strategic goal to improve the busi- ness environment and attract investments. TARP will contribute toward a more efficient, transparent and service-oriented system that will re- duce administrative costs, improve quality of taxpayer services, enhance voluntary compliance, and reduce the size of the shadow economy. 70 Tax at a Glance Population: 73.6 million (Year: 2011) GDP Per Capita (Current US$): 10,524 (Year: 2011) Upper middle income Country profile Turkey‘s economy had a soft landing in 2012 for the first time in the country‘s recent economic history, with external and internal imbalances improving. Real GDP growth slowed to 2.2 percent in 2012, down from 8.5 percent in 2011. The contribution of domestic demand to headline growth turned negative on the back of shrinking private investment, while net exports more than offset the slowdown in domestic demand and be- came the major contributor to headline growth. Thanks to the slowdown in domestic demand, the current account deficit has narrowed to reach 6.0 percent of GDP in 2012. Despite the adjustment, Turkey‘s dependence on short -term financing for the still relatively high current account deficit remains a concern. Labor market outcomes have been resilient in the current growth slowdown. Unemployment has been below the pre-crisis average of 10.3 percent for the last 16 months, while the employment rate is now at 46 percent, a level not seen since before the 2001 crisis. The central government budget deficit is estimated to have reached 2.3 percent of GDP in 2012 compared to the target of 1.5 percent and 1.3 percent in 2011. The main reasons behind this deterioration are the rise in personnel expenditures and duty losses of state owned enterprises (SOEs) as a result of delayed price adjust- ments. The increasing rigidity of current expenditures and the cyclical sensitivity of revenues is a fiscal risk going forward. Source: The World Bank Fiscal structure Source: 2011 Article IV Consultation Year: 2011 Year: 2011 Year: 2012 Tax as % of GDP: 20.5% Budget balance % of GDP: 1.8% VAT rate: 18% (Standard) Non-tax as % of GDP: 2.6% Primary balance % of GDP: 1.2% 1% (Reduced) VAT % in GDP: 6.3% Revenue potential: 27.81* 8% (Reduced) CIT % in GDP: 1.9% Size of shadow economy: 29.1% (2007) VAT threshold: None PIT % in GDP: 3.6% ——ECA average (unweight): 37.5% (2007) CIT rate: 20% Excise % in GDP: % ——World average (unweight): 31.0% (2007) PIT rate: 15% (Not exceeding 10,000 TL) Social contributions % of GDP: 6.5% Source: Policy research working paper 5356, the World Bank 20% (Not exceeding 25,000 TL) 2010. Public debt % of GDP: 39.8% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue 27% (Not exceeding 88,000 TL) Potential, Tax Space and Tax Gap in ECA Countries: A 35% (Exceeding 88,000 TL) Comparative Analysis‖ (to be published). Tax Administration Features Source: World Bank Database Trends and Revenues Indicator 2010 Number of tax staff 47,289 Number of taxpayers Number of taxpayers to tax staff Number of regional offices 29 Directorates Number of local offices Not Available Large Taxpayer Unit Yes Revenue Administration, Department of Organization Taxpayer Services Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is established as a (semi-) autonomous authority Turkey and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 71 The ease of paying taxes in Turkey over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Accelerated structural reforms are needed to increase potential growth Rank in 2005 Rank in 2008 and safeguard stability. Turkey‘s business environment remains relatively Tax rates 1 1 burdensome with the country ranking 71st in the 2013 Doing Business ratings. Improving the investment climate is critical for raising Turkey‘s Corruption 4 2 low labor productivity and further boosting its export performance. Tax administration 2 5 In addition, boosting domestic savings remains a priority to decrease the country‘s dependence on external financing and improving the current Customs and trade regulations 11 12 account deficit. Over the longer-term, reforms to enhance energy efficiency and invest in alternative energy sources hold potential to reduce depend- Note: measured by the mean score. The most severe problem ranks number 1, and so on. ence on oil and gas imports and further reduce risks of exogenous shocks. Productivity Indicators Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no In 2012, Turkey lowered the social security contribution rate for com- leakage. panies by offering them a 5% rebate. 72 Tax at a Glance Population: 45.7 million (Year: 2011) GDP Per Capita (Current US$): 3,615 (Year: 2011) Lower middle income Country profile Developments in the Euro area and the global economy have begun to affect Ukraine. According to the Statistics Service, real GDP decelerated to 4.7 percent in the fourth quarter of 2011. Cumulative growth for the whole of 2011 slowed to 5.2 percent. The current account (CA) deficit has continued to widen, while external financing has become more challenging. The base case scenario anticipates growth to slow to 2.5 percent in 2012 as Ukraine enters a period of lower external demand, higher funding pressures, and instabil- ity in international markets. Downside risks to this forecast are unusually high. The increased uncertainty in international financial markets has resulted in a lower appetite for risk, and investors have opted to reduce their exposure to emerging markets, including Ukraine. The World Bank's Country Partnership Strategy (CPS) for Ukraine for 2012-2016, prepared in partnership with the Government of Ukraine and in consultation with the private sector, civil society and donors, was endorsed by the World Bank's Board of Directors in February 2012. The World Bank Group‘s assistance will be concentrated in two areas: improving public services and public finances and improving the business climate to unlock Ukraine‘s economic potential. Source: The World Bank Fiscal structure Source: IMF Country Report 2011 Year: 2010 Year: 2010 Year: 2012 Tax as % of GDP: 38.1% Budget balance % of GDP: -6.5% VAT rate: 20% (Standard) Non-tax as % of GDP: 4.7% Primary balance % of GDP: -3.7% Rate will be reduced to 17% in 2014 VAT % in GDP: 9.0% Revenue potential: 29.85* VAT threshold: 36,923 (US$ equiv.) CIT % in GDP: 4.1% Size of shadow economy: 46.8% (2007) CIT rate: 21% PIT % in GDP: 4.7% ——ECA average (unweight): 37.5% (2007) PIT rate: 15% and 17% + simplified regime for Excise % in GDP: 3.1% ——World average (unweight): 31.0% (2007) entrepreneurs –physical persons doing specific Social contributions % of GDP: % Source: Policy research working paper 5356, the World Bank economic activities. 2010. Public debt % of GDP: 39.5% *Source: Munawer Sultan Khwaja & Indira Iyer, ―Revenue Potential, Tax Space and Tax Gap in ECA Countries: A Comparative Analysis‖ (to be published). Tax Administration Features Source: IOTA Database Trends and Revenues Indicator 2010 Number of tax staff 58,900 Number of taxpayers 3,895,302 Number of taxpayers to tax staff 66 Number of regional offices 27 Number of local offices 374 Large Taxpayer Unit Yes Organization State Tax Service of Ukraine Electronic filing Yes The tax administration is organized along Function functional lines Relationship with MOF The tax administration is established as a (semi-) autonomous authority Ukraine and comparator economies rank on the ease of paying taxes Source: Doing Business Database 2013 73 The ease of paying taxes in Ukraine over time Source: Doing Business Database 2013 Tax Administration Unofficial Payments: Taxes Tax Inspections Unofficial Payments: Customs Key issues Source: IMF Article IV 2012 Regional Ranking of Problems Source: BEEPS In Ukraine, significant progress has been made in modernizing state tax Rank in 2005 Rank in 2008 services, including implementation of a centralized web-based solution Tax rates 1 1 for registering taxpayers, filing and paying taxes, and tax audit execu- tion. Also, there has been some progress in automating VAT refunds Corruption 3 2 with latest data through end-May 2012 showing about 60 percent of Tax administration 4 4 receipts refunded via the automated system, but some companies con- tinue to report overdue refunds. Customs and trade regulations 9 13 New tax code was approved in 2010 that gradually lowers corporate tax rates (which dropped 2 percentage points on January 1) and VAT in Note: measured by the mean score. The most severe problem ranks number 1, and so on. line with the authorities‘ objective of lowering the tax burden. However, the tax system continues to suffer from loopholes, evasion, and uneven Productivity Indicators administration. Besides, high marginal tax rates and compliance costs compared with other countries. Measures need to be taken to improve tax administration to increase taxpayers‘ trust in the tax system and reduce widespread tax avoidance. Tax reform efforts Note: Tax productivity is equal to the tax as a percent of the tax base (GDP or consumption) divided by the standard tax rate. For VAT productivity the base is total consumption. For PIT and CIT, the base is GDP. In an ideal world, productivity will be 100 if the entire base is taxed, there are no exemptions and there is no leakage. In 2009, the tax burden on businesses was eased by reducing several social security tax rates including: pension fund, social security fund, and social insurance for accidents at work. Thanks to electronic tax filing systems, the time to pay taxes was reduced. In 2011, Ukraine eased tax compliance by introducing and continually enhancing an electronic filing system for value added tax. 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