revenue leakeage and tax administration-nowook...

1 Copyright 2005 Korea Institute of Public Finance. All Right Reserved.

Revenue Leakage:Causes and Reform Agenda

No-Wook ParkKorea Institute of Public Finance


Contents

Causes of revenue leakageReform agenda


Why taxation matters for development

Urgent need to mobilize resources to maintain and provide even the most basic social services in many developing countriesIn reality, those with political power and economic ability are few, and they would not want to pay taxesThose with little political power and economic ability would resist paying taxes, tooFor poor and open economies, it gets harder to raise domestic revenues.


Comparison of tax to GDP Ratio (2004)

Sweden: 50.7%, Denmark: 49.6%United States: 25.4%, Korea: 24.6%Mexico: 18.5%Tanzania: 11% in 1997, Uganda: 10% in 1997For some European countries, overburden of tax is a problem, while, for developing countries, inability to raise tax revenue is a problem.


Criteria for Good Tax System

Ability to raise revenueEffects on economic efficiencyEquity implicationAdministrative feasibility


Recent Trend of Tax Reform

Key words for every countries including both industrialized and developing countries

Broadening tax base & flattening the tax ratesIntroduction of value-added taxLower personal and corporate income taxesSimplification of tax bands and broadening of the bases for personal and corporate income taxesReduction of import duties and simplification of the rate structureAbolition of export taxes


Causes of Revenue Leakage

Developing countries suffer from revenue leakage due to various reasons

Complicated tax systemToo much discretionary power of tax officialsNon-transparency leads to corruption and revenue leakage

Inefficient and corrupt tax administrationLack of infrastructureScarcity of qualified tax officersLow incentives for tax officers

Low tax morale due to “culture of corruption”


Recent Failed Reforms in Africa

Tax reforms are tried in some African countries in the last two decades

Uganda established semi autonomous revenue authority in 1991Tanzania followed in 1996.

Reform programsSimplification of tax structureRemove discretionary tax exemptionImprove tax administrationHarmonize central and local tax system


Recent Failed Reforms in Africa (Cont’d)

Tax revenue rose initially but it went downIn Uganda, it rose from 7% of GDP in 1991 to 10% in 1997. In Tanzania, it rose from 10% in 1996 to 11% in 1997.However, it has declined thereafter.

Why?Political influence eroded the autonomy of revenue authorityToo many taxes and complicated tax system despite tax reformToo weak legal sanctions for tax payers and collectorsCorruption networks took over tax administration


Issues in Korean Tax SystemNeed for more revenues to finance spending on social welfare programs

Aging population and polarized economy requires more spending for the elderly and poor

Lack of information on the income of self-employed taxpayers

Raises of equity issue in providing social welfare benefit and imposing new tax burdenKorean government revenues depend more on indirect taxes than income taxes

Consumption is easier to observe than incomeAttempt to control rising property prices by taxation

Its effects are uncertain yet


Tax Reform Agenda in Korea

Reform of tax systemSimplification of tax system

Reform of tax administrationIntroduce self-reporting systemStrengthen tax-auditDevelop effective tax-related information system

Reform of tax environmentPromote book keepingPromote credit card use

Strengthen penalties for tax evasionStrengthen penalties for briberyProvide incentives for reporting of tax-related crimeReform incentive system for civil servant in tax administration


Reform of Tax System

Simplify tax systemReduce tax compliance costComplicated tax system creates room for tax officers’discretion which will lead to corruption

Korean caseToo many kinds of taxes

16 national taxes, 15 local taxesAbout 10 taxes occupy most tax revenues and others are negligible

Too many earmarked tax


Reform of Tax Administration

Promote self-reporting Self-reporting system minimize interaction between taxpayers and tax officers

Strengthen tax auditInstead of interaction between taxpayers and tax officers, strengthen tax audit systemAudit rate is too low

Korea: 0.2 - 0.3% for value added tax OECD countries: 1 - 3%

Improve quality of tax-related information Make tax-related information publicImprove transparency in tax administration


Reform of Tax Environment

Promote book keepingTo reduce corruption, it is important to base taxation on real data and book keeping provides basis for taxation based on transaction recordProvide incentives for book keeping

Apply lower tax rateExempt from tax audit


Ratio of book-keeping tax reporter

50.1

2,031

2003

53.647.345.444.2Ratio (%)

2,2362,0101,7411,535Number of book-keeping tax reporter

2004200220012000

Unit: thousand, %


Reform of Tax Environment (Cont’d)

Promote use of credit card use and cash receipt

It enables tax authority to identify transaction details and to expose income source of self-employed citizensIntroduced tax incentives and lottery chance for credit card users Introduced tax incentives and lottery chance for cash receipt obtainers in 2005


Ratio of Credit Card-used and Cash Receipt-obtained Expenditure to total Consumption Expenditure

41.7

401,469

167,096

2004

43.8

389,177

170,529

2003

45.7

381,063

174,023

2002 2005200019941990Year

49.725.510.75.7Ratio(%)

424,630312,300175,96993,505Total Consumption

18,643Cash Receipt

192,45979,59218,8755.323Credit Card


Reform of Tax Environment (Cont’d)

Introduce e-filing and tax information systemEstablished home tax service

All the tax-related problems can be solved through internet98% of tax agent and 53% of business registered in 2005

E-filing is available for all taxes97.1% of corporate tax, 59.8% of value-added tax, and 73.9% of income tax is reported by e-filing in 2005


Ratio of e-filers in selected countries (2003)

26%25%40%E-filing ratio (%)

200019911986Year e-filing is introduced

Australia(Value Added Tax)

France (Corporate Tax)

USA (Income Tax)


Reform of Penalty System for Tax Evasion

Develop various types of penaltiesMonetary penalty, non-monetary sanction, educational requirement, publicizing, and so on

Increase degree of penalty on bribery giverProvide incentives for whistle blowerStrengthen internal audit of tax authority


Thank you !!

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