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INTERNATIONAL MONETARY FUNINTERNATIONAL MONETARY FUNDD

Tax Revenues

Uncollectible Taxes

Tax Credits

Adriaan BloemAssistant Director

Real Sector Division

CONTENTCONTENT

• Background and context

• Tax revenues (definition and coverage) Issues Advisory Expert Group (AEG) recommendation

• Accrual basis of recording of tax revenue (including uncollectible taxes issue) Issues AEG recommendation

• Tax credits Issues AEG recommendation

Background And ContextBackground And Context

• Review of SNA 1993

• Paper prepared by Task Force on the Harmonization of Public Sector Accounting (TFHPSA)

• Considered by AEG at its July 2005 Bangkok meeting

Tax RevenueTax RevenueDefinition And CoverageDefinition And Coverage

• Current SNA definition of taxes– ‘Compulsory, unrequited payments to government.’

• Issues related to the borderline between taxes, fees, licenses and permits are significant

Taxes Versus Fees, Licenses And Taxes Versus Fees, Licenses And PermitsPermits

• Fees, licenses and permits can be: Unrequited transactions (usually a tax) Requited transactions

Purchase of a serviceAcquisition of an asset

• The label (tax, fee etc) is not determinant of classification, but Whether a service is received by the payer

approximately commensurate with the amount paid determines whether it is a fee or tax.

AEG’s RecommendationAEG’s Recommendation

• The AEG supported the general definition of tax revenue.

• Examples should be provided to illustrate the underlying concepts (particularly on the issue of fees, licenses and permits). But these should not be seen as exhaustive or

prescriptive.

Discussions on distinction taxes-licenses are still ongoing.

Tax – Accrual RecordingTax – Accrual Recording

• General principle of accrual recording ‘Flows are recorded when economic value is created, transformed, exchanged or extinguished and not when cash payments are made.’

• Flexibility is permitted in practice for taxes because reliable estimates of the amount of tax may not be known until time of tax assessment Time-adjusted cash method

Assessment of due taxes

Tax – Accrual RecordingTax – Accrual Recording

• Unresolved issue: prepaid taxes Accrue over reference period

or

Record in period of payment

Uncollectible Tax Uncollectible Tax

• Uncollectible tax is the difference between what is actually collected and what has theoretically accrued

• Two methods of accounting Net – only record as tax the amount that is realistically

expected to be collected

Gross – record all tax that has theoretically accrued and record a transfer for the amount not collected

AEG’s RecommendationAEG’s Recommendation

• AEG reaffirmed the accrual basis for recording tax revenue

• The principle of not including uncollectible taxes (net recording method) was agreed

Tax CreditsTax Credits

• 1993 SNA does not make recommendations on treatment of tax credits

• Two types of tax credits Payable – if the tax credit owed to a taxpayer exceeds

his/her tax liability, the difference is paid out

Non-payable – the tax credit to an individual is limited to his/her tax liability.

Tax Credits Tax Credits ContinuedContinued

• Non-payable tax credits are recorded as reducing tax revenue

• Payable tax credits – debate about how to record Net – amount of tax credit up to a taxpayers tax liability

recorded as reducing tax revenue, and amount paid out in excess recorded as government expenditure

Gross – tax revenue not reduced, and full amount of tax credit (not just the excess over the tax liability) recorded as tax expense

AEG’s RecommendationAEG’s Recommendation

• The AEG recommended that payable tax credits should be recorded on a gross basis. With the presentation being such that it would permit

the derivation of tax credits on a net basis as well