THE TAX ADMINISTRATION AND INTERNATIONAL MONETARY FUND S VALUE ADDED TAX GAP REPORT

Transcription

1 THE TAX ADMINISTRATION AND INTERNATIONAL MONETARY FUND S VALUE ADDED TAX GAP REPORT Aki Savolainen/Finnish Tax Administration 12/2/216

2 Summary of the IMF Report on Finland s Value Added Tax Gap CONTENTS 1 The IMF s approach to measuring the Value Added Tax Gap Finland s participation in the IMF s estimate of the value added tax gap Data forming the base of Finland s estimate VAT Gap (compliance gap) in Finland Size of the gap and changes Reasons for the low gap Gap by sector IMF s observations and recommendations The VAT gap resulting from fiscal support (policy gap) in Finland Size of the gap and changes... 6

3 1 THE IMF S APPROACH TO MEASURING THE VALUE ADDED TAX GAP The aim of the IMF s (International Monetary Fund) RA-GAP program (Revenue Administration Gap Analysis Program) is to support countries to develop their estimates of the tax gap particularly as regards value added tax. The program is made up of expert visits to the target country, the calculation of the value added tax gap using the approach developed by the IMF and the final report. 1.1 Finland s participation in the IMF s estimate of the value added tax gap The Tax Administration set up a working party which included representatives of the Tax Administration, Finnish Customs, the Ministry of Finance, Statistics Finland as well as VATT Institute for Economic Research. The working party mapped out alternative approaches for estimating the gap for different types of tax. With regard to the value added tax gap, it was decided to recommend the approach developed by the IMF and to request consultation on applying this approach in Finland. 1.2 Data forming the base of Finland s estimate The IMF s approach to calculate the value added tax gap is based on national accounting data as well as data from the Tax Administration and Finnish Customs on VAT returns and payments received. National accounting data is used to determine the tax revenues legally due. On the basis of taxpayers returns and payment data, the amount of value added tax declared that has been paid is calculated i.e. the actual revenue. What is critical in this approach is that the payment is allocated to the year in which the tax due was accrued. The IMF has examined the development of the value added tax gap in Finland from The estimates for 213 and 214 are forecasts as the national accounting data for these years have not yet been finalised. It is therefore possible that the figures for these years will be adjusted once the statistical data is confirmed. The IMF distinguishes between the overall Vat gap, the compliance gap and the policy gap. 2 VAT GAP (COMPLIANCE GAP) IN FINLAND The compliance gap is calculated as the difference between the potential tax revenue under the tax rules and the actual revenue received. It is divided into the assessment gap and the collection cap. 2.1 Size of the gap and changes The VAT gap in relation to the potential tax revenue under the tax rules in Finland is very low and it has decreased a little since 28. The VAT gap in 214 was about half a per cent of GDP. That is equivalent to a tax gap of about a billion Euros. The VAT gap has remained at roughly this level from

4 Gap as a proportion of potential revenues under current tax rules, % Gap as a proportion of GDP, % IMF: Finland s VAT gap in relation to potential revenue under current tax rules and GDP ,9,8,7,6,5,4,3,2,1 VAT gap as a proportion of potential revenue under current tax rules, % (left hand side scale). VAT gap as a proportion of GDP % (right hand side scale) The gap calculated by the IMF corresponds to the results of the research commissioned by the European Commission from the CASE - Center for Social and Economic Research. Comparison between results of VAT gap research for Finland (IMF and CASE) (gap as a proportion of GDP),9,8,7,6,5,4,3,2,1 Comparison of VAT gap results in proportion to GDP, % IMF CASE 215

5 2.2 Reasons for the low gap 2.3 Gap by sector One reason for the low tax gap is the high level of positivity towards taxes among Finns and satisfaction regarding the effective functioning of the Tax Administration. The high level of job satisfaction among the Tax Administration s employees is reflected in their high levels of professionalism. The VAT gap in the construction sector has been affected by measures taken by the Tax Administration and by legislation. The Tax Administration ran a Construction sector tax monitoring project from , and as part of that the reverse charge obligation for construction services which came into effect in 211 has resulted in a reduction of the VAT gap in the construction sector. The effectiveness of the collection measures taken by the Tax Administration can be seen in the fact that the level of the collections gap did not really increase after the 28 financial crisis. The review by sector is only indicative because there are major uncertainty factors associated with sector-specific modelling resulting from factors such as differences in classification between VAT and accounting as well as those at the unit level (VAT returns are recorded differently for a sector than the underlying activities in the accounts). The sector specific tax gap review focuses on the construction sector. There is a visible decline in the construction sector VAT gap after the adoption of the reverse charge practice for construction services in 211. The retail sector has the largest impact on VAT revenue. The concentration of the sector into a few large corporate groups is of great significance for the low level of the VAT gap. It is typical for some sectors to have a negative gap. There are three reasons for a sector to have a negative gap: 1. Reasons related to modelling the sector's tax revenue under the tax rules: For example matching exports and imports to the correct sectors. 2. Matching VAT returns and payments: A company may have a different sector code in the national accounting and Tax Administration registers, or a company may have operations that are in a different sector in the national accounts to that of the company (the VAT return will be recorded under the company's sector). This results in the VAT return being recorded against a different sector to the one where production takes place. 3. Over estimation of the tax revenue under the tax rules: This may be a consequence of mistakes in estimating the proportions of taxable and non-taxable production. Of these, the first two would not affect the tax gap for the whole economy. The third reason would result in over estimation of the tax gap for the whole economy. However, it should be noted that the negatives are small and remain within the model s margin of error.

6 Relative to GDP, % IMF: Finland s VAT gap by sector ,5,4,3,2,1 -,1 -, ,3 A-B C D-E F G-H I J K-L M-N O-Q R-S T-Z Sector A-B Agriculture, fishing, forestry, extractive C Manufacturing D-E Electricity, gas, and heat supply, Water supply; sewerage, and waste management F Construction G-H Wholesale and retail trade, transportation and storage I Accommodation and food service activities J Information, communication K-L Financial and insurance activities, real estate activities M-N Professional, scientific and technical activities, administrative and support service activities O-Q Public administration, education, health and social work activities R-S Arts, entertainment and recreation, other service activities T-Z Other activities, industry unknown 2.4 IMF s observations and recommendations The Tax Administration has developed its readiness to carry out tax analyses and it will continue to carry out its current and planned tax analyses. The material available to the Tax Administration will enable it to take analytical approach as the basis for risk management. The Tax Administration should continue its tax gap analyses and publish its findings. 3 THE VAT GAP RESULTING FROM FISCAL SUPPORT (POLICY GAP) IN FINLAND The policy gap measures the impact of tax policy on VAT revenues. The policy gap is broken down into the efficiency gap and the expenditure gap. 3.1 Size of the gap and changes The fiscal support that contributes to the margin of the policy gap was about two billion Euros in 214 i.e. about one per cent of GDP. The proportion is thus about double that of the VAT gap.

7 Relative to Gross Domestic Product, % The policy gap has increased from 28 to 214. The increase in the policy gap can be the result of decisions regarding taxation policy (for example a reduction of VAT on certain products or for certain sectors) or the switching of consumption to products subject to reduced VAT (for example more food is consumed in restaurants and consumption of alcohol is reduced). The increase in the policy gap between is explained by the reduction in VAT on food and restaurant services in both 29 and 21. IMF: Policy gap vs VAT revenues Policy gap margin, % GDP Essential fiscal support, % GDP VAT revenues, % GDP