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Kiyoshi Nakayama
A well-designed regional tax treaty to which developing countries are signatories will include provisions securing minimum withholding taxes on investment income and technical service fees, a taxing right in respect of capital gains from indirect offshore transfers, and guarding against-treaty shopping. A tax treaty policy framework—national or regional—that specifies the main policy outcomes to be achieved before negotiations commence would enable developing countries with more limited expertise and lower capacity for tax treaty negotiations to avoid concluding problematic tax treaties. This note provides guidance for members of regional economic communities in the developing world on what should and should not be included in a regional tax treaty and how to design on a common tax treaty policy framework for use in negotiations of bilateral tax treaties with nonmembers.
Stephane Schlotterbeck
Over the past decade, governments in the Caribbean region have introduced the value-added tax (VAT) to modernize their tax system, rapidly mobilize revenue and reduce budget deficits. This paper analyzes VAT performance in the region and concludes that while it has boosted revenues, the VAT has not reached its potential. Intended as a broad-based tax with limited exemptions, a single rate and zero-rating confined to exports, the VAT’s design often lacks these characteristics. The paper also finds that although tax administration reforms can boost revenues, countries have just started to address organizational inefficiencies, data integrity issues, and operational ineffectiveness. These reforms need to intensify in order to have a more significant impact on compliance and revenue.
Mr. Paolo Dudine and João Tovar Jalles
In this paper we provide short- and long-run tax buoyancy estimates for 107 countries (distributed between advanced, emerging and low-income) for the period 1980–2014. By means of Fully-Modified OLS and (Pooled) Mean Group estimators, we find that: i) for advanced economies both long-run and short-run buoyancies are not different from one; ii) long run tax buoyancy exceeds one in the case of CIT for advanced economies, PIT and SSC in emerging markets, and TGS for low income countries, iii) in advanced countries (emerging market economies) CIT (CIT and TGS) buoyancy is larger during contractions than during times of economic expansions; iv) both trade openness and human capital increase buoyancy while inflation and output volatility decrease it.
Mr. Giovanni Melina, Ms. Susan S. Yang, and Luis-Felipe Zanna
This paper presents the DIGNAR (Debt, Investment, Growth, and Natural Resources) model, which can be used to analyze the debt sustainability and macroeconomic effects of public investment plans in resource-abundant developing countries. DIGNAR is a dynamic, stochastic model of a small open economy. It has two types of households, including poor households with no access to financial markets, and features traded and nontraded sectors as well as a natural resource sector. Public capital enters production technologies, while public investment is subject to inefficiencies and absorptive capacity constraints. The government has access to different types of debt (concessional, domestic and external commercial) and a resource fund, which can be used to finance public investment plans. The resource fund can also serve as a buffer to absorb fiscal balances for given projections of resource revenues and public investment plans. When the fund is drawn down to its minimal value, a combination of external and domestic borrowing can be used to cover the fiscal gap in the short to medium run. Fiscal adjustments through tax rates and government non-capital expenditures—which may be constrained by ceilings and floors, respectively—are then triggered to maintain debt sustainability. The paper illustrates how the model can be particularly useful to assess debt sustainability in countries that borrow against future resource revenues to scale up public investment.
Mr. James L. Smith
We present a simple model of petroleum exploration and development that can be applied to study the performance of alternative tax systems and identify potential distortions. Although the model is a highly simplified, it incorporates many factors and some of the key tradeoffs that would influence an investor’s investment behavior. The model recognizes the role of enhanced oil recovery and treats the impact of taxation on exploration and development in an integrated manner consistent with an investor’s joint optimization of investments at both stages of the process. The model is simple and user-friendly, which facilitates application to a broad range of problems.
Ms. Nese Erbil
This paper examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures - government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance - and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group.
Mr. Sanjaya P Panth, Mr. Paul Cashin, and Mr. W. A Bauer
The Caribbean has made substantial progress in recent years in implementing economic reforms, both at the national and regional level. The Caribbean: Enhancing Economic Integration examines the product of the efforts made by Caribbean policymakers to strengthen regional cooperation and integration, which has yielded economic transformation and tighter integration with the global economy. This volume discusses regional financial integration as a means of deepening financial systems and raising regional growth; the relationship between tax incentives and investment, where harmonized regional action is important in seeking to overcome collective actions problems; and the consequences for the Caribbean of the erosion of trade preferences in key export markets. The book is based on empirical research carried out as part of the IMF's regional surveillance work in the Caribbean.
International Monetary Fund
CARTAC, the second of the regional technical assistance centers, was created with singular emphasis on ownership of technical assistance by the beneficiary countries. To this end, it was structured as a UNDP project with the IMF as Executing Agency and with a Steering Committee empowered to give strategic guidance to the program and select its senior staff from short lists provided by the IMF. With the spread of the RTAC modality, the IMF has sought to bring the Centers' activities within the ambit of overall resource planning for technical assistance, ensure consistency with the institution's view on priorities for technical assistance in the countries concerned, and tighten quality control through backstopping. This has created the potential for conflict with the relative independence that CARTAC has enjoyed from its inception. The conclusion in this report, however, is that alignment with the IMF does not necessarily undermine country ownership and that the Steering Committee can play a pivotal role in defusing any tension that may arise.
International Monetary Fund
CARTAC, the second of the regional technical assistance centers, was created with singular emphasis on ownership of technical assistance by the beneficiary countries. To this end, it was structured as a UNDP project with the IMF as Executing Agency and with a Steering Committee empowered to give strategic guidance to the program and select its senior staff from short lists provided by the IMF. With the spread of the RTAC modality, the IMF has sought to bring the Centers' activities within the ambit of overall resource planning for technical assistance, ensure consistency with the institution's view on priorities for technical assistance in the countries concerned, and tighten quality control through backstopping. This has created the potential for conflict with the relative independence that CARTAC has enjoyed from its inception. The conclusion in this report, however, is that alignment with the IMF does not necessarily undermine country ownership and that the Steering Committee can play a pivotal role in defusing any tension that may arise.