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International Monetary Fund

This paper describes economic developments in Guatemala during the 1990s. The paper discusses social and institutional expenditures of the peace program. The paper highlights that Guatemala’s illiteracy rate was approximately 44 percent in 1995, the second highest in Latin America. Illiteracy is much higher in the predominantly rural departments (about 65 percent), where the indigenous population is more heavily concentrated, than in Guatemala City (16 percent) and is much higher for women (46 percent) than for men (33 percent). The paper also discusses the tax system and trade regime in Guatemala.

International Monetary Fund. Western Hemisphere Dept.

Guatemala: Selected Issues and Analytical Notes

Mario Pessoa, Andrew Okello, Artur Swistak, Muyangwa Muyangwa, Virginia Alonso-Albarran, and Vincent de Paul Koukpaizan
The value-added tax (VAT) has the potential to generate significant government revenue. Despite its intrinsic self-enforcement capacity, many tax administrations find it challenging to refund excess input credits, which is critical to a well-functioning VAT system. Improperly functioning VAT refund practices can have profound implications for fiscal policy and management, including inaccurate deficit measurement, spending overruns, poor budget credibility, impaired treasury operations, and arrears accumulation.This note addresses the following issues: (1) What are VAT refunds and why should they be managed properly? (2) What practices should be put in place (in tax policy, tax administration, budget and treasury management, debt, and fiscal statistics) to help manage key aspects of VAT refunds? For a refund mechanism to be credible, the tax administration must ensure that it is equipped with the strategies, processes, and abilities needed to identify VAT refund fraud. It must also be prepared to act quickly to combat such fraud/schemes.
Mr. Ricardo Fenochietto and Juan Carlos Benitez
This paper analyses and compares two different groups of tools, the first to encourage the use of invoices (or payment systems) and the second to refund the VAT to low-income individuals. The analysis contributes to the existing literature by providing a clear characterization between these two groups of tools that are too often misunderstood and offers clear guidance to policymakers on the benefits and pitfalls of them based on available empirical studies and novel data analysis. Briefly, the first group includes a set of regressive and distortive tools (such as, allowing deducting the VAT paid on personal consumption from the PIT and reducing the VAT rate for using electronic means of payments or registration), while the second group includes tools that are less distortionary and improve income distribution (tax credits and VAT rate reduction targeted only at low-income individuals). This paper also finds that allowing the deduction of personal consumption against the PIT’s taxable base (i) did not impact positively the VAT revenue in Guatemala and (ii) worsens the income distribution in Ecuador.

Abstract

Taxation, like politics, is the art of the possible--yet most public finance texts ignore the critical role played by tax administration in restoring macroeconomic balance and promoting equity and efficiency. This volume, edited by Richard M. Bird and Milka Casanegra de Jantscher, fills a gap in the literature by linking tax policy and tax administration reform and exploring ways to improve taxpayer compliance.

Ms. Stefania Fabrizio, Davide Furceri, Mr. Rodrigo Garcia-Verdu, Bin Grace Li, Mrs. Sandra V Lizarazo Ruiz, Ms. Marina Mendes Tavares, Mr. Futoshi Narita, and Adrian Peralta-Alva
Despite sustained economic growth and rapid poverty reductions, income inequality remains stubbornly high in many low-income developing countries. This pattern is a concern as high levels of inequality can impair the sustainability of growth and macroeconomic stability, thereby also limiting countries’ ability to reach the Sustainable Development Goals. This underscores the importance of understanding how policies aimed at boosting economic growth affect income inequality. Using empirical and modeling techniques, the note confirms that macro-structural policies aimed at raising growth payoffs in low-income developing countries can have important distributional consequences, with the impact dependent on both the design of reforms and on country-specific economic characteristics. While there is no one-size-fits-all recipe, the note explores how governments can address adverse distributional consequences of reforms by designing reform packages to make pro-growth policies also more inclusive.
International Monetary Fund

This 2005 Article IV Consultation highlights that following three years of sluggish economic growth, activity in Guatemala improved somewhat in 2004, with real GDP rising by 2¾ percent, but consumer price inflation drifted upward to more than 9 percent. Monetary policy is being geared to reducing inflation to the 4–6 percent range. The exchange system is flexible, but the central bank has intervened in the foreign exchange in 2004 to contain the appreciation of the quetzal against the U.S. dollar. In January 2005, a rules-based mechanism for interventions was introduced.