At the breakup of the Soviet Union, the newly independent countries faced the daunting task of enacting their own tax laws and establishing separate tax and customs administrations. Initially, the new countries simply adopted the former Soviet tax system, which had been modified just days prior to the breakup of the Soviet Union to include a value-added tax (VAT). As the transition to a market economy proceeded, however, the new tax and customs administrations had to shift from handling the taxation transactions of a highly controlled state sector to dealing with the more challenging compliance activities of the emerging private sector and increasingly autonomous state-owned firms. This shift demanded a new approach to tax policy, and a totally different operational strategy for tax administration. Most of the countries of the Commonwealth of Independent States (CIS), which includes all countries of the former Soviet Union but the three Baltic countries, have struggled to adapt to the change and have experienced declining and inadequate revenue in varying degrees of severity.1
General government revenues, which include revenue from both central and local governments, collected within the Baltics, Russia, and other countries of the former Soviet Union had already fallen below Soviet-era levels by 1993. Revenue as a share of GDP declined on average by the equivalent of about 5 percentage points, from about 35 percent of GDP (weighted average) in 1993 to under 30 percent of GDP in 1995. This reflects a modest increase in the Baltics since 1993, more than offset by a decline in the revenue to GDP ratio of substantially more than 5 percentage points for most CIS countries (Table 1). Thus, for example, the revenue-to-GDP ratio fell by 23 percentage points in Azerbaijan, probably at least 15 percentage points in Tajikistan, and 11 percentage points in Armenia from 1993 to 1996.2 In Georgia, while no comparable data are available for earlier years, the 1993 revenue-to-GDP ratio of 3.4 percent, reflecting the civil strife at the time, clearly indicates that there must have been a precipitous drop from the preceding period; thus the rising trend after 1993 is not surprising. To summarize the situation for the CIS countries in the late 1990s, experience ranged from a sizable decline in the revenue-to-GDP ratios—for example, in strife-torn Georgia and Tajikistan, where revenue dropped to 10–12 percent of GDP—to little if any change in places such as Ukraine and Belarus, where economic and structural reforms were less advanced and revenue remained as high as 40-45 percent of GDP.
This section summarizes the principal initiatives implemented by CIS countries, including those under revenue action plans in the areas of tax policy and tax administration, as well as the current status of tax policy and administration in the Baltics, Russia, and other countries of the former Soviet Union. Tax policy and tax administration are treated separately.
The paper discusses the social protection implications of the weakening financial and administrative capacity of countries undergoing economic transition. The formal sector is shrinking, and unemployment and underemployment are rising rapidly. This is affecting both the revenue base of social protection programs and the ability of these countries to target social benefits. These developments make it imperative for these countries to restructure social benefits, rely more on self-targeting mechanisms to deliver benefits, as well as take immediate steps to improve payroll tax compliance. This is a Paper on Policy Analysis and Assessment and the author(s) would welcome any comments on the present text Citations should refer to a Paper on Policy Analysis and Assessment of the International Monetary Fund, mentioning the author(s) and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.
This Selected Issues paper for Algeria analyzes the potential economic impact of Algeria’s Association Agreement with the European Union (AAEU). The paper lays out the major elements of Algeria’s AAEU and makes a comparison with other AAEUs. It discusses the potential economic implications (costs and benefits) of the agreement, and elaborates economic policy issues and challenges. The paper also takes stock of Algeria’s business climate as the authorities consider the use of the fiscal space created by higher hydrocarbon revenues to tackle Algeria’s jobs challenge.
Tax policy in Ukraine is engaged in two fronts at once. On one front, very significant work has been done over the years on the gradual improvement and updating of the tax system; on the other, it questions essential tenets of the existing system, exploring fundamental changes to it. While serious efforts have been devoted, for example, to the modernization of the international aspects of the income tax, upgrading the regime to OECD standards, there is a strong push from some quarters of the policy debate to do away with the Corporate Profit Tax (CPT) altogether. The central idea is to replace it with a Distributed Profit Tax (DPT), generally referred to in Ukraine as the Exit Capital Tax (ECT). In essence, this system would not tax profits as they accrue to the corporation, deferring the tax to when the corporation distributes dividends to the shareholder.
Tax policy reforms have begun in almost all CIS countries, with some countries having made considerable progress. Specifically, several CIS countries have substantially redrafted their laws so that they are more congruent with the demands of a market economy. But, much less change has occurred in tax administration because of (1) the multiple and frequent changes in the tax codes and related laws; (2) the complex nature of tax administration reform (i.e., changes in organizations and procedures); and (3) weak and inconsistent political commitment to serious reform. Those government officials committed to policy and administrative reforms, including the elimination of exemptions, frequently find themselves opposed by others in government and parliament, who remain wedded to old policies and to the existing ways of administrative organization. Progress is therefore slow.
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This paper provides an overview of the recent revenue performance in the Baltics, Russia, and other countries of the former Soviet Union, and a survey of these countries efforts to modify tax policy in line with the needs of increasingly market-oriented economies and to increase the effectiveness of tax administration. It focuses principally on the 12 countries of the CIS, but refers also to the Baltic countries, and addresses the period from 1995 to mid-1998, prior to the August 1998 financial crisis in Russia.
This paper examines Ukraine’s Request for a Stand-By Arrangement (SBA). The authorities have requested a 12-month SBA, which they intend to treat as precautionary. Their economic program for 2004 aims to sustain recent stabilization gains and advance some important structural reforms. Key objectives are to support economic growth; keep inflation under control; bolster debt sustainability; maintain an adequate level of international reserves; reduce credit risk in the banking sector; and improve the investment climate, including through wide-ranging tax reforms.