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International Monetary Fund

This Selected Issues paper and Statistical Appendix on Brazil looks at price developments following the floating of the Real in mid-January 1999. The paper highlights that the experiences in East Asia—Indonesia, Korea, Malaysia, Philippines, and Thailand—all show that the pass-through from devaluation to inflation has been lower than expected, with the exception of Indonesia. The paper analyzes the competitiveness and export performance of Brazil. Effects of high interest rates and currency depreciation on Brazilian enterprises are also analyzed.

GEORGE E. LENT

The basic approaches to the taxation of corporate profits by developing countries are modeled on those of developed countries, and are subject to evaluation on similar grounds. As is true of industrial countries, the issues involved have never been satisfactorily resolved, and shifts continue to be made from one system to another. There is, therefore, an abundance of experience with different forms of corporation tax, even within particular countries, and a voluminous literature exists on the comparative merits and limitations of each.1 Differences in the economic environment and in the relationships between shareholders and corporations in different stages of economic development, however, call for a re-examination of the tax treatment of corporations that is most appropriate for developing countries.

International Monetary Fund. External Relations Dept.

In a news brief dated July 28, the IMF announced that the Executive Board had completed the third review under the Stand-By credit for Brazil. As a result, Brazil will be able to draw up to the equivalent of SDR 1.7 billion (about $2.3 billion) from the IMF. Excerpts from IMF First Deputy Managing Director Stanley Fischer’s statement on the Executive Board’s discussion of the review follow.

Mr. Giorgio Brosio and Mr. Ehtisham Ahmad
A weakness of decentralization and overall tax reforms in Latin America is the lack of attention to adequate taxation at the subnational government. A reliance on shared taxes with extensive earmarking leads to weak subnational accountability and soft budget constraints. The paper explores the options for expanding subnational taxation in Latin America. A range of subnational tax instruments might be considered, but interactions between new tax assignments and the system of transfers is important from a political economy perspective.
Mr. Parthasarathi Shome
From the mid-1980s to early 1990s, Latin American tax policy provided rich lessons for other reforming countries. Meaningful innovations led also to perceptible revenue gains. Later in the 1990s, tax policies began to drift. Shining examples of fundamental reform seemed to lose their luster. Revenue in terms of GDP also stagnated, partly reflecting over-reliance on consumption taxes and neglect of taxable capacity on incomes. The stagnation has been exacerbated by excessively simplified administrative practices. Based on these developments and on the limited taxability of internationally mobile capital, the paper anticipates a likely tax structure for the new century.
Mr. Howell H Zee
This paper proposes a new hybrid cash-flow tax on corporations that, on one hand, taxes only excess corporate profits as they accrue, and, on the other hand, treats real and financial transactions neutrally. It is, therefore, a superior tax compared to the cash-flow tax on real transactions that seems to have gained common acceptance. The hybrid tax is a modified version of the cash-flow tax on real and financial transactions combined. The modification involves replacing expensing of fixed assets with normal depreciation allowances, but the undepreciated value of fixed assets is carried forward with interest at the opportunity cost of equity capital.
Mr. Nigel A Chalk, Mr. Michael Keen, and Ms. Victoria J Perry
This paper assesses the landmark Tax Cuts and Jobs Act (TCJA), from the perspective of both the U.S. itself and the wider world. The reform has many positive aspects including steps to broaden the base of, and reduce marginal rates under, the personal income tax (PIT), reduce distortions to investment and financing decisions, and mitigate outward profit shifting. But the TCJA has a large fiscal price tag and leaves significant uncertainty as to how the U.S. tax system will develop. The PIT changes could have better targeted relief at low earners, and there is scope to more fully address distortions in business taxation. The novel international provisions create a complex array of both positive and negative international spillovers, and have the potential to significantly reshape the wider international tax system.