Title Page

VOLUME 1

Tax Law Design and Drafting

Editor

Victor Thuronyi

INTERNATIONAL MONETARY FUND

1996

Copyright Page

© 1996 International Monetary Fund

This book was designed and produced by IMF Graphics Section

Library of Congress Cataloging-in-Publication Data

Tax law design and drafting / editor, Victor Thuronyi

p. cm.

Includes bibliographical references (p.) and index.

ISBN 1-55775-587-6 (vol. 1)

1. Taxation—Law and legislation. 2. Tax administration and procedure. 3. Bill drafting. 4. Taxation—Government policy. I. Thuronyi, Victor.

K4460.4.T37 1996 96-34672

328.3’73—dc20 CIP

Price: $25.00

Address orders to:

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Internet: publications@imf.org

Summary of Contents

• Volume 1

• Contents of Volume 1

• Preface

• Acknowledgments

• Introduction

  • 1 Tax Legislative Process

    • Richard K. Gordon and Victor Thuronyi

  • 2 Legal Framework for Taxation

    • Frans Vanistendael

  • 3 Drafting Tax Legislation

    • Victor Thuronyi

  • 4 Law of Tax Administration and Procedure

    • Richard K. Gordon

  • 5 Regulation of Tax Professionals

    • Victor Thuronyi and Frans Vanistendael

  • 6 Value-Added Tax

    • David Williams

  • 7 VAT Treatment of Immovable Property

    • Sijbren Cnossen

  • 8 Excises

    • Ben J.M. Terra

  • 9 Tax on Land and Buildings

    • Joan M. Youngman

  • 10 Taxation of Wealth

    • Rebecca S. Rudnick and Richard K. Gordon

  • 11 Social Security Taxation

    • David Williams

  • 12 Presumptive Taxation

    • Victor Thuronyi

  • 13 Adjusting Taxes for Inflation

    • Victor Thuronyi

• Table of Tax Laws Cited

• Biographical Sketches

• Volume 2

  • 14 Individual Income Tax

    • Lee Burns and Rick Krever

  • 15 PAYE

    • Koenraad van der Heeden

  • 16 Taxation of Income from Business and Capital

    • Lee Burns and Rick Krever

  • 17 Depreciation, Amortization, and Depletion

    • Richard K. Gordon

  • 18 International Aspects of Income Tax

    • Richard Vann

  • 19 Taxation of Legal Persons and Their Owners

    • Graeme Cooper and Richard K. Gordon

  • 20 Taxation of Reorganizations

    • Frans Vanistendael

  • 21 Taxation of Flow-Through Entities

    • Alexander Easson and Victor Thuronyi

  • 22 Taxation of Investment Funds

    • Eric Zolt

  • 23 Incentives for Investment

    • David Holland and Richard Vann

  • Guide to Foreign Tax Law Research

    • Jeanette F. Yackle, Silke A. Sahl, and Stephen Wiles

• Bibliography

• Bibliography of Tax Laws

• Index

Contents

• Volume 1

• Chapter 1. Tax Legislative Process

  • Richard K. Gordon and Victor Thuronyi

  • I. Institutionalizing the Tax Reform Process

    • A. In General

    • B. Identifying the Problems to Be Addressed by Legislation and Establishing the Pace of Reform

    • C. Research Support

      • 1. Estimating Revenue

      • 2. Surveys of Current Practice

      • 3. Comparative Law

  • II. Interdisciplinary Nature of Taxation

  • III. Communication and Collaboration in the Tax Reform Process

    • A. Reform Considered by Working Groups Composed of Ministry Macroeconomists, Tax Policy Experts, Lawyers, and Administrators

    • B. Consultation with Other Government Experts

    • C. Consideration of Related Tax Issues by Different Working Groups

    • D. Consultations with Parliament

    • E. Consultations with the Private Sector

    • F. Responsibility for Process of Tax Legislation

  • IV. Drafting Process

  • V. Special Considerations in Using Foreign Legal Advisors

• Chapter 2. Legal Framework for Taxation

  • Frans Vanistendael

  • I. Legal Foundation; Power to Make Tax Laws

  • II. General Principles and Limitations on Power to Make Tax Laws

    • A. Principle of Equality

    • B. Principle of Fair Play or Public Trust in Tax Administration

    • C. Principles of Proportionality and Ability to Pay

    • D. Principle of Nonretroactivity

    • E. Other Constitutional Limitations

    • F. Charters of Taxpayer Rights

    • G. International Agreements

  • III. Interpretation of Tax Laws

    • A. General Considerations

    • B. France

    • C. Belgium

    • D. Germany

    • E. Netherlands

    • F. United Kingdom

    • G. Australia

    • H. United States

    • I. Antiabuse Legislation

    • J. Specific Antiabuse Provisions

    • K. Conclusion

  • IV. Distribution of Tax Law Making Power Between the Legislative and Executive Branches of Government

    • A. Distinction Between Executive and Legislative Functions of Government

    • B. Delegation of Power to Make Tax Laws in the Continental European Tradition

    • C. Delegation of Tax Law Making Powers in Common Law Countries

    • D. Administrative Commentaries, Interpretations, and Statements of Practice

    • E. Administrative Rulings

  • V. Division of Tax Powers Between the Central and Local Governments

    • A. Classification of Tax Powers

    • B. Leading Principles in the Distribution of Tax Powers

      • 1. Federal vs. a Centralized State

      • 2. Economic and Monetary Union in a Federal State

      • 3. Relation Between Revenue and Expenditure

      • 4. Distribution of Tax Law Making Power with Respect to Certain Elements of the Tax

      • 5. Distribution of Tax Law Making Power According to the Level of Implementation of the Tax

      • 6. Deduction or Credit for Regional and Local Taxes

      • 7. Distribution of Tax Law Making Powers in a Centralized State

      • 8. Distribution of Tax Law Making Powers in a Federal State

• Chapter 3. Drafting Tax Legislation

  • Victor Thuronyi

  • I. Introduction

  • II. Understandability

    • A. Brevity

    • B. Transparency

    • C. Avoiding Legalistic Language

    • D. Numbering of Sections

    • E. Section Headings

    • F. Sentence Structure

  • III. Organization

    • A. General Issues

    • B. Use of a Code

    • C. Organization of Tax Laws in the Absence of a Code

  • IV. Effectiveness

    • A. Relation Between Policy and Drafting

    • B. Anticipating Application and Interpretation

    • C. Drafting for a Judicial Audience

    • D. Relation Between Statute, Regulations, and Other Explanatory Material

  • V. Integration

    • A. Local Drafting Style

    • B. Gender-Neutral Language

    • C. Relation Between Tax Law and Other Legislation

    • D. Specific Problems of Terminology

      • 1. Legal Person

      • 2. Employee

      • 3. Property

    • E. Use of Models

• Chapter 4. Law of Tax Administration and Procedure

  • Richard K. Gordon

  • I. Structure of Tax Administration Law

    • A. Organizing Principles of Tax Administration Law

      • 1. Functional Categories

      • 2. Temporal Organization

      • 3. Legal Categories

    • B. Interrelation of Tax Administration Law with Other Laws

      • 1. Nontax Law

      • 2. Substantive Tax Law

      • 3. Location of Tax Administration Law

  • II. Matters to Be Included in a Tax Administration Law

    • A. Compilation and Publication of All Tax Laws

    • B. Definitions of General Applicability

    • C. Regulations and Rulings

      • 1. Regulations and Rulings of General Applicability

      • 2. Rulings of Specific Application

    • D. Returns and Record Keeping

      • 1. Returns

      • 2. Information Returns

      • 3. Conditioning a Tax Benefit on Identification of the Payee

      • 4. Record Keeping

    • E. Audits and Investigations

      • 1. Relationship Between the Taxation Authority and Investigative Agencies

      • 2. Access to Third-Party Records and the Power to Issue Summonses

      • 3. Indirect Methods of Assessment

    • F. Dispute Settlement

      • 1. Compromises

      • 2. Payment of Tax During Dispute

      • 3. Disputes Within the Taxation Authority

      • 4. Tax Adjudications

      • 5. Procedures in Tax Adjudications

      • 6. Burden of Proof in Tax Adjudications

    • G. Recovery

      • 1. Tax Liens

      • 2. Seizure of Property

      • 3. Sale of Seized Property

      • 4. Recovery of Debts Owed the Taxpayer by Third Parties

      • 5. Installment Payment Arrangements

      • 6. Receivership

      • 7. Property Transferred Without Full Consideration

      • 8. Compromise and Write-Offs

    • H. Internal Investigations

    • I. Taxpayer Ombudsperson

    • J. Interest

    • K. Taxpayer Rights

      • 1. Confidentiality

      • 2. Notice

      • 3. Reasonable Audits

      • 4. Explanation

      • 5. Counsel

      • 6. Record

      • 7. Discovery

      • 8. Hearing

      • 9. Appeal

      • 10. Limitations

  • III. Taxpayer Compliance and Sanctions

    • A. Existing Research into Compliance Issues

    • B. Design of the Substantive Tax Law

    • C. Sanctions

      • 1. Purpose of Sanctions

      • 2. Operation of Deterrence

      • 3. Design of Civil Sanctions

        • A. Deterrence

        • B. Encouraging Resolution of Disputes

        • C. Punishment

        • D. Flat-Rate Penalties

      • 4. Severity of Civil Sanctions

      • 5. Rules to Increase the Effectiveness of Civil Sanctions

      • 6. Criminal Offenses by Taxpayers

      • 7. Tax Administrator Penalties

• Chapter 5. Regulation of Tax Professionals

  • Victor Thuronyi and Frans Vanistendael

  • I. Basic Policy Considerations in Regulating Tax Advisors

    • A. Balance of Supply and Demand

    • B. Maintenance of Quality Standards

    • C. Conflicting Loyalties of Tax Advisors

    • D. Relationship Between Tax Consulting and the Legal and Accounting Professions

    • E. Admission of Legal Persons to the Profession

    • F. Regulation of International Tax Consulting Services

    • G. Provision of Tax Services by Employees

    • H. Privileged Communications and Work Product

  • II. Tailoring Regulation to Functions of Tax Advisors

    • A. Tax Planning

    • B. Advice Ancillary to Financial and Other Services

    • C. Preparation and Auditing of Commercial Accounts

    • D. Preparation of Tax Returns

    • E. Representation of Taxpayer Before the Tax Administration

    • F. Representation Before the Courts

  • III. Approaches to Regulation

    • A. Full Regulation: The German Model

    • B. Partial Regulation: The U.S. Model

    • C. The Model of No Regulation

    • D. Issues in Regulation of Tax Consultancy

    • E. Penalties for Practitioners

  • IV. Legal Consequences of Using Advisors

    • A. Returns

    • B. Liability for a Tax Advisor’s Mistakes

    • C. Facilities for Taxpayers’ Use of Tax Advisors

  • Appendix A. Organization of Tax Profession in Different Countries

• Chapter 6. Value-Added Tax

  • David Williams

  • I. Introduction

    • A. Adoption of VAT

    • B. Terminology

    • C. Economic Scope

    • D. Territorial Scope

    • E. Internal Charge to VAT

    • F. Approach to Charging VAT on Imports

    • G. Principle of Nondiscrimination

  • II. Taxable Persons

    • A. Persons Within the Scope of the Law

    • B. Excluding Persons with Low Levels of Business Activity

    • C. A VAT Register

    • D. VAT Numbers

    • E. Voluntary Registration

    • F. Exporters and Persons Engaged in International Activities

    • G. Effect of Nonregistration

    • H. Cancellation of Registration

    • I. Continuing a Registration Despite a Change in the Taxable Person

  • III. Supplies of Goods and Services

    • A. Transactions Within the Scope of the Law

    • B. Supplies of Goods

    • C. Land

    • D. Supplies of Services

    • E. Supplies by Employees and Officeholders

    • F. Supplies by Agents

    • G. Mixed Supplies and Multiple Supplies

    • H. When a Supply of Goods Takes Place

    • I. When a Supply of Services Takes Place

    • J. Where a Supply of Goods Takes Place

    • K. Where a Supply of Services Takes Place

    • L. Treatment of Imports

  • IV. Taxable Supplies

    • A. Definition

    • B. Economic Activities

    • C. Payment for a Supply

    • D. Transactions Where No Payment Is Payable

    • E. Supplies Where Payment Is Not Full

  • V. Exempt Supplies

    • A. General Comments

    • B. Effect of Exemptions

    • C. Specific Exemptions: Internal Supplies

      • 1. Land and Buildings

      • 2. Supplies by Nonprofit Organizations and Individuals

      • 3. Financial Services

    • D. Using Alternative Taxes

    • E. Exemption of Diplomatic Activities

    • F. Exempt Imports

    • G. Problems Caused by Exempt Supplies

  • VI. Taxable Value of Supplies

    • A. Charge to VAT

    • B. Value of Internal Supplies

    • C. Tax Inclusive vs. Exclusive Base

    • D. Fair Market Value of Supply

    • E. Adjustments and Rebates

    • F. Value of Imports

  • VII. Payment of VAT

    • A. Determining the Amount to Be Paid

    • B. Rates of VAT

    • C. Zero Rate

    • D. Zero Rating Exports and International Supplies

    • E. Should Internal Supplies Be Zero Rated?

    • F. Paying VAT to the Tax Authorities

    • G. Entitlement to Credit for Input Tax

    • H. Partial Exemption

    • I. Disallowed Input Tax

    • J. Capital Goods

    • K. Safeguarding the Revenue

    • L. Bad Debts

  • VIII. Procedure and Administration

    • A. Need for Specific VAT Rules

    • B. Combining VAT and Customs Administration on Imports

    • C. Handling VAT on Internal Supplies

    • D. Regulations, Instructions, and Guidance

    • E. VAT Invoices

    • F. VAT Returns

    • G. Payment of VAT

    • H. Assessing VAT

    • I. VAT Periods

    • J. Repayment of Excess VAT Credit

  • IX. Special Cases

• Chapter 7. VAT Treatment of Immovable Property

  • Sijbren Cnossen

  • 1. Introduction

  • II. Nature of the VAT

    • A. Activities or Expenditures?

    • B. Flows or Stocks?

  • III. How Immovable Property Should Be Taxed

    • A. An Economic Point of View

    • B. A Legal Point of View

    • C. Practical Solutions

  • IV. How Immovable Property Is Taxed

    • A. Construction

    • B. Lease

    • C. Sale

  • V. Conclusion

• Chapter 8. Excises

  • Ben J.M. Terra

  • 1. Introduction

    • A. Nature of Excise Taxes

    • B. Terminology

    • C. Territoriality

    • D. Method of Charging

    • E. Principle of Nondiscrimination

  • II. General Design Issues

    • A. General Provisions

    • B. Taxable Event and Chargeability

    • C. Movement of Goods

    • D. Payment of the Duty

    • E. Reimbursement

    • F. Exemptions

  • III. Issues in Designing Specific Taxes

    • A. Mineral Oils

    • B. Alcohol and Alcoholic Beverages

    • C. Tobacco

    • D. Others

• Chapter 9. Tax on Land and Buildings

  • Joan M. Youngman

  • I. Introduction

    • A. Why a Property Tax?

      • 1. Local Government Finance

      • 2. Defining the Public Claim on Property Value

      • 3. Inelastic Tax Base

      • 4. Equity Arguments

    • B. Drafting Issues

    • C. Terminology

  • II. Legal Issues in Defining the Tax Base

    • A. Types of Property Subject to Tax

    • B. Measure of the Tax Base

      • 1. Market Value as a Tax Base

      • 2. Capital Value and Annual Value

      • 3. Income-Based Valuation

      • 4. Area-Based Taxation

      • 5. Acquisition Value

      • 6. Other Tax Bases

    • C. Special Assessments and Betterment Levies

    • D. Market Value Taxation in Developing Economies

    • E. Taxation In Rem or In Personam

    • F. Defining the Unit

    • G. Exemptions

  • III. Property Rights and Valuation

    • A. What Is “Ownership”?

    • B. Property Rights and Tax Liability

    • C. Valuation of Land and Buildings

  • IV. Legal Issues in Setting the Tax Rate

    • A. Use of Assessment Ratios

    • B. Responsibility for Setting Tax Rates

  • V. Administrative Issues

    • A. Assignment of Responsibility

    • B. Enforcement and Liens

    • C. Revaluation Cycles

  • VI. Checklist of Issues for Legislative Drafting

    • A. Scope of the Tax

    • B. Identification of the Taxpayer

    • C. Exemptions

    • D. Concessions and Preferential Assessments

    • E. Measurement of the Tax Base

    • F. Setting the Tax Rate

    • G. Intergovernmental Issues

    • H. Procedural Issues

    • I. Collection and Enforcement

• Chapter 10. Taxation of Wealth

  • Rebecca S. Rudnick and Richard K. Gordon

  • I. Introduction

    • A. Tax Capacity

      • 1. Wealth Taxes in General

      • 2. Wealth Transfer Taxes

    • B. Social, Moral, and Political Justifications

      • 1. Wealth Taxes in General

      • 2. Wealth Transfer Taxes

    • C. Economic Efficiency

      • 1. Wealth Taxes in General

      • 2. Wealth Transfer Taxes

    • D. Problems of Administration

      • 1. Net Wealth Taxes

      • 2. Wealth Transfer Taxes

    • E. Conclusion

  • II. Issues in the Design of Periodic Net Wealth Taxes

    • A. Taxpayers

      • 1. Physical Persons and Residence

      • 2. Entities and Resident and Nonresident Owners

      • 3. Exemptions

      • 4. Implications for Drafting

    • B. Tax Base

      • 1. Base for Residents and Nonresidents

      • 2. Exemptions

      • 3. Valuation

    • C. Double Taxation

    • D. Administration

  • III. Design of Wealth Transfer Taxes

    • A. Taxable Transfer and Taxpayer

    • B. Tax Base

    • C. Double Taxation

    • D. Deductions

    • E. Exclusions

    • F. Valuation

    • G. Rate Schedule and Exempt Amount

    • H. Administration

    • I. Gift Tax

      • 1. Inclusion of Certain Gifts in Taxable Estate

      • 2. Definition of Gift

      • 3. When a Gift Is Complete

      • 4. Jurisdictional Issues

      • 5. Integration with Estate, Inheritance, or Accessions Regimes

      • 6. Exemptions

• Chapter 11. Social Security Taxation

  • David Williams

  • I. Introduction

    • A. What Is Social Security?

    • B. Are Social Security Payments Taxes?

    • C. Is the Legislation for Contributions Tax Legislation?

    • D. What Are the Forms of Social Security Tax?

    • E. Links Between Contributions and Benefits

  • II. Issues in Social Security Taxation for Employees

    • A. General Terms

    • B. What Is Employment?

    • C. Independent Workers: Are They Employees?

    • D. What of Officeholders?

    • E. What Categories of Employees May Be Excluded?

      • 1. Age-Based Exclusions

      • 2. Education and Training

      • 3. Voluntary and Nonremunerated Workers

      • 4. Recipients of Benefits

      • 5. Specific Employments

      • 6. Employment Within the Family

      • 7. Jurisdictional Exclusions

    • F. Who Are Employers?

    • G. Allocating Contributions Between Employer and Employee

    • H. Should the State Contribute?

    • I. Basis of Contribution Liability

      • 1. Gender Discrimination

      • 2. Earnings-Related Contribution Rates

      • 3. Earnings Bands

    • J. What Are Earnings?

      • 1. Links with Income Tax

      • 2. Reaching Settlements

      • 3. Benefits in Kind

      • 4. Specific Expenses and Allowances

      • 5. Practical Effects

    • K. How Should Rates of Contribution Be Determined?

    • L. Earnings Periods

      • 1. The Income Tax Year

      • 2. Separate Earning Periods

    • M. Multiple Employments

    • N. What Records Are Necessary?

  • III. Issues for the Self-Employed

    • A. What Is Self-Employment?

    • B. What Is the Income of the Self-Employed?

    • C. How Is Contribution Liability of the Self-Employed Based?

    • D. What Records Are Necessary?

  • IV. International Aspects

    • A. What Limits Do Schemes Impose?

    • B. What Jurisdictional Rules Are Used?

      • 1. Nationally Determined Limits

      • 2. Specific Problems

      • 3. Migrant Workers

      • 4. Rules for Employers

      • 5. Rules for the Self-Employed

    • C. Rules in the European Economic Area

    • D. What Other Treaty Rules Exist?

  • V. Interaction of Income Tax and Social Security Schemes

    • A. General Principles

    • B. Interactions Between Contributions and Income Tax

      • 1. Rules for Deductibility

      • 2. Measurement and Timing Issues

      • 3. Treatment of Employer’s Contributions

      • 4. Treatment of the Self-Employed

    • C. Should Benefits Be Subject to Tax and Contributions?

      • 1. Making Benefits Subject to Contributions

      • 2. Notional Contributions

      • 3. Imposing Income Tax on Benefits

    • D. Implicit Tax Rates on Benefit Programs

    • E. Can High Implicit Tax Rates Be Avoided?

  • VI. Conclusion

• Chapter 12. Presumptive Taxation

  • Victor Thuronyi

  • I. General Concepts

  • II. Legal Characteristics of Presumptive Methods

    • A. Rebuttable vs. Irrebuttable

    • B. Minimum Tax vs. Exclusive

    • C. Mechanical vs. Discretionary

    • D. Scope of Application

    • E. Taxpayers Targeted

  • III. Particular Presumptive Methods

    • A. Reconstruction of Income

      • 1. In General

      • 2. Net Worth Method

      • 3. Bank Deposit Method

      • 4. Expenditures Method

    • B. Percentage of Gross Receipts

    • C. Percentage of Assets

      • 1. Gross or Net Assets?

      • 2. Who Is the Taxpayer?

      • 3. Tax Rate

      • 4. Tax Base

        • A. Average Value vs. Opening or Closing Balance

        • B. Integration

        • C. Leasing

        • D. Special Rule for Expanding Companies

      • 5. Exceptions for Nonproductive Periods

      • 6. Relation Between Assets Tax and Income Tax

        • A. Qualification for Foreign Tax Credit

        • B. Carryovers and Carrybacks

        • C. Nondeductibility of Assets Tax

      • 7. Foreign Tax Credit

      • 8. Valuation

      • 9. Exemptions

      • 10. Tax Planning

      • 11. Assets Tax with Partial Scope

    • D. Industry-Specific Methods for Small Businesses

      • 1. Fixed Amounts Based on Profession or Trade

      • 2. Contractual Method

      • 3. Methods Based on Turnover

      • 4. Standard Assessment Guides

      • 5. Taxation of Agriculture

    • E. “Outward Signs” of Lifestyle

    • F. Conclusion

  • Appendix A. Lesotho Provision on Outward Signs of Lifestyle

• Chapter 13. Adjusting Taxes for Inflation

  • Victor Thuronyi

  • I. Effects of Inflation on Tax Liability—in General

    • A. Erosion of Statutory Amounts Expressed in National Currency

    • B. Erosion of Tax Obligations

    • C. Measurement of Tax Base

    • D. Reason for Categorization

  • II. Adjustment of Taxes Other Than Income Tax

  • III. Adjustment of Income Tax

    • A. General Issues

    • B. Ad Hoc Adjustment

    • C. Partial Adjustment

    • D. Global Adjustment

      • 1. General Issues

      • 2. Global Adjustment in the Context of the Net Worth Method

        • A. Summary Explanation

        • B. Adjustment of Opening Net Worth

        • C. Adjustment of Increases in Net Worth

        • D. Adjustment of Decreases in Net Worth

        • E. Valuation of Items in Closing Balance

        • F. Valuation of Depreciable Property

        • G. Valuation of Inventory

        • H. Valuation of Foreign Currency Items

        • I. Valuation of Other Items in Closing Balance

        • J. Items to Be Included in Balance

        • K. Measurement of Inflation

        • L. Adjustment of Advance Payments, Tax Liability, and Loss Carryovers

        • M. Effect of Global Adjustment on Deduction for Interest Expense

      • 3. Alternative Approaches

      • 4. Equivalence Between Net Worth Calculation and Accounting in Constant Currency

      • 5. Determination of Specific Types of Income

      • 6. Limitations on Expenses

    • E. Inflation Adjustment of Nonbusiness Income of Individuals

    • F. Collection of Tax

    • G. Foreign Currency Translation

  • IV. Conclusion

  • Appendix A. Global Adjustment Method in Detail

  • Appendix B. Global Adjustment in the Context of Income-Less-Expenses Method of Determining Taxable Income

• Table of Tax Laws Cited

• Biographical Sketches

Preface

For over thirty years, the Legal Department of the International Monetary Fund has provided technical assistance in drafting tax legislation to member countries of the IMF. Because these countries belong to different legal traditions, have different political and administrative structures, and pursue different fiscal policies, each law has had to be specifically designed to fit the traditions, structures, and policies of each country. Yet, this continued empirical exercise in comparative law has led to a cross-fertilization of ideas, where the same issues have had to be faced in comparable contexts.

Initially, the demand for technical assistance came mainly from newly independent countries that wanted to modernize the tax laws they had inherited from the former colonial powers. More recently, countries in transition to a market economy, which have now become members of the IMF, have requested assistance to design tax laws “from scratch.”

One of the benefits of comparative law is that it makes us aware that what is obvious or implicit in our national system either may not be so obvious or is explicitly condemned in other systems. For instance, in some countries courts have held that tax laws should be applied only within their literal terms, while in others the courts have had no difficulty interpreting the laws with a view to giving full effect to the lawmakers’ presumed intent. Fortunately, in most cases, a substantial degree of consensus has emerged, and some general principles have been recognized that may guide legislators. The difficulty, however, is that there is no comprehensive treatise in which these principles can be found.

The objective of this book is to help fill this vacuum. In this respect, it is unique in the literature on comparative law. It is not intended to answer questions on existing laws or treaties. Its purpose is to identify legal issues that arise in the drafting of tax laws, including those that are often revealed only at the time of their subsequent interpretation and implementation, and the different solutions that have been given in national laws. It does offer some guidance while recognizing that there may be no perfect or uniform solution.

Most of the contributors to this book are staff members or consultants of the Legal Department of the IMF. Current and former staff members of the IMF’s Fiscal Affairs Department have also contributed, reflecting the collaboration between these departments in technical assistance activity. All have brought to the IMF’s technical assistance and to this book the invaluable benefit of their extensive experience acquired both inside and outside the IMF.

François Gianviti

General Counsel

International Monetary Fund

Acknowledgments

Although the editor of this book and the individual authors of each chapter are identified (generally listed alphabetically, where there is more than one author), the book is a collaborative effort of the authors. It also draws on the collective experience of a number of people who have assisted developing and transition countries with the drafting of new tax legislation over the past several years, including some who have not specifically participated as authors of particular chapters, but who may have written material drawn on in this book, Ward Hussey, Jinyan Li, Donald Lubick, Richard Pomp, and others.

Acknowledgment of all indirect contributions would be impossible. Individual chapters acknowledge persons who have contributed to them, by comment or otherwise. In addition, the editor is grateful to those who have commented on larger portions of the manuscript: Hugh Ault, Guy Gest, Minoru Nakazato, and Hans Georg Ruppe. Particular credit is due to Leif Mutén for the extensive comments he provided. Colleagues from the IMF Fiscal Affairs Department, Milka Casanegra de Jantscher, Dale Chua, Julio Escolano, John King, Anthony Pellechio, Janet Stotsky, Victoria Summers, Emil Sunley, and Zühtü Yücelik, and Legal Department, Tobias Asser, François Gianviti, William E. Holder, Ross Leckow, and Aarno Liuksila, have also contributed comments, ideas, and text. I am grateful to all these commentators, and the reader should be grateful, because the book is substantially better for their comments and corrections.

In addition to these commentators and listed authors, the book could not have been produced without the conscientious efforts of Melinda Milenkovich and Pam Sak, who provided expert legal research, checking of citations, editing, and reviewing sources in many languages; Carmen de Perignat, who, together with Melinda Milenkovich, worked on the bibliography of tax laws; and Heather Sera-Leyva, who provided expert word processing and editorial services. Elisa Diehl, of the IMF’s External Relations Department, edited the final version and coordinated production.

Introduction

This book arises from the substantial and ongoing tax law revision taking place in many developing and transition countries.¹ In some cases, laws have remained on the books for many years without major changes and need to be modernized. In most transition countries, the current laws are only a few years old and will require substantial revision as the tax system and the economy develop. Other countries are considering the adoption of new taxes (such as a value-added tax (VAT)). Officials responsible for tax legislation in developing and transition countries would like to study the tax laws of other countries to obtain models and guidance for drafting new laws. Unfortunately, the tax laws of most member countries of the Organization for Economic Cooperation and Development (OECD) have grown so complex that they are barely understandable to tax practitioners in the country concerned and are even more impenetrable to outsiders. This book responds to this need for information and seeks to present it in a way that is relevant and accessible.

The book grows out of the experience of the editor, in collaboration with most of the authors, together with other consultants, in drafting laws and advising on tax legislation for over two dozen countries (in Central and Eastern Europe, Africa, Asia, the Pacific, and Central and South America) over the past five years. The project responds to the suggestion of Richard Vann, who spent a year at the IMF Legal Department in 1990, that there was a need in developing and transition countries for nonprescriptive drafting materials that covered the major choices to be made in constructing a tax system. It represents an effort to distill from our collective experience, and from the tax laws of many other countries of the world, practical guidelines for drafting tax legislation that can be used by officials of developing and transition countries and by their foreign advisors.

While there is discussion of matters of special interest to developing and transition countries, paradoxically, most of the discussion does not focus on the peculiar problems of these countries, but rather is based on a comparative discussion of the tax laws of developed countries. This is because the mechanics of tax law in developing and transition countries are not markedly different from those of developed countries, except that the laws tend to be shorter, and there are some differences in policy. An additional reason for the general scope of the discussion is that the book is intended to be broadly relevant, rather than being directed to a particular group of countries. Drafting tax laws for a particular developing or transition country requires studying a great deal of specific material in addition to the more general background provided in this book.

Because of its general nature, the book should also be of interest to students, academics, and practitioners with an interest in comparative tax law, although the book does not purport to be a complete treatise on this subject.² There is selective, but not comprehensive, footnoting. The emphasis in the footnotes is on giving practical examples of tax legislation, without reviewing all possible sources or all the available academic literature, on the assumption that those wishing to do further research can readily find the information they need.

The relative paucity of literature on comparative tax law was an important factor in determining to publish this book. To be sure, there are a number of comparative studies of specific topics, such as the annual study by the International Fiscal Association.³ There are a number of studies of the tax systems of particular countries, and some comparisons of two or a few countries, but there exists to my knowledge no general treatise on comparative tax law. Professor Tipke’s recent three-volume work⁴ comes close, being a theoretical study with many references to non-German literature, but it is based on the German system. In the income tax area, a comparative study involving a wide range of structural issues in nine OECD countries is currently being produced by a group of authors under the leadership of Professor Hugh Ault.

This book consists of two volumes. Volume 1 covers general issues, some special topics, and major taxes other than income tax. Volume 2 deals with the income tax and also contains a bibliography of the tax laws of the world, a guide to foreign tax law research, a short bibliography of recommended books, and the index for both volumes. Although the two volumes are closely related, they can be used independently.

In no sense is the book intended to be the last word on the matters addressed. Rather, the emphasis is on identifying options and providing guidelines and examples so that the book may serve as a useful tool in the drafting of new tax laws. Any recommendations that are made are, first, the personal views of the authors and, in any event, are not intended to be applied indiscriminately. While the major taxes are covered in broad terms, a number of important matters (including fiscal federalism issues, taxation of cooperatives, and taxation of insurance, banking, and other financial institutions and products) are touched on only very lightly, if at all. Nor do we deal with customs duties or any number of other taxes that form part of the tax legislation of many countries. To attempt a more detailed discussion on the matters addressed and to include additional specialized topics and additional taxes, important though they are, would have indefinitely delayed publication. Nonetheless, the coverage is broad enough so that the book can be a useful starting point and guide on many practical questions.

Taxes have an important effect on the life of every member of society. Given the far-reaching effect of taxation and the complexity of taxes in modern societies, the development of tax reform proposals requires contributions from a number of disciplines:

• Macroeconomists and specialists in public finance can help determine required revenue targets, including cash-flow requirements.

• Economists who are specialists in estimating revenues from taxation can analyze whether any particular set of proposals is likely to meet the targets determined.

• Economists can help predict the effects on the economy of alternate tax structures. These include the effects of taxation on savings, investment, work effort, consumption choices, and alternate production methods, as well as macroeconomic effects.

• Tax administration specialists can evaluate the administrative mechanisms needed to apply particular proposals and can advise on the feasibility of various alternatives.

• Technical tax specialists (usually lawyers, accountants, or economists) who are familiar with the detailed operation of particular types of provisions can help design the rules needed to implement overall policy.

• Legislative drafters (lawyers who have experience in drafting tax legislation) can write the actual words of a proposed statute.

Chapter 1 discusses the need for the various professions to work together in designing tax legislation. Although close collaboration is important, each profession brings to bear its own specialized knowledge and approach. This book is concerned in particular with matters that are in the domain of lawyers,⁵ and the legal viewpoint is emphasized. In particular, problems of drafting are discussed in detail, both as a general matter (chapter 3) and with respect to particular taxes and special issues. The overall legal framework for taxation (chapter 2) and the structure and design issues for particular taxes are examined from the point of view of comparative law. The treatment is of necessity general, focusing on matters that are likely to be of relevance to most countries, rather than exploring the peculiar legal problems of particular countries or groups of countries. The focus on legal matters means that the book cannot serve as a complete manual for the development of tax policy; references to literature on tax policy for developing countries are given in the bibliography (in volume 2).

The bibliography also lists a group of books that together represent a basic library for the study of comparative tax law. The list was intentionally kept short, the aim being to identify a library that could be acquired at modest cost and that would be sufficient to provide working answers to many questions.

In addition to consulting secondary sources, drafters of tax laws must consult the tax laws of other countries. It would be convenient if the tax laws of all countries were published in one place. Unfortunately, this has not been done on a comprehensive basis. As a step toward compiling this legislation, we have prepared a bibliography of current tax statutes of most countries (see bibliography of tax laws, in volume 2). Footnote references in this book are to abbreviations found in this bibliography. Although the bibliography is not complete, it is believed to be the most comprehensive bibliography of its nature currently available. For convenience, the statutes cited in volume 1 have been extracted from the bibliography and reproduced as a table at the end of this volume.

Because of the number of countries whose laws are referred to (some sixty jurisdictions), it has been impracticable to bring all the citations and discussions of particular countries’ laws up to date as of some uniform date. Moreover, the purpose of these references is to furnish examples, not authoritative statements of the law in a particular country. Therefore, the reader should not rely on them as being necessarily up to date or complete.

The term “country” as used in this book does not in all cases refer to a territorial entity that is a state as understood by international law and practice. The term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate, independent basis.