Revenue Performance

Before the August 1998 financial crisis in Russia, there was evidence that the revenue decline in CIS countries was beginning to be reversed. Progress had been uneven, and in some of the countries, special circumstances were behind this recent measured improvement. These preclude a firm judgment on the sustainability of this trend. Several points can be stated with more certainty, however. In general, indirect taxes and taxes on labor have performed most strongly while enterprise profits taxes have been weak; and there is some correlation between the pattern of general economic transition and the path of revenue decline, with slow reform in some instances delaying the decline of revenue from pretransition levels.

Finally, a high priority should be assigned to eliminating the use of tax offsets. Their use makes the measurement of revenues uncertain, and, more important, has clearly contributed to the inability to effectively enforce tax collection in these countries.

Tax Policy

In the CIS countries, lax policy reforms are generally further advanced than reforms in tax administration, albeit with considerable variation across countries. Most progress has been achieved in the elimination of export taxes and excess wage taxes. Mixed progress has occurred in the introduction of appropriate VAT, excise tax, and personal income tax regimes, and in the unification of rates within various tax categories. Not surprisingly, the least amount of progress has taken place on aspects that are either technically very difficult to implement or politically sensitive, such as the introduction of new accounting systems and standards, the elimination of exemptions, the consistent use of a destination basis for VAT, and the effective taxation of small businesses.

Tax Administration

Progress in tax administration reform has been slow and uneven, partly because of broader political and economic factors, such as the pervasiveness of noncash transactions in the economy and the uncertain legislative framework for tax administration; and partly because of specific shortcomings related to the administration of the tax system, including weak political commitment to major institutional and procedural reforms and the absence of a strong management team and trained tax administrators to design and implement such reforms. IMF technical assistance in this area has been confined to a much smaller subset of countries than in the case of tax policy. The progress that has been made has often been limited to a small subset of the reforms that are required to significantly improve the effectiveness of tax administration. Indeed, with only few exceptions, progress in most aspects of organization, collection, and enforcement has been sporadic at best.

Overall Assessment

Against this background, it is clear that comprehensive tax policy reform is still needed in most CIS countries. Piecemeal changes in tax policy can be counterproductive because they tend to narrow the tax base, foster tax avoidance and evasion, and encourage activity in the unofficial economy by smaller entities and lobbying by larger ones. The critical outstanding issues for tax reform in the CIS countries generally include:

• VAT: eliminate exemptions and shift to the destination principle.

• Excises: implement symmetric treatment of domestic and foreign production, and restrict coverage to a few commodities.

• Profits tax: eliminate tax holidays and other incentives, and reform the accounting system.

• Personal income tax: broaden the tax base and make effective use of presumptive methods for small businesses.

• Payroll taxes: reduce high tax rates and broaden the tax base.

The above list provides a clear agenda for action by governments in the immediate future. Addressing this agenda will require a renewed effort by government leaders to push through the needed legislative changes. The technical work of the recent past, including, among other things, the action plans, has in many cases provided the necessary components in the form of concepts, draft legislation, and design of institutional mechanisms. Some cause for hope is visible in the renewed efforts by the government in countries like Moldova, Tajikistan, and Ukraine to push forward substantial and comprehensive changes in the tax system. However, without a political effort at implementation, these plans will not bear fruit.

But even if such renewed efforts at tax policy reform are successful, a parallel acceleration of tax administration reform is also needed. Consider first the critical issues for tax administration reform in the CIS countries (in rough order of priority) as evidenced by this study:

• focusing arrears collection on the taxpayers with the largest arrears and with arrears that have arisen in the most recent period;

• establishing fully functioning large taxpayer units;

• controlling stopfilers in a timely fashion;

• imposing reasonable penalties and interest charges;

• establishing a single, nationwide taxpayer registration system with unique taxpayer identification numbers;

• establishing an annual audit plan to deter evasion; and

• organizing the tax service along functional lines.

Implementing tax administration reforms involves significant institutional changes. Government leaders must give high priority to needed bureaucratic changes; senior tax administration officials must agree on the path of reform; and reluctant line employees must be brought on board. While, ideally, institutional change should progress on all fronts simultaneously, resource constraints demand that the authorities establish priorities and adopt the proper sequencing of reforms. Where the commitment to reform is strong and pervasive at all levels, the assignment of one or possibly two long-term technical assistance experts can catalyze the requisite changes. Where commitment is lacking, the value of continued technical assistance may be quite limited.

Obviously, improvements in tax administration will be more effective if there is also a strengthening of the political will to collect taxes. The nonpayment of taxes, using a variety of mechanisms such as tax arrears, noncompliance, and special exemptions, is a device exploited by state enterprises in transition to avoid hard budget constraints. Governments have, in general, been able to tighten up on earlier devices, especially subsidies and directed credits, but are taking longer to come to grips with nonpayment of taxes. To do so they must tackle some governance problems, including political interference in tax collection, corruption in the tax service, and weak judicial systems, which impede progress in this area.

The review in this paper suggests several conclusions for work on tax matters in CIS countries. First, and especially in countries where tax policy reforms have lagged, there must be a renewed effort to complete the reforms and modernize the tax system through legislative and other policy changes. Second, even greater effort should be applied to the area of tax administration. Considerable technical assistance in tax administration has been ineffective because of poor implementation and the lack of necessary involvement on the part of senior officials. Perhaps most fundamental, government leaders and parliaments must express a much greater political will to collect the needed revenues by, among other moves, eliminating undesirable exemptions and the use of “noncash methods” of paying taxes.