Summary of WP/94/105: “The Pay-As-You-Earn Tax on Wages--Options for Developing Countries and Countries in Transition”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

This paper presents a comparative study of systems for withholding income tax on wages. It identifies types of withholding that can be used in developing countries and countries in transition where administrative capacity is a major consideration. Another consideration examined in the paper is the compatibility of withholding taxes with the income tax. A comprehensive income tax, which applies to all taxable income regardless of the source, offers a different environment than a schedular income tax with final taxation by source.

Following the introduction, Section II discusses the different aspects of preliminary and final withholding. Section III addresses the subject of integrating withholding of income tax from wages and withholding done for social security purposes. Section IV outlines the administrative constraints that developing countries and countries in transition face in designing and operating a withholding system. Section V summarizes the wage withholding systems of three developed countries, four developing countries, and two countries in transition. Section VI analyzes the impact of inflation on the withholding system. Finally, Section VII recommends a simple pay-as-you-earn system for developing countries and countries in transition that entails a minimum of return filing. The paper concludes that, ideally, taxation of income, including that from employment income, should be comprehensive and the return filing rules should be pragmatic.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund