Clampdown Of Tax Evasion Should Be Ramped Up Says IMF Fiscal Chief

24.09.10

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Local governments, the G20 and the Organisation for Economic Co-Operation and Development (OECD) have all been taking increasingly successful steps to prevent tax evasion. Now the International M

Local governments, the G20 and the Organisation for Economic Co-Operation and Development (OECD) have all been taking increasingly successful steps to prevent tax evasion. Now the International Monetary Fund (IMF) has called for the global crackdown on tax evasion to be intensified. The director of the IMF?s fiscal affairs department, Carlo Cottarelli, said this was necessary in order to guarantee that measures to cut countries? public debt are fair to all taxpayers. He also called for an independent international body to be set up to help fight tax evasion and co-ordinate tax policy.

A report on ?Long-Term Trends in Public Finances in the G-7 Economies?, written by Cottarelli and senior economist Andrea Schaechter, reflected:

An equitable adjustment will require a more energetic fight against tax evasion and erosion, both nationally and internationally. The recent initiatives undertaken to fight tax havens are an important development in this respect. But more coordination is needed among tax administrations of various countries and among tax policies in a globalised economy. Maybe it is time to revive the idea of a World Tax Organisation to address these co-ordination issues?.

The IMF has previously discussed the idea of a single organisation to oversee world tax issues, but this is the first time it has done so in the last ten years.

Cottarelli acknowledged that the creation of a World Tax Organisation is a very difficult step and can be considered a ?provocative proposal?, but he argued that what is ?less provocative and more concrete is the need for more discussions, co-ordination, in tax policy because it is clear that there are major spillovers in tax policy across countries?.

In September, The Times reported that in the UK, HM Revenue & Customs (HMRC) calculate that the tax gap is around ?40 billion each year. Some experts believe it is actually around ?100 billion. Tax Research UK calculates the figure rises to over ?120 billion when you add in late taxes.

Governments, whether in the UK, Europe or elsewhere, all need to increase their tax revenues, possibly more now than ever.

In an IMF Survey Magazine article entitled: ?Moving Public Debt onto a Sustainable Path?, it is stated that: ?The global economic crisis has eroded the government coffers of advanced economies and countries will need to return debt levels to a sustainable path to manage fiscal risks, foster long-term growth, and create jobs in the coming years.?

It went on to say that in order to protect the fragile recovery and reassure financial markets, governments need to develop credible fiscal plans that focus on longer-term solutions, rather than on quick fixes. It advised that, in some cases, ?a marked departure from the normal historical pattern of adjustment to rising public debt is needed to manage fiscal risks?.

Illustrating the severity of debt that governments need to finance, the IMF reported that general government debt in the G20 advanced economies surged from 78% of GDP (gross domestic product) in 2007 to 97% of GDP in 2009 and is projected to rise to 115% of GDP in 2015.

The IMF said that governments needed to ?clearly define their fiscal plans for the long-term, including pensions and healthcare reforms?. Unless there was a ?change to rein in large primary deficits public debt will spiral out of control?. The IMF said that its analysis should help identify fiscal strategies – including cutbacks in spending, and for some countries, raising revenues – needed to return public debt to a sustainable path.

The Cottarelli and Schaechter report also warned that, as a result of ageing populations, ?health care reform will be the fiscal challenge of the twenty-first century? for developed economies.

They argue that while many countries are focusing on how ageing populations will affect state spending on pensions and are placing much less emphasis on the cost of health care, this is a mistake. While the pension issue is not trivial and further reforms are needed, ?the challenge seems to be manageable?.

On the other hand, governments are vastly underestimating the amount their spending on healthcare will rise over the next 20 years.

The European Commission calculates that spending will rise by 0.8% over the next two decades, but Cottarelli points out that this does not include the increasing cost of state healthcare. When this is added in, the increase in government spending will be around 3% of GDP.

The report concludes that:

?The key policy challenge over the coming decades will be to make healthcare systems sustainable by containing costs as well as creating fiscal space in other areas so as to adapt to societal preferences and needs for a greater share of ageing-related spending?.

Increasing their tax collections, whether by implementing new initiatives to trace and prevent tax evasion or hiking tax rates, would help governments create ?fiscal space? to help accommodate the ever increasing costs of their ageing populations. While the IMF believes that the pension issue is manageable, it will also remain a pressing concern for governments when budgeting for future years.

The global crackdown on tax evasion is destined to get even tougher. Speaking to a tax and wealth management adviser like Blevins Franks will give you peace of mind that your tax planning is both fully legitimate and designed to minimise your current and future tax liabilities in your country of residence as much as possible.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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