IMF Urges Cambodia To Boost Revenue

The International Monetary Fund (IMF), at the end of the 2010 Article IV Consultation with Cambodia, has agreed that enhancing revenue collection and administration procedures were essential to ensure internal fiscal sustainability, while also providing room for the country to meet its medium-term development objectives.

It was reported that, following a significant easing in 2009, it is probable that Cambodia’s 2010 budget target will be bettered and a gradual fiscal consolidation is on track. The rebound in tax revenue is broadening, with a rise in both direct and indirect cumulative tax revenue. In particular, profit tax collection has gained momentum, supported by the ongoing economic recovery. Continued efforts to strengthen revenue administration, and reduced incentives for smuggling due to diminishing regional disparities in gasoline and diesel prices, have also helped contain tax evasion.

The Cambodian government is committed to further improving revenue administration. It concurred with the IMF that gains in tax collection offer the best hope for Cambodia to meet the dual objective of securing fiscal sustainability and mobilizing resources for its large development needs. Specifically, there was agreement that the scope to improve the productivity of the tax system is significant.

The IMF estimated that, based on its experience in similar countries, Cambodia’s tax revenue to gross domestic product (GDP) ratio is about 5%-7% below its potential. Since the mid-1990s, the tax revenue to GDP ratio has doubled, but at 12%, it is still the second lowest among Asian low-income countries (LICs) that average 17%. According to the IMF, bringing the productivity of the value-added tax alone to a level comparable with other Asian low-income countries would yield an additional 1.5% of GDP.

The IMF, therefore, supported the government’s target of improving the tax revenue to GDP ratio through better administration by 0.5% per year, which means that about one-third to one-half of the revenue enhancing potential would be realized over the medium-term.

There was also agreement that much will depend on following through with detailed action plans of the revenue collecting agencies, including: the enhancement of taxpayer compliance through auditing; information sharing among revenue-collecting and law-enforcement agencies; taxpayer education; and improved governance within the agencies (notably through better protection of enforcement officers and disclosure requirements under the recently adopted anti-corruption law).

The IMF recommended that a comprehensive strategy to enable a more aggressive collection of tax arrears, which rose 20% in the year ending July 2010, be put in place.

It was suggested that reducing the scope for evasion will also critically enhance the effectiveness of tax policy changes that are currently considered with a view to raise revenue. For example, the IMF estimated that replacing the reference price for taxes on petroleum imports to the current transactions price level would yield about 1% of GDP, and higher “sin” taxes on alcohol and tobacco could generate an additional 0.2% of GDP.

However, it was pointed out that these calculations assume that the resulting increase in domestic retail prices over those in neighbouring countries does not erode the tax base. This requires that greater incentives for smuggling are effectively curbed by the envisaged improvements to customs control. It was agreed that better information sharing and transfer of know-how in the fight against tax evasion from the General Customs and Excise Department to the General Tax Department will also be needed in light of trade liberalization commitments and the growing reliance on domestic taxes relative to trade taxes.

Source: http://www.tax-news.com/cyprus/cyprus_review_2010.asp