Entry points and specific nature of EU intervention Jean-François Brun and Gérard Chambas CERDI Module 9

Outline 1 - Main objectives of the Tax transition reform 2 - Obstacles to reform 3 - Conditions for reform 4 - Essential instruments of the reform? 5 - The regional dimension Reference: (Bensouda, 2006); (Brun, Chambas, Laurent, 2007) 2EU Workshop Brussels 2014

3 Objectives of the tax transition reform To reinforce VAT, the key element of tax transition (single rate, monitoring and refunding of VAT credits) To reduce exemptions (increase tax base) To reform income tax (simplify, “dual tax”) To modernize tax administration (Real customs-taxation administrations connection, unique tax identifying number etc.) EU Workshop Brussels 2014

What are the main obstacles to the reform? Losers of liberalization process: a potentially well-organized group Institutional difficulties for the evaluation of impacts Uncertainty concerning the effects of the reforms Prospect of political change Risk of a reduction in public revenue Internal resistance to the administration Environment not favorable to reform EU Workshop Brussels 20144

The losers: an often well-organised force Entrepreneurs organization (coalition phenomena) Trade unions (employment problems) Links with politics (role of Parliament) Close relations with the media 5EU Workshop Brussels 2014

6 Institutional difficulties for the evaluation of impacts Strategy of secrecy Overestimation of the difficulty and of the cost of the evaluations: the case of tax expenditure Internal coordination difficult with different administrations Lack of capacity for assessments significantly increased by coordination failures Need for international validation EU Workshop Brussels 2014

Uncertainty concerning the effects of the reforms Reticence of reform winners (objective alliance with losers) Reinforcement of opponents to the reform Reduction of uncertainties through a clear understanding of the impacts of the reform Prospect of political change Immediate costs: major political issue of taxation Benefits of the reform uncertain and difficult to promote by politicians EU Workshop Brussels 20147

Environment not favorable to reform Natural disasters Unfavorable climatic conditions (poor rainfall, etc.) Economic instability (inflation, high deficits).Tension concerning the prices of basic goods (food,…) Political instability (internal tension, border tension) Tense social climate EU Workshop Brussels 20148

Conditions of success for the reform Option for transparency and seeking support from within the country (operators and public opinion) National capacity for a credible diagnosis Reform with a long term perspective (anticipation and reduction of uncertainties) Seeking support from external partners (support from international donors) 9EU Workshop Brussels 2014

10 Essential instruments of the reform “Scientific” work - diagnosis, assessment of the effects of the reform - tax expenditure, social impact, CGE model (redistributive effect, etc.) Intense communication strategy (communication service) aimed at economic operators, media, political decision- makers, Parliament, development partners, etc. Appropriate support of external partners, political will and support for the reform, type of financial support, external expertise (validation and encouragement for coordination) EU Workshop Brussels 2014

The IMF remains the key player in terms of fiscal policy and tax transition (regular missions, technical assistance, etc.) Other organizations play an important role (bilateral donors, World Bank, regional development banks, e.g.: AfDB, IADB; UNDP; regional bodies (e.g.: WAEMU via “directives”), etc. The EU plays a complementary role. Co-financing of PEFA exercises, capacity building of revenue administrations in developing countries, etc. EU points of entry in the reform (1) EU Workshop Brussels

The EU can intervene as a facilitator of dialogue between the different groups of society involved in the reform The EU can help to introduce flexibility in support for the country (there is no point in undertaking reform when the conditions are not favourable) The role of the EU in aspects neglected by other donors (local taxation, social levies, etc.) EU points of entry in the reform (2) EU Workshop Brussels

Regional dimension of the reforms: specific nature of EU intervention Ex WAEMU: de facto coordination (common fiscal tradition, legislation and administration) Failure in good practice (refund of VAT credits, exchange of customs-tax information, etc.) Regional integration - often decisive vector of the reforms... but there may be difficulties (trouble in Côte d’Ivoire) Regional integration offers a common framework (better practices, exchange of information or technique, etc.) 13EU Workshop Brussels 2014

Regional dimension of the reforms: specific nature of EU intervention The EU has unique know-how in regional cooperation The EU can help to set up working groups on subjects that are difficult for countries to address in isolation (international taxation, mining taxation, etc.) The EU must count on the support of recognised experts, in particular from other institutions (credibility and recognition of the work) 14EU Workshop Brussels 2014

Thank you for your attention. 15EU Workshop Brussels 2014