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SPEECH BY HON. MINISTER OF FINANCE, GHANA (SETH TERKPER) IMF INTERNATIONAL SEMINAR FOR TAX POLICY AND ADMINISTRATION TOPICAL TRUST FUND (TPA-TTF) BENEFICIARY COUNTRIES. THEME: “MANAGING TAX ADMINISTRATION REFORM PROGRAMS”

Mr. Chairman
Distinguished Guests
Ladies and Gentlemen  
 
INTRODUCTION AND WELCOME STATEMENT

  1. I wish to  welcome you our distinguished  guests to Ghana. Ghana is a beacon of democracy, an interactive investment destination, and a country with a welcoming and genuinely hospitable environment. As we say in one of our local dialects “Akwaaba”, which means “welcome”.  

 

  1. It is a distinct honor to be invited to give an open remarks and it is also a privilege for Ghana to be hosting the IMF’s  International Seminar for Tax Policy and Administration for its Topical Trust Fund (TPA-TTF) beneficiary countries. Distinguished Ladies and gentlemen, permit me to  thank the organizers , the Fiscal Affairs Department of the IMF for creating the platform for continuous dialogue in this important area of fiscal management.

 

  1. The theme of the seminar, Managing Tax Administration Reform Programs, is topical. The seminar comes towards the end of the six-year TPA-TTF program and follows the launch of the second phase of the program as the “Revenue Mobilization Trust Fund (RMTF).” This seminar provides a useful starting point to discuss future tax administration reform priorities and the role we all have to play in the financing for development and fiscal stability agenda.

 

  1. Distinguished ladies and gentlemen, my opening remarks this morning, will center on three broad areas.
  • The importance of strengthening Tax Policy and Tax Administration;
  • A review of Tax Administration Reforms in Ghana; and
  • Challenges in developing and Implementing Tax Administration Reform programs.

 
THE IMPORTANCE OF STRENGTHENING TAX POLICY AND TAX ADMINISTRATION

  1.  Mr. Chairman, notwithstanding an extremely challenging macroeconomic environment, most Low and Lower Middle Income countries (LLMICs) including Ghana have recorded a robust but gradually declining growth over the past decade. The Ghanaian economy has started a turnaround to continue to remain resilient, and despite recent slowdown, is currently in its thirteenth (13th) consecutive year of expansion It combines  improvements in macroeconomic management and strong capital investments in infrastructure and the energy sector during this period. this performance has pushed Ghana into the Lower Middle Income bracket and the prospects for consolidating this status also remains bright.

 

  1.  The recent slowdown in the economy occurred as a result of serious disruption in gas supply for generating power and falling commodity prices – notably gold, cocoa and crude oil. In 2013, Ghana launched a Home-Grown policy that was later transformed to an IMF ECF Programme in 2015. The review and reforms in tax policy and administration reforms remain a key element of the Programme. The Programme also has strong elements of public financial and debt management reforms. I will return to this topic later.

 

  1. Ghana recorded inclusive economic growth of about 6% between 2001 and 2010 and 7.7% between 2011 and 2015. Improved social spending under the Ghana Poverty Reduction Strategy (GPRS) and Ghana Shared Growth and Development Agenda (GSGDA 1 and 2) have contributed to a significant decline in poverty rates. In 2013, Ghana achieved the Millennium Development Goal (MDG) of halving its extreme poverty level. The overall poverty rate declined from 31.9 percent in 2005/06 to 24.2 percent in 2012/13. Similarly, extreme poverty rate declined from 16.5 percent to 8.4 percent over that period.

 

  1. Ghana has started the process of aligning its earmarked budget to national objectives in the area of education, health and rural development.

 

  1. Economic performance and progress towards the Sustainable Development Goals (SDGs) differ and are uneven across developing countries, reflecting weak policies and governance and the need for countries to foster growth and development through the crucial process of enhanced resource mobilization efforts.

 

  1. Indeed, the Addis Ababa Action Agenda, which builds on the outcomes of two previous Financing for Development Conferences in Monterrey – Mexico and Doha – Qatar, identifies effective domestic resource mobilization as central to its agenda and key to the realization of the Sustainable Development Goals (SDGs). Key among the Addis domestic resource mobilization theme, is the need to widen the revenue base, improve tax collection and combat tax evasion and illicit financial flows.

 
 

  1. In recent times, Low and Lower Middle Income countries (LLMICs) have had to contend with fiscal imbalances, as they face setbacks in commodity prices while pushing for rapid economic development. that has resulted in huge fiscal expansionary programs by governments. Revenue, however, has not kept pace with spending, with consequential downside implications on development financing. The current situation is further exacerbated by a rapid decline in grant financing and deteriorating the overall fiscal position of countries.

 

  1. Our reform experience shows that our countries need to complement the revenue resource mobilization programme with strong budget, expenditure financing and debt restructuring reforms. Hence, in addition to our Revenue Mobilization reforms, we are also implementing concurrent budget, financial and debt management reforms.

 

  1. In many developing economies, tax administration reform has formed an integral part of a broader fiscal reform strategy aimed at restoring macroeconomic stability and at restructuring tax systems so that taxes are more efficient, less distortionary of market forces and easier to administer.  The impetus is for these countries to modernize tax administration and make it responsive to the demands of a growing economy as well as broaden the overall tax base.

 

  1. The biggest lesson for us from the existing scenario is to identify more sustainable ways of raising domestic revenues, managing expenditures and alternative ways of financing development. Studies have found that more than 40% of tax potential in developing countries remains untapped, preventing these countries to be financially self-sufficient and making them donor dependent.[1] Therefore, reforms of countries’ systems of revenue administration and PFM are a priority. 

 
 
A REVIEW OF TAX ADMINISTRATION REFORMS IN GHANA

  1. Mr. Chairman, distinguished ladies and gentlemen, bold changes in Ghana’s tax administration have played a key role in improving the country’s revenue mobilization efforts. Prior to 1986, revenue mobilization in Ghana was embedded in the Civil Service. The thrust of the early tax administration reforms in Ghana centered around removing the revenue institutions from the civil service and granting them operational autonomy, with a view to improving efficiency through enhanced work and employment conditions.

 

  1. Two practical steps were taken in 1986 to reform and strengthen revenue administration in Ghana. These were the establishment of the National Revenue Secretariat (NRS) and the creation of 2 major revenue organizations; i.e. the Customs, Excise and Preventive Service (CEPS) and the Internal Revenue Service (IRS).  The 2 separate revenue authorities were effectively placed under the NRS.

 

  1.  With the establishment of the NRS, Ghana became the first African country to establish an independent Revenue Authority on the continent and in doing so created the foundation for sound tax administration system.[2] The NRS played the coordinating role for the newly established revenue agencies – which also had two separate Boards of Directors.

 

  1. However, the creation of the NRS and the respective revenue agencies did not fully address the country’s tax administration problems as shown by the relatively low ratio of taxpayers to the population despite the improvement in revenue mobilisation. The incidence of domestic taxes continued to fall on public service employees, the few manufacturing companies and other formal businesses.

 

  1. Therefore, to enlarge the tax base and improve tax collection, the government introduced the Value Added Tax (VAT) in 1998, a system that has been shown to facilitate improved revenue mobilization in other countries. Earlier policy reforms involved the rationalization of the income tax, sales tax, excise and tariff or customs duty systems. However the implementation of the VAT system was not plain sailing. The VAT Act (Act 486) which was implemented in 1995 was quickly withdrawn in the same year, in response to a general public outcry against a sudden increase in the prices of goods (including food items) which was blamed mainly on the introduction of VAT.

 

  1. As noted, VAT was reintroduced in 1998 under the Value Added Tax Act, 1998 (Act 546) and the Value Added Tax Regulations, 1998 (L.I 1646). Their Its primary aim was the administration and collection of the Value Added Tax (VATS) that replaced the Sales and Service Taxes previously administered by Customs, Excise and Preventive Service (CEPS) and the Internal Revenue Service (IRS), respectively. On the administration front, a third Board of Directors was created for the VAT Service.

 

  1. In 1998, however, as part of the tax administration reforms, the Revenue Agencies Governing Board (RAGB) was introduced to replace the NRS. This was to ensure stronger cooperation among the 3 agencies (i.e. IRS, CEPS and VATS). While the RAGB was also to act as the central governing body in place of the existing boards of the respective revenue agencies, it lacked centralized executive control over the three ‘tax type’ revenue agencies.

 

  1. Thus, while Ghana blazed the trail in tax administration reforms on the continent, it was slow in introducing the requisite reforms towards the establishment of an integrated revenue administration mechanism. It lacked the administrative structures to move towards a “functioning” model of administration that will facilitate coherent enforcement of the tax laws in a balanced manner, such that all the different taxes are collected, across all taxpayer classes and among all classes of income.

 

  1. Mr. Chairman, 23 years after the establishment of NRS and 10 years of RAGB,  In 2009, the Ghana Revenue Authority Act -Act 791 was passed. This effectively completed the full integration of the IRS, VATS, CEPS and the RAGB into a holistic Revenue Authority with a Commissioner General at the apex. The formation of the Ghana Revenue Authority (GRA) was to help integrate the management of the erstwhile Agencies and also modernize its operations through the review of tax systems, organization, processes and procedures. A Tax Policy Unit (TPU) was also established in the Ministry of Finance as part of the ownership of PFM reforms.

 

  1. Following the creation of the GRA, Ghana has embarked on crucial second-to-third tax administration reforms to achieve its overall goal of modernizing domestic revenue mobilization. The following are some of the key modernization reforms being undertaken by the  GRA:
  • Review of Existing Tax Laws to bring them in line with international best practice. The Tax Policy Unit of the Ministry of Finance and the GRA have reviewed all  the key tax laws in Ghana. This has resulted in the passage of four new and modernized charging Acts: the VAT Act, 2013 (Act 870); Excise Duty Act, 2014 (Act 878); Customs Act, 2015 (Act 891)  and the Income Tax Act, 2015 (Act 896). Regulations are being developed to facilitate the smooth implementation of these Tax laws.
  • Revenue Administration Bill. Currently the consolidated Revenue Administration Bill is before parliament. The bill is to facilitate the integration of the various administrative provisions of the erstwhile Acts (i.e. Income Tax, Customs, VAT and Excise Acts) to improve domestic revenue mobilisation.
  • Introduction of an integrated ICT system to support tax administration.  The introduction and roll out of the Total Revenue Integrated Processing System (tripsTM) is to facilitate functional administration – registration, filing, tax accounting, debt management and compliance. The system is being used to automate the processes and procedures for domestic tax administration. Last year, Government modernized its Customs Administration by introducing the National Single Window, which commenced with the return of the classification and valuation functions to the Customs Division of the Ghana Revenue Authority. It has resulted in the introduction of the Pre-Arrival Assessment Reporting System (PAARS).  When fully deployed the system will facilitate trade in Ghana and is estimated to save the country about US$120 million annually.
  • Setting up of an integrated Domestic Tax Revenue Division (DTRD). Creation of one-stop shop offices for domestic taxes (VAT, Income Tax and Excise Duty) where taxpayers can transact their business.
  • Segmentation of taxpayers. The application of client-oriented organization concepts to cater for special needs of different categories of taxpayershas resulted in the creation of one Large Taxpayer Office (LTO), 15 Medium Taxpayer Offices (MTO) and 50 Small Taxpayer Offices (STO).
  • Implementation of Geographic Information System (GIS). To widen the tax net, particularly, in the informal sector, the GRA has adopted and is applying the GIS technology as a viable option. This uses the Geographic Positioning System (GPS) to locate and register potential taxpayers.
  • Introduction of an enhanced Presumptive Tax system. To further make it easier for small taxpayers to fulfil their obligations a simplified system has been put in place that allows an individual to make payments based on turnover or to keep records and submit returns using a modified cash basis of accounting.

 
CHALLENGES IN DEVELOPING AND IMPLEMENTING TAX ADMINISTRATION REFORM PROGRAMS.

  1. Mr. Chairman, permit me to pause at this stagew to express my gratitude to the IMF’s FAD and Legal Department’s as well as other development partners for actively supporting these reforms. Notwithstanding the immense reforms undertaken by many developing countries including Ghana, there are still challenges in the design and implementation of Tax Administration Reform Programs. International experience has shown that political commitment to, and the sustainability of, reforms is crucial if progress can be made in resource mobilization.

 

  1. I can assure you that in Ghana, the political will is at the highest levels of Government. I must admit that, the heavy tax and PFM agenda has been daunting. However, the structures are in place but they need to boost administration and compliance. In this regard, we have asked the IMF’s Fiscal Affairs Department to visit Ghana to review the status of revenue administration reforms and propose the next steps. This request comes mid-way into the implementation of the Ghana Revenue Authority’s 3-year strategic plan (2015 - 2017). We trust that the diagnostics will take stock of reform progress and address some of the challenges in the design and implementation of reforms.

 

  1. A key challenge for tax administrators in developing countries is the modernization of tax administration to operate moreeffectively in a complex global economic system; growing difficult to tax sectors such as  financial and services; and the rapid expansion of sophisticated computer and communications technology which could be used by taxpayers to conceal economic transactions.  

 

  1. Sophisticated tax planning as demonstrated by the infamous Panama Papers Leaks and illicit Financial flows from both advanced  and developing countries has been identified among the key binding constraints to improved domestic revenue mobilization efforts. Global Financial Integrity (GFI) in its research estimates that US$1 trillion moves illicitly out of developing countries annually, primarily into western economies. What is even more disturbing is that, the bulk of illicit financial flows emanate not from conventional corruption or criminal activity, but rather from commercial activity, (i.e. international trade) - which infringes on tax laws and therefore are criminal too.

 

  1. The research arrives at a staggering conclusion that, illicit financial flows outpace Official Development Assistance by a ratio of nearly 10 to 1. Measured against the flow of Official Development Assistance in 2006, developing countries in aggregate are losing close to $10 dollars for every $1 dollar they receive in aid. Illicit financial flows from developing countries deny those countries of revenues that could be used to meet their obligations to their citizens in terms of poverty reduction and sustainable development.

 

  1. Another area of concern is ensuring that taxpayers’ rights are protected. Fair and transparent cooperation with taxpayers must be based on a proper legal definition of their rights and duties, with appropriate checks and balances integrated in the design and implementation of tax reforms.

 

  1. Evidence shows that, even though reforming the tax system can be a valuable instrument for fostering economic growth and competitiveness, the implementation of such reforms in a piece-meal manner could in itself become a source of uncertainty as well affect economic stability and undermine the integrity of the reform process.

 

  1. Issues of tax transparency should also be high on the agenda. For many citizens, the details of the tax system are difficult to understand, and seem detached from everyday life. The system is regarded as a black box of rates, thresholds and reliefs. Many taxpayers find it difficult to know exactly when and where to pay taxes and how much of their income earned they get to keep.

 

  1. The fact that tax is necessary to support critical public services should not give governments the right to take more than the tax laws permit. Governments also need to be accountable for what they raise, how they raise it and how it is spent. And for this to happen, citizens need to be in a position to understand what they pay for and why.

 

  1. In this regard, it is important to simplify the tax system to facilitate administration and reduce compliance costs. One of the most important lessons learnt from experience is that, the simplification of the tax system enhances the effectiveness and efficiency of tax administration.

 

  1. Mr. Chairman, to an extent, a simplified tax system can also help address the challenges of voluntary compliance. Ultimately, tax administration reforms must promote voluntary tax compliance to complement the need to penalize tax evaders and pursue tax delinquents. These are also to ensure the sanctity and fairness of the tax system.

 

  1. It is my hope that these challenges will be effectively discussed during this seminar based on best practice country experiences to provide useful insights in addressing tax administration challenges. I also hope the experience (both positive and negative) of the IMF in providing technical assistance in 20 TPA TTF countries will be brought to bear and provide useful leads in the ensuing discussions throughout the seminar.

 
CONCLUSION

  1.  Governments need sufficient tax revenue to finance the spending required to provide public services and underwrite investments and development. Smart tax reforms can help developing countries lower their financial dependency on foreign aid and make governments more accountable to its citizens.

 

  1. I wish to end with the familiar quote by Jean Baptiste Colbert, the Finance Minister under King Louis 14th, who famously said “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest possible amount of hissing.”

 

  1.  Ladies and gentlemen, permit me to declare this seminar officially open. I wish you all fruitful deliberation over the next 3 days as you enjoy the Ghanaian hospitality.

 

 
 

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