Significant gaps between taxation systems of Latin America and OECD countries
Latin America has made great strides in improving its taxation systems but there is still room for further improvement, according to the Organisation for Economic Cooperation and Development (OECD).
It points out in a new study that additional tax revenues enable governments to simultaneously improve their competitiveness and promote social cohesion through increased spending on education, infrastructure and innovation.
Its latest report, Revenue Statistics in Latin America, shows that the average tax to GDP ratio in 12 Latin American and Caribbean countries rose almost continuously from 14.9% in 1990 to 19.2% in 2009. This increase reflects strong economic growth, taxation of non-renewable natural resources, and better management of tax administrations.
Despite these improvements, significant gaps between Latin America and OECD countries remain, it adds. The average tax to GDP ratio in OECD countries is much higher than in Latin American countries, 33.8% compared to 19.2% in 2009, respectively.
‘As the countries in the region still find themselves in relatively strong economic conditions, now is the time to consider reforms that generate long term, stable resources for governments to finance development,’ the report says.
Tax to GDP ratios for the countries covered by the report, including Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Mexico, Peru, Uruguay, and Venezuela, vary from Guatemala with the lowest percentage at 12.2% in 2009 to Brazil with the highest percentage at 32.6%. The second highest was Argentina at 31.4%.
Non-renewable natural resources have played a significant economic role in Latin America with the largest economies in the region being traditionally net exporters. The extensive mineral resources are strategically important for tax policy and, coupled with the recent commodity price boom, have boosted tax revenues, it explains.
Following strong growth over the past twenty years, general consumption taxes, mainly VAT and sales taxes, accounted for 35% of tax revenues in the Latin American countries in 2009, whereas the share of specific consumption taxes such as excises and taxes on international trade, declined to 15%.
Taxes on income and profits accounted for 28% of revenues in the Latin American countries, an increase of 5% over the period, and social security contributions represented 15%.
The major differences between the tax structures in Latin American countries and OECD countries relate to general consumption taxes which were 35% in Latin America and 20% of tax revenues in OECD, social security contributions at 15% in Latin America and 27% in OECD, and income taxes at 28% in Latin America and 33% in OECD.
The scope of sub-national governments’ tax policies in the region has been relatively modest and limited, it adds. The share of tax revenues collected by local governments has not increased. Between 1995 and 2009, the share of tax revenue raised by local government declined by 2 to 3% in Argentina and Brazil.
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