SANTO DOMINGO, January 17th, 2018 – A new report presented today by the World Bank proposes alternatives to improve the efficiency of the Dominican Republic’s tax system to support the Government in its efforts to increase public revenue, promote inclusive growth and competitive business climate.
Despite its solid growth trajectory, poverty and inequality indicators in the Dominican Republic remain relatively high. In view of the Fiscal Agreement foreseen in the 2030 National Development Strategy Law, this diagnostic identifies options to improve fiscal efficiency and increase revenue. These options include: better policies to increase tax revenue, better targeting of fiscal spending to benefit the poorest, and an increase of the tax base to reduce informality,” said Alessandro Legrottaglie, World Bank Country Manager.
The report “Gearing up for a More Efficient Tax System in the Dominican Republic” points that losses in tax collection caused by fiscal evasion, fraud, and poor management of the Transfer of Industrialized Goods and Services Tax (ITBIS, in Spanish), are among the largest in Latin America and the Caribbean.
The diagnosis recalls that the Dominican Republic is following an exemplary growth trajectory compared to its regional neighbors. However, tax revenues between 2004 and 2014 represented on average 13.4% of GDP, less compared to the 14.3% regional average. In 2016, total revenue only reached 14.6% of GDP, well below the 2007 high of 16.6% and the revenues from several comparable countries in the region with a lower per capita GDP.
The exemptions to ITBIS (the country’s VAT) constitute the Dominican Republic’s single largest tax expense, followed by preferential fuel subsidies, real estate deductions and corporate tax incentives. The benefits accrued by the private sector rose by around 0.7% of GDP in 2015 through income tax expenses; and their impact on the economy has still not been fully assessed. Due to labor informality, the revenue relinquished by the Government from personal income tax alone represents close to one third of a GDP percentage point.
In recent years, the country has increased the transparency of public accounts and has managed to improve its access to finance. However, more efforts are needed to improve the efficiency of the Dominican tax system and increase revenue, to pursue more active social policies and a more inclusive growth.
The report suggests interventions in three areas:
· Continue improving management and reducing fraud by strengthening the use of ICT to reinforce tax administration. This would include: improving the exchange of information between the General Directorate for Internal Revenue and the General Directorate for Customs; identifying a list of goods and services subject to ITBIS exemption in Special Economic Zones (ZEEs); reviewing and consolidating low-revenue taxes; and aligning taxes to environmental and health goals at national level.
· Modify fiscal incentives for companies and reduce ITBIS exemptions to increase public revenue by: introducing cost-benefit analysis, adopting clear sunset clauses in legislation, and targeting exemptions to benefit the poorest.
· Expand the tax base by reducing labor informality, with a focus on: gathering more data to facilitate the identification of the right policies; implementing educational programs; and increasing the capacity to promote mobility of informal workers
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