After 2016 dip, regional tax revenues expected to recover

A new report says tax revenues in Latin America and the Caribbean, LAC, dipped in 2016, falling further behind the average OECD country levels, but adds that recovery is likely in subsequent years.

The report, Revenue Statistics in Latin America and the Caribbean 2018 notes the average tax-to-GDP ratio stood at 22.7 per cent in 2016, a fall of 0.3 percentage point since 2015.

The Economic Commission of Latin American and the Caribbean, ECLAC, said the 2016 decrease "reflects the overall economic environment in the LAC region, where GDP growth slowed between 2012 and 2016.

"Declining commodity prices partly drove this downturn and remain a key determinant of revenue trends in LAC countries," said ECLAC, a regional UN agency.

It said the decline in tax revenue as a

percentage of GDP is expected to reverse in subsequent years, thanks to a recovery in commodity prices and an improving

economic climate, with GDP growth in LAC forecast to be between 2 per cent and 2.5 per cent in 2018.

The report, which covers 25 LAC countries, including Guyana for the first time, is produced jointly by the Inter-American Centre of Tax Administrations, ECLAC, Inter-American Development Bank, the OECD Centre for Tax Policy and Administration, and the OECD Development Centre.

The report notes that while the average tax-to-GDP ratio in the LAC region decreased by 0.3 percentage point, it increased by 0.3 percentage point to 34.3 per cent among member countries of the Organisation for Economic Cooperation and Development.

In 2016, the tax-to-GDP ratios of the 25 countries covered by the report ranged from 12.6 per cent in Guatemala to 41.7 per cent in Cuba. Barbados and Brazil had the highest tax-to-GDP ratios after Cuba, at 32.2 per cent; while Dominican Republic at 13.7 per cent, and Venezuela at 14.4 per cent had the lowest ratios after Guatemala.

In 2016, the report says tax revenues as a percentage of GDP declined in about half the countries, whereas declines were only recorded in four countries in 2015.

The fall in the LAC ratio in 2016 was driven by a decrease in revenue from income taxes of 0.2 percentage points, due to lower corporate income tax revenue.

In 2016, value added tax was the biggest source of tax revenue in the LAC region, amounting to 29.3 per cent of collections, followed by income and corporate tax at 27.3 per cent, and other taxes on goods and services, 21.2 per cent.

"This represented a shift towards value-added taxes and away from taxes on income and profits," the report noted.

A special feature in this year's report identified trends in fiscal revenues from non-renewable natural resources for 12 commodity-exporting countries in the LAC region. The report finds that fiscal revenues from non-renewable natural resources continued to fall on average in the 12 commodity exporters in LAC, from 3.5 per cent of GDP in 2015 to 2.3 per cent in 2016.

Hydrocarbon-related revenues drove the decrease - falling on average from five per cent of GDP in 2015 to 3.4 per cent in 2016 in the 10 oil-exporting countries in the region - "as a result of a gradual decline in crude oil prices, weak profits at major oil producers and a sharp contraction in regional production."

Mining revenues, in contrast, held relatively stable at around 0.4 per cent of GDP on average in 10 mineral-producing countries, the report says.

Overall, the report says the region's dependence on non-renewable natural resources declined significantly between 2010 and 2016, "reflecting commodity-market dynamics and higher mobilisation of revenues from other sources such as VAT and income tax."