World Bank: The objective of tax reform is in encouraging business to invest

In essence, the objective is to decide on a set of tax policy and tax administration measures that encourages (and convinces) businesses to (i) invest, innovate, expand, and export; and (ii) be honest in its tax declarations provided to the Tax Committee, the World Bank country director for Tajikistan noted.

According to him, this, in turn, requires a focus on principles and processes. If decisions on tax audits are based on considerations of expected tax payments, penalties, and pre-payments, effective tax obligations end up being, essentially, a “negotiated settlement”.  “And, like in any negotiations, tax authorities and businesses would start with, respectively, “maximum requests” and “minimum offers”, resulting in incentives to (i) slow down business expansions (as strategy to become a less attractive target for tax audits); and (ii) hide, to the effect possible, turnover and revenue (to maintain the maximum “bargaining ground” vis-à-vis the tax authorities),” said Mr. Olters.  “By contrast, if tax obligations are predictable (even if considered “too high”) and tax audits be made dependent on the quality and accuracy of tax statements, businesses—in balancing costs plus expected tax obligations against potential revenues—have incentives to exploit existing commercial opportunities in domestic and neighboring markets, thereby stimulating investment, innovation, and employment generation.  Similarly, if the likelihood of tax audits depends on risk assessments, derived from internal consistency checks, and if it is understood that it is “high risk” enterprises that will be audited, it will be in the companies’ own interest to be honest in its interactions with the Tax Committee.”

To this end, the obligations of both the tax authorities and businesses reportedly can be supported by simplifying the tax code as much as is possible, with minimum complexities, exceptions, and rates.  The easier it is for the Tax Committee to identify potential under-reporting, the easier it is for businesses to comply with the tax code, and the faster the country will be able to develop a partnership with the private sector and increase the latter’s confidence in the improving business climate and available profit opportunities.

The second critical feature of the current debate on the tax reform, beyond the discussions on specific rates, links to the ability to use the instrument of tax exemptions and incentives in an effective manner, according to the World Bank official.

The Government reportedly has every right to define development objectives that would warrant the temporary granting of tax incentives—to all companies that would qualify.  Political decision-makers, including Parliament, would need to know both the fiscal costs of revenues foregone and development results achieved to develop an informed opinion about whether there is a proper balance between tax revenues lost and socio-economic benefits derived in the use of this policy instrument. As demonstrated in many other countries, it is a delicate policy instrument, one that, if not properly monitored, risks undermining fiscal stability objectives of Government and an environment of fair competition required by businesses.

Recall, the final version of the draft Tax Code was posted on www.itcmf.tj/kodeks on February 8 and it was available for public consultations until February 26.

Citizens of Tajikistan might send their comments and proposals on the draft Tax Code to the Tax Committee through the abovementioned website.

President Emomali Rahmon initiated development of a new tax code in late May 2019.  He ordered to take into consideration interests of business entities and citizens of the country while developing the new tax code.

In a statement delivered at a joint session of both houses of parliament, President Emomali Rahmon on January 26 ordered relevant ministries and agencies to complete the country’s tax code in new reading until March this year and submit it for consideration to the government.