Chaired by Senator Silvia Hernandez of Mexico

The first session began with presentations by Dr. Claudino Pita, Director of Planning and Strategies at the Inter-American Tax Administration Centre, followed by Dr. Albert Barreix of the Inter-American Development Bank.

Dr. Pita gave a lecture entitled "Harmonization and Tax Systems in America", in which he presented the main facts and challenges in this area, including communications technology, the search for competitiveness, economic integration, interdependence, transfer price control, taxation and e-commerce, and tax harmonization.

He explained that the general characteristics of tax systems in the Americas are fairness, in the sense that the tax burden falls upon the taxpayers with greater means; neutrality, to the extent that taxes do not generate distortions that determine the location of production factors; and simplicity, which means that the systems are transparent, trustworthy and have legal certainty. The challenge at hand relates to obtaining sufficient revenues by combining these factors.

The new challenges have made changes to the tax systems necessary to avoid undesirable effects such as incentives that reduce the performance capacity of the State's public policies. Along these lines, Dr. Pita concludes that future changes should aim to achieve sufficiency, fairness and neutrality.

The speaker pointed out that the need to harmonize the tax systems of countries in the Americas is based on the fact that today there is discrimination against goods from abroad and distortion in the conditions for competition conditions and in the localization of investment.

Dr. Alberto Barreix spoke on the topic of "The Challenges of Tax Policy Related to Regional Economic Integration". He began his presentation by describing the fiscal crisis currently facing all countries in Latin America in the form of a fiscal deficit they cannot overcome. He explained that all fiscal policies consist of three components, namely revenues, expenditures and financing, if applicable.

With respect to trade liberalization, Dr. Barreix explained that this leads to reduction and uniformity of tariffs, which in turn limits industrial policy and revenues in the sheltered sectors. Another implicit aspect of this is the restriction of sectoral policies to tax incentive policies alone, as well as the comparison of products and raw materials at the international level.

The speaker stated that trade liberalization entails challenges that are present in integration, such as revenue losses due to lower tariffs. He also noted that subsidies or non-tariff barriers affect developing countries by artificially lowering the prices of subsidized products and hence the coffers of developed as well as developing nations (lost revenues).

Dr. Barreix likewise mentioned that harmonization of customs procedures is required to ensure adequate compliance with rules of origin and institutionalization with respect to dispute resolution and mechanisms that reinforce the legal safety of investments and improve country risk rating.

Once the speakers' presentations had concluded, there was a question period for the parliamentarians, who were able to address arguments and questions to the speakers in the context of hemispheric integration.

One position put forth by the parliamentarians was the dissimilarity between Latin American tax systems and those of the FTAA and European Union, which led to a discussion as to whom to associate with. All of this points to the need for broad negotiations at the bilateral and multilateral levels.

One participating parliamentarian was of the opinion that speculative transactions (hot money) on the exchange market should be taxed-what is known as the Tobin tax-with the exception of those intended for export and import transactions for goods and services and for investments in productive assets, as in the case of direct foreign investments.
Some highly important issues were raised during the debate, namely:

How does tax harmonization affect the integration process?
Are the present tax models compatible with the integration to which we aspire?

Is administrative and tax decentralization compatible with integration, taking into account that this is a highly political decision?

How might developing economies be assisted in competing with the developed economies in a context of trade liberalization, taking into account the asymmetries that exist?

In general terms, the first day's session concluded with the following thoughts:

The question period began with the basic question "Do the parliamentarians want integration or not?" As the debate unfolded, however, the conclusion was reached that integration is unavoidable, the real question is how to do it. The task the parliamentarians have at hand is finding common ground on tax harmonization as well as on other integration issues.
Integration is not a goal in and of itself, but a means of achieving socioeconomic development for the hemisphere. One of the most important tools for achieving this goal is a fair, transparent and efficient tax system.

Integration seeks to achieve the harmonious development of member countries. Therefore, it is necessary to recognize the different relative situations. The unequal conditions in effect require compensation processes to make use of all the economic potential for the mutual benefit of the partners and to ensure equal opportunities. These compensations must be granted in the form of commercial or financial advantages.

In the countries where it applies, the decentralization process complements the economic integration process. Responsible fiscal decentralization that is carried out with economic efficiency criteria allows citizen control regarding the size of the public sector, which becomes supranational in the regional integration process.

The second day of sessions for Working Group No. 1 began with consideration of the text by the rapporteur, which was generally approved with very minor amendments. Dr. Claudino Pita then presented some reflections on integration experiences in America pertaining to the harmonization of tax systems. To this end, he explained the different regional integration agreements that were staged in the continent from the sixties through to the present.

When asked what model or experience could be used as a basis for undertaking the task of tax harmonization in the context of economic integration, Dr. Pita explained that the way to achieve that objective was to begin by standardizing the technical aspects of taxation, leaving the quantitative part pertaining to tax levels reflected in tax rates to each country's domestic tax policy decisions. He said, for example, that the value-added tax should have the same structure in all countries in the hemisphere, and that the difference would lie in the rates each country might choose to establish.

The need for adequate flexibility throughout this whole tax harmonization process was stressed, so that the effects it produces do not generate rigidity in national tax policy management, as long as advances in the integration process do not demand greater coordination of those policies. As a result, the concrete recommendation on this subject is to identify the technical models as reference points to obtain a harmonized tax structure that leaves room for each country to make political decisions to ensure social development and to facilitate the regional integration process.

Concern was expressed about the progress of the FTAA negotiations, given that a timely debate has not been encouraged in the national parliaments on domestic legislations, and that this topic affects aspects such as competitiveness and localization of investments as the hemispheric agreement begins to take effect.

Emphasis was also placed on the need to strike a balance between the harmonization of tax systems (which in some cases will mean reduced revenues) and the need to finance public spending on social investment.

The issue of exacerbated focalization of legal formalism and technicism was also addressed in the debate on tax reforms, which moves it away from the humanist perspective that views the human being as the main objective of all public policies.
One matter on which several parliamentarians agreed was the need to create a supranational parliament that deals correctly with decisions pertaining to integration agreements, as in the case of tax matters.

Another relevant aspect mentioned was the need to promptly address the impact of the informal economy in the countries and its effect on the integration process, as well as on tax harmonization. The parliamentarians acknowledged the density of the informal economy in our countries and its impact on the efficiency of tax management.

After the remarks by the parliamentarians, the chair turned the floor over to Dr. Alberto Barreix, who raised three issues:

Fiscal and tax aspects. It was noted that this subject is not explicitly included in the hemispheric integration processes although it was an important aspect in the European Union and NAFTA.

Institutional integration aspects. 1) The harmonization of customs processes to encourage trade; and 2) The resolution of international disputes to ensure legal security for investments. Without these aspects, integration would be difficult.
Compensation between sectors and countries. It was noted that the European Union has tariffs and other taxes aimed at financing common policies and institutions.

The common objective in tax matters is to collect taxes fairly without affecting the countries' competitiveness.
Finally, it was stated that effective integration in Latin America will indefectibly require the consideration of tax matters.

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Chaired by Congressman Marcelo Stubrin of Argentina

Working Group II discussed the topic of "The Impact of the Economic and Financial Crises in the Region". The discussion was based on Dr. Roberto Frenkel's authoritative lecture entitled "Globalization and Financial Crises in Latin America".
After hearing Dr. Frenkel's lecture, the members of Working Group II proceeded to give their input by raising the following points:

Financial crises arise from a system that currently lacks rules to help forecast its behaviour, as demonstrated by the successive and recurrent appearance of episodes of this nature in different emerging markets, including countries once considered successful models of insertion in the global economy.
Societies whose political system is more democratic and transparent and whose public accounts are managed in an orderly fashion are less vulnerable to financial and economic crises. For this reason, one of the elements that must be taken into account when building solid and stable economic systems is the development and implementation of public policies to control corruption. Likewise, parliament plays a fundamental role in this area as a generator of appropriate and modern legal instruments, and supervisor of the correct behaviour of the authorities and institutions called upon to execute these policies.

Notwithstanding the foregoing, it was stated that multiple factors lie behind problems of this type. Elements such as the following would therefore have to be considered: foreign debt negotiation methods, sovereign risk determination that influences interest rates, as well as the lack of common guiding principles and unambiguous rules that strengthen legal security in this field. That is, solutions must take a multidisciplinary approach, as there are political considerations in addition to the economic implications of this subject.

Furthermore, it was determined that, in recent years, the net balance of capital flows in the region had been negative, though this did not entail a reduction in Latin America's foreign debt. This points to the need to find mechanisms that promote a new international financial architecture.

The fact that financial crises have a heavier impact on society's least protected sectors through budget adjustments is of great concern, as this weakens the credibility of the democratic system and, hence, the governments' capacity for political action.

It is also clear that the smaller countries are more vulnerable to crises, and it is therefore necessary to take this into account and design economic policies consistent with this reality.

In light of this situation, it is important that our institutions and authorities act transparently within a framework of weights and balances in order to control corruption, and to establish an environment with unambiguous rules.

Without underestimating the serious economic and financial problem generated by corruption, it is important to emphasize that the international financial system functions in such a way as to generate great instability, and because of this, it is necessary to create forms and rules that help increase certainty levels in international financial relations.

These innovative forms and rules could eventually involve delegating part of the nations' sovereignty to international institutions to reduce the risk inherent to international financial activity.

It is imperative for the international community to implement a new financial architecture. It must improve the interregional integration mechanisms and ask international financial institutions to review their economic policy proposals with a view to encouraging economic growth rather than becoming yet another element that promotes recessions.

Recommendations:

The role of inter-parliamentary institutions like FIPA must be geared towards stimulating horizontal cooperation, exchanging successful practices, standardizing regulations and generating appropriate forums for discussing and debating crucial and strategic topics for strengthening our economies.

It is therefore necessary for FIPA to create a Periodic Analysis Group to study the international financial situation, which could function by using the available virtual connectivity tools.

It is essential to strengthen the parliament's role of control and supervision, determining the policy and program goals of our governments and taking into account the principles of efficiency, effectiveness, economy and quality in the different public programs and services, as well as the indicators that may have been defined to measure the results of institutional management and achieve transparency in the rendering of accounts. This direction should serve to anticipate and avoid the consequences of financial crises.

It is also very important to move towards new legal forms that allow financial restructuring of the countries in an orderly environment, thus preventing foreign debt problems from being aggravated by strong recommendations that have an impact on sovereign risk determination.

It is necessary to improve the quality of integration in the region, including the coordination of macroeconomic policies, for the purpose of strengthening its negotiating position before the international financial institutions.

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Chaired by John Godfrey, Canadian Member of Parliament

Mr. Peter E. Kirby participated as speaker and presented the document "Update on the Free Trade Area of the Americas (FTAA) process, including recent developments in the FTAA negotiations." This document served as a basis for the discussions of the Working Group that covered a wide range of topics from the draft FTAA Agreement published after the Seventh Meeting of Ministers of Trade held in Quito in November 2002.

The Working Group reaffirmed the Recommendations on the FTAA agreed upon by FIPA at its Inaugural Meeting held in Ottawa in 2001 and at the 1st Plenary Meeting held in Mexico City in 2002. The Working Group drew particular attention to the following recommendations:

-That the Free Trade Area of the Americas be based on a convergence of political, economic and social values and effectively contribute to raising the standards of living of the people, ensuring equal opportunities, and improving the distribution of wealth and democracy;

-That Parliaments, as representatives of people in the Americas, play a key, effective and active role in the negotiations and signing of international trade agreements;

-That the development needs of countries be taken into account and made an integral part of the FTAA negotiations in Agriculture, including recognition of the particular vulnerability, sensitivity, and structural difficulties of the agricultural sectors in developing countries;

-The elimination of agricultural export subsidies and other trade-distorting practices for agricultural products affecting trade in the hemisphere;

-That the FTAA negotiations take into account the interest and concerns of different sectors of society, the need for a permanent commitment to transparency and to increasing and sustained communication with civil society;

-That the FTAA establish clear, transparent, and effective rules to address and prevent unilateral and/or protectionist trade practices under a rules-based trading system;

-That the FTAA negotiations take into account all the concerns of countries in issues of intellectual property related to access to genetic resources, indigenous and traditional knowledge, and the right of each country to protect public health and access to medicines for all;

-That differences in the level of development and size of the economies in the hemisphere are taken into account in the FTAA and that smaller economies receive the treatment that they require to ensure their full participation and benefit in the FTAA;

In addition to the oral recommendations and proposals introduced during the debate by different delegations, the Group took note of 6 written recommendations submitted by Congresswoman Patricia Gutiérrez from Colombia, Senator Raymundo Cárdenas from Mexico, Congressman Nathan Jorge Sevilla Gómez from Nicaragua, Congressman Jaime Vázquez Castillo from Mexico and Congresswoman Silvia Álvarez and Congressman Francisco Patiño from Mexico.

RECOMMENDATIONS CONCERNING PARLIAMENTARY PARTICIPATION IN THE FTAA PROCESS THROUGH FIPA

Aware that the final and critical phase of the FTAA negotiations has already started;

Concerned with the experiences and implementation of trade agreements that are in force in the Hemisphere;

Convinced of the need to build on the recommendations already adopted by FIPA and to follow up on these recommendations with specific actions,

We Parliamentarians of the Americas

Recommend that the Executive Committee of FIPA undertake the following initiatives:

1) Establish a section in the Virtual Parliament of the Americas web site to facilitate the exchange of information regarding the negotiation and implications of trade agreements. This web site should provide Parliamentarians with information, documents and links to Internet sites on the FTAA negotiations and to conduct discussions or informative sessions on issues relevant to the negotiations.

2) Prepare and distribute in advance of the next Plenary meeting of the FIPA a document to follow up on each of the previous recommendations on the FTAA and keep track on the results or any progress achieved on the issues agreed by the Parliamentarians.

3) Explore mechanisms to benefit from experiences and concerns arising from trade agreements that have already entered into force, such as NAFTA or other bilateral trade agreements existing in the Americas signed by Canada, Chile, Costa Rica and Mexico, among others.

4) Study the system adopted by the Brazilian Parliament as a model mechanism to monitor and actively participate in the FTAA negotiations at the national level and request that Heads of delegation of countries represented at this Second Plenary Meeting provide existing information or notify the Executive Committee of FIPA on the adoption in the future of similar mechanisms in their countries. Such information will then be posted on the new FTAA section of the Virtual Parliament web site.

5) Establish a mechanism for FIPA to interact formally with the Trade Ministers in the context of the FTAA process and keep track of the negotiations. The "Parliamentary Conference on the WTO" adopted by the Inter-Parliamentary Union (IPU) provides a useful model of how such interaction might work at the hemispheric level.

6) Submit a formal communication on behalf of FIPA directed to the FTAA Co-Chairmanship of Brazil and the United States to be considered by the FTAA negotiations covering the following issues:

- Indicate our concerns regarding the potential benefits and negative effects that the FTAA may have in our countries considering the difference in level of development and size of the economies and inequality prevailing in the Americas;

- Consider other integration arrangements models such as the European Union where Social Cohesion Funds were available to guarantee the effective participation and benefit of all FTAA countries;

- Address Agricultural issues in the FTAA negotiations taking into account the particular vulnerability and sensitivity of Agricultural issues for all FTAA countries and the need to eliminate agricultural subsidies and other trade distorting practices;

- Take into account the particular needs and conditions of all countries when setting deadlines for implementation of the FTAA Agreement.

7) Discuss with the FTAA Co-Chairs potential mechanisms to provide input from FIPA to the FTAA negotiations on the implementation and further development of the Hemispheric Cooperation Program (HCP) under the FTAA, in particular with respect to social adjustment funds for the agricultural and manufacturing sectors.

Further, recommend that the FTAA consider the creation of a special fund within the HCP for professional education, science and technology to provide developing countries with scientific and technological capabilities that will allow them to catch up with developed countries and effectively contribute to economic development and a better economic integration of the FTAA countries.

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