Inter-Parlamentary Forum of the Americas Forum Interparlamentaire des Amériques Foro Interparlamentario de las Américas Fórum Interparlamentar das Américas

Working Group I: The interaction of tax policy and trade,
economic growth and social development

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.