Tax revenue under threat amid deteriorating regional outlook, Latin America and Caribbean

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WASHINGTON, USA – Tax revenues in Latin America and the Caribbean (LAC) increased to 23.1 percent of GDP on average in 2018, according to the new edition of Revenue Statistics in Latin America in the Caribbean published today. However, these gains are now under threat as a result of the region’s deteriorating fiscal outlook, which has been exacerbated by the COVID-19 pandemic and the global economic crisis.

The increase of 0.4 percentage points (p.p.) from their level in 2017 is the highest level of tax revenues ever recorded in the region. However, LAC tax revenues remain far below the OECD average (34.3 percent in 2018). Against this background, the capacity to finance public goods and services and to cushion economic shocks in the region remains limited.

Revenue Statistics in Latin America and the Caribbean 2020 is a joint publication by the Inter-American Centre of Tax Administrations (CIAT), the Economic Commission for Latin America and the Caribbean (ECLAC), the Inter-American Development Bank (IDB), the Organisation for Economic Co-operation and Development (OECD) Centre for Tax Policy and Administration and the OECD Development Centre. This is the ninth edition in the series and the second produced through the European Union’s Regional Facility for Development in Transition for Latin America and the Caribbean. This year’s edition covers 26 countries, including Saint Lucia for the first time.

Tax-to-GDP ratios (measured as tax revenues, including social security contributions paid to general government, as a proportion of GDP) continued to vary widely across the region in 2018, from 12.1 percent in Guatemala and 13.2 percent in the Dominican Republic to 33.1 percent in Brazil and Barbados and 42.3 percent in Cuba. Fifteen countries reported an increase in their tax-to-GDP ratios between 2017 and 2018, while seven recorded a decrease and three remained at the same level. Three Caribbean countries (Trinidad and Tobago (up 3.3 p.p.) Belize (up 1.4 p.p) and Guyana (1.3 p.p.) recorded the largest increases while the largest decreases were in Argentina (down by 1.3 p.p.) and Nicaragua (0.8 p.p.).

Although revenue performance improved across the LAC economies in 2018, the region has subsequently faced major headwinds, which have intensified as a result of the COVID-19 pandemic. While stronger domestic and external demand underpinned the increase in tax-to-GDP ratios in 2018, economic conditions across the region deteriorated in 2019, in large part due to a decline in commodity prices. According to a special feature in the new report, hydrocarbon revenues across the region’s main producers increased from 2.0 percent in GDP in 2017 to 2.7 percent in 2018 but are estimated to have fallen to 2.5 percent in 2019. Hydrocarbon revenues are declining precipitously in 2020 as a result of collapsing oil prices.

LAC’s relatively low levels of revenue-generation constrain spending on public services – including health – and raise questions about how countries will finance the emergency social protection measures they are introducing to respond to the COVID-19 pandemic. Moreover, weaker administrative systems for managing taxes and transfers relative to those in OECD countries reduce the range of tools available to the region in effectively responding to the crisis. Looking ahead, in the wake of COVID-19, it will be necessary for LAC economies to strengthen the role of tax systems to stimulate inclusive economic development and, in the longer term, to restore their public finances onto a more sustainable footing.

Although the region’s tax structure has moved closer to that of OECD countries as a result of higher revenues from direct taxes and lower trade taxes, persistently low revenues from key taxes, such as personal income taxes (PIT), remain a constraint on revenue generation and a source of vulnerability. At just 2.2 percent of GDP, the region’s revenues from PIT in 2017 were far below the level in OECD countries (8.3 percent), while social security contributions amounted to 4.0 percent of GDP in 2017 compared to 9.1 percent in the OECD. At the same time, the region is far more reliant on taxes on consumption than OECD countries. Together, this reduces the potential for redistribution and tackling vulnerabilities in a context where persistent inequalities have been an important factor behind social unrest across the region in recent times.

Other highlights from the new report include a special feature on equivalent fiscal pressure (EFP) in the LAC region. EFP tracks a broader range of fiscal revenues than taxes collected by governments, including non-tax revenues from natural resources and mandatory contributions to private social security schemes. In 2018, EFP averaged 25.0 percent of GDP across the region, up from 24.4 percent in 2017 and 17.4 percent in 1990.

Key findings

Tax-to-GDP ratios

  • The highest tax-to-GDP ratios in the LAC region in 2018 were in Cuba (42.3 percent), Brazil and Barbados (both 33.1 percent). The countries with the lowest tax-to-GDP ratios were Guatemala (12.1 percent), the Dominican Republic (13.2 percent) and Paraguay (14.0 percent).
  • The average tax-to-GDP ratio in the Caribbean sub-region was 25.7 percent in 2018, versus 23.1 percent in South America and 21.0 percent in Central America (including Mexico).

Evolution of tax revenues at regional and sub-regional level since 1990

  • LAC’s average tax-to-GDP ratio rose from 15.9 percent in 1990 to 23.1 percent in 2018.
  • Between 1990 and 2018, revenues from VAT as a percentage of GDP more than doubled for LAC countries on average, from 2.3 percent of GDP to 6.0
  • Over this period, LAC’s average tax-to-GDP ratio has trended towards the OECD average, which increased from 31.9 percent in 1990 to 34.3 percent in 2018.
  • The Caribbean’s tax-to-GDP ratio has remained consistently above the LAC average and increased by 1.5 percentage points between 2016 and 2018, the best performance amongst the three sub-regions covered in the report.

Tax structure

  • On average, LAC’s share of revenues from taxes on incomes and profits grew by 8.0 percentage points (from 19.7 to 27.8 percent of total tax revenues) between 1990 and 2018.
  • Since 2007, corporate income tax (CIT) revenues as a percentage of GDP have declined, whereas revenues from PIT have increased. In 2018, the LAC averages for CIT and PIT revenues as a percentage of GDP stood at 3.5 and 2.3 percent respectively.
  • The share of VAT revenues in total tax revenues reached 27.8 percent in 2018, an increase of 11.6 percentage points since 1990.
  • The share of social security contributions in total tax revenues has increased by 4.2 percentage points since 1990, reaching 17.1 percent in 2018.

Resource revenues and environmentally related taxes

  • Hydrocarbon revenues across the region’s main producers rose from 2.0 percent of GDP in 2017 to 2.7 percent in 2018. Revenues from mining increased from 0.3 percent of GDP to 0.4 percent of GDP in 2018.
  • Revenues from hydrocarbons and mining are estimated to have declined to 2.5 percent of GDP and 0.3 percent of GDP, respectively, in 2019.
  • Environmentally related tax revenues (ERTR) in 23 LAC countries for which data is available were equivalent to 1.1 percent of GDP on average in 2018 versus 2.3 percent of GDP in the OECD.
  • ERTR ranged from 0.02 percent of GDP in Belize to 2.3 percent of GDP in Honduras in 2018.
  • Revenues from energy products amounted to 0.6 percent of GDP on average in 2018, representing around 60 percent of environmentally related tax revenue. Revenues from motor vehicle and transport services taxes amounted to 0.4 percent of GDP.

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