Thursday, October 29, 2009

Opening Remarks by Mr. Takatoshi Kato,
Deputy Managing Director of the IMF

At the International Tax Dialogue Global Conference:
Financial Instruments and Institutions—Tax Challenges and Solutions
Beijing, October 26, 2009

I am honored and delighted to have the opportunity to speak to you here at this third Global Conference of the International Tax Dialogue. The topic—tax challenges posed by the financial sector—is certainly a timely and critical one: indeed I can only congratulate our hosts and ITD partners in selecting over 18 months ago a subject that has proved even more topical than I imagine they then suspected! I will have more to say on that in a moment.

Before that, however, I would like to stress the importance that the IMF attaches to our work as a founding member of the ITD. Recent events in the world economy have made even more clear the necessity of international cooperation and experience-sharing in economic matters, including not least taxation. This was the very reason for the ITD's founding after the Monterrey meetings in 2002. Since then, the ITD has lived up to its name in fostering dialogue on important topics in the field —value added taxation, in 2006 in Rome; taxation of small and medium enterprises, in 2007 in Buenos Aires; and now taxation of the financial sector here in Beijing. And it has also functioned as a disseminator and repository of information on matters of interest in taxation around the world, through its expanding website. Importantly, the ITD has also served well as a vehicle to bring together those working on tax reforms, whether on their own tax systems or, in the case of the various agencies involved, on systems of member countries. In this regard, it has been gratifying to watch the expansion of the ITD membership from the original group, to include now UK DfiD and the European Commission.

We have been reminded painfully over the past year and a half of the great importance of the financial sector for macroeconomic stability and growth, and to reaching development goals. In the modern economy, without the financial sector credit could not exist, capital could not be channeled to useful purposes and risks could not be managed. This makes the financial sector critical, and has led the world's nations to act in concert, and to date by and large successfully, to prevent its collapse.

I speak to you here today against the background of the worst financial—and economic—crisis to strike the world in three generations. This makes your work and interactions here in the next three days all the more vital. Taxation was not itself the cause of the crisis; indeed, there were no obvious tax changes that would explain rapid increases in debt. However, most tax systems do embody strong incentives for corporations (including financial institutions), and in some cases individuals, to use debt rather than equity finance, and thus are likely to have contributed to the crisis by leading to higher levels of debt than would otherwise have been the case, making institutions more vulnerable to shocks. Likewise, tax distortions may also have encouraged the development of complex and opaque financial instruments and structures, including through extensive use of low-tax jurisdictions, which in turn increased the difficulties of identifying the real risks involved.

The magnitude of the fiscal challenges facing the world economy is greater than at any other time since World War II. Estimates done by IMF staff on the fiscal adjustment necessary to bring government debt-to-GDP ratios down to 60 percent by 2030—over 20 years hence—show a gap in the cyclically adjusted primary balances of some 8 percentage points of GDP in advanced economies, to be closed between 2010 and 2020. This cannot all be accomplished by expenditure reduction; new, or increased, sources of revenue will need to be found, on average of perhaps 3 percentage points of GDP. While improvements in compliance and administration could account for some of that gap, it will be necessary to adjust tax policies to a degree not hitherto seen on a wide scale.

Although the world economy remains weak, with downside risks and much hardship remaining,signs of improvement are thankfully now visible. This is an opportune juncture, therefore, to begin the work of planning countries' exits from the deteriorated fiscal positions developed in response to the crisis, and, apropos of your discussions here this week, to raise questions regarding the interaction between tax policy and administration and the performance of the financial sector. First and foremost, what role can better tax policies, and administration, play in preventing a recurrence of this terribly costly episode in economic history? The important thing now is to look forward, and I hope and expect that the conclusions and observations drawn during this important conference will constitute a significant addition to the world's thinking on the topic of appropriate modes of taxing the financial sector.

The financial sector has been, and must continue to be, a critical link in the development of the world's economies. Certainly we have witnessed the key role played by the sector in accelerating the development of the emerging markets—many of which, prior to this most recent episode, had grown able to tap the world's financial resources at an increasing rate unparalleled in history. And for the world's most vulnerable economies, continued financial deepening will be absolutely necessary to permit them to meet their development goals. I hope that this conference will allow us all to consider the role of taxation in both the industrial and developing countries with respect to these goals.

This conference will address not only the role of the financial sector as a source of revenue itself, and its broader role in the development and growth of the world economy, but also its function in assisting in administration of the tax system—through information reporting, collection of tax payments, and withholding. This latter role will become ever more important with growing international cooperation in fighting tax evasion and avoidance. Again, this is an area of great concern to the IMF—particularly as addressed through our technical assistance function—as well as to national governments.

Finally, though, I would leave you with the observation that, regardless of the roles played by the financial sector both in the current crisis and more generally, it is critical not to lose sight of the main function of the tax system—to raise revenue in an economically efficient, non-distortionary, and administratively feasible manner. Even as we fully recognize the existence of both market failures and policy-induced vulnerabilities in the financial sector, including those that contributed to this crisis, it is important to avoid accidentally introducing distortions through the tax system that may prove worse than the evils they are intended to remedy. "Neutrality" of taxation of the financial sector in this sense remains a key benchmark. Deviations from this objective must be carefully evaluated and clearly motivated. We must ask ourselves whether our interventions are targeted at a recognized externality or existing distortion, and, even if so, whether tax instruments provide the most appropriate response. And those of us in the multilateral institutions in particular must, of course, look to the effects which the financial sector and its taxation may have not only on the world's highly developed economies—those with the greatest depth of financial intermediation—but equally as important, the effects, direct and indirect, on the world's developing nations. I am most pleased to see the breadth of international participation in this conference.

International cooperation on these matters will be critical to making improvements that will benefit all of us. I am pleased to be able to participate in this important event of the ITD, which is itself a model in this regard. Thank you.

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