2013-06-20
Rationale for tax incentives lacks clarity
“International practice recommends to assess tax incentives in view of their purpose, impact on business, society and budget revenue, and to make such information publicly available. It is important that politicians responsible for decision making receive as detailed information on the impact of tax incentives as possible to be able to make reasonable decisions. However, an audit of tax incentives carried out by the National Audit Office revealed that monitoring of the application of tax incentives in Lithuania has been ineffective”, said Auditor General Giedrė Švedienė summing up the audit findings.
In total, there are 215 tax incentive currently offered in Lithuania. Auditors assessed 70 ones and found that no purpose is specified for 27 tax incentives. As to the remaining 43 incentives, only general purposes may be traced in the text of documents accompanying draft legislation, such as to improve competitiveness, to reduce tax burdens. Failure to (clearly) indicate the purpose of tax incentives makes it difficult to determine whether the purpose has been achieved and whether the expected benefits have been obtained.
World Bank experts have pointed out that tax incentives are usually set for an indefinite period, so after a while they become irrelevant. In Lithuania, a term is set for the application of 4 tax incentives out of 215. When tax incentives are used for market regulation and no application term is indicated, in the long run they can become market distorting measures, because they were adopted under different economic conditions.
The audit found that the Ministry of Finance, the State Tax Inspectorate and the State Patent Bureau have data on the loss of budget revenue due to the application 52 tax incentives, the amount of which totalled LTL 1808 million in 2009, LTL 1882 million in 2010, and LTL 2101 million in 2011. However, the state budget execution reports show the loss of budget revenue due to the application of 10 tax incentives: LTL 979 million in 2009, LTL 713 million in 2010, and LTL 918 million in 2011. Auditors note that public availability of more detailed information about losses of budget revenue as a result of the application of tax incentives would increase transparency of public administration.
One person may be entitled to several different tax incentives. In 2009 these incentives were used 3 319 thousand times, in 2010 – 3 025 thousand times, and in 2011 – 2 926 thousand times. In some cases tax incentives were applied improperly due to vague definitions of tax incentives, objects and conditions, which increases the risk of unfair taxation.
As from 2004, extended assessment of impacts of draft decisions has been regulated in relevant legislation; however, no such assessment is conducted when setting new tax incentives or modifying their content. Monitoring of regulatory acts, which should have been performed since 2009, was carried out only in respect of one tax incentives. According to the Ministry of Finance, it performs monitoring of the application of individual tax incentives on demand. Tax incentives have fiscal implications for budget revenue, promoting effects on the development of a specific area of economy or social relations, therefore not only the Ministry of Finance but also other line ministries should carry out continuous monitoring of the application of tax incentives.
The National Audit Office put forward recommendations to the Government and the Ministry of Finance intended to help assess expedience and impacts of tax incentives and to provide for conditions for the monitoring of the application of tax incentives.