Moldova & IMF IMF Activities Publications Press Releases

Limba romana


"Fiscal Monitor" Magazine, issue no. 4 (14), July 2013

Interview with Tokhir Mirzoev

Taxpayers will be happy if paying taxes will be the only thing they must do

Mr. Mirzoev, why the Moldovan people do not like to pay taxes (frankly speaking, many choose not to)?

At first I smiled when you asked, but then it got me thinking. I remembered the saying about two inevitable things in life – death and taxes… Indeed, nobody is happy to pay taxes; however,there is a higher rate of compliance in some other countries than here, because, first of all, there is a common understanding of the public benefits coming from taxes and, secondly, there is trust that the money will be used to the benefit of the people. Besides, tax evasion is more difficult and sanctions are tougher. That is, if we compare to advanced countries. I believe that these are the paths the authorities' efforts should be channeled towards – cooperation with the business community, the public at large, on one hand, and better quality of tax administration on the other. I hope there will be progress then.

What is your opinion about the tax burden  in Moldova?

The tax burden is not heavy, both if compared to other countries in the region and against international norms. Perhaps, if one factors in administrative costs due to imperfect tax administration, the tax burden could be heavier, but the tax rates as such are comparable to or even lower in many cases. I wouldn't say it is right to trace a cause-effect relationship between the tax burden and tax evasion, and one example in this context would be the tax compliance level in Scandinavian states, where the tax rates are the highest. There were a number of experiments in Moldova, when they cut tax rates, hoping that it would make people pay them. Moldova  has made this mistake several times – for example, when the corporate income tax was cut to zero, but it did not help getting business out of shadow… After cutting the VAT rate for agricultural producers down to 8 per cent, tax evasion increased even more and VAT revenues dropped. The explanation is that those who saw the opportunity stuck to it to avoid paying taxes. I do believe still that tax rates are not the problem in Moldova, while tax administration quality is.

What do you mean when you refer to tax administration: red tape requirements that imply repeated visits to the tax office, unclear legislation or something else?

Administration includes the whole system of relationships between taxpayers and the Tax Service, and these relationships determine how much taxpayers comply with their tax duties. There are different models of building such relationships. I  mean, on one hand, the well-known old model - the so-called police model, where there are established taxes and forms and the taxpayer is left face to face with the Tax Code, to tackle it himself, to search for relevant articles and provisions and pay taxes in due time. All these are supplemented by checkups, again and again. On the other hand, there is the model to which many developed countries have shifted already and we hope to see it implemented in Moldova as well; it implies collaboration with taxpayers. We need to understand that the Tax Service is not a police body, but a service provider for the people. If the services are high quality, that is if tax payment does not take much time, paperwork is not burdensome, the tax returns are simple and there is a certain degree of trust between the taxpayers and the tax service, paying taxes is not a problem. I believe that the taxpayer would be happy if he is required no more than pay his taxes. In parallel, the Tax Service should develop analytical mechanisms to identify tax evasion, in particular in high risk areas. In turn, the taxpayer who would have to choose between a simple tax payment procedure and inevitable steep fine would be willing to collaborate voluntarily. Tax administration improvement is exactly about this. There is much to be done and this is the goal of the five-year Tax Service reform plan.

What changes in the activity of the Tax Service would you mention if you compared the current state of affairs with the early 90's, the first years of Moldova's independence?

Indeed, a lot changed. IT development has transformed the Tax Service's operation in a number of ways. Reforms implemented during the last 5-6 years are positive. The critical mass for improving tax administration has not been reached yet; first of all, I mean the mentality of staff in regional offices, the shift from the centralized control system to a tax audit system, when the tax officer acts as an auditor – he first analyses how a business operates, where the money comes from, reaches conclusions about tax amounts due, based on general indicators, and only after homework is done does he go to the enterprise and discusses very specific issues. Lots of training and practice are needed for this, and for this model to become lucrative, reform is needed in adjacent areas as well, e.g. the delayed IT reform that, we hope, will be implemented very soon. The overall outcome, the feeling left after contacts with tax bodies are important for the business community. However, the feedback we receive shows that the progress reached is not sufficient.

What objectives should the Tax Service have, what should its role in state affairs, in business environment development should be?

I think that the Tax Service should aspire that the business community perceives it as a service-provider, i.e. an institution providing services. The relationship between business and the state also include tax payment and the Tax Service should be the instrument that helps businesses to, first of all, calculate and pay taxes accurately and voluntarily, to avoid eventual sanctions. As long as the business community sees the Tax Service as a prosecution body seeking to impose fines and sanctions, the end destination is not reached yet.

And, in this context, what is your opinion about establishing a Revenue Agency by merging the Tax Service and the Customs Service?

Such merger would have both positive and negative aspects. The activity of these two services would be better coordinated, which is good. However, the bad part is that the tax administration reform is advancing at a fast pace: the reform strategy for the Main State Tax Inspectorate has been developed and implementation has already started. If the Main State Tax Inspectorate is merged with the Customs Service, my concern would be that the reform would be taken aback by several years. I think that it would be reasonable to continue the tax reform as it isconsider merging the two institutions at a later, more advanced stage. There are also purely practical barriers – the IT system, for the development of which they have been looking for funding for some time already, which implies not only replacement of computers, but the improvement of all business processes within the Tax Service. The technical parameters of the IT system for the Tax System have been developed already and we hope that the World Bank will support this process. However, if the Tax Service and Customs Service merge all these projects will lose their relevance.

But the merger of these two institutions might help at means-tested income assessment for tax purposes…

Means-tested income assessment also depends on customs data, but also on many other sources. The institutions in charge must develop a list of the richest people, e.g. 50 or 100 names, it does not matter, and analyse in detail their lifestyle, their expenses, their income, their bank accounts, assets etc. Then they should compare the income and expenses data. Hence, customs data are just a fragment of the general picture, while the lion's share of information would come from the banking system, the car register, the cadaster office and, of course, data from abroad.

Would then the merger f the two institution result in reduced administrative costs?

Yes, it would. However, when seeking for solutions one mast start from problem identification. I do not believe that administrative costs represent the main problem in tax and customs administrations. The greatest challenge of the Customs Service now is how to reduce the duration of customs procedures. The business community howls and groans that their freights are delayed, that they are expected to pay bribes etc.  Even if in Moldova a large share of fiscal revenues come from the customs, the Customs Service's priorities should be  different. Same goes for the tax administration. Also, the Customs Service's key task is to facilitate external trade, while the Tax Service must take care of collecting taxes.

In the first quarter of 2013 budget revenues exceeded the forecast by 17 per cent. Do you think it is the outcome of the efforts to combat ghost companies, better taxpayer compliance or better tax administration?

First, it is the result of a better economic environment. Although these are not spectacular increases, improvement was registered in almost all areas – export, import, industrial production... Also, in the first quarter of the year a different VAT regime was applied in agriculture, which resulted in greater budget revenues, but it was abolished since April. Besides, the introduction of the electronic register of tax returns had a positive effect. The introduction of the VAT rate of 20 per cent in agriculture and of the electronic register of tax returns resulted in the elimination of all VAT-related tax evasion opportunities.

The introduction of new phone services is meant to simplify the conditions of operation for enterprises. What should be done to ensure that electronic documentation circulation prevails in the relations with the Tax Service?

It depends to a large extent on the IT system, again. E-governance reform meant to also cover the tax system, but, regretfully, was limited to other fields. However, the development of the electronic circulation of documents facilitates everybody's activity, reduces opportunities for corruption, saves time etc. When documents and information are requested in electronic form, when reports are submitted electronically etc. i.e. personal involvement is reduced to the minimum, life will be much easier.

Does the IMF have any recommendations regarding the improvement of the public-private dialog for tax policy development? To what extent does the success of the dialog depend on the Tax Service as an implementing institution, on one hand, and on Government, Parliament, politicians in general, on the other hand? In the same context, the business community in Moldova ready for such dialog without being taken away by emotions?

Firstly, the dialog is needed; secondly, constructive proposals need to be separated from the emotion-based ones. Dialogs are informative, in any case, for all stakeholders, and many solutions can be identified specifically through dialogs, by understanding the viewpoints of the business community, by understanding what bothers them most etc., thus also establishing the priorities for the public sector. In this process the public sector has the ball at its feet. Last year a round table was held, which was a start of a very efficient dialog, and we hope that the dialog will continue.

Discussions between the IMF and Government have also touched lately the issue of tax consolidation that should not harm economic growth. What should be the point of balance between the two approaches?

I think that actually the bone of contention is the quality of tax administration. This is the reason for which the Ministry of Economy has argued in favor of tree enterprise zones as a means to decrease the tax burden in certain cases etc., to compensate for the quality of tax and customs administration.

In your opinion, should tax incentives be provided to attract into a big investor Moldova such as BMW, which has announced the intention to open a plant in South-Eastern Europe, Russia or Latin America? If, by a miracle, the BMW chooses to come to Moldova, given investment of a billion dollars and huge turnover, significant VAT amounts would be blocked all the time. For investors of such size special conditions could be discussed, such as creation of a free enterprise zone, VAT exemptions or establishment of a special VAT refund regime?

According to tax legislation, VAT is refunded in a relatively short time – 45 days. It used to be a problem before, when VAT paid in Chisinau and Balti was bot refunded, but kept on accounts as advance payment of future tax obligations. The cost of blocking the funds for 45 days is not that big if we calculate the average interest rate in European countries, i.e. 1-2 per cent a year, and divide it by 45 days... The main issue is whether specific tax conditions need to be established for investors just because they are new and 'big'. Out opinion is that Moldova is a small economy and it makes no sense to jack it into zones favorable for investment and zones where economic agents have the bad luck to be required to pay all taxes... It is important to ensure good functioning of administration. The idea of free enterprise zones was first conceived in Russia, where they needed to attract investment to unattractive far-away zones and the only possibility to attract investors was to compensate for unfavorable climate, lack of infrastructure etc. by granting tax incentives.

As part of the tax reform supported by the IMF reports on the activity of the Tax Service are developed. What are the main recommendations of the IMF's experts? What is your opinion about the implementation of the recommendations?

The key strategic goal is tax administration reform by shifting to voluntary compliance and better collaboration with taxpayers. In parallel, the goal of the Tax Service is to reduce tax evasion. To this end, efforts need to focus on highest-risk areas and such risks are not found when it comes to small taxpayers, but rather to large ones. In our opinion, there are three sources of increasing revenues. First, efforts to combat incorrect VAT refunds; secondly, correct implementation of means-tested income assessment methods; thirdly, real estate taxation, given that the cadaster value of real estate is much lower than the market value, hence the tax base may be increased significantly. Once these risks have been identified we started to cooperate with the Main State Tax Inspectorate to solve them. Implementation of the means-tested income assessment methods continues. I would say that it is a shift from total saturation bombing to targeted spot hits.

Vitalie Condratchi