The Reporter (Addis Ababa)

Ethiopia: Economic Shadows and Light

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The focus of G-20 summits on global tax evasion in recent years is also encouraging. When the G-20 leaders convened in Los Cabos, Mexico, in June 2012, they reiterated their commitment to strengthen transparency and comprehensive exchange of tax information. They also reiterated the need to prevent BEPS.

Moreover, the G-20 has launched efforts to encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, developed jointly by the Council of Europe and the OECD.

But more must be done to combat the informal economy. I can easily imagine bilateral agreements - and then a multilateral arrangement - that establishes a unique global tax ID for all taxpayers.

In Turkey, a comprehensive plan to reduce the scope of the informal economy involves 14 major public institutions, including the Ministry of Finance. Proactive tax-collection mechanisms to improve voluntary tax compliance have been put in place. For example, a system developed for landlords has helped to double the number of taxpayers reporting rental income. Turkey has also improved regulatory enforcement, created a more effective Tax Audit Board, and invested in human capital and technology.

Macroeconomic reforms have also helped to curtail Turkey's shadow economy. In 2006, the corporate-tax rate was lowered from 33 percent to 20 percent, and rates for personal-income tax were also reduced, with the highest rate falling from 49.5 percent to 35 percent, and the lowest rate to 15 percent, from 22 percent. Moreover, in 2008, the income-tax burden on minimum-wage earners was set at a low of 0 percent, depending on marital status and number of children. Further, the rate for value-added tax on health, education, clothing, and tourism was cut from 18 percent to 8 percent, while the VAT on major food items is now 1 percent.

Last but not least, Turkey's authorities have implemented major reforms aimed at improving the business environment. These include a new commercial code and debt legislation. A new income-tax law is currently under parliamentary consideration, and a law on tax procedures will be submitted soon.

Turkish policymakers have also focused on international cooperation and coordination in creating a level playing field globally. Turkey now has double-taxation agreements with 82 countries and information-exchange agreements with five countries.

As a result of these efforts, informal employment in Turkey has declined by 14.5 percentage points since 2002, to 37.6 percent in April 2013. Likewise, the informal economy as a share of GDP declined by six percentage points during this period, to 26.5 percent in 2013.

But these ratios remain too high. The authorities' medium-term objective is to reduce the informal economy's GDP share by five more percentage points and to reduce informal employment in non-agricultural sectors by five percentage points as well.

Determined efforts such as these are indispensable to dispelling the shadows in which informal economic activity exists. But national policymakers cannot hold the light alone.

Ed.'s Note: Mehmet Simsek is Minister of Finance of Turkey. The article was provided to The Reporter by Project Syndicate: the world's pre-eminent source of original op-ed commentaries. Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. The views expressed in this article do not necessarily reflect the views of The Reporter.

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