Tax evasion in Latin America worth 6.7% of GDP, UN agency finds

By on 30/03/2017
ECLAC Executive Secretary Alicia Bárcena opens the Regional Seminar on Fiscal Policy in Santiago, Chile. (Image courtesy: Carlos Vera/ECLAC)

Tax evasion cost Latin America a breathtaking US$340bn (€312bn or £270bn) in 2015 and must be tackled to help fight inequality, regional public finance leaders were told last week.

Finance ministers gathering in Chile for an event organised by the Economic Commission for Latin America and the Caribbean (ECLAC) heard that this estimated revenue shortfall is equivalent to 6.7% of GDP, and more than double the combined $150bn (€138bn or £119bn) capital spending by their governments. “Just think what would be possible if we took control of this evasion – with this we could finance many aspects of our development,” Alicia Bárcena, Executive Secretary of ECLAC, told delegates.

Bárcena was unveiling the UN regional organisation’s annual report on fiscal trends at the seminar in Santiago. The report calls for careful stewardship of public spending and investment in the current economic context to bolster growth and confront climate change.

It highlights considerable variation in fiscal revenues and expenditures across Latin America, where the average fiscal deficit in 2016 remained stable at -3.0% of GDP for the second consecutive year. Deficits shrunk in northern Latin American countries, but worsened in South America. Tax revenues rose slightly, reaching on average 18.4% of GDP, while capital expenditure grew in Mexico, Central America, Haiti and the Dominican Republic but fell in South America.

Bárcena said it is “imperative” to reduce evasion and avoidance in order to increase the overall tax take and end a reliance upon indirect taxation, but she singled out Mexico for praise. A series of reforms since 2014 increased Mexican tax revenues in 2014–15 by 1.3 percentage points of GDP, with receipts from income tax up by 0.8 points. Honduras also boosted overall tax revenues by 1.4 percentage points.

“It is fair to say that finance ministers and tax authorities confront a Pandora’s Box, because you are trying to take forward very controversial fiscal reforms, as was the case in Mexico – but thanks to that, Mexico has been able to compensate for a fall in non-tax revenues,” Bárcena said.

ECLAC economists argue that tackling evasion – the US$340 billion estimate of revenue forfeited in 2015 includes personal income tax, corporate tax and VAT – is crucial to protect public investment and meet welfare needs.

The report notes that despite progress in recent years, personal income tax revenue in Latin America (1.6% of GDP in 2015) remains very low compared with the European Union (10.7%), and that the region’s redistributive capacity has been undermined as a result.

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See also:

Indian demonetisation may clear the way for radical tax reforms

 

Mexican health system needs urgent reform, says OECD report

India collects $9.8bn in tax evasion amnesty scheme

El Salvador signs multilateral convention to fight tax evasion

 

About Gavin O’Toole

Gavin O’Toole is a freelance writer and editor in London. He has written for leading newspapers, magazines, wire services and business schools about financial markets, business and regulation around the world. He has a particular interest in international relations, and a specialism in Latin American affairs. He has conducted research on this region’s political economy and has also published a number of books about its politics and natural environment. His latest title, Environmental Security in Latin America, will be published by Routledge in September 2017.

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