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International Monetary Fund
This paper reviews the request from the São Tomé and Príncipe authorities for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). In 2004, the economy continued to grow at a moderate pace, but inflation increased to 15 percent by year-end, as bank credit to the private sector rose sharply and the government loosened fiscal policy. The proposed program for 2005–07 aims at correcting macroeconomic imbalances and sets the conditions for sustained strong growth. Real GDP growth is envisaged to slow down in 2005 in response to tight financial policies.
International Monetary Fund

reductions only covering up to 75 percent of profit taxes due; (iii) a new tax procedural code establishing tax tribunals at different levels of government to handle tax issues and disputes, as well as penalties and fines for underpayment, late payment and other tax violations; and (iv) a new investment code that provides for equal treatment of domestic and foreign investors and is consistent with the new code on corporate taxation. 4. On July 29, 2005, the authorities provided the staff with a timetable for the reduction of outstanding payments arrears to the water

International Monetary Fund

percent; (iii) reinstatement of quarterly tax payments; (iv) changes in the rates applied to tax withholdings, including those on interest income from certain financial assets; and (v) a minimum tax of 1 ½ percent on gross assets. • Tax administration . Changes in the penal code to make tax violations subject to imprisonment. 1995. In early 1995 the Constitutional Court suspended: (i) some of the modifications to the penal code introduced in 1994 (ii) income tax withholdings on certain activities, including interest income; (iii) the tax on assets. To compensate

Mr. Eric Le Borgne and Ms. Katherine Baer

to resolve their past tax violations and get current on their tax liabilities. Governments also introduce tax amnesties in response to pressures from various interest groups for forgiveness of existing tax debts, declared and undeclared. In addition to the above, IMF missions have found that in many countries, especially developing and transition countries, tax amnesties are introduced as a result of fundamental weaknesses in the legal framework, management, and operations of the tax administration. Box 1 describes in greater detail some of the legal

Mr. Eric Le Borgne and Ms. Katherine Baer

Voluntary Disclosure of Violations Instead of one-time amnesties, some countries have standing or permanent programs that provide for more lenient treatment of voluntary disclosures of tax violations at any time. Such programs may be better described as part of the penalty structure. Properly structured and in the presence of proper enforcement efforts, these measures may be a cost-effective way to encourage voluntary disclosures of violations and may make a temporary amnesty unnecessary. A number of countries have such measures, including Denmark, Germany, Mexico, the

Ms. Dora Benedek, Martin Grote, Grace Jackson, Maksym Markevych, Mr. Christophe J Waerzeggers, and Ms. Lydia E Sofrona

repatriation or identification of foreign assets, then it would be reasonable to insist that the liability for a VDP flat tax in lieu of standard taxes should be defrayed from foreign-held assets. This should be done before taking into account any fees or commissions charged by financial institutions on the conversion of the funds. The principle is that the already discounted levies in lieu of outstanding taxes should not be further eroded by charges in the banking sector. If a VDP charge for domestic tax violations, that enabled the placing of funds offshore, is found