IMF backs reduction of social security contributions along with improvement of payment administration

The International Monetary Fund (IMF) supports the reduction of social security contributions (SSC) and the introduction of the tougher regime for small self-employed taxpayers, according to the technical report assistance published by the IMF experts on Monday and entitled "Technical assistance report—reducing social security contributions and improving the corporate and small business tax system."

The IMF experts said that the reduction of SSC is unlikely to allow considerably reducing the shadow economy.

"International evidence indicates that this requires a comprehensive approach, involving the regulatory environment, access to financial services and providing quality social security benefits," the IMF said.

"The mission strongly believes that foregone revenues from a reduction in SSC rates should be recouped from no uncertain sources; any resulting expansion of the tax base from lower SSC rates should not be relied upon upfront," the fund said.

A possible scenario is to reduce the average SSC more moderately than currently contemplated, for example, to 28% (keeping very few of the current 67 risk specific rates), increasing the cap on the payroll tax to 25 minimum wages (MW), and compensating revenues primarily from indirect taxes.

"Despite recent reforms the current general tax system is complex, but this arises mostly from the Tax Code’s intricate and sometimes vague language, leading to disparate and arbitrary interpretations of the law. This breeds a severely antagonistic relationship between taxpayers and the SFS [State Fiscal Service], aggravated by the absence of effective dispute resolution mechanisms (either administrative or legal)," the IMF said.

The mission agrees that the Tax Code needs to be simplified by gaining clarity and improving technical legal drafting, but some important policy amendments are required.