OECD Calls For VAT Reform In Poland

by Ulrika Lomas, Tax-News.com, Brussels

05 July 2002

In its recently released Economic Survey of Poland, the Organisation for Economic Cooperation and Development (OECD) urged the government to consider reforming the country's VAT system in order to increase its efficiency.

Revealing that: 'The slowdown in economic activity that was already evident at the time of the previous Economic Survey of Poland has since intensified,' the multilateral body predicted a recovery this year- albeit a slow one - with GDP growth picking up to 2.5% by 2003.

'The turnaround in demand is expected to be led by stronger exports as world demand picks up,' the OECD reported.

The economic survey then highlighted several areas in which the Polish government could improve the efficiency of its tax system and spending plans in order to boost the sluggish economy.

'As regards expenditure reform, a key objective should be to increase the comprehensiveness of the State Budget by abolishing the numerous extrabudgetary funds; eliminating their reliance upon earmarked taxes; and incorporating into the State Budget their programmes, revenues and expenditures,' the OECD review suggested.

It went on to praise the government for recent measures introduced in this area, arguing that they represent a step in the right direction, but that they need to be greatly expanded.

With regard to VAT reform, the economic review pointed to the fact that although the imposition of a low or zero rate of VAT on a large number of goods and services has significant adverse effects, such as price distortions and large amounts (6.5% of GDP) of foregone revenue, the redistributive impact of the low sales tax rates is actually very small.

'A more efficient mechanism to fight poverty would see the standard VAT rate applied more uniformly and the additional revenues used to reduce payroll taxes, which would stimulate private-sector employment and income growth,' the report suggested, adding that: 'Indeed, the recent decision to subject interest income to taxation works in this way by widening the tax base.'

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