## Introduction

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---

### Overview
- Tax expenditures are alternative policy means by which governments deliver financial support to individuals and companies; they reduce tax revenue rather than appearing as outlay expenditures.
- Examples:
  - direct payments to households (Denmark) versus income tax reductions for families with children (United States);
  - direct payments for business investment versus tax reductions for investing businesses.
- Governments should devote the same attention to controlling tax expenditures as to controlling outlay expenditures; however, tax expenditures are often less scrutinized and sometimes not measured or reported.
- The note focuses on developing and emerging market economies, where tax expenditure accounts are often in their infancy because of data constraints, insufficient human and financial resources, and weak fiscal institutions.
- Prepared by Christopher Heady and Mario Mansour.

### Definition, forms, and benchmark concept
- Tax expenditures are generally defined as a reduction in tax liability compared with a “benchmark tax system.”
- Forms of tax expenditures include:
  - Exemptions: exclusion from the tax base
  - Allowances: amounts deducted from the tax base before applying the tax rate(s)
  - Credits: amounts deducted from tax liability
  - Rate relief: a reduced tax rate
  - Tax deferral: a delay in paying the tax liability
- The benchmark tax system should be grounded in neutrality, efficiency, and equity; choice of benchmark critically affects which provisions are identified as tax expenditures and comparisons across countries.

### Role in fiscal management and good practices
- Key advantages of tax expenditure reporting:
  - Better transparency in fiscal management—shows that tax expenditures are as important to government finances as outlay expenditures.
  - Enables evaluation and comparison of tax policy options with direct spending options (cost-benefit comparisons).
- Minimum “good practices” required:
  - The production of tax expenditure cost estimates should be required by law and presented to Parliament either with the annual budget or early in the budget cycle to inform policymaking.
  - Presentation of tax expenditure estimates should follow the laws that authorize them and be presented by the line ministry responsible or the ministry in charge of implementing the law.

### Steps to report on tax expenditures
- Estimation and reporting involve these steps:
  1. Define the benchmark tax system.
  2. Identify tax expenditures by comparing current policy to the benchmark.
  3. Build and apply data sets, methods, and models to estimate the cost of tax expenditures.
  4. Organize findings in a public report to communicate to stakeholders.
- The fourth stage (format and content of the report) is discussed elsewhere; initial reporting need not be extensive.

### Defining the benchmark tax system — highlights by tax type
- General guidance: choose a simple benchmark reflecting key features of main taxes; exclude provisions that favor particular groups or activities so their costs are reported as tax expenditures.
- Personal income tax (PIT):
  - Benchmark: prevailing tax schedule without tax relief other than the basic allowance (or zero-tax income bracket).
  - Deductions, credits, and lower rates on certain income (capital gains, interest, dividends) are tax expenditures.
  - For schedular or dual systems, separate benchmarks for wage tax and capital income are reasonable.
- Corporate income tax (CIT):
  - Benchmark: prevailing tax on profits with a single (general) rate and no tax relief except usual business expenses.
  - Timing issues (accelerated depreciation) and limits on interest deductibility present definitional challenges; consistency is essential.
  - Under nonstandard corporate systems (cash-flow tax, allowance for corporate equity), some features (total expensing, equity allowances) may be part of the benchmark.
- VAT-style consumption tax:
  - Benchmark: the broadest measure of final consumption at a single tax rate; no exemptions or reduced rates (except zero rate on exports).
  - Low rates and exemptions should generally be considered tax expenditures and reported.
  - Exemptions for capital and intermediate inputs that do not cause cascading may not be tax expenditures.
- Excise taxes:
  - Benchmarking is product-specific and may reflect externality-correcting rates (for alcohol, fuel carbon content) or prevailing rates.
  - For items like sugar-sweetened beverages, a narrow benchmark (excise on sugar-sweetened drinks) may be practical.
- Import tariffs:
  - Benchmark could be a uniform tariff within groups of similar goods or reflect country-of-origin rules; bilateral/multilateral agreements complicate benchmarks.
- Social security contributions:
  - Benchmark depends on contribution taxation and financing; timing aspects are complex and can be ignored for an informative benchmark.
- Property taxes:
  - Benchmark: prevailing recurrent property tax system without exceptions; a uniform standard rate is natural.
  - When subcentral governments set property tax policy, central government tax expenditures may be excluded; in many developing economies, central reporting is appropriate.
- Example statistic:
  - United States estimates tax expenditures on its income taxes alone at approximately 6 percent of GDP.

### Preparing an inventory of tax expenditures
- After defining the benchmark, prepare an inventory listing deviations and dimensions such as:
  - Title and brief description
  - Legal reference (date introduced, main provisions)
  - Type of tax (PIT, CIT, VAT, excise, customs tariff)
  - Type of measure (preferential rate, exemption, credit, zero-rate VAT, etc.)
  - Objectives (officially stated)
  - Beneficiaries (households, sectors, firm sizes)
  - Reason not part of the benchmark
  - Data sources used for estimates
  - Estimation method
  - Cost estimates by year (Year t, Year t+1, Year t+2, Year t+3)
- Even without cost estimates, qualitative analysis of the inventory (number of tax expenditures, legal fragmentation, classification by tax type) yields valuable insights.

### Estimating the cost of tax expenditures: methodology, data, and models
- Recommended methodology for developing economies: revenue-forgone approach (quantifies direct revenue loss relative to the benchmark).
- Key aspects of the revenue-forgone method:
  - No dynamic tax effects: assumes no behavioral change after removal of a tax expenditure; consistent with strict accounting comparison to outlays.
  - Constant compliance behavior: assumes compliance remains at current levels; removal can change compliance and this must be considered in broader cost-benefit assessment.
  - Interdependence: removal of one tax expenditure may mechanically affect revenue forgone from others (for example, higher profits affecting accelerated depreciation usage).
- Alternative revenue-gain methods include behavioral changes but differ from pure tax expenditure accounting.
- Data requirements:
  - Administrative tax return data are ideal but often unavailable in usable electronic form in developing economies.
  - Alternative sources: national accounts, supply-use tables, household expenditure surveys, firm surveys, regional office records; use best available data and build capacity over time.
  - For VAT, two data sources: (1) national accounts data on final consumption (household surveys, supply-use tables) and (2) VAT tax return data—both risk overstating compliance and therefore overestimating tax expenditure costs.
- Micro- and macro-simulation models:
  - Microsimulation models (even in Excel) aggregate individual/company-level effects and support distributional analysis by beneficiary group (small vs large firms, households with/without children).
  - Macrosimulation approaches use sectoral national accounts data when microdata are absent.
  - Models can account for progressive tax schedules, household characteristics, interactions among reliefs, and taxpayer choices when data allow.

### Institutional setting and minimum requirements
- Institution design must ensure integrity and usefulness of estimates. Five minimum requirements:
  1. Preparation of tax expenditure reports should be the responsibility of the Ministry of Finance (tax policy unit suggested) to prevent manipulation by line ministries.
  2. Revenue collection agencies must be effective data providers and able to request additional taxpayer information; they may undertake data processing and share data.
  3. Other ministries with incentives to grant tax relief must provide data, but the Ministry of Finance must validate such data and conduct selective audits; memoranda of understanding and legal obligations are important.
  4. National statistical offices are useful data sources (firms and household surveys) and typically lack incentives to falsify figures if free from political interference.
  5. The Ministry of Finance should have oversight over legislation that introduces or eliminates tax expenditures—ideally by being the only ministry authorized to propose tax expenditures or at least required to provide cost-benefit assessments for legislative consideration.
- Additional governance requirement:
  - Full detailed expenditure estimates must be provided to the legislature, enabling budget setting to take tax expenditures into account and allowing scrutiny by legislators, academics, civil society, and journalists.

### Experience in developing and advanced economies — selected findings
- Survey of 26 developing and emerging market economies found:
  - Legal requirement to produce tax expenditure reports: about half of reviewed countries have such a legal requirement.
  - Reporting frequency: with exceptions (Philippines, Ghana, Mauritania), all countries report annually.
  - Definition of tax expenditure: all surveyed countries define tax expenditure except Morocco; regional differences exist in treatment of temporary versus permanent revenue losses.
  - Definition of the benchmark system: half of countries do not include a discussion of the benchmark in their reports despite defining tax expenditures.
  - Tax categories covered: all surveyed countries report on personal and corporate income taxes and VAT (except India, Pakistan, and the Philippines); several report on import tariff-related tax expenditures; Argentina reported on social security contributions.
  - Classification: all countries classify tax expenditures by type of tax; only Uruguay reports duration (permanent vs sunset) in the survey.
- OECD and G20/OECD findings:
  - Most OECD countries use the revenue-forgone method and report annually; only Canada and the United States have explicit conceptual benchmark definitions among the cited group.
  - Redonda and Neubig (2018) review: among 43 countries, 8 did not report on tax expenditures over the past 10 years; only 28 reference a legal requirement to report; only half of reporting countries provide a legal reference for each item.

---

### Box 1. Tax Expenditure Reporting in Advanced Economies

#### Estimation methods and country practices
- All countries surveyed use the revenue-forgone method.
- Nicaragua also uses the revenue-gain method.
- A few countries add assumptions to the revenue-forgone method to account for changes in taxpayer behavior:
  - Chile and Uruguay assume that consumers have fixed total gross spending; this means that the elimination of a VAT tax expenditure on a good will reduce spending by the full amount of the tax expenditure and, hence, VAT revenue.

#### Projections of future tax expenditures
- Chile, Costa Rica, Guatemala, and India are the only countries to estimate the value of tax expenditures for future years.
- Projecting tax expenditures is consistent with medium-term budget frameworks and allows better arbitrage between spending and revenue adjustments in the medium term.

#### Concluding observations on reporting quality and capacity
- The note offers a simple and rigorous approach for countries to report on their tax expenditures.
- The capacity to produce such reporting is an evolving process; developing economies should plan strategically, taking into account their political and institutional capacity.
- Emphasis on simplicity aims to make reporting both feasible and useful for improving transparency in fiscal management.
- The quality of reporting is critical to the credibility and effectiveness of tax expenditure reporting.
- Review of experience in developing and advanced economies indicates that substantial improvements remain possible to achieve better quality of reporting on tax expenditures.
- The IMF can help countries build the institutional framework and capacity to report on tax expenditures.
- Using a step-by-step approach, the IMF helps countries identify an appropriate strategy and produce a report on tax expenditure in less than 24 months.

#### IMF TEA Program: strategies for producing tax expenditure estimates
- TEA recognizes reporting as an evolving practice and helps countries produce estimates according to three alternative strategies:

  - Basic:
    - (a) defining the benchmark tax system;
    - (b) preparing an inventory of tax expenditures;
    - (c) preparing simple cost estimates of a short list of tax expenditures;
    - (d) preparing a short section or annex to accompany the annual budget document, analyzing the landscape of tax expenditures with basic statistics on their number, distribution across taxes, and a summary of the estimates.

  - Intermediate:
    - In addition to the basic strategy, includes:
      - (a) a framework for the necessary data to estimate tax expenditures;
      - (b) simple Microsoft Excel–based methods to estimate a longer list of tax expenditures;
      - (c) a brief report on tax expenditures, to be published with the annual budget or separately.

  - Advanced:
    - In addition to the intermediate tasks, includes:
      - simple microsimulation models for key taxes (personal and corporate income taxes, value-added tax).

#### TEA step-by-step capacity-building activities and outputs
- Step 1: Assessment of institutional capacity and identification of the appropriate strategy to produce tax expenditure estimates (basic, intermediate, or advanced)
  - Evaluates a country’s readiness to commit, politically and technically, to the production and publication of tax expenditure reports.
  - The assessment determines which strategy to adopt.

- Step 2: Defining the benchmark tax system
  - The IMF helps the country define its benchmark tax system.
  - A descriptive analysis of the existing tax system, together with bilateral and multilateral agreements affecting tax and customs laws, will be undertaken to define the benchmark.
  - Identification starts with a generic model; conceptual adjustments are then made to reflect country-specific characteristics, which could reflect social and economic policy objectives.

- Step 3: Preparing an inventory of tax expenditures
  - Inventory is derived from a comparison of the benchmark tax system in Step 2 with actual tax laws and other laws containing tax provisions.
  - For each tax expenditure, the IMF will assist the beneficiary country in preparing a series of tables (similar to Table 1), which can be enriched and modified over time as the system of tax expenditure accounts evolves.

- Step 4: Identifying data sources and building data templates
  - Depends on a country’s availability and organization of data, the framework for sharing data among government agencies and ministries, and data quality and depth.
  - If a country adopts the “advanced” approach, strong collaboration and coordination among government agencies is required, which may need to be formalized (for instance in a protocol) to ensure sustainability.

- Step 5: Building static models for estimating the cost
  - Depends on the selected strategy, from simple stand-alone calculations to microsimulation models.
  - More sophisticated approaches would allow for projections of tax expenditures, in line with medium-term budget frameworks.

- Step 6: Workshops for capacity building
  - IMF teams will propose workshops to help government officials, particularly those in the Ministry of Finance charged with tax policy analysis, master the project and become capable of producing tax expenditure information annually.
  - This step determines whether the project can reach sustainability or if additional capacity development is required.

*Source: htnea2019002 - Introduction (PDF).*

### Introduction

### Introduction

### Overview
- Tax expenditures are alternative policy means by which governments deliver financial support to individuals and companies; they reduce tax revenue rather than appearing as outlay expenditures.
- Examples: direct payments to households (Denmark) versus income tax reductions for families with children (United States); direct payments for business investment versus tax reductions for investing businesses.
- Governments should devote the same attention to controlling tax expenditures as to controlling outlay expenditures; however, tax expenditures are often less scrutinized and sometimes not measured or reported.
- The note focuses on developing and emerging market economies, where tax expenditure accounts are often in their infancy because of data constraints, insufficient human and financial resources, and weak fiscal institutions.

*Prepared by Christopher Heady and Mario Mansour.*

### Definition, forms, and benchmark concept
- Tax expenditures are generally defined as a reduction in tax liability compared with a “benchmark tax system.”
- Forms of tax expenditures include:
  - Exemptions: exclusion from the tax base
  - Allowances: amounts deducted from the tax base before applying the tax rate(s)
  - Credits: amounts deducted from tax liability
  - Rate relief: a reduced tax rate
  - Tax deferral: a delay in paying the tax liability
- The benchmark tax system should be grounded in neutrality, efficiency, and equity; choice of benchmark critically affects which provisions are identified as tax expenditures and comparisons across countries.

### Role in fiscal management and good practices
- Key advantages of tax expenditure reporting:
  - Better transparency in fiscal management—shows that tax expenditures are as important to government finances as outlay expenditures.
  - Enables evaluation and comparison of tax policy options with direct spending options (cost-benefit comparisons).
- Minimum “good practices” required:
  - The production of tax expenditure cost estimates should be required by law and presented to Parliament either with the annual budget or early in the budget cycle to inform policymaking.
  - Presentation of tax expenditure estimates should follow the laws that authorize them and be presented by the line ministry responsible or the ministry in charge of implementing the law.

### Steps to report on tax expenditures
- Estimation and reporting involve these steps (Figure 2):
  1. Define the benchmark tax system.
  2. Identify tax expenditures by comparing current policy to the benchmark.
  3. Build and apply data sets, methods, and models to estimate the cost of tax expenditures.
  4. Organize findings in a public report to communicate to stakeholders.
- The fourth stage (format and content of the report) is discussed elsewhere; initial reporting need not be extensive.

### Defining the benchmark tax system — highlights by tax type
- General guidance: choose a simple benchmark reflecting key features of main taxes; exclude provisions that favor particular groups or activities so their costs are reported as tax expenditures.
- Personal income tax (PIT):
  - Benchmark: prevailing tax schedule without tax relief other than the basic allowance (or zero-tax income bracket).
  - Deductions, credits, and lower rates on certain income (capital gains, interest, dividends) are tax expenditures.
  - For schedular or dual systems, separate benchmarks for wage tax and capital income are reasonable.
- Corporate income tax (CIT):
  - Benchmark: prevailing tax on profits with a single (general) rate and no tax relief except usual business expenses.
  - Timing issues (accelerated depreciation) and limits on interest deductibility present definitional challenges; consistency is essential.
  - Under nonstandard corporate systems (cash-flow tax, allowance for corporate equity), some features (total expensing, equity allowances) may be part of the benchmark.
- VAT-style consumption tax:
  - Benchmark: the broadest measure of final consumption at a single tax rate; no exemptions or reduced rates (except zero rate on exports).
  - Low rates and exemptions should generally be considered tax expenditures and reported.
  - Exemptions for capital and intermediate inputs that do not cause cascading may not be tax expenditures.
- Excise taxes:
  - Benchmarking is product-specific and may reflect externality-correcting rates (for alcohol, fuel carbon content) or prevailing rates.
  - For items like sugar-sweetened beverages, a narrow benchmark (excise on sugar-sweetened drinks) may be practical.
- Import tariffs:
  - Benchmark could be a uniform tariff within groups of similar goods or reflect country-of-origin rules; bilateral/multilateral agreements complicate benchmarks.
- Social security contributions:
  - Benchmark depends on contribution taxation and financing; timing aspects are complex and can be ignored for an informative benchmark.
- Property taxes:
  - Benchmark: prevailing recurrent property tax system without exceptions; a uniform standard rate is natural.
  - When subcentral governments set property tax policy, central government tax expenditures may be excluded; in many developing economies, central reporting is appropriate.

- Example statistic: United States estimates tax expenditures on its income taxes alone at approximately 6 percent of GDP.

### Preparing an inventory of tax expenditures
- After defining the benchmark, prepare an inventory listing deviations and dimensions such as:
  - Title and brief description
  - Legal reference (date introduced, main provisions)
  - Type of tax (PIT, CIT, VAT, excise, customs tariff)
  - Type of measure (preferential rate, exemption, credit, zero-rate VAT, etc.)
  - Objectives (officially stated)
  - Beneficiaries (households, sectors, firm sizes)
  - Reason not part of the benchmark
  - Data sources used for estimates
  - Estimation method
  - Cost estimates by year (Year t, Year t+1, Year t+2, Year t+3)
- Even without cost estimates, qualitative analysis of the inventory (number of tax expenditures, legal fragmentation, classification by tax type) yields valuable insights.

### Estimating the cost of tax expenditures: methodology, data, and models
- Recommended methodology for developing economies: revenue-forgone approach (quantifies direct revenue loss relative to the benchmark).
- Key aspects of the revenue-forgone method:
  - No dynamic tax effects: assumes no behavioral change after removal of a tax expenditure; consistent with strict accounting comparison to outlays.
  - Constant compliance behavior: assumes compliance remains at current levels; removal can change compliance and this must be considered in broader cost-benefit assessment.
  - Interdependence: removal of one tax expenditure may mechanically affect revenue forgone from others (for example, higher profits affecting accelerated depreciation usage).
- Alternative revenue-gain methods include behavioral changes but differ from pure tax expenditure accounting.
- Data requirements:
  - Administrative tax return data are ideal but often unavailable in usable electronic form in developing economies.
  - Alternative sources: national accounts, supply-use tables, household expenditure surveys, firm surveys, regional office records; use best available data and build capacity over time.
  - For VAT, two data sources: (1) national accounts data on final consumption (household surveys, supply-use tables) and (2) VAT tax return data—both risk overstating compliance and therefore overestimating tax expenditure costs.
- Micro- and macro-simulation models:
  - Microsimulation models (even in Excel) aggregate individual/company-level effects and support distributional analysis by beneficiary group (small vs large firms, households with/without children).
  - Macrosimulation approaches use sectoral national accounts data when microdata are absent.
  - Models can account for progressive tax schedules, household characteristics, interactions among reliefs, and taxpayer choices when data allow.

### Institutional setting and minimum requirements
- Institution design must ensure integrity and usefulness of estimates. Five minimum requirements:
  1. Preparation of tax expenditure reports should be the responsibility of the Ministry of Finance (tax policy unit suggested) to prevent manipulation by line ministries.
  2. Revenue collection agencies must be effective data providers and able to request additional taxpayer information; they may undertake data processing and share data.
  3. Other ministries with incentives to grant tax relief must provide data, but the Ministry of Finance must validate such data and conduct selective audits; memoranda of understanding and legal obligations are important.
  4. National statistical offices are useful data sources (firms and household surveys) and typically lack incentives to falsify figures if free from political interference.
  5. The Ministry of Finance should have oversight over legislation that introduces or eliminates tax expenditures—ideally by being the only ministry authorized to propose tax expenditures or at least required to provide cost-benefit assessments for legislative consideration.
- Additional governance requirement:
  - Full detailed expenditure estimates must be provided to the legislature, enabling budget setting to take tax expenditures into account and allowing scrutiny by legislators, academics, civil society, and journalists.

### Experience in developing and advanced economies — selected findings
- A survey of 26 developing and emerging market economies produced key patterns:
  - Legal requirement to produce tax expenditure reports: about half of reviewed countries have such a legal requirement (examples listed in source).
  - Reporting frequency: with exceptions (Philippines, Ghana, Mauritania), all countries report annually.
  - Definition of tax expenditure: all surveyed countries define tax expenditure except Morocco; regional differences exist in treatment of temporary versus permanent revenue losses.
  - Definition of the benchmark system: half of countries do not include a discussion of the benchmark in their reports despite defining tax expenditures.
  - Tax categories covered: all surveyed countries report on personal and corporate income taxes and VAT (except India, Pakistan, and the Philippines); several report on import tariff-related tax expenditures; Argentina reported on social security contributions.
  - Classification: all countries classify tax expenditures by type of tax; only Uruguay reports duration (permanent vs sunset) in the survey.
- OECD and G20/OECD country experiences:
  - Most OECD countries use the revenue-forgone method and report annually; only Canada and the United States have explicit conceptual benchmark definitions among the cited group.
  - Redonda and Neubig (2018) review: among 43 countries, 8 did not report on tax expenditures over the past 10 years; only 28 reference a legal requirement to report; only half of reporting countries provide a legal reference for each item.

*Source: htnea2019002 - Introduction (PDF).*

### Box 1. Tax Expenditure Reporting in Advanced Economies

### Box 1. Tax Expenditure Reporting in Advanced Economies

### Estimation methods and country practices
- All countries surveyed use the revenue-forgone method.
- Nicaragua also uses the revenue-gain method.
- A few countries add assumptions to the revenue-forgone method to account for changes in taxpayer behavior.
  - Chile and Uruguay assume that consumers have fixed total gross spending; this means that the elimination of a VAT tax expenditure on a good will reduce spending by the full amount of the tax expenditure and, hence, VAT revenue.

### Projections of future tax expenditures
- Chile, Costa Rica, Guatemala, and India are the only countries to estimate the value of tax expenditures for future years.
- Projecting tax expenditures is consistent with medium-term budget frameworks and allows better arbitrage between spending and revenue adjustments in the medium term.

### Concluding observations on reporting quality and capacity
- The note offers a simple and rigorous approach for countries to report on their tax expenditures.
- The capacity to produce such reporting is an evolving process; developing economies should plan strategically, taking into account their political and institutional capacity.
- Emphasis on simplicity aims to make reporting both feasible and useful for improving transparency in fiscal management.
- The quality of reporting is critical to the credibility and effectiveness of tax expenditure reporting.
- Review of experience in developing and advanced economies indicates that substantial improvements remain possible to achieve better quality of reporting on tax expenditures.
- The IMF can help countries build the institutional framework and capacity to report on tax expenditures.
- Using a step-by-step approach, the IMF helps countries identify an appropriate strategy and produce a report on tax expenditure in less than 24 months.

### IMF TEA Program: strategies for producing tax expenditure estimates
- TEA recognizes reporting as an evolving practice and helps countries produce estimates according to three alternative strategies:

  - Basic:
    - (a) defining the benchmark tax system;
    - (b) preparing an inventory of tax expenditures;
    - (c) preparing simple cost estimates of a short list of tax expenditures;
    - (d) preparing a short section or annex to accompany the annual budget document, analyzing the landscape of tax expenditures with basic statistics on their number, distribution across taxes, and a summary of the estimates.

  - Intermediate:
    - In addition to the basic strategy, includes:
      - (a) a framework for the necessary data to estimate tax expenditures;
      - (b) simple Microsoft Excel–based methods to estimate a longer list of tax expenditures;
      - (c) a brief report on tax expenditures, to be published with the annual budget or separately.

  - Advanced:
    - In addition to the intermediate tasks, includes:
      - simple microsimulation models for key taxes (personal and corporate income taxes, value-added tax).

### TEA step-by-step capacity-building activities and outputs
- Step 1: Assessment of institutional capacity and identification of the appropriate strategy to produce tax expenditure estimates (basic, intermediate, or advanced)
  - Evaluates a country’s readiness to commit, politically and technically, to the production and publication of tax expenditure reports.
  - The assessment determines which strategy to adopt.

- Step 2: Defining the benchmark tax system
  - The IMF helps the country define its benchmark tax system.
  - A descriptive analysis of the existing tax system, together with bilateral and multilateral agreements affecting tax and customs laws, will be undertaken to define the benchmark.
  - Identification starts with a generic model; conceptual adjustments are then made to reflect country-specific characteristics, which could reflect social and economic policy objectives.

- Step 3: Preparing an inventory of tax expenditures
  - Inventory is derived from a comparison of the benchmark tax system in Step 2 with actual tax laws and other laws containing tax provisions.
  - For each tax expenditure, the IMF will assist the beneficiary country in preparing a series of tables (similar to Table 1), which can be enriched and modified over time as the system of tax expenditure accounts evolves.

- Step 4: Identifying data sources and building data templates
  - Depends on a country’s availability and organization of data, the framework for sharing data among government agencies and ministries, and data quality and depth.
  - If a country adopts the “advanced” approach, strong collaboration and coordination among government agencies is required, which may need to be formalized (for instance in a protocol) to ensure sustainability.

- Step 5: Building static models for estimating the cost
  - Depends on the selected strategy, from simple stand-alone calculations to microsimulation models.
  - More sophisticated approaches would allow for projections of tax expenditures, in line with medium-term budget frameworks.

- Step 6: Workshops for capacity building
  - IMF teams will propose workshops to help government officials, particularly those in the Ministry of Finance charged with tax policy analysis, master the project and become capable of producing tax expenditure information annually.
  - This step determines whether the project can reach sustainability or if additional capacity development is required.

*Source: Box 1. Tax Expenditure Reporting in Advanced Economies (htnea2019002).*

---


_Source: https://www.imf.org/-/media/files/publications/howtonotes/htnea2019002.pdf_