Good financial governance (PROFI)

Project description

Title: Good financial governance (PROFI)
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ)
Country: Guatemala
Lead executing agency: Ministry of Finance of Guatemala (MINFIN)
Overall term: 2016 to 2017

Context

Although Guatemala is Central America’s largest national economy and regarded as a middle-income country, the government has a relatively small national budget at its disposal. This budget is far from sufficient to initiate and finance universally accepted state and societal reforms. The lack of financing for the national budget is hampering the country’s development.

In terms of revenue, key actors do not have the skills they need to shape tax policy, making it difficult to strike a balance between the different interest groups involved. Individual interests have a strong influence on tax policy. Furthermore, there is a general reluctance to pay taxes as the national tax administration is inefficient and not citizen-friendly.

At local level, due to a lack of skills, the potential for income from property tax – the municipalities’ most important type of own-source revenue – is not being fully utilised. An additional reason for the country’s weak tax culture is a lack of transparency and accountability in public finance at all state levels in Guatemala.

The government’s objectives under President Jimmy Morales include strengthening the tax administration. A structural reform of the national tax administration is being prepared and discussed in parliament.

Objective

The capacity to perform and transparency of the Guatemalan tax system have increased, improving the state’s financial self-sufficiency and ensuring it is able to function effectively in the long term in order to achieve its development goals.

Approach

The programme advises the tax authority (Superintendencia de Administración Tributaria, SAT) and the Ministry of Finance at national level on applying existing tax laws consistently. The goal is to strengthen and improve existing forms of revenue. Simultaneously, a transparent, efficient tax administration system aims to help citizens better understand how taxes are collected and what they are spent on. The programme is also designed to foster public debate on ‘tax culture’ and thus encourage citizens to fulfil their tax obligations voluntarily.

A pilot scheme is being used to improve the options and skills of selected municipalities in collecting property tax and put them on a sound financial footing.

All parties relevant to fiscal policy, such as the president’s office, Ministry of Finance, tax authority and audit office, are being included systematically in this process. The programme is based on the Good Financial Governance approach, which includes dialogue on tax culture and a multi-level approach (a national and subnational revenue system). This cross-institutional approach enables coherent action at policy, administrative and audit level which will support reform and achieve sustainable results across systems.

The programme builds on the experience and success of the 2013-2015 Advice on Fiscal Policy Project.

Results

Significant results of activities to strengthen the national and local tax system:

  • Drawing up a common, cross-institutional work plan to reinforce the municipal finance system
  • Introducing and applying the International Public Sector Accounting Standards (IPSAS) in Guatemala’s public finances
  • Strengthening national municipal policy by compiling a 2013 municipality ranking
  • Drafting a bill to establish the national municipal tax plan and revising the municipal tax code bill
  • Collaborating with the Women’s Committee of the Congress for Reform of the Municipal Tax Code to promote jobs for women at local level
  • Providing support to the Ministry of Finance’s Dirección de Asistencia a la Administración Financiera Municipal (DAAFIM) on setting up and developing a decentralised advisory structure for administrating local finances in Guatemala’s 338 municipalities
  • Giving targeted advice to the Dirección de Catastro y Avaluos de Bienes Inmuebles (DICABI) to improve Guatemala’s land registry tax system
  • Sharing experience between Guatemalan tax authority (SAT) officials and their counterparts in Argentina, Chile, Costa Rica, Ecuador and Mexico
  • Improving the audit function of the state tax authority (SAT) through training in, for example, preparing an audit and auditing in selected sectors of the economy, such as airlines, mining companies, telephone operators, construction firms and electricity companies
  • Piloting a digital data analysis system for preparing audits