CHAPTER 1 : INTRODUCTION TO IMF

1.1 INTRODUCTION
The International Monetary Fund (IMF) is an international organization that was initiated in 1944 at the Bretton Woods Conference and formally created in 1945 by 29 member countries. The IMF's stated goal was to assist in the reconstruction of the world's international payment system post World War II. Countries contribute money to a pool through a quota system from which countries with payment imbalances can borrow funds temporarily. Through this activity and others such as surveillance of its members' economies and the demand for self-correcting policies, the IMF works to improve the economies of its member countries. The IMF describes itself as an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The organization's stated objectives are to promote international economic co-operation, international trade, employment, and exchange rate stability, including by making financial resources available to member countries to meet balance of payments needs. Its headquarters are in Washington, D.C., United States.

1.2 ORIGINS
Prior to World War II, there was no negotiated international regime governing international monetary and trade relations. It was the shared view among the allied powers that many characteristics of the international financial system during the period between the first and second world wars, including competitive devaluations, unstable exchange rates, and protectionist trade policies, worsened the 1930s depression and accelerated the onset of the war. To address these concerns, representatives of the 44 allied nations gathered in Bretton Woods, NH, in July 1944 for the United Nations Monetary and Financial Conference. Their goal was ambitious and largely

successfulto create a cooperative and institutional framework for the global economy that would facilitate international trade and balanced global economic stability and growth. At the Bretton Woods conference, Articles of Agreement for the IMF and the International Bank for Reconstruction and Development (IBRD), later known as the World Bank, were drafted and adopted. They entered into force, formally creating the institutions, on December 27, 1945, following the adoption of implementing or authorizing legislation within member countries. The Articles of Agreement of both institutions constitute an international treaty, imposing obligations on member states, which have changed over time. In the eyes of its founders, the IMFs purpose and contribution to postwar macroeconomic stability were threefold: (1) facilitate trade by restricting certain foreign exchange controls; (2) create monetary stability by managing a fixed (but flexible) exchange rate system; and (3) provide short-term financing to member countries to correct temporary balance-of-payments problems. The U.S. Senate agreed to the ratification (by the President) of the Fund and Bank Agreements in July 1945. U.S. participation in both organizations is authorized by the United States Bretton Woods Agreement Act, as amended (Bretton Woods Act).2 Unique among the founding membersthe United States, in the Bretton Woods Act, requires specific congressional authorization to change the U.S. quota or shares in the Fund or for the United States to vote to amend the Articles of Agreement of the IMF or the World Bank. The U.S. Congress, thus, has veto power over major decisions at both institutions.

1.3 THE BRETTON WOODS MONETARY SYSTEM

From 1946 to 1971, the main purpose of the IMF was regulatory, ensuring IMF members compliance with a par value exchange rate system. This was a two-tiered currency regime using gold and the U.S. dollar. Each IMF member government could choose to define the value of its currency

in terms of gold or the U.S. dollar, which the U.S. government agreed to support at a fixed gold value of one ounce of gold being equal to $35. Unlike in the classic gold standard period (18801914), monetary policy was not strictly restricted by a countrys holdings of gold. Member countries were allowed to intervene in the currency market but were obligated to keep their exchange rates within a 1% band around their declared par value. When currencies (other than the U.S. dollar) came under pressure from short-term balance of payments imbalances that normally arose through international trade and finance exchanges, countries would receive short-term financial support from the IMF. In cases where the currency peg was considered fundamentally misaligned, a country could devalue (or revalue) its currency. By providing monetary independence limited by the peg, the Bretton Woods monetary system combined exchange rate stability, the key benefit of the 19th century gold standard, with some of the virtues of floating exchange rates, principally independence to pursue domestic economic policies geared toward full employment. The first major challenge to the postwar international monetary system came in the early 1960s. The postwar expansion in international trade and economic growth required an increase in international liquidity, that is, an increase in central bank holdings of the two major international reserve assets, gold and the U.S. dollar. With the economic recovery of Europe well advanced, the slow growth in gold supplies was hampering the growth of international reserve assets. As early as 1960, global foreign dollar holdings exceeded the value of U.S. gold holdings (at $35 an ounce). The system could continue to function as long as countries were willing to settle their balance of payments in U.S. dollars instead of gold. The international communitys response was to create a new international reserve currency, the Special Drawing Right (SDR). The SDR also serves as the IMFs unit of account. Initially defined as equivalent to 0.888671 grams of fine gold, the value of the SDR was switched to a basket of international currencies following the collapse of the Bretton Woods system of fixed parity exchange

rates in 1973. The current basket includes the euro, the Japanese yen, the British pound sterling, and the U.S. dollar. By 1970, a large and prolonged U.S. balance-of-payments deficit was mirrored by its counterpart, large balance-of-payments surpluses in the other major industrial countries. As a result, much of the 1960s was characterized by substantial currency instability, as liberalized capital flows brought about repeated currency crises in the supposedly fixed exchange rate Bretton Woods system. Amid declining confidence in the U.S. dollar, foreign central banks increasingly became reluctant holders of U.S. dollars and began exchanging their dollar reserves for U.S. gold holdings. After several years of instability, the Bretton Woods system of fixed exchange rates finally collapsed in March 1973 when the United States severed the link between the dollar and gold, allowing the value of its currency to be determined by market forces.

1.4 FROM 1973 TO THE PRESENT

A major purpose of the IMF as originally conceived at Bretton Woodsto maintain fixed exchange rateswas, thus, at an end. Although the IMF had lost its motivating purpose, it adapted to the end of fixed exchange rates. In 1973, IMF members enacted a comprehensive rewrite of the IMF Articles. IMF members condoned the floating-rate exchange rate system that was already in place; officially ended the international monetary role of gold (although gold remains an international monetary asset); and, nominally, but unsuccessfully, made the SDR the worlds principal reserve asset. Henceforth, member countries were allowed to freely determine their currencys exchange rate, and use private capital flows to finance trade imbalances. The IMF was also given two new mandates, which became the foundation of its role in the postBretton Woods international monetary system. The first was for the IMF to oversee the international monetary system to ensure its effective operation. The second was to oversee the compliance by member states with their new obligations to collaborate with the Fund and other members to assure

orderly exchange arrangements and to promote a stable system of exchange rates. Consequently, the IMF transformed itself from being an international monetary institution focused almost exclusively on issues of foreign exchange convertibility and stability to being a much broader international financial institution, assuming a broader array of responsibilities and engaging on a wide range of issues including financial and capital markets, financial regulation and reform, and sovereign debt resolution. The IMF also increasingly relied on its lending powers, as floating exchange rates and the growth of international capital flows led to more frequent, and increasingly severe, financial crises. Over the past several decades, the IMF has been involved in the oil crisis of the 1970s; the Latin American debt crisis of the 1980s; the transition to market-oriented economies following the collapse of communism; currency crises in East Asia, South America, and Russia; and, most recently, the global response to the 2008-2009 global financial crisis and the 2010-2011 European sovereign debt crisis.

CHAPTER 2 : GOVERNANCE OF IMF

2.1 ORGANIZATIONAL STRUCTURE The IMF Articles provide for a three-tiered governance structure with a Board of Governors, an Executive Board, and a Managing Director

A. LEADERSHIP

Board of Governors

The Board of Governors consists of one governor and one alternate governor for each member country. Each member country appoints its two governors. The Board normally meets once a year and is responsible for electing or appointing executive directors to the Executive Board. While the Board of Governors is officially responsible for approving quota increases, special drawing right

allocations, the admittance of new members, compulsory withdrawal of members, and amendments to the Articles of Agreement and By-Laws, in practice it has delegated most of its powers to the IMF's Executive Board.

The Board of Governors is advised by the International Monetary and Financial Committee and the Development Committee. The International Monetary and Financial Committee has 24 members and monitors developments in global liquidity and the transfer of resources to developing countries. The Development Committee has 25 members and advises on critical development issues and on financial resources required to promote economic development in developing countries. They also advise on trade and global environmental issues.

Executive Board

24 Executive Directors make up Executive Board. The Executive Directors represent all 188 member-countries. Countries with large economies have their own Executive Director, but most countries are grouped in constituencies representing four or more countries.

Following the 2008 Amendment on Voice and Participation, eight countries each appoint an Executive Director: the United States, Japan, Germany, France, the United Kingdom, China, the Russian Federation, and Saudi Arabia. The remaining 16 Directors represent constituencies consisting of 4 to 22 countries. The Executive Director representing the largest constituency of 22 countries accounts for 1.55% of the vote.

Managing Director

The IMF is led by a managing director, who is head of the staff and serves as Chairman of the Executive Board. The managing director is assisted by a First Deputy managing director and three other Deputy Managing Directors. Historically the IMF's managing director has been European and the president of the World Bank has been from the United States. However, this standard is

increasingly being questioned and competition for these two posts may soon open up to include other qualified candidates from any part of the world.

In 2011 the world's largest developing countries, the BRIC nations, issued a statement declaring that the tradition of appointing a European as managing director undermined the legitimacy of the IMF and called for the appointment to be merit-based. The head of the IMF's European department is Antnio Borges of Portugal, former deputy governor of the Bank of Portugal. He was elected in October 2010.

Dates 6 May 1946 5 May 1951 3 August 1951 3 October 1956 21 November 1956 5 May 1963

Name Camille Gutt Ivar Rooth Per Jacobsson

Nationality Belgian Swedish Swedish French Dutch French French German Spanish

1 September 1963 31 August 1973 Pierre-Paul Schweitzer 1 September 1973 18 June 1978 18 June 1978 15 January 1987 Johan Witteveen Jacques de Larosire

16 January 1987 14 February 2000 Michel Camdessus 1 May 2000 4 March 2004 7 June 2004 31 October 2007 1 November 2007 18 May 2011 5 July 2011 Horst Khler Rodrigo Rato

Dominique Strauss-Kahn French Christine Lagarde French

On 28 June 2011, Christine Lagarde was named managing director of the IMF, replacing Dominique Strauss-Kahn. Previous managing director Dominique Strauss-Kahn was arrested in connection with charges of sexually assaulting a New York room attendant. Strauss-Kahn subsequently resigned his

position on 18 May. On 28 June 2011 Christine Lagarde was confirmed as managing director of the IMF for a five-year term starting on 5 July 2011.

Ministerial Committees The IMF Board of Governors is advised by two ministerial committees, the International Monetary and Financial Committee (IMFC) and the Development Committee.
The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that of the Executive Board and its 24 constituencies. As such, the IMFC represents all the member countries of the Fund.

The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee discusses matters of common concern affecting the global economy and also advises the IMF on the direction its work. At the end of the Meetings, the Committee issues a joint communiqu summarizing its views. These communiqus provide guidance for the IMF's work program during the six months leading up to the next Spring or Annual Meetings. There is no formal voting at the IMFC, which operates by consensus.

The Development Committee is a joint committee, tasked with advising the Boards of Governors of the IMF and the World Bank on issues related to economic development in emerging and developing countries. The committee has 24 members (usually ministers of finance or development). It represents the full membership of the IMF and the World Bank and mainly serves as a forum for building intergovernmental consensus on critical development issues.

Governance Reform

To be effective, the IMF must be seen as representing the interests of all its 188 member countries. For this reason, it is crucial that its governance structure reflect todays world economy. In 2010, the IMF agreed wide-ranging governance reforms to reflect the increasing importance of emerging

market countries. The reforms also ensure that smaller developing countries will retain their influence in the IMF.

B. MEMBER COUNTRIES

The 188 members of the IMF include 187 members of the UN and the Republic of Kosovo. All members of the IMF are also International Bank for Reconstruction and Development (IBRD) members and vice versa.

Former members are Cuba (which left in 1964) and the Republic of China, which was ejected from the UN in 1980 after losing the support of then US President Jimmy Carter and was replaced by the People's Republic of China. However, "Taiwan Province of China" is still listed in the official IMF indices. Apart from Cuba, the other UN states that do not belong to the IMF are Andorra, Liechtenstein, Monaco, Nauru and North Korea.

The former Czechoslovakia was expelled in 1954 for "failing to provide required data" and was readmitted in 1990, after the Velvet Revolution. Poland withdrew in 1950allegedly pressured by the Soviet Unionbut returned in 1986.

Qualifications

Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar period, rules for IMF membership were left relatively loose. Members needed to make periodic membership payments towards their quota, to refrain from currency restrictions unless granted IMF permission, to abide by the Code of Conduct in the IMF Articles of Agreement, and to provide national economic information. However, stricter rules were imposed on governments that applied to the IMF for funding.

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement. Some members have a very difficult relationship with the IMF and even when they are still members they do not allow themselves to be monitored. Argentina for example refuses to participate in an Article IV Consultation with the IMF.

Benefits

Member countries of the IMF have access to information on the economic policies of all member countries, the opportunity to influence other members economic policies, technical assistance in banking, fiscal affairs, and exchange matters, financial support in times of payment difficulties, and increased opportunities for trade and investment.

2.2 FUNCTIONS OF THE IMF

In practice, the IMFs mandate of promoting international monetary stability translates into three main functions: (1) surveillance of financial and monetary conditions in its member countries and in the world economy; (2) financial assistance to help countries overcome major balance-ofpayments problems; and (3) technical assistance and advisory services to member countries.

A. SURVEILLANCE
When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. It also makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy. The IMF's regular monitoring of economies and associated provision of policy advice is intended to identify

weaknesses that are causing or could lead to financial or economic instability. This process is known as surveillance.

Country surveillance

Country surveillance is an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries, with discussions in between as needed. The consultations are known as "Article IV consultations" because they are required by Article IV of the IMF's Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country's economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labor unions, and civil society.

The team reports its findings to IMF management and then presents them for discussion to the Executive Board, which represents all of the IMF's member countries. A summary of the Board's views is subsequently transmitted to the country's government. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies. Summaries of most discussions are released in Press Releases and are posted on the IMF's web site, as are most of the country reports prepared by the staff.

Regional surveillance Regional surveillance involves examination by the IMF of policies pursued under currency unions including the euro area, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union. Regional economic outlook reports are also prepared to discuss economic developments and key policy issues in Asia Pacific, Europe, Middle East and Central Asia, Sub-Saharan Africa, and the Western Hemisphere.

Global surveillance

Global surveillance entails reviews by the IMF's Executive Board of global economic trends and developments. The main reviews are based on the World Economic Outlook reports, the Global Financial Stability Report, which covers developments, prospects, and policy issues in international financial markets, and the Fiscal Monitor, which analyzes the latest developments in public finance. All three reports are published twice a year, with updates being provided on a quarterly basis. In addition, the Executive Board holds more frequent informal discussions on world economic and market developments.

B. FINANCIAL ASSISTANCE

Notwithstanding its macroeconomic surveillance, the IMF is perceived as an institution that primarily provides temporary financing to troubled economies. The IMFs financial structure can best be characterized as that of a credit union (see box). IMF member countries deposit hard currency and some of their own currency, from which they can draw the currencies of other countries if they face significant problems in managing their balance of payments. As noted above, supplemental resources are available from the NAB or GAB if quota resources are insufficient.

In the past, there have been debates about whether the austerity conditions that are often the core of IMF conditionality are productive in increasing economic growth. In 2000, one heavily cited paper found that participating in IMF programs lowers growth rates during the program, as would be expected. In addition, however, the study found that once countries leave the program, they grow faster than if they had remained, but not faster than they would have without participating in the IMF program in the first place.20

After heavy criticism of the conditions attached to IMF loans to East Asia in the late 1990s, the IMF revamped its conditionality guidelines in 2002. Additional reforms, including new IMF lending instruments based on economic prequalification (ex-ante conditionality) rather than traditional structural adjustment (ex-post conditionality) also address these concerns.21

C. IMF LOAN PROGRAMS

The changing nature of lending Lending to preserve financial stability Conditions for lending Main lending facilities Helping low-income countries Debt relief

A country in severe financial trouble, unable to pay its international bills, poses potential problems for the stability of the international financial system, which the IMF was created to protect. Any member country, whether rich, middle-income, or poor, can turn to the IMF for financing if it has a balance of payments needthat is, if it cannot find sufficient financing on affordable terms in the capital markets to make its international payments and maintain a safe level of reserves.

IMF loans are meant to help member countries tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. This crisis resolution role is at the core of IMF lending. At the same time, the global financial crisis has highlighted the need for effective global financial safety nets to help countries cope with adverse shocks. A key objective of recent lending reforms has therefore been to complement the traditional crisis resolution role of the IMF with more effective tools for crisis prevention.

The IMF is not a development bank and, unlike the World Bank and other development agencies, it does not finance projects.

The changing nature of lending

About four out of five member countries have used IMF credit at least once. But the amount of loans outstanding and the number of borrowers have fluctuated significantly over time.

In the first two decades of the IMF's existence, more than half of its lending went to industrial countries. But since the late 1970s, these countries have been able to meet their financing needs in the capital markets.

The oil shock of the 1970s and the debt crisis of the 1980s led many lower- and lower-middleincome countries to borrow from the IMF.

In the 1990s, the transition process in central and eastern Europe and the crises in emerging market economies led to a further increase in the demand for IMF resources.

In 2004, benign economic conditions worldwide meant that many countries began to repay their loans to the IMF. As a consequence, the demand for the Funds resources dropped off sharply .

But in 2008, the IMF began making loans to countries hit by the global financial crisis The IMF currently has programs with more than 50 countries around the world and has committed more than $325 billion in resources to its member countries since the start of the global financial crisis.

While the financial crisis has sparked renewed demand for IMF financing, the decline in lending that preceded the financial crisis also reflected a need to adapt the IMF's lending instruments to the changing needs of member countries. In response, the IMF conducted a wide-ranging review of its lending facilities and terms on which it provides loans.

In March 2009, the Fund announced a major overhaul of its lending framework, including modernizing conditionality, introducing a new flexible credit line, enhancing the flexibility of the Funds regular stand-by lending arrangement, doubling access limits on loans, adapting its cost structures for high-access and precautionary lending, and streamlining instruments that were seldom used. It has also speeded up lending procedures and redesigned its Exogenous Shocks Facility to make it easier to access for low-income countries. More reforms have since been undertaken, most recently in November 2011.

Lending to preserve financial stability

Article I of the IMF's Articles of Agreement states that the purpose of lending by the IMF is "...to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity."

In practice, the purpose of the IMF's lending has changed dramatically since the organization was created. Over time, the IMF's financial assistance has evolved from helping countries deal with short-term trade fluctuations to supporting adjustment and addressing a wide range of balance of payments problems resulting from terms of trade shocks, natural disasters, post-conflict situations, broad economic transition, poverty reduction and economic development, sovereign debt restructuring, and confidence-driven banking and currency crises.

Today, IMF lending serves three main purposes.

First, it can smooth adjustment to various shocks, helping a member country avoid disruptive economic adjustment or sovereign default, something that would be extremely costly, both for the country itself and possibly for other countries through economic and financial ripple effects (known as contagion).

Second, IMF programs can help unlock other financing, acting as a catalyst for other lenders. This is because the program can serve as a signal that the country has adopted sound policies, reinforcing policy credibility and increasing investors' confidence.

Third, IMF lending can help prevent crisis. The experience is clear: capital account crises typically inflict substantial costs on countries themselves and on other countries through contagion. The best way to deal with capital account problems is to nip them in the bud before they develop into a fullblown crisis.

Conditions for lending

When a member country approaches the IMF for financing, it may be in or near a state of economic crisis, with its currency under attack in foreign exchange markets and its international reserves depleted, economic activity stagnant or falling, and a large number of firms and households going bankrupt. In difficult economic times, the IMF helps countries to protect the most vulnerable in a crisis.

The IMF aims to ensure that conditions linked to IMF loan disbursements are focused and adequately tailored to the varying strengths of members' policies and fundamentals. To this end, the IMF discusses with the country the economic policies that may be expected to address the problems most effectively. The IMF and the government agree on a program of policies aimed at achieving specific, quantified goals in support of the overall objectives of the authorities' economic program. For example, the country may commit to fiscal or foreign exchange reserve targets.

The IMF discusses with the country the economic policies that may be expected to address the problems most effectively. The IMF and the government agree on a program of policies aimed at achieving specific, quantified goals in support of the overall objectives of the authorities' economic program. For example, the country may commit to fiscal or foreign exchange reserve targets.

Loans are typically disbursed in a number of installments over the life of the program, with each installment conditional on targets being met. Programs typically last up to 3 years, depending on the nature of the country's problems, but can be followed by another program if needed. The government outlines the details of its economic program in a "letter of intent" to the Managing Director of the IMF. Such letters may be revised if circumstances change.

For countries in crisis, IMF loans usually provide only a small portion of the resources needed to finance their balance of payments. But IMF loans also signal that a country's economic policies are on the right track, which reassures investors and the official community, helping countries find additional financing from other sources.

Main lending facilities

In an economic crisis, countries often need financing to help them overcome their balance of payments problems. Since its creation in June 1952, the IMFs Stand-By Arrangement (SBA) has been used time and again by member countries, it is the IMFs workhorse lending instrument for emerging market countries. Rates are non-concessional, although they are almost always lower than what countries would pay to raise financing from private markets. The SBA was upgraded in 2009 to be more flexible and responsive to member countries needs. Borrowing limits were doubled with more funds available up front, and conditions were streamlined and simplified. The new framework also enables broader high-access borrowing on a precautionary basis.

The Flexible Credit Line (FCL) is for countries with very strong fundamentals, policies, and track records of policy implementation. It represents a significant shift in how the IMF delivers Fund financial assistance, particularly with recent enhancements, as it has no ongoing (ex post) conditions and no caps on the size of the credit line. The FCL is a renewable credit line, which at the countrys discretion could be for either 1-2 years, with a review of eligibility after the first year. There is the flexibility to either treat the credit line as precautionary or draw on it at any time after the FCL is

approved. Once a country qualifies (according to pre-set criteria), it can tap all resources available under the credit line at any time, as disbursements would not be phased and conditioned on particular policies as with traditional IMF-supported programs. This is justified by the very strong track records of countries that qualify to the FCL, which give confidence that their economic policies will remain strong or that corrective measures will be taken in the face of shocks.

The Precautionary and Liquidity Line (PLL) builds on the strengths and broadens the scope of the Precautionary Credit Line (PCL). The PLL provides financing to meet actual or potential balance of payments needs of countries with sound policies, and is intended to serve as insurance and help resolve crises. It combines a qualification process (similar to that for the FCL) with focused ex-post conditionality aimed at addressing vulnerabilities identified during qualification. Its qualification requirements signal the strength of qualifying countries fundamentals and policies, thus contributing to consolidation of market confidence in the countrys policy plans. The PLL is designed to provide liquidity to countries with sound policies under broad circumstances, including countries affected by regional or global economic and financial stress.

The Rapid Financing Instrument (RFI) provides rapid and low-access financial assistance to member countries facing an urgent balance of payments need, without the need for a full-fledged program. It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, post-conflict situations and emergencies resulting from fragility.

The Extended Fund Facility is used to help countries address balance of payments difficulties related partly to structural problems that may take longer to correct than macroeconomic imbalances. A program supported by an extended arrangement usually includes measures to improve the way markets and institutions function, such as tax and financial sector reforms, privatization of public enterprises.

The Trade Integration Mechanism allows the IMF to provide loans under one of its facilities to a developing country whose balance of payments is suffering because of multilateral trade liberalization, either because its export earnings decline when it loses preferential access to certain markets or because prices for food imports go up when agricultural subsidies are eliminated.

Lending to low-income countries

To help low-income countries weather the severe impact of the global financial crisis, the IMF has revamped its concessional lending facilities to make them more flexible and meet increasing demand for financial assistance from countries in need. These changes became effective in January 2010. Once additional loan and subsidy resources are mobilized, these changes will boost available resources for low-income countries to $17 billion through 2014. To ensure resources are available for lending to low-income countries beyond 2014, the IMF approved an additional $2.7 billion in remaining windfall profits from gold sales as part of a strategy to make lending to low-income countries sustainable.

Three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT) as part of this broader reform: the Extended Credit Facility, the Rapid Credit Facility and the Standby Credit Facility.

The Extended Credit Facility (ECF) provides financial assistance to countries with protracted balance of payments problems. The ECF succeeds the Poverty Reduction and Growth Facility (PRGF) as the Funds main tool for providing medium-term support LICs, with higher levels of access, more concessional financing terms, more flexible program design features, as well as streamlined and more focused conditionality.

The Rapid Credit Facility (RCF) provides rapid financial assistance with limited conditionality to low-income countries (LICs) facing an urgent balance of payments need. The RCF streamlines the Funds emergency assistance, provides significantly higher levels of concessionality, can be used

flexibly in a wide range of circumstances, and places greater emphasis on the countrys poverty reduction and growth objectives.

The Standby Credit Facility (SCF) provides financial assistance to low-income countries (LICs) with short-term balance of payments needs. It provides support under a wide range of circumstances, allows for high access, carries a low interest rate, can be used on a precautionary basis, and places emphasis on countries poverty reduction and growth objectives.

Several low-income countries have made significant progress in recent years toward economic stability and no longer require IMF financial assistance. But many of these countries still seek the IMF's advice, and the monitoring and endorsement of their economic policies that comes with it. To help these countries, the IMF has created a program for policy support and signaling, called the Policy Support Instrument.

Debt relief

In addition to concessional loans, some low-income countries are also eligible for debts to be written off under two key initiatives.

The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in 1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoring debt sustainability; and

The Multilateral Debt Relief Initiative (MDRI), under which the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF) canceled 100 percent of their debt claims on certain countries to help them advance toward the Millennium Development Goals.

D. TECHNICAL ASSISTANCE

Beneficiaries of Technical Assistance Types of Technical Assistance Working Closely with Donors

The IMF shares its expertise with member countries by providing technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. The objective is to help improve the design and implementation of members' economic policies, including by strengthening skills in institutions such as finance ministries, central banks, and statistical agencies. The IMF has also given advice to countries that have had to reestablish government institutions following severe civil unrest or war.

In 2008, the IMF embarked on an ambitious reform effort to enhance the impact of its technical assistance. The reforms emphasize better prioritization, enhanced performance measurement, more transparent costing and stronger partnerships with donors.

Beneficiaries of technical assistance

Technical assistance is one of the IMF's core activities. It is concentrated in critical areas of macroeconomic policy where the Fund has the greatest comparative advantage. Thanks to its nearuniversal membership, the IMF's technical assistance program is informed by experience and knowledge gained across diverse regions and countries at different levels of development.

About 80 percent of the IMF's technical assistance goes to low- and lower-middle-income countries, in particular in sub-Saharan Africa and Asia. Post-conflict countries are major beneficiaries. The IMF is also providing technical assistance aimed at strengthening the architecture of the international financial system, building capacity to design and implement poverty-reducing and growth programs, and helping heavily indebted poor countries (HIPC) in debt reduction and management.

Types of technical assistance

The IMF's technical assistance takes different forms, according to needs, ranging from long-term hands-on capacity building to short-notice policy support in a financial crisis. Technical assistance is delivered in a variety of ways. IMF staff may visit member countries to advise government and central bank officials on specific issues, or the IMF may provide resident specialists on a short- or a long-term basis. Technical assistance is integrated with country reform agendas as well as the IMF's surveillance and lending operations.

The IMF is providing an increasing part of its technical assistance through regional centers located in Cte d'Ivoire, Gabon, Mauritius, and Tanzania for Africa; in Barbados and Guatemala for Central America and the Caribbean; in Lebanon for the Middle East; and in Fiji for the Pacific Islands. The IMF also offers training courses for government and central bank officials of member countries at its headquarters in Washington, D.C., and at regional training centers in Austria, Brazil, China, Singapore, Tunisia, and the United Arab Emirates.

Partnership with donors

Bilateral and multilateral donors are playing an increasingly important role in enabling the IMF to meet country needs in this area, with their contributions now financing about two thirds of the IMF's field delivery of technical assistance. Strong partnerships between recipient countries and donors enable IMF technical assistance to be developed on the basis of a more inclusive dialogue and within the context of a coherent development framework. The benefits of donor contributions thus go beyond the financial aspect.

The IMF is currently seeking to leverage the comparative advantages of its technical assistance to expand donor financing to meet the needs of recipient countries. As part of this effort, the Fund is strengthening its partnerships with donors by engaging them on a broader, longer-term and more strategic basis.

The idea is to pool donor resources in multi-donor trust funds that would supplement the IMF's own resources for technical assistance while leveraging the Fund's expertise and experience. Expansion of the multi-donor trust fund model is envisaged on a regional and topical basis, offering donors different entry points according to their priorities. To this end, the IMF is establishing a series of topical trust funds, covering such topics as anti-money laundering/combating the financing of terrorism; fragile states; public financial management; management of natural resource wealth, public debt sustainability and management, statistics and data provision; and financial sector stability and development.

2.3IMF AND GLOBALIZATION

Globalization encompasses three institutions: global financial markets and transnational companies, national governments linked to each other in economic and military alliances led by the US, and rising "global governments" such as World Trade Organization (WTO), IMF, and World Bank. Charles Derber argues in his book People Before Profit, "These interacting institutions create a new global power system where sovereignty is globalized, taking power and constitutional authority away from nations and giving it to global markets and international bodies." Titus Alexander argues that this system institutionalises global inequality between western countries and the Majority World in a form of global apartheid, in which the IMF is a key pillar.

The establishment of globalised economic institutions has been both a symptom of and a stimulus for globalisation. The development of the World Bank, the IMF regional development banks such as the European Bank for Reconstruction and Development (EBRD), and, more recently, multilateral trade institutions such as the WTO indicates the trend away from the dominance of the state as the exclusive unit of analysis in international affairs. Globalization has thus been transformative in terms of a reconceptualising of state sovereignty.

Following US President Bill Clinton's administration's aggressive financial deregulation campaign in the 1990s, globalisation leaders overturned long-standing restrictions by governments that limited foreign ownership of their banks, deregulated currency exchange, and eliminated restrictions on how quickly money could be withdrawn by foreign investors.

CHAPTER 3 : ISSUES OF IMF

1.1 ISSUES
International tax issues have risen to prominence in public debate and are now attracting considerable attention from policymakers. Most recently, the Lough Erne Declaration from the G-8 summit of June 1718, 2013 set out a number of commitments and objectives in this area, including for instance the aspirations that Tax authorities around the world should automatically share information to fight the scourge of tax evasion (point 1) and that Countries should change rules that let companies shift their profits across borders to avoid taxes..

There are, broadly speaking, two sets of issues on which current actions are focused: (legal) tax avoidance2 by multinationals, and (illegal) evasion by rich individuals. These do not cover all international tax problems, of course: multinationals might evade, for instance, and individuals can avoidand these are in practice significant issues. This distinction is, nonetheless, a useful organizing framework for understanding current debates and initiatives. Subsections A and B below elaborate on them in turn.

The overarching problem, however, is in each case the fundamental difficulty that national tax policies create cross-country spillovers. The opportunities for avoidance and evasion that are now

such a concern are a very visible manifestation of such spillovers: they exploit gaps and inconsistencies in the international tax framework that arise from combining national tax systems. But the setting of national tax policies without considering the spillovers on other countries can generate distortions even in the absence of erosion and evasion phenomena. These can arise instead in the less visible but perhaps even more damaging form of either a dislocation of economic activity purely to exploit differences in national tax policies or an overall level of taxation below that which would be chosen if countries took full account of how each is affected by the others policies. This point is developed further in Subsection C.3

A. Tax Avoidance by Multinationals

Tax avoidance by multinationals has emerged as a major risk to governments much-needed revenue and, ultimately, citizens trust in the tax systemnot only in advanced but also in developing and emerging economies. Recent high profile cases of multinationals paying very small amounts of tax have caused considerable public disquiet in many advanced economiesand similar concerns have become increasingly apparent in many developing countries. At a time when taxpayers are being asked to shoulder heavier burdens, the concern is a reasonable one, on grounds of equitymuch of the benefit is likely to go to the better off4as well as efficiencythrough the distortion of real activities, and need to raise revenue from potentially more distortionary means or cut valued public spendingand sustaining public support for the wider tax system.

It is widely recognized that the current framework for international taxation is under considerable strain, as the landmark report of the OECD (2013) makes clear. A century ago, when the basic principles were put in place, foreign direct investment was largely a bricks-andmortar business. Developments since, however, mean that this framework has enabled extensive

base erosion and profit shifting (BEPS)the artificial reduction of taxable profits and/or detachment of tax location from the location of business activity. Box 1 provides an overview of some common tax planning strategies. Key factors underlying these include the increased importance of:

Intra-firm transactions and complex modern business models. Intra-firm flows, including the provision of intangibles, put increased strain on the notion of arms-length pricesthose which would be set in the same transaction between unrelated partiesas a way to allocate profits between jurisdictions. Moreover, while the current international tax framework has been constructed predominantly through bilateral arrangements, whose primary focus is on allocating taxing rights between the two countries concerned, business models are now so globally integrated that looking at any two locations in isolation is unlikely to be sufficient to arrive at an appropriate split of tax base.

Digital transactions. The current international tax architecture took shape when a physical presence was presumed necessary to undertake business activity. But IT advances now allow many more businesses to undertake substantial economic activity without the degree of physical nexus required to be subject to the corporate income tax; by, for instance, providing services over the internet.5

Financial sector innovation. The current international tax framework makes distinctions between forms of income (business profit, investment income, capital gains, etc.) and between active and passive income that financial innovation has made quite easy to engineer around. Intangibles. The increased importance of intellectual property rights and other intangibleseasy to move and hard to valuehas posed particular difficulties.

Otherwise benign arrangements in some cases increase the risk of avoidance. Tax treaties, in particular, while traditionally seen as important to facilitate investment flows, have in many cases

enabled the host countrys tax base to leak elsewhere, including by treaty shopping. Some difficulties arise simply from mismatches in national practice and definitions (of, for example, where a company is resident and hence liable to tax).

The Funds technical assistance (TA) and other discussions have shown that many countries are increasingly concerned at the difficulty of taxing business activities within their jurisdiction. Especially where administrative capacity is weak, authorities increasingly fear that their base is being substantially eroded in ways that are less than fully understoodwith adverse effects on the trust between authorities and large investors.

The extent of artificially shifted income is hard to assess, but there are signs that it is large. Beyond the anecdotes of high profile cases, the evidence of such effects (usefully reviewed in OECD, 2013) is essentially indirectbut suggests that the revenue at issue is substantial. One sign, for instance, is that positive shocks to parent companies earnings are followed by a larger increase in pre-tax profits of affiliates in low-tax countries than of those in high-tax countries (Dharmapala and Reidel, 2013). For the United States, Gravelle (2013) reports estimates of the annual revenue loss from profit shifting between $10 and $60 billion (the higher figure being about one-quarter of all receipts from the federal corporate income tax in 2012); and, a further indication of orders of magnitude, President Obamas international tax proposals,6 relatively technical in nature, are projected to raise around $15 billion per annum.

B. Tax Evasion by Individuals

Opportunities for tax evasion are increased when low-tax jurisdictions do not share taxpayer information with foreign tax authorities. In most countries, individuals are liable to tax in their home country on their worldwide income (with credit for any taxes paid abroad). This cannot be

properly enforced, however, unless the home country can obtain information on assets or income located abroad.

Though the extent of the problem is again hard to assess, there are signs that it is substantial. The IRS probe of U.S. taxpayers with accounts in UBS, for instance, led to disclosure of 4,450 accounts (and a fine on UBS of $780 million). More generally, one estimate is that around 6 percent of the global net financial wealth of householdsabout $4.5 trillionis unrecorded and located in tax havens (Zucman, 2013).7

Jurisdictions heavily reliant on these activities face risks. Inflating balance sheets by extracting funds escaping taxation or other legal requirements can create vulnerabilities; and, for some countries, international actions discouraging these activities, described below, may call for changes in wider development strategies. Tax evasionand avoidance toobenefit from secrecy provisions. Tax and criminal justice authorities difficulties in accessing information on the beneficial ownership of corporations and trusts hamper the determination of the legal nature of some tax planning schemes and the recovery of evaded taxes. In addition, financial institutions and professionals such as lawyers and accountants have been misused to hide the proceeds of tax evasion. While the anti-money laundering (AML) standard has long included provisions to pierce the veil, they have been extended to tax matters only recently. The synergies of the AML and revenue administration processes have strong potential but also present institutional challenges in terms of domestic and international cooperation.

C. Spillovers and Tax Competition These international avoidance and evasion problems are instances of the cross-country spillovers arising from interactions between national tax systems. Aggressive tax planning and evasion imply that tax measures adopted in one countrythe provision of regimes favoring the use of conduit companies, for instance, or low withholding taxes combined with reluctance to share

information with other tax authoritiesmay undermine the revenues of others. Tax base thus shifts between countries, and in some cases almost entirely disappears. In the process, taxpayers and tax authorities often incur significant administrative costs, investment flows may well be distorted, and considerable talent is allocated to tasks of questionable social value.

But these spillover effects take many other forms too. Even if all tax provisions were fully complied within both spirit and letter of the lawreal activities would potentially be distorted by incentives created by disparities and inconsistencies in national tax practices. Most obviously, and perhaps most fundamentally, changes in the overall level of business taxation in one country will likely affect levels of activity and revenue in others. But there are many other potential forms of spillover. A number of advanced countries, for instance, have moved or been urged to move away from a residence-based system for taxing active business income, under which they tax such income arising abroad but give a credit for foreign taxes paid, to a territorial one, under which they simply exempt such income. Such a shift can have significant implications for host countries, since any tax they charge will now remain as a final burden for the investor rather than be offset by reduced taxation in their home countryas a result, these countries, anxious to attract investment, may face greater pressure to offer tax incentives, lower tax rates, and take other measures that erode their revenue base.

The fundamental problem is the failure of national policies to take full account of the spillover effects on other countriestax competition in a broad sense. Countries naturally seek to protect or expand their own tax bases, and attract or support economic activity in light of the policies pursued by others. The consequent strategic interaction between them in setting their tax policies one country reacting to the policy choices of others (of which there is now ample evidence)8 implies a risk of mutually damaging beggar thy neighbor outcomes. In

the limit, one can conceive of such tax-setting leading all countries to have the same and perfectly aligned tax rates and base, with no compliance problems: there would then be no revenue loss from base erosion or profit shifting, residence based taxes would be perfectly enforced, and there would be no distortion of real decisionsyet there would still be a social harm suffered, since effective tax rates would be reduced below levels that a collective decision would have led to. While such an extreme outcome is of course unlikely in practice, the broader concern is already one that is routinely encountered: it largely explains, for instance, the prevalence of tax incentives of various kinds, which has been a recurrent concern in the Funds work for many years.

Tax competition has some potential merit, but fiscal consolidation needs have sharpened policymakers appreciation of its potential costs. The argument that international tax competition has a beneficial effect in constraining governments from raising too much revenue has a long intellectual pedigree,9 though why this should be superior to other and more explicit fiscal constraints is unclear. Variants of this view include the argument that tax planning has enabled promising firms to grow rapidly (at home, as well as abroad): in this view, it is, in effect, a way by which countries tax more mobile capital at a lower rate, consistent with the standard principle of taxing less heavily the more tax-sensitive tax bases.10 In general, the case for tax competition is weaker the greater is the marginal social value of tax revenue,11 and to that extent will have become less persuasive given current needs for fiscal consolidation, with a greater recognition that reducing revenue losses from this source may be a relatively efficient and fair route to much-needed revenue. Differing national circumstances and interests can make it difficult to reverse collective damage from tax competition in such a way that all benefit, but this is not necessarily impossible: there are circumstances, for instance, in which minimum tax rates can benefit even those obliged to raise their tax rate.

3.2 TACKLING CURRENT CHALLENGES

The global economic crisis created the worst recession since the Great Depression of the 1930s. The crisis began in the mortgage markets in the United States in 2007 and swiftly escalated into a crisis that affected activity and institutions worldwide. The IMF mobilized on many fronts to support its member countries, increasing its lending, using its cross-country experience to advise on policy solutions, and introducing reforms to modernize its operations and become more responsive to member countries needs. As the apex of the crisis shifted to Europe, the Fund has become actively engaged in the region and is also working with the G-20 to support a multilateral approach.

Stepping up crisis lending

As part of its efforts to support countries during the global economic crisis, the IMF has beefed up its lending capacity. It has approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries varying strengths and circumstances. More recently, further reforms strengthen the IMFs capacity to respond to and prevent crises. In particular:

Doubling of lending access limits for low-income member countries and streamlining procedures to reduce perceived stigma attached to borrowing from the Fund

Introducing and refining a Flexible Credit Line (FCL) for countries with robust policy frameworks and a strong track record in economic performance; a Precautionary and Liquidity Line (PLL) for countries that have sound economic policies and fundamentals, but are still facing vulnerabilities; and a Rapid Financing Instrument (RFI) for countries facing an urgent financing need but that do not need a full-fledged economic program

Modernizing conditionality to ensure that conditions linked to IMF loan disbursements are focused and adequately tailored to the varying strengths of members policies

Focusing more on social spending and more concessional terms for low-income countries

The IMF has committed more than $300 billion to crisis-hit countriesincluding Greece, Ireland, Portugal, Romania, and Ukraineand has extended credit to Mexico, Poland, and Colombia under a new flexible credit line. The IMF is also stepping up its lending to low-income countries to help prevent the crisis undermining recent economic gains and keep poverty reduction efforts on track.

A partner in Europe

The IMF is actively engaged in Europe as a provider of policy advice, financing, and technical assistance. We work both independently and, in European Union countries, in cooperation with European institutions, such as the European Commission and the European Central Bank as part of the so-called troika. The IMF's work in Europe has intensified since the start of the global financial crisis in 2008, and has been further stepped up since mid-2010 as a result of the sovereign debt crisis in the euro area. The IMF has recommended that Europe focus on structural reforms to boost economic growth, such as product and services market reforms, as well as labor market and pension changes. The IMF has also urged eurozone members to make a more determined, collective response to the crisis by taking concrete steps toward a complete monetary union, including a unified banking system and more fiscal integration. Read our Factsheet on Europe and visit our webpage that pulls together IMF information about Europe. See also article on fixing the flaws in EMU.

Supporting low-income countries

The IMF has upgraded its support for low-income countries, reflecting the changing nature of economic conditions in these countries and their increased vulnerabilities due to the effects of the global economic crisis. It has overhauled its lending instruments, especially to address more directly countries' needs for short-term and emergency support. The IMF support package includes:

Mobilizing additional resources, including from sales of an agreed amount of IMF gold, to boost the IMFs concessional lending capacity to up to $17 billion through 2014, including up to $8 billion in the first two years. This exceeds the call by the Group of Twenty for $6 billion in new lending over two to three years.

Providing interest relief, with zero payments on outstanding IMF concessional loans through end-2012 to help low-income countries cope with the crisis.

Commiting resources to secure the long-term sustainability of IMF lending to low-income countries beyond 2014.

Reinforcing multilateralism

The 2008 global financial crisis highlighted the tremendous benefits from international cooperation. Without the cooperation spearheaded by the Group of Twenty industrialized and emerging market economies (G-20) the crisis could have been much worse. At their 2009 Pittsburgh Summit G-20 countries pledged to adopt policies that would ensure a lasting recovery and a brighter economic future, launching the "Framework for Strong, Sustainable, and Balanced Growth."

The backbone of this framework is a multilateral process, where G-20 countries together set out objectives and the policies needed to get there. And, most importantly, they undertake to check on their progress toward meeting those shared objectivesdone through the G-20 Mutual Assessment Process or MAP. At the request of the G-20, the IMF provides the technical analysis needed to evaluate how members policies fit togetherand whether, collectively, they can achieve the G-20s goals. The IMFs Executive Board has also been considering a range of options to enhance multilateral, bilateral, and financial surveillance, and to better integrate the three. It has launched spillover reports for the five most systemic economiesChina, the euro area, Japan, United Kingdom, and

the United Statesto assess the impact of policies by one country or area on the rest of the world. The IMF recently strengthened the ways in which it keeps an eye on country economies with its global analysis, and as Managing Director Christine Lagarde has stressed, the IMF must continue to pay more attention to understanding interconnectedness and incorporating this understanding into risk and policy analysis.

Strengthening the international monetary system The current International Monetary Systemthe set of internationally agreed rules, conventions, and supporting institutions that facilitate international trade and cross-border investment, and the flow of capital among countrieshas certainly delivered a lot. But it has a number of well-known weaknesses, including the lack of an automatic and orderly mechanism for resolving the buildup of real and financial imbalances; volatile capital flows and exchange rates that can have deleterious economic effects; and related to the above, the rapid, unabated accumulation of international reserves, concentrated on a narrow supply.

Addressing these problems is crucial to achieving the global public good of economic and financial stability, by ensuring an orderly rebalancing of demand growth, which is essential for a sustained and strong global recovery, and reducing systemic risk. The IMFs recent review of its mandate and resultant reformsto surveillance and its lending toolkitgo some way towards addressing these concerns but further reforms are being pursued.

Implementing organizational changes

The IMF must represent the interests of all of its 188 member countries, from its smallest shareholder Tuvalu, to its largest, the United States. Unlike the General Assembly of the United Nations or the World Trade Organization, where each country has one vote, decision making at the IMF was designed to reflect the position of each member country in the global economy. Each IMF

member country is assigned a quota that determines its financial commitment to the IMF, as well as its voting power.

In recent years, emerging market countries such as China, India, Brazil, and Russia have experienced strong growth and now play a larger role in the world economy. In December 2010, the IMF agreed on reform of its framework for making decisions to reflect the increasing importance of emerging market and developing economies.

When fully implemented, the reforms will produce a shift of more than 6 percent of quota shares to dynamic emerging market and developing countries. The reform contains measures to protect the voice of the poorest countries in the IMF. Without these measures, this group of countries would have seen its voting shares decline. The reform will enter into force once three fifths of the IMFs membershipwhich currently amounts to 113 countries representing 85 percent of total voting power have accepted the proposed amendment. Watch a video on the latest efforts on reforming IMF governance.

3.3 CURRENT GLOBAL INITIATIVES

A variety of measures addressed to these issues have been adopted at national and regional levels. Many countries, for instance, have adopted voluntary disclosure programs to encourage taxpayers to report undeclared assets offshore; the European Union requires members to provide information or levy withholding taxes on deposits held by residents of other member states; and some countries have canceled some of their tax treaties because of the perception that they were being abused.

Initiatives intended to have global participation are also underway. The two most important of these, now described, aim to address the tax planning and evasion issues above.

A. Base Erosion and Profit Shifting (BEPS) Addressing BEPS has become one of the highest priorities of the international community. This was reiterated at the Lough Erne G-8 meeting, and the need to do so was stressed by G-20 leaders in their Los Cabos declaration of June 2012, which asked the OECD to report back on this issue.

The OECD will present a comprehensive action plan on BEPS to G-20 leaders at their July meeting.13 Likely areas of proposed action include: addressing mismatches in entity or instrument characterization; improvements to or clarifications of transfer pricing rules, including the treatment of intangibles; updated approaches to issues related to jurisdiction to tax, particularly in relation to digital goods and services; more effective anti-avoidance measures, including general anti-avoidance rules; rules on the treatment of intra-group financial transactions; and more effective actions to counter harmful tax regimes.

B. Information Exchange The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes (GF)now with 120 memberspromotes effective exchange of information (EOI), with automatic EOI becoming the new standard.14 Peer reviews examine whether a country complies with the internationally agreed standards of EOI, which prohibit a country from declining to provide information on grounds of bank secrecy. The G-8 and G-20 have called on all countries to adopt measures to facilitate automatic exchange of tax information, and mandated the OECD to develop the standard for thiswhich would be a substantial step forward, albeit one that faces considerable practical difficulty in implementation. Also important in this context is the opening of the Multilateral Convention on Mutual Administrative Assistance in Tax Matterswhich covers all

forms of EOI and assistance in tax collectionto all countries from 2013; it now covers more than 70 jurisdictions.

The OECD estimates an increase in tax revenue from offshore compliance initiatives in 20 countries of 14 billion in 2011.15 Some empirical work suggests that there has been a relocation of bank deposits from the most compliant tax havens to the least compliant.16

The U.S. Foreign Account Tax Compliance Act (FATCA) is also having a major impact. This requires foreign financial institutions (FFIs) to report to the IRS information on financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.17 Non-compliant FFIs will face 30 percent withholding on all payments received from U.S. sources. The EU Commission recently proposed to expand automatic EOI between member states to ensure that the scope of EOI within the EU is at least as comprehensive as that between member states and the United States in the context of FATCA.

The Financial Action Task Force (FATF) has expanded the scope of money laundering predicate offenses to include tax crimes and stepped-up requirements related to the transparency of companies and trusts. The AML framework complements and supports the efforts of revenue administrations against tax evasion. An effective use of the AML framework should enhance compliance with tax laws by increasing the probability of detection of tax evaders, facilitating domestic and international cooperation, imposing deterring sanctions, and increasing revenues. 17 The United States has also concluded some intergovernmental agreements under which FFIs will report information on U.S. account holders to their national tax authorities (rather than to the IRS), who will in turn automatically provide this information to the IRS. This removes domestic legal impediments to compliance in partner countries and should reduce compliance burdens.

3.3 THE ROLE OF THE IMF A. Mandates and Comparative Advantage

The OECD, by its history and expertise, is well placed to lead technical work on international taxation. Through its Committee on Fiscal Affairs (CFA), it has traditionally set consensual standards for its membersand indirectly for other countriesmost notably for bilateral treaties and standards for avoiding abusive transfer pricing, though in other related technical matters as well. The IMF participates as an observer in the CFA, and staff maintains close and good links with their counterparts. The United Nations has played a significant but smaller role in this area, largely limited to the drafting and revision of the UN model tax treaty and transfer pricing guidelines, through its committee of experts (in which Fund staff also often participate). The World Bank is increasing its TA on transfer pricing. International tax issues are important for the Funds mandate, given their significance for macroeconomic stability at both the national and international levels. In particular, the Fund, in its surveillance, assesses whether members are pursuing policies that promote their own domestic and balance of payments stability, and whether their policies give rise to spillovers that may undermine global economic and financial stability. The impact of international tax policies on revenue mobilizationboth directly and indirectly through effects on the rest of the tax systemas well as on investment and capital movements can have important implications for these assessments. The Funds comparative advantage in relation to international tax issues comes from its unparalleled TA experience on these issues, recognized expertise in their economic analysis, and the near-universal Fund membership. Progress on these sensitive issues requires a firm grasp of the technicalities, a strong analytical basis, and an understanding of the impact on widely differing countries, which the Fund is well equipped to provide.

B. Previous and Current Work

Technical assistance International tax issues figure prominently in the Funds demand-led TA in tax policy and administration. For some time, it has hardly been possible to analyze or implement corporate taxation without addressing international aspects: the persistence of tax incentives, for instancea recurrent concern in much of the Funds tax workvery largely reflects tax competition concerns. Box 2 provides a partial list of technical international tax issues encountered in recent TA; many of these are now dealt with as a matter of routine. IMF TA addresses these issues in a holistic context of wider reforms of tax policy, administration, and tax law drafting. While the current prominence of international taxation in public debate makes it an important focus of attention in many countries, it is important that the risks and opportunities be assessed realistically and responses designed in the context of the many other challenges facing policymakers and, especially, tax administrations. In relation to the taxation of high wealth individuals, for instance, FAD TA addresses this in a context in which international considerations are an integral part of a much wider approach.

Policy development Fund staff have worked on a wide range of aspects of international taxation :

Board papers have raised international tax issues in the contexts of assessing links between taxation and the crisis and of meeting fiscal consolidation needs (respectively, IMF, 2009 and 2010).

Analytical work of staff on international taxation is much-cited, covering a range of empirical and theoretical issues: it includes, for instance, work on spillover effects from corporate tax reform in advanced countries (Perry, Matheson, and Veung, 2013); the United States Staff Report for the 2013 Article IV Consultation (forthcoming); empirical work on tax interactions (Abbas and Klemm, 2013); empirical work on profit by European multinationals (Huizinga and Leuven, 2008), and a

recent survey of the area (Keen and Konrad, 2013). Other relevant work includes work on: the fundamentals of tax competition games (Kanbur and Keen, 1993; Kempf and Rota Graziosi, 2012); tax treaties (Thuronyi, 2010); the impact of preferential tax regimes (Keen, 2001) and of information sharing (Keen and Ligthart, 2006); meta-analysis of tax effects on foreign direct investment (de Mooij and Ederveen, 2003); the empirics of debt-shifting (Huizinga, Leuven, and Nicodme, 2008); special issues in the resources sector (Mullins, 2010); and tax competition in WAEMU, the Caribbean, and Latin America (Mansour and Rota Graziosi, 2012; Klemm and van Parys, 2012).

Technical work includes a book in progress on international tax regimes for the extractive industries, together with work on the implementation of arms-length pricing (Schatan, 2010) and on domestic law aspects of tax treaties (Nakayama, 2011).

3.4 AREAS FOR FUTURE WORK

Work planned is guided by the IMFs mandate and comparative advantageand will complement and enlighten, not supplant, the current initiatives described above. It will have three main components.

A. Paper on Spillovers in International Taxation This will identify the nature and extent of the cross-country impact of national policies and practices in international taxation, and assess current and possible responses. While the focus will be on international corporate taxation, the strong links with elements of national tax systems mean that aspects of domestic policy will also need to be recognized. The paper will focus on a series of under-studied issues critical to the future development of the international tax system, in both short and longer terms. There is a large theoretical literature on spillovers and international tax competition, which the paper will draw on and review; but it

remains at a high level of abstraction; and empirical work remains in its infancy. The planned work complements work underway elsewhere, especially at the OECD, by addressing overarching design and implementation issues that need to be faced if the fundamental problems arising from international tax spillovers are to be resolved. These can be broadly grouped under two headings: Understanding and assessing tax spillovers

attention will also be given to issues of financial stability and effects on growth and development. The former include, for instance, effects on the structure and financing of financial institutionsand a better understanding and quantification of tax-induced cross-country flows more generally; the latter include, in addition to wider spillover issues raised above, the potential vulnerabilities of jurisdictions whose business model relies on facilitating tax planning and now may face reorientation.

responding to international initiatives, in a context of limited capacity. These problems have received little systematic attention, so that it is often unclear how extensive the challenges are or how measures to address them should be designed and prioritized within wider programs of administrative reform.

tax rates but in tax planning terms, these are far from being the sole concern. Much less attention has been paid to the revenue and other implicationsboth in aggregate and for particular types of countryof other provisions, which are often quite technical. These include, for instance, the wider design of international tax regimes (territorial or worldwide), treaty shopping, and hybrid mismatches. and as a step towardbetter understanding how these issues may affect particular countries, it is important to assess their likely impact in particular sectors: including, for instance, the

extractive industries, telecoms, and financial institutionsthe core of the corporate tax base in many countries. A fuller understanding of the importance of and challenges posed by the taxation of these sectors, and of multinationals more widely, is much needed, especially in many developing countries.

asymmetric treatment of debt and equity, which IMF (2009) and others19 have argued for on other grounds, would also close some planning opportunities (though in ways that would depend on precisely how this is done). And the appropriate corporate tax policy for developing countries may need to be revisited given advanced countries shift away from granting credits against domestic tax for taxes paid abroad, since this reduces the importance of ensuring their corporate tax is so designed as to meet conditions for creditability.

FATF standard opens new avenues to fight tax evasion. However, in most countries, there is a need for a cultural change in the work processes of AML and the tax authorities in order to meaningfully unlock the potential for revenue collection. Fund staff is currently working on these issues with some members in the context of surveillance and Fund-supported programs. The subject deserves further study and the development of general policy recommendations. induce countries to engage more intensely in other forms of tax competition, limiting and conceivably even reversing the consequent gains.20 Should this be a real concern? 20 The general point here is that partial coordination is not necessarily beneficial even if full coordination would be: see Keen and Konrad (2013). Dealing better with spillovers: Toward an improved international tax framework

alternatives to the current international tax framework, such as formulary apportionment (allocating a multinationals global profits among countries by some formula intended to proxy its

real relationships with those in which it operates, not by a transactional arms-length basis) and some form of minimum taxation. Even if the conclusion is that these are infeasible or undesirable, such schemesincluding their impact on developing countriesdeserve a more thorough and realistic assessment. ing close attentionmore in the nature of fixes than deeper improvementsinclude wider use of minimum taxes and denial of deductions as a response to profit shifting. treaties is being increasingly questioned. Key issues are when and whether domestic legislation can achieve the same effects in better ways, and whether there is scope for increased multilateralism. -by-country reporting raises questions as to whether countriesespecially developinghave, or under current arrangements, can obtain information needed to protect against erosion of their tax bases. Beyond this are wider issues as to how best administrations can assess and address the challenges of international taxation that they face, including in dealing with current initiatives, in the wider context of their broader efforts to strengthen revenue mobilization. f whether the spillovers, and countries reactions to them, are large enough to warrant deeper and fuller cooperation on international tax mattersand if so, given the great sensitivities in tax matters, what form might it take? There may be lessons to draw from various regional efforts at this cooperation, several of which the Fund continues to be closely involved in.

B. Inform and Contribute to Technical Discussions FAD has traditionally drawn on its fiscal expertise and TA experience to encourage and inform debate on technical tax issues. Drawing on its extensive and increasing TA to a wide range

of members, the Fund is in a unique position to set out technical issues and possible approaches, fully integrated in its wider country TA programs and wider dialogue. Various technical contributions are planned. These include, in addition to the work already underway described above, pieces on tax treaties (where new thinking is underway, and evident in Fund TA) and transfer pricing (where the Fund has experience in assessing how risks can be addressed in circumstances of limited capacity). Other technical pieces are expected to emerge, providing further background for the wider paper on spillovers.

C. Encourage and Contribute to the Wider Debate There will be extensive consultation and outreach in preparing the spillovers paper and technical materials, and in communicating the results. Existing dialogue on these issues with country authorities, other organizations active in the area, academics, civil society, and business will be intensified. Stressing the collaborative intent of the Funds work, the intention is that a good part of this work would be developed in combination with the OECD21 and others, including the World Bank and United Nations, active in the area. FAD will work closely with COM on communication issues.

References International Monetary Fund, 2013, United States: Article IV Consultation Staff Report, forthcoming (Washington: International Monetary Fund). _______, 2010, From Stimulus to Consolidation: Revenue and Expenditure Policies in Advanced and Emerging Economies, available at http://www.imf.org/external/np/pp/eng/2010/043010a.pdf (Washington: International Monetary Fund). _______, 2009, Debt Bias and Other Distortions: Crisis-Related Issues in Tax Policy, available at https://www.imf.org/external/np/pp/eng/2009/061209.pdf (Washington: International Monetary Fund). Abbas, Ali, and Alexander Klemm, 2013, A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies, International Tax and Public Finance, forthcoming. Brennan, Geoffrey, and James M. Buchanan, 1980, The Power to Tax: Analytical Foundations of a Fiscal Constitution (Cambridge: Cambridge University Press) de Mooij, Ruud A., and Sjef Ederveen, 2003, Taxation and Foreign Direct Investment, International Tax and Public Finance, Vol. 10, pp. 67393. Dharmapala, Dhammika, and Nadine Riedel, 2013, Earnings Shocks and Tax-motivated Incomeshifting: Evidence from European Multinationals, Journal of Public Economics, Vol. 97, pp. 95 107. Gravelle, Jane G., 2013, Tax Havens: International Tax Avoidance and Evasion, Congressional Research Service Report for Congress. Klemm, Alexander, and Stefan van Parys, 2012, Empirical Evidence on the Effects of Tax Incentives, International Tax and Public Finance, Vol. 19, pp. 393423. Lane, Philip R., and Gian-Maria Milesi-Ferreti, 2007, The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 19702004, Journal of International Economics, Vol. 73, pp. 22350.

Nakayama, Kiyoshi, 2011, Tax Policy: Designing and Drafting a Domestic Law to Implement a Tax Treaty, IMF Technical Notes and Manuals No. 11/01. Available at http://www.imf.org/external/pubs/cat/longres.aspx?sk=24653.0 (Washington: International Monetary Fund). Organization for Economic Cooperation and Development, 2013, Addressing Base Erosion and Profit Shifting (Paris: OECD). .

CONCLUSION

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