The Need for Independent Fiscal Institutions

In recent years, financial and economic crises have been linked to the lack of independent fiscal institutions to support the legislative processes involved in fiscal policy making. Such bodies are responsible for overseeing the legislative process and reviewing the possible effects of any tax reform. At the current political juncture, it is important to strengthen the presence of various kinds of independent institutions and committees in Mexico, including in fiscal matters, above all, in face of a potential tax reform to finance the social and infrastructure projects of the current government.

Recently, the Chairman of the Commission on Budget and Public Accounts, Alfonso Ramírez Cuéllar, referred to the need to have an independent technical advisory body, the Fiscal Council, to analyze tax policies and make recommendations to enhance revenues and improve public spending. Despite having autonomy of management and budget, the congressman recognized that this institution would depend on the Congress and would be accountable to it, emphasizing that the said Fiscal Council should be focused on studying the benefits for the economy of any tax reform and other related aspects.

The existence of independent fiscal institutions or committees that can be involved in national legislative processes, being responsible for design and implementation, is not a recent issue in the global context. Records of the first institution for which information is available date back to 1936, when such an entity was created in Belgium. Since then, various institutions have been set up with the sole purpose of safeguarding the health of public finances.

According to data from the Organization for Economic Cooperation and Development (OECD), since 2008 the presence and creation of these organizations have tripled. Despite the presence and growth of such entities around the world, Mexico has failed to establish an institution as such, that participates independently and that looks after the interests of both the governed and the State in tax processes. Currently, Mexico has the Center for Public Finance Studies (Centro de Estudios de las Finanzas Públicas, CEFP), which is part of the Chamber of Deputies, Congress, and serves as a technical, non-partisan support body.

In addition, the Senate of the Republic has the Belisario Domínguez Institute (Instituto Belisario Domínguez), responsible for conducting strategic research on national development, as well as studies on the legislative agenda in order to contribute to the decision-making process.

Although these institutions have independence from the Federal Executive Power, both maintain a close relationship and dependence on the Legislative Power, which violates the principle of independence, as established by the applicable principles to said fiscal institutions or committees suggested by the OECD. Thus, there could be a set of political interests that could result in the approval of an accelerated tax reform, affecting areas such as employment, tax collection, economic stability and investor confidence, among others.

The intervention of independent fiscal institutions and experts in such processes can be of great help, providing support to the legislative chambers in the study, review, analysis, interpretation, quantification and implementation of potential tax reform initiatives. This would generate a non-partisan counterweight for decisions and analyses, in a frame of reference that enables debate on the floor of the legislative body on a well-informed, analytical basis and assures a decision-making process that is aligned with these principles.

What functions could an independent fiscal institution carry out in Mexico?

Taking as an example the Joint Committee on Taxation in the United States, two of the most important aspects that such a fiscal institution must have are: firstly, independence and autonomy from political parties; and secondly, the technical and practical knowledge necessary to be able to provide valuable suggestions.

In addition, rather than an advisory body, we believe that such an institution or committee must be involved in the entire tax-related legislative process, in order to ensure consistency, even during different legislatures. Its actions should be limited to quantifying the impact of tax initiatives from a collection point of view, initiatives for attracting investment, economic stimuli, and side effects on employment, investment, reinvestment, savings, security and legal certainty, among others. Thus, an independent fiscal institution should carry out the following activities:

1. Assisting the Finance Commissions of each of the Legislative Houses in drafting possible fiscal reforms, from the point of view of legislative drafting and analysis, seeking to align them with quantitative effects.
2. Preparing estimates and projections of the impact of suggested reforms on collection and public finances, thereby enabling an analysis of their quantitative effects.
3. Researching and developing the federal tax system and the corresponding background, contributing to support for explaining motives and reasons for any tax reforms.
4. Providing objective technical advice.

The institution should only focus on tax and fiscal issues, to avoid an excess of responsibilities and tasks that could reduce the efficacy in its functioning.

For the model to be successful and to assure the creation of a fully independent fiscal institution, the OECD recommends that the entity have the following characteristics:

• Local ownership: Regardless of the models implemented in other countries, it is important that an independent fiscal institution have local ownership and be customized according to the different needs and aspects of each particular country.
• Independent and non-partisan: This is a fundamental requirement to ensure that the institution does not follow political interests and to demonstrate professional objectivity and excellence. The members of the body must be selected on the basis of merit and technical competence, without any reference to political affiliation.
• Mandate: The mandate, functions and tasks, as well as the interaction with the users of the said institution, must be identified from the very beginning of its existence.
• Resources: Specific resources should be allocated to meet the needs of the institution, to give it budgetary independence.
• Relationship with the legislature: The participation of an independent fiscal institution should be part of the legislative process in Mexico. In other words, it must be involved when a law initiative is being created. Also, its involvement should allow sufficient time for the institution to carry out the analyses necessary for the legislative process.
• Access to information: At all times, fiscal institutions must have access to unlimited information.
• Transparency: To generate trust for the users of the reports and analyses of the institution, full information must be available for the government and the governed.
• Communications: A direct line of communication with the media, the general public and other interested parties must be established from the beginning.
• External evaluation: To avoid falling into bad practices, external evaluation by third parties should be carried out.

Thus, the interaction and participation of an independent fiscal institution in Mexico with the tax authorities will be essential.

It would even be important for such an institution to be involved in all international tax issues that are currently in a transition period worldwide, for example taxes on the digital economy and new business models for a predominantly non-industrial economy, BEPS (Base Erosion and Profit Shifting) agreements and multilateral instruments, among others. Similarly, the participation of the independent fiscal institution in international tax forums could be sought, allowing it to understand different initiatives worldwide and replicate them in the country as necessary. Market globalization has required that international tax rules be adapted. Tax changes need to be at the forefront of international tax issues and adapted to recent changes around the world. This confirms the idea of including highly trained personnel to study, review, analyze, interpret and quantify the potential impact of any tax law modification on collection and public finances.