This Article provides a framework for examining tax issues related to privatization of non-market economies in the formerly socialist countries. These countries need to address tax issues related to privatization for at least three reasons. First, a clear and stable tax system will greatly aid the privatization process. Systematic tax rules enable participants in the process (whether holders of vouchers or investment certificates, fund managers, or purchasers of enterprises) to evaluate the potential rates of return for alternative investment opportunities. Second, a good tax system must provide rational tax treatment of traditional sources of income as well as new forms of income created as a result of privatization. Decisions about how to tax new ownership interests and new investment vehicles will affect how citizens invest in different types of economic activity. Finally, state-owned enterprises, particularly the more successful ones, provided substantial revenue to the formerly socialist countries. If countries are to replace these revenues, an effective tax regime must apply to the newly privatized companies. In short, tax decisions regarding privatization will directly influence economic development.
Privatization poses great challenges for these countries. The portion of the economy, in both percentage and absolute terms, which these governments seek to privatize far exceeds the privatization programs in either Western Europe or less developed countries. In addition, privatization is taking place in a legal and commercial framework that is either being completely replaced or substantially revised. Unlike other privatization efforts where privatized firms move into an existing tax regime, the formerly socialist countries are designing privatization programs and tax structures contemporaneously.
Privatization proposals should not dictate the design of the tax system. However, as these countries make the transition to a market economy, they require tax systems that address issues relating to privatization methods by considering both the consequences of existing and proposed tax rules and the current limitations of tax administration systems. In designing both the tax system and the privatization proposals, Ministries of Finance and privatization agencies should harmonize their efforts. This Article does not purport to provide a comprehensive, ideal scheme for taxing income from capital in the formerly socialist countries. Indeed, it recognizes that administrative capabilities, as well as political and social attitudes, often constrain tax reform.
Part I presents an overview of the different privatization methods used in the formerly socialist countries. Part II discusses some fundamental choices with respect to taxation of privatization programs. For the most part, the outlines of tax systems in mature market economies can be applied to these decisions. This Article argues, however, that governments of the newly emerging market economies should adjust these blueprints to take into account the limitations in their ability to administer a revised tax system. Part III addresses tax issues that are unique to the formerly socialist countries, and that cannot be evaluated in terms of other countries experiences. These items include transactions under mass privatization programs, relative tax treatment of privatized and state-owned enterprises, restructuring of enterprises to separate business from social service functions, and restructuring of debt. Part IV summarizes our conclusions.
I. Overview of Privatization Methods
Countries generally use four methods of privatization: direct privatization, capital privatization, mass privatization, and reprivatization. The first two forms are will known in market-oriented economies; the latter two forms are unique to the formerly socialist countries. In practice, governments use different privatization methods for different types of enterprises. …