Taxation of Capital Gains in

Developing Countries
Juanita D. Amatong *
ECONOMISTS GENERALLY AGREE that gains from capital
JC/ are a proper source of taxation in developing countries. This view
was expressed in the Technical Assistance Conference on Comparative
Fiscal Administration in Geneva in 1951 and more recently in the
Santiago Conference on Fiscal Policy for Economic Growth in Latin
America.1 A capital gains tax is on the appreciation of capital assets
and is commonly imposed only when the increase in value is realized
through sale or exchange. It should be distinguished from net wealth
tax, death duties, and other capital taxes in that these are assessed on
the total value of assets.
Capital gains in developing countries differ from those in developed
countries. In the former, capital gains are mainly from the sale or
exchange of real estate, and in the latter, chiefly from the sale of securi-
ties. Three reasons account for the preponderance of capital gains from
real estate in developing countries: the concentration of wealth held in
real estate; the dominance in the corporate sector of foreign corporations
whose shares are owned by nonresidents who are taxed abroad; and the
widespread use of bearer shares, which limits the effectiveness of taxa-
tion of capital gains from shares.
Because capital gains in developing countries result largely from
investments in land, the taxation of these gains is justifiable in that such
investments are not socially productive and are highly speculative.
Therefore, a capital gains tax discourages investments that are not in
line with the social and economic objectives of developing economies.
A capital gains tax is on an increment which generally accrues to the
high-income group and thus provides an element of progressivity in the
tax system. This function is particularly important in developing coun-
* Mrs. Amatong, a graduate of Silliman University in the Philippines and of
Syracuse University, was an economist in the Fund's Fiscal Affairs Department
when this paper was prepared. She is now on the faculty of Andres Bonifacio
College in the Philippines.
*See United Nations, Technical Assistance Administration, Taxes and Fiscal
Policy in Under-Developed Countries (New York, 1954); Joint Tax Program of
the Organization of American States, Inter-American Development Bank, and
Economic Commission for Latin America (hereinafter referred to as Joint Tax
Program, OAS/IDB/ECLA), Fiscal Policy for Economic Growth in Latin
America (Baltimore, 1965), pp. 164-65 and 187-96.
344

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 345

tries with a high concentration of wealth and/or with an otherwise

regressive tax system. A capital gains tax combined with a well-
structured progressive income tax and levies on capital would be useful
in promoting tax equity.
The lock-in effect of a capital gains tax in developing countries may
have important repercussions on the mobility and composition of invest-
ments; on the other hand, the adverse effect on investments is less serious
than claimed, judging from the general low rate structure and the
restricted nature of the capital gains tax in many developing countries.
Administration and the revenue potential of the tax are to be con-
sidered in the introduction of a capital gains tax. Such a tax is complex
and necessitates high administrative cost to make it effective. Experience
in many countries shows that the revenue yield from the tax is low.
However, the high cost of administering a capital gains tax and the low
potential yield may be partly compensated for by the fact that tax
administrators may gain access to records that aid in the administration
of the income tax and other taxes. A developing country considering the
adoption of a capital gains tax should weigh carefully its economic,
social, administrative, and revenue consequences.
This paper is divided into five sections: Section I discusses the nature
of capital gains in developing countries; Section II evaluates the factors to
be considered in the taxation of capital gains; Section III describes the
various forms under which realized capital gains are taxed in selected
countries; Section IV assesses the size of the contribution made by
capital gains tax to total revenue in these countries; and Section V
discusses some of the problems in administering a capital gains tax in
less developed countries.2

I. Nature of Capital Cains in Developing Economies

The composition of capital gains in developing countries is different
from that in advanced countries. In advanced countries, a considerable
proportion of capital gains comes from the sale of securities. In the
United States, for example, 42 per cent of the reported gross capital
gains in 1962 came from security sales and exchanges.3 In the United
2
Principally Argentina, Bolivia, Burma, Ceylon, Chile, Colombia, Republic of
China, Ecuador, El Salvador, Ghana, India, Israel, Malagasy Republic, Mexico,
Pakistan, Panama, Peru, Philippines, and Venezuela. Although Ghana repealed
its 3tax in 1967, reference is made to its provisions.
Securities here include corporate stock, U.S. Government obligations, state
and local securities, bonds, notes, and debentures. The ratio rises to 70 per cent
if all other npnphysical assets are included. U.S. Treasury Department, Internal
Revenue Service, Statistics of Income, 1962, Supplemental Report (Washington),
September 1966, pp. 21-27.

©International Monetary Fund. Not for Redistribution

346 INTERNATIONAL MONETARY FUND STAFF PAPERS

Kingdom it is estimated that the proportion of capital gains from the

sale of securities would approximate that of the United States. In con-
trast,4 in developing countries gains resulting from the sale or disposal
of physical assets, particularly in the form of real estate, predominate.
Several reasons account for this phenomenon: (1) the concentration of
wealth in developing countries held in real estate; (2) the prevalence of
foreign-owned or foreign-dominated corporations whose shares are
traded in the home country or in other foreign capital markets; (3) the
widespread use of bearer shares, which makes it difficult to enforce a
tax on capital gains arising from securities. These reasons are examined
in the following section.

CONCENTRATION OF WEALTH HELD IN REAL ESTATE

In advanced countries wealth is principally in the form of securities.
In the United States, for example, it is estimated that of total investment
by the household sector investment in real estate is 28 per cent, against
29 per cent in corporate securities.5 The pattern of investments of top
wealth holders in the United States shows that their investment in cor-
porate shares is almost double that in real estate, the former representing
40 per cent and the latter only 22 per cent of the total. Smaller
percentages are held in bonds, mortgages and notes, life insurance
reserves, etc. In contrast, wealth holding in developing countries is gen-
erally concentrated in real estate and other physical assets, while only a
small proportion is in corporate securities.6 Table 1 gives a classification
of investments for four Asian countries. Investment in corporate stocks
is on average 6.1 per cent of total investments in Malaysia, 23.3 per
cent in the Philippines, 6.5 per cent in India, and a negligible 0.1 per
cent in Ceylon. Investments in physical assets (land, residential con-
struction, and consumer durables) constitute a major proportion of the
total investment in these countries, ranging from 39 per cent to 67 per
cent. In Ceylon, 60 per cent of total investment was in real estate. In the
4
See, for example, Ifigenia M. de Nayarrete, "El Impuesto a las Ganancias de
Capital en la Teoría y en la Práctica Fiscal," El Trimestre Económico (Mexico,
D.F.), April-June 1963, p. 210; Ram Niranjan Tripathy, Public Finance in
Under-Developed Countries (Calcutta, 1964), p. 142; J.J. Puthucheary, Ownership
and5 Control in the Malayan Economy (Singapore, 1960), pp. 136-37.
Estimates were based on the estate multiplier method as used by Robert J.
Lampman, The Share of Top Wealth-Holders in National Wealth, 1922-56
(National Bureau of Economic Research, Princeton University Press, 1962),
pp.6 157 and 192-93.
A good socioeconomic study of savings and wealth in South Asia is found
in United Nations Educational, Scientific and Cultural Organization, The Role of
Savings and Wealth in Southern Asia and the West, ed. by Richard D. Lambert
and Bert F. Hoselitz (Paris, 1963).

©International Monetary Fund. Not for Redistribution

 TABLE 1. SELECTED ASIAN COUNTRIES: PATTERN OF ASSETS IN HOUSEHOLD SECTOR

TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES

(In per cent of total)

Financial Assets Physical Assets

Currency
and net Residential
bank Corporate construc- Grand
Country deposits securitiesi Others 2
Total tion Others 3 Total Total
5
Ceylon, 1962/63 -0.4* 0.1 33.6 33.3 59.7 7.0 β 66.7 100.0
India, 5-year average
(1959/63) 20.0 6.5 20.6 47.1 52.9 100.0
Malaysia, 5-year average
(1954/58) 5.4 6.1 30.3 41.8 58.2 100.0
Philippines, 5-year average
(1956/60) 19.8 23.3 17.5 60.6 28.6 10.8 39.4 100.0

Sources: Central Bank of Ceylon, Report on the Sample Survey of Consumer Finances, 1963 (Colombo, 1964),
pp. 122-25; Reserve Bank of India Bulletin, March 1965, p. 324; Richard W. Hooley, Saving in the Philippines, 1951-
1960 (University of the Philippines, Manila, 1963), pp. 22-32; Indian Institute of Asian Studies, Savings in Asian Econ-
omy, ed. by M. R. Sinha (Bombay, 1965), pp. 198-214.
1
In the Philippines, corporate securities represent net investment in new security issues of corporations and amounts
paid as capital subscriptions in partnerships and proprietorships. For India, this column represents investments in new
and old
2
issues of corporations and cooperatives.
Includes such contractual assets as insurance premiums, contributions to provident funds, investments in mutual funds,
and net
3
claims on the government.
4
Includes consumer durables.
5
Includes government bonds and savings certificates.
6
Includes land.
Excludes consumer durables.

347
©International Monetary Fund. Not for Redistribution
348 INTERNATIONAL MONETARY FUND STAFF PAPERS

Philippines, residential construction constitutes 29 per cent of the total

investment; physical investment represents 39 per cent of the total
household sector investment.
A survey of the pattern of urban savings in the city of Dacca,
Pakistan showed a similar pattern of investments—39.4 per cent of total
investments is in real estate while a negligible 0.04 per cent is invested
in corporate shares.7
Investment in real estate in developing countries is explained by
several factors, including the lack of developed capital markets, the
holding of land as a hedge against inflation, and the desire to gain long-
range stability, political power, and social prestige.
A continuing pressure on land in many developing countries—arising
from a combination of factors, such as population growth, urbanization,
general economic development, and the preference for real estate
investment—has the effect of inflating real estate values and results in
the accrual of capital gains for the real estate owners.
In many African countries, however, land is largely communal
property. The tribe or the community has the right to the land, and
the individual members have only the right of use. Even if individual
ownership is possible, uncertainty of title often exists. These factors
inhibit the sale of land.8

FOREIGN CORPORATIONS
The fact that many, if not the majority, of the big businesses in
developing countries are foreign-owned or foreign-dominated means that
their securities are generally bought by nonresident investors who nor-
mally are not subject to the capital gains tax in the country in which the
business is carried on. A survey of the largest enterprises in Argentina,
Brazil, Chile (excluding copper and nitrate producers), Colombia, and
Mexico shows a pattern of ownership in which foreign private capital
and domestic private capital share about equal percentages of ownership
in 3 of the 5 countries (Table 2). Similar statistics are not available for
Africa, but a National Planning Association study indicates that foreign
companies dominate the modern African private sector, particularly in
finance, manufacturing, and the extractive industries.9
7
M . Habibullah, Pattern of Urban Savings: A Case Study of Dacca City
(Bureau
8
of Economic Research, Dacca University, 1964), pp. 25-48 and 140-41.
For a discussion of land tenure in Africa, see African Agrarian Systems, ed.
by 9 Daniel Biebuyck (Oxford University Press, 1963), pp. 52-64.
Theodore Geiger and Winifred Armstrong, The Development of African
Private Enterprise (National Planning Association, Washington, March 1964),
pp. 21-23 and 62-76.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 349

TABLE 2. SELECTED LATIN AMERICAN COUNTRIES: OWNERSHIP OF LARGE

ENTERPRISES 1
(In per cent of total)

Argentina 2 Brazil Chile 3 Colombia 4 Mexico 5

Government 61.3 59.1 63.3 54.1 82.2
Private
Domestic 20.5 20.0 18.0 39.1 13.9
Foreign 18.2 20.9 18.7 6.1 3.9

Source: Based on a survey of the 30-32 largest enterprises as reported by Frank

Brandenburg in The Development of Latin American Private Enterprise (National
Planning Association, Washington, May 1964), pp. 50-66.
1
2
Size of the firm is determined by capital and reserves.
3
Excluding petroleum exploration and development companies.
4
Excluding copper and nitrate exporters.
Excluding petroleum companies and two state enterprises owing to unavaila-
bility of reliable data. Percentages do not total 100 because of the omission of the
Ecuadoran
5
Government's ownership in a shipping firm.
Mexican law stipulates that at least 51 per cent of ownership must be Mexican.

In Malawi, the importance of foreign capital may be gleaned from

the income tax assessment in 1965. Foreign companies (incorporated
outside Malawi) accounted for 39 per cent of the total taxable income
reported; inclusion of foreign-owned companies incorporated in Malawi
would raise this ratio.10 Foreign capital also has made an important
contribution to the industrial development of Jamaica and of Trinidad
and Tobago. At the end of 1964, foreign capital represented 58.4 per
cent of total capital invested in approved enterprises in Jamaica. In
Trinidad and Tobago, a survey in 1959 showed that foreign capital was
responsible for 83.4 per cent of the total capitalization of 52 firms.11
Foreign equity investment in Pakistan over the period April 1959 to
December 1963 accounted for 44 per cent of the total investment, the
remainder being owned domestically.12
Foreign enterprises in developing countries operate as either branches
or subsidiaries. With foreign direct investment in the form of branches
and subsidiaries in contrast to portfolio investment or joint ventures,
control remains with the parent companies, and there is less incentive
to tap the domestic supply of capital or to promote domestic participa-
10
Department of Taxes, Income Tax Statistics (Blantyre, Malawi, February
1967),
11
Table 4.
George E. Lent, "Tax Incentives for Investment in Developing Countries,"
Staff12 Papers, Vol. XIV (1967), p. 301.
Report of the Economic Adviser to the Government of Pakistan, Economic
Survey of Pakistan, 1963-64 (Ministry of Finance, Rawalpindi, 1964), pp. 44-45.

©International Monetary Fund. Not for Redistribution

350 INTERNATIONAL MONETARY FUND STAFF PAPERS

tion. For example, the value of German investment in developing coun-

tries between 1952 and 1961 consisted of 54 per cent in the form of
subsidiaries and branches and 46 per cent in minor participations.13 U.S.
direct investments in Africa, Asia, and Latin America are mainly those
in which control rests with the parent companies. This is shown both in
value of investments and in number of firms established between 1951
and 1957. U.S. investments in those firms in developing countries in
which U.S. ownership comprises at least 95 per cent accounted for
87 per cent of the total value of U.S. direct investments; 77 per cent of
the total number of these establishments was made up of firms with
95 per cent or more of U.S. ownership.14 Capital requirements that
are met by parent companies and by retained earnings deter domestic
participation in the equity holding of foreign enterprises.

USE OF BEARER SHARES

The use of bearer shares, especially popular in Latin America, also
inhibits the taxation of capital gains from shares in developing countries.
Bearer shares are transferable without any formal registration on the
books of the corporation, and thus permit anonymity of ownership.15
Outside Latin America, bearer shares are used in most European coun-
tries and in Ghana, India, and Israel. Twelve of 19 countries included in
this study have a capital gains tax on sale of securities; but only 6 of the
12 countries which permit the issue of bearer shares have a tax on
capital gains arising from sale or exchange of securities (Table 3).

II. Considerations Involved in Taxing Capital Gains

The taxation of capital gains in developing countries may be justified
on equity and economic grounds. On equity grounds, capital gains
enhance a person's taxpaying capacity. Although realized capital gains
13
Developing countries of Africa (excluding South Africa), Asia (excluding
Japan), Central America (including Mexico), and South America. See Helmut
Giesecke, Industrial Investments in Developing Countries (Hamburg Archives
of 14
World Economy, Hamburg, 1963), p. 237.
Giesecke, ibid., p. 240. More recent data on long-term private investments
in developing countries by industrial countries show an increasing trend, but
classification as to ownership control is not available. See Marcus Diamond,
"Trends in the Flow of International Private Capital, 1957-65," Staff Papers,
Vol.
15
XIV (1967), pp. 1-42.
Alexandre Kafka ascribes the presence of bearer shares in developing coun-
tries to the lack of confidence in the nondiscriminatory treatment of individual
property rights. "The alternative to bearer shares may often be capital flight. . . .
the transferability of registered shares, which is often made difficult by the lack
of institutions such as transfer agents or by the sheer problem of communica-
tions." Kafka's comments on the paper, "Corporate Income Taxation in Latin
America," Joint Tax Program, OAS/IDB/ECLA, Fiscal Policy for Economic
Growth in Latin America (cited in footnote 1), p. 258.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 351

TABLE 3. SELECTED COUNTRIES: BEARER SHARES AND TAX ON CAPITAL GAINS

ON SHARES

Bearer Shares
Permitted Tax on Shares

Africa
Ghana Yes No
Malagasy Republic No No
Asia
Burma No Yes
Ceylon No Yes
China, Republic of No Yes*
India Yes Yes
Pakistan No Yes
Philippines No Yes
Central and Latin America
Argentina Yes No
Bolivia Yes No
Chile Yes Yes
Colombia Yes No
Ecuador Yes Yes
El Salvador No Yes 2
Mexico Yes Yes
Panama Yes No
Peru Yes No
Venezuela Yes Yes
Middle East
Israel Yes Yes3
1
2
Except those issued by closed corporations and held for more than one year.
3
Gains reinvested in approved enterprises within 15 months of sale are exempt.
Except those traded on the stock exchange.

are a small fraction of total income, they represent a higher proportion

of the income of the high-income recipients than that of those in the
low-income brackets. Therefore, taxation of such gains is a progressive
element in the tax system and a force for reducing the high concentra-
tions of wealth existing in many developing countries.
An important economic function of the capital gains tax is to curb
speculation—especially in real estate, the values of which have been
rising owing to population growth, urbanization, and development
programs—and to encourage investments which are economically pro-
ductive. Adverse economic effects of a capital gains tax on the supply
of savings and on the mobility of capital need to be weighed carefully
against possible undesirable effects on the allocation of investment which
may occur when ordinary income is taxed and capital gains are tax free.
Few developing countries are adequately prepared to administer a
capital gains tax because of its complex and sophisticated nature. Unless
such a tax is administered effectively, evasion and avoidance are
encouraged and inequities result.

©International Monetary Fund. Not for Redistribution

352 INTERNATIONAL MONETARY FUND STAFF PAPERS

EQUITY CONSIDERATIONS

Modern income taxation is based on the relative economic position

of persons. Since capital gains increase a person's taxable capacity,
their taxation can be supported on equity grounds.16

Concentration of gains
The equity reason for taxing capital gains in developing countries is
emphasized by the high concentration of wealth in the hands of the few.
Capital gains accrue only to those who own property, and failure to tax
these gains would discriminate in favor of property owners and would
encourage reinvestment of these gains in assets which would perpetuate
severe inequalities in income and wealth.17
Another argument for the inclusion of capital gains in the tax net is
the relatively low taxation of real estate in most developing countries.
There are two reasons for this: (1) the very low assessment values of
real property subject to tax and (2) the low rates of property taxation.18
The forms of property taxation that have been suggested to supplement
the real property tax are a net wealth tax, a land increment tax, a capital
gains tax, and other capital taxes, such as estate and gift taxes. Owner-
ship of property, particularly financial assets, may be encouraged if a
capital gains tax is limited to real estate, but a net wealth or estate tax
would be levied on these assets.
The distribution of capital gains by income classes shows that, as
income increases, capital gains are an increasing fraction of the total
16
For a discussion of the different kinds of capital gains and their effect on
taxable capacity, see Nicholas Kaldor, An Expenditure Tax (London, 1955),
pp.1741-46.
In the United Kingdom, the Memorandum of Dissent of the Royal Com-
mission on Taxation of Profits and Income argued for the inclusion of capital
gains in income taxation on the grounds that *'. . . capital gains increase a
person's taxable capacity by increasing his power to spend or save; and since
capital gains are not distributed among the different members of the taxpaying
community in fair proportion to their taxable incomes but are concentrated in
the hands of property owners (and particularly the owners of equity shares)
their exclusion from the scope of taxation constitutes a serious discrimination
in tax treatment in favour of a particular class of taxpayer." Royal Commission
on the Taxation of Profits and Income, Final Report, Cmd. 9474 (London, 1955),
p. 365.
18
In Colombia, the OAS/IDB mission reported that the average effective rate
of the real property tax for all municipalities would be about $4.00 per $1,000.
Joint Tax Program, OAS/IDB, Fiscal Survey of Colombia (Baltimore, 1965),
p. 145. The OAS/IDB mission to Panama also recommended an increase in the
property tax from 0.75-1.5 per cent to 1-2 per cent, because of the "compara-
tively light burden borne by the owners of land and buildings." Joint Tax Pro-
gram, OAS/IDB, Fiscal Survey of Panama: Problems and Proposals for Reform
(Baltimore, 1964), pp. 62 and 79.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 353

income. For example, in India, the ratios of capital gains to total

assessed income of individuals for the fiscal year 1962/63 range from
0.02 per cent to 6.52 per cent for the income brackets between Rs 3,001
and Rs 5,000, and over Rs 500,000, respectively. The distribution of
capital gains among resident taxpayers in Ceylon also shows that capital
gains as a percentage of assessed income are higher among the high-
income groups. A more detailed analysis of the distribution of capital
gains by income brackets in Ceylon and India is shown in Tables 4 and 5.
Similar distribution of capital gains is revealed in the U.S. data.19
TABLE 4. CEYLON: DISTRIBUTION OF CAPITAL GAINS AS PERCENTAGE 1OF TOTAL
ASSESSED INCOME OF RESIDENT INDIVIDUALS, 1961/62-1964/65
Income Bracket
(In rupees) 1961/62 1962/63 1963/64 1964/65
Less than 2,500 0.36 —
2,501- 5,000 0.02 0.01 — 0.01
5,001- 7,500 0.03 0.04 0.08 0.01
7,501- 10,000 0.03 0.11 0.01 0.01
10,001- 15,000 0.23 0.55 0.04 0.02
15,001- 20,000 0.13 0.54 0.10
20,001- 25,000 0.13 0.09 0.26 —
0.18
25,001- 30,000 0.68 2.02 0.10 0.08
30,001- 40,000 1.50 2.91 0.15 0.37
40,001- 50,000 0.42 0.75 0.41 0.41
50,001- 75,000 4.00 8.00 1.96 0.76
75,001-100,000 0.36 1.15 0.52 0.97
More than 100,000 3.40 1.92 1.14 1.79
Sources: Administration Report of the Commissioner of Inland Revenue
(Colombo), 1962, 1963, 1964, and 1965.
1
The ratios are derived by dividing assessed capital gains by assessed total
income in each income bracket.

Failure to tax capital gains accruing to those who receive high incomes
puts a greater relative burden of the income tax on those who do not
enjoy such gains. If capital gains are not taxed or if they are given
preferential treatment, there is an incentive to convert ordinary income
to capital gains.
Unearned increment
Economic development involves the building of roads, public high-
ways, and harbors, the installation of power plants, and other public
19
In the United States, net capital gains as a percentage of the adjusted gross
income (AGI) were 18 per cent of AGI below $10,000; 11 per cent between
$10,000 and $50,000; 21 per cent between $50,000 and $100,000; and 29 per
cent over $100,000. U.S. Treasury Department, Internal Revenue Service, op. cit.,
p. 70.

©International Monetary Fund. Not for Redistribution

354 INTERNATIONAL MONETARY FUND STAFF PAPERS

TABLE 5. INDIA: DISTRIBUTION OF CAPITAL GAINS OF INDIVIDUALS AS PERCENTAGE

OF TOTAL ASSESSED INCOME, 1960/61-1962/63 *

Income Bracket
(In rupees) 1960/61 1961/62 1962/63
Less than 3,000 0.21 0.13 2.642
3,001- 5,000 — 0.02
5,001- 7,500 0.11 —
0.1 0.21
7,501- 10,000 0.17 0.29 0.27
10,001- 12,500 0.16 0.30 0.28
12,501- 15,000 0.22 0.28 0.34
15,001- 20,000 0.26 0.38 0.42
20,001- 25,000 0.2 0.47 0.41
25,001- 30,000 0.27 0.39 0.48
30,001- 40,000 0.43 0.47 0.54
40,001- 50,000 0.34 0.35 0.65
50,001- 60,000 0.38 0.60 0.59
60,001- 70,000 0.60 0.5 0.74
70,001-100,000 0.35 0.82 0.66
100,001-200,000 2.03 1.79 1.84
200,001-300,000 2.39 2.68 3.55
300,001-400,000 2.85 3.53 7.19
400,001-500,000 2.60 7.24 3.73
More than 500,000 2.97 4.1 6.52

Sources: Central Board of Revenue, All-India Income-tax Revenue Statistics,

1960/61 and 1961/62; for 1962/63, the publication was issued by the Central
Board of Direct Taxes.
l
ThQ ratios are derived by dividing assessed capital gains by assessed total
income
2
in each income bracket.
The unusually high ratio of 2.64 in 1962/63 is explained by the number of
assessees: 461 in 1962/63; 23 in 1960/61; and 22 in 1961/62.

improvements. Growth of the economy results in rising land values as

increases in population and incomes press on the limited resources, and
property values increase without the deliberate effort of the owners.
Proponents of the capital gains tax argue that gains arising from projects
created by the community are unearned increments, and that a tax on
them would impose a small sacrifice on the taxpayer. The introduction
of the capital gains tax in India was based on the unearned increment
argument. In presenting the budget for 1947/48, the Minister of
Finance said, "there is stronger justification for taxing these profits than
there is for taxing ordinary income since they represent what is properly
described as unearned increment." 20 In justifying a capital gains tax in
Malaysia in 1965, the Minister of Finance said "these gains have
accrued not as a result of the taxpayer's own exertions, but purely
20
R. N. Bhargava, Public Finance, Its Theory and Working in India (Allahabad,
India, 1954), p. 279.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 355

fortuitously, often as a result of the growing prosperity of the society in

which he is fortunate enough to live and to be allowed to operate." 21
The unearned increment theory of taxation has been advanced to
justify the tax on land values. This theory holds that increases in land
value are not the result of the effort or skill of owners but of social
factors and hence may be fairly subjected to special taxation to finance
community needs. Such taxation, moreover, has no adverse effect on
economic incentives.22 The capital gains tax in developing countries
usually applies mainly to real estate gains, and it may be regarded as a
good substitute for a special tax on increments in land values.

EFFECTS OF SPECULATION IN LAND AND OF INFLATION

Speculation in real estate arises from inflation, population growth,
and urbanization, which have characterized most of the developing
countries. A notable feature of land prices during an inflationary period
is that they increase much faster than the general price index. In Chile,
for example, in 1963 the average price index (1955 = 100) of registered
real estate sales rose to 865, while the wholesale price index registered
671.23 In Colombia, where inflation was less pronounced than in Chile,
in 1965 the average price index (1955 = 100) of registered real estate
sales was 615, and the wholesale price index was 317.24
The historical development of land prices in Israel has also shown
that population growth, urbanization, and inflation have pushed land
prices upward. The demand for land in the Tel Aviv region and other
urban centers has resulted in the prices of land increasing by as much
as 150 times. For example, in the northern quarter of the Tel Aviv Yafo,
land which was priced at I£75 per square meter in 1953 was sold for
!<£ 1,000 per square meter in 1963. In the coastal part of Bat Yam, the
price of land has increased from I£l per square meter in 1953 to
I£150inl963.25
21
Budget speech of the Minister of Finance, 1965 Budget (Kuala Lumpur,
November 1964), p. 47. In 1966 the capital gains tax was abolished for admin-
istrative
22
reasons.
For a discussion on the taxation of increments in land value, see George E.
Lent,
28
"The Taxation of Land Value," Staff Papers, Vol. XIV (1967), pp. 101-10.
24
Dirección de Estadística y Censos, Boletín (Santiago), 1960-64.
Departamento Administrativo Nacional de Estadística, Boletín Mensual de
Estadística (Bogotá), October 1966; Revista del Banco de la República (Bogotá),
October
25
1966.
Paper submitted by H. Darin-Drabkin to the Seminar on the Supply, Develop-
ment and Allocation of Land for Housing and Related Purposes (Economic Com-
mission for Europe, Paris, 1965), p. 170.

©International Monetary Fund. Not for Redistribution

356 INTERNATIONAL MONETARY FUND STAFF PAPERS

The following quotation describes land speculation in Israel:

. . . unlike these two types of demand for land earmarked for building,
there has been the demand for land as a value-accumulating capital. This
demand, which is by nature speculative, is governed by three main motives:
First, since there have always existed in Israel certain elements of under-
development in its economy, and consequently investment possibilities were
limited, the capital was often geared towards the purchase of land. This
was most conspicuous in periods when the accumulation of capital in the
country was speeded up. Secondly, owing to long periods of inflation,
investment in land was, in many cases, the best way to secure the value of
currency. One more fact can be added to the above factors: As years went
by, it became obvious that the prices of land were constantly rising, generally
at a faster rate than other prices. Consequently, more people started buying
land, expecting a price increase and high profits. This trend was the more
visible in view of the fact that the capital market in Israel was undeveloped and
the expectancy for a land price increase was of the same nature as the
expectancy, in industrial countries, for an increase of stock value.26
The case for a capital gains tax is made on the grounds that invest-
ments of this nature are speculative and not socially productive and
that a capital gains tax is a suitable instrument for tapping speculative
gains. The property tax is not well adapted for this purpose, owing to
the typically wide gap between cadastral and current market values.
In Israel, the strengthening of the capital gains tax on land (Land
Betterment Tax) in 1963 is said to have brought land speculation to a
standstill.27 Many developing countries that have recently proposed or
enacted capital gains taxes have done so in order to curb speculation in
land values, e.g., Colombia, Ghana, and Korea.
It is argued that the appreciation of capital assets during inflation is
merely a paper gain and therefore illusory. Because inflation raises the
nominal value of the assets without a corresponding increase in real
values, some economists oppose a tax on capital gains under inflationary
conditions. In rebuttal, it is argued that a rising price level affects people
in different ways. Holders of such assets as corporate shares and urban
real estate may make real gains because the value of their property
increases more rapidly than the general price level, while holders of
bonds and of other fixed money claims suffer real losses. A capital gains
tax is defended as a means of reducing such inequities.
Others contend that an adjustment for general price changes should
be made by applying a suitable price index (e.g., the consumer price
index) and that gains or losses should be recognized only to the extent
of changes in deflated values. The correction factor is determined by
dividing the price index for the year of sale of the asset by the corre-
26
27
ibid., p. 166.
E. W. Klimowsky, "Capital Gains Taxation in Israel—Modifications,"
Bulletin for International Fiscal Documentation, Vol. XVIII (1964), p. 455. See
also Lent, "The Taxation of Land Value" (cited in footnote 22), p. 109.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 357

sponding index for the year of the purchase.28 The original cost of the
asset is multiplied by the correction factor to obtain the adjusted cost.
The difference between the sales price and the adjusted cost would give
the gain to which the capital gains tax rate is applied to determine the
tax liability. Not only would administrative complications be involved
but, with any adjustment in price, the stabilizing power of the tax in
periods of inflation would be lost.
In opposing the application of deflationary factors, the members of
the minority of the British Royal Commission in their Memorandum of
Dissent stated
Equity cannot be secured by ignoring relative changes in the taxable capacities
of different property owners; and, if it were held to be desirable (and
possible) to exempt that part of capital appreciation which was com-
mensurate with the general price rise, it would follow that any lesser degree
of capital appreciation should be regarded as a loss. It is not our view that
the tax code should be so devised as to insure taxpayers against the risk of
inflation. Indeed we should consider any such intention singularly inappro-
priate, for taxation must be regarded as one of the principal weapons in
the armoury of the central government for combatting inflation.29
However, others believe that on equity grounds the capital gains
arising from rapid inflation should remain untaxed. Muten supports the
idea of freeing inflationary gains from taxation:
Generally, one might say that the worse the inflation is in any country, the
better are the reasons for making the tax system such as to diminish its
hazardous effects, either through introducing a valoristic system or through
abstaining from capital gains taxes.30
A compromise solution would be revaluing the assets subject to the
capital gains tax and taxing only those gains on assets held for a certain
number of years; after that, no tax would be charged on capital gains.
For example, in Sweden, gains from shares and from movable property
held over five years and from real property held ten years or more are
tax free.31
28
Carl W. Cloe, "Capital Gains and the Changing Price Level," National Tax
Journal, Vol. V (1952), pp. 209-10. To use Cloe's example, if the consumer
price index in 1951 (the year of sale) is 185.6 and the corresponding index in
1856
1945 (the year of purchase) is 128.6, the correction factor is * ' , , or 1.44.
29
128.6
Royal Commission, op. cit., p. 366.
30
Leif Muten, "Some General Problems Concerning the Capital Gains Tax,"
British
31
Tax Review, May-June 1966, p. 141.
The tax on gains from sale of shares in Sweden has recently been included in
the tax base. Long-term capital gains on real property (held ten years or more)
are recommended for taxation by the Land Value Committee. See Martin Norr
and Nils G. Hornhammar, "Extension of Capital Gains Taxation in Sweden,"
Canadian Tax Journal, Vol. XIV (1966), pp. 413-21.

©International Monetary Fund. Not for Redistribution

358 INTERNATIONAL MONETARY FUND STAFF PAPERS
EFFECTS ON ECONOMIC DEVELOPMENT
An appraisal of a capital gains tax includes particularly its effect on
investment. Investment is one of the most important variables in
economic development, and capital gains taxation is directly related to
the supply of savings, the composition of investments, and the mobility
of capital.
In the following analysis, it is important to bear in mind the preferen-
tial treatment of capital gains given in the majority of the countries
studied.

Effects on the supply of savings

In order to analyze the effect of a capital gains tax on savings, it is
important to know who are the savers and what effect the tax has on
incentives to save. In developing as well as developed economies, savings
ratios are high among the high-income recipients and low or negative
for those in the low-income brackets.32 In many preindustrial and
primary producing countries, landowners frequently are the richest
members of the community and a principal source of savings. Savings
by other members of the community, particularly the urban commercial
class, are also important.
It has been held that the capital gains tax reduces savings more than
an income tax of the same yield because the capital gains tax, being a
nonrecurrent tax, is more likely to be paid out of capital. Also, it is
argued that the income from capital gains cannot be depended upon to
meet consumption expenditures and that those who realize capital gains
are not likely to increase consumption substantially nor likely to reduce
their consumption because of a capital gains tax.83 It is suggested that
savings are reduced by "something not far from the amount of revenue
produced." 84
Concessionary rates, combined with such provisions as exemptions
and nontaxation of gains transferred at the time of death, mitigate the
32
There are reserved opinions on this statement pointing to the fact that in
developing countries savings behavior, as indicated by family budget studies, is
measured by average savings ratios rather than by the marginal propensities to save.
It is held that the latter differs less between income classes. See Richard Goode,
"Taxation of Saving and Consumption in Underdeveloped Countries," National
Tax33 Journal, Vol. XIV (1961), pp. 309-10.
See, for example, Lawrence H. Seltzer, The Nature and Tax Treatment of
Capital Gains and Losses (National Bureau of Economic Research, Inc., New
York, 1951), p. 87, and Henry C. Wallich, "Taxation of Capital Gains in the
Light of Recent Economic Developments," National Tax Journal, Vol. XVIII
(1965),
8
pp. 140-45.
* Wallich, ibid., p. 144.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 359

effect of the tax on savings. It is argued, moreover, that in developing

countries, the capital gains tax may influence to a large extent savings
that would be directed toward investment in real estate and other assets
of low social productivity. The role that the capital gains tax, together
with other taxes, plays in penalizing undesirable investment is under-
scored by Tripathy:
. . . taxes should penalize the diversion of savings into land, buildings,
inventories, and similar investments held for speculative gain or prestige
purposes rather than productive uses. In order to achieve these ends such
tax instruments as land value increment taxes, taxes on idle land, pro-
gressive taxes on either net worth or real estate holdings and tax on capital
gains should be imposed. It is necessary to tax capital gains in the developing
countries because they provide an incentive for35speculative investments which
draw savings from the developmental channels.

Effects on the composition of investments

Preferential taxation of capital gains influences the composition of
investment in that a capital gains tax at a low rate induces the shifting
of investments to those which yield capital gains from those which yield
income taxed at a higher rate, e.g., dividends, interest, and rent. Also,
lower tax rates on capital gains than on ordinary income favor the
retention of profits in corporations rather than their distribution, reduc-
ing the availability of funds for investment in new enterprises and other
outlets.36 Furthermore, it is contended that a preferential capital gains
tax that induces retention of earnings decreases the liquidity and turn-
over in the capital market, and lessens the efficiency of the market
mechanism in allocating resources. In developing countries a need to
develop capital markets and to encourage the diversification of invest-
ments is very important.37
In many of the countries studied the preferential rates on capital gains
would encourage the reallocation of investment resources. These low
rates on capital gains may induce some shifting of investments toward
assets producing capital gains. Some of these investments generally
represent venture capital, which contributes in an important way to
economic development,38 but others are speculative investments in real
35
36
Tripathy, op. cit., p. 94.
Martin David, "Economic Effects of the Capital Gains Tax," The American
Economic
37
Review, Vol. LIV (1964), pp. 296-97.
Ragnar Nurske (Problems of Capital Formation in Underdeveloped Countries,
Oxford University Press, 1953, pp. 4-31) has expounded the theory that in
developing countries diversification of investments is a key factor in increasing
the size of the market. The latter is said to be the principal limiting factor in the
inducement
28
to invest.
W. W. Rostow (The Stages of Economic Growth, Cambridge University
Press, I960, pp. 46-57) believes that three factors are responsible for take-off in
the historical economic development of countries: (1) a supply of loanable

©International Monetary Fund. Not for Redistribution

360 INTERNATIONAL MONETARY FUND STAFF PAPERS

estate, which contribute nothing to industrialization and productive

activities.
Many developing countries have attempted to influence the alloca-
tion of investment along desired lines by exempting from tax the gains
from the sale of certain securities and of agricultural land. To stimulate
investment in shares, Argentina, El Salvador, Israel, and Mexico have
excluded gains from the sale of certain securities.

Effects on the mobility of capital

Considerable emphasis has been placed on the lock-in effect of a
capital gains tax in inhibiting the sale of capital assets which have
appreciated in value.39 The result is an increase in the reservation price
of the asset and a reduction in the flow of investment. In developing
countries, the lock-in argument is of special importance because of
the need for greater investment mobility. It is alleged that the capital
gains tax discourages a shift in capital from the unproductive investments
in real estate to more venturesome undertakings in commerce and
industry; consequently, funds are withheld and unavailable for the
development of capital markets.
Thus, in the Philippines, for example, in 1963 a bill to suspend the
capital gains tax for five years passed in Congress, but was vetoed
by the President.40 The explanatory note to the House Bill No. 2794
stated that its purpose was "to unlock immobile capital . . . funds
locked up in land holding [that] could be mobilized and made instru-
ments of production if some inducements can be given to the owners
to dispose of their holdings for purposes of investments." In explaining
the repeal of an earlier capital gains tax in India in 1949, the Minister
of Finance stated that the tax was having a bad psychological effect on

funds; (2) a source of entrepreneurship; and (3) the presence of leading sectors
in the take-off stage. The last two factors are highly associated with risk taking.
Rostow concludes that: "At any period of time it appears to be true even in a
mature and growing economy that forward momentum is maintained as the result
of rapid expansion in a limited number of primary sectors, whose expansion has
significant
39
external economy and other secondary effects."
See, for example, Jonathan A. Brown, "The Locked-in Problem," pp. 367-81,
and Walter W. Heller, "Investors' Decisions, Equity, and the Capital Gains Tax,"
pp. 381-90, in Joint Committee on the Economic Report, Federal Tax Policy
for Economic Growth and Stability (84th Congress, 1st Session, Washington,
November
40
9, 1955).
The approved bill was vetoed by the President on the grounds that it would
cause a loss of revenue of no less than IP 50 million annually, or a total of
Ψ 300 million for the duration of the said exemption, without any reasonable
assurance of attaining the objectives behind the proposed grant of exemption.
(Reported in "President Macapagal's Veto Message on the Capital Gains Bill,"
Philippine Tax Journal, July 1963, pp. 373-74.)

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 361

investment and hindered the movement of capital.41 Late in 1965 Israel

exempted from capital gains tax gains on shares traded on the stock
exchange because of its alleged dampening effect on the stock market.
The lock-in effect of the capital gains tax has been questioned. In the
United States, where capital gains have been taxed since 1913, the
validity of the lock-in argument has been attacked. The empirical
evidence discounts the heavy weight usually charged to the lock-in
effect of the tax. A recent survey in the United States of taxpayers with
incomes of $10,000 and over revealed that only 19 per cent of those
interviewed stated that they did not sell their appreciated assets because
of taxes, while 61 per cent did not sell because of the lack of better
investment opportunities.42
The influence of the capital gains tax on the locking-in of invest-
ment depends upon the level of rates and the structure of the tax itself.
A very high rate will encourage investors to hold on to their assets in
order to save on taxes. The holding-period provision also influences
the timing of the sale of capital assets. In many countries short-term
gains are charged at the ordinary income tax rate, while long-term gains
are taxed at preferential rates. Investors may postpone the sale of assets
in order to take advantage of reduced tax rates on long-term gains.
Another factor concerns the definition of realization as applied to capital
gains. If realization is construed as only the sale or transfer for a con-
sideration and does not include transfer at death, the tendency, especially
for older people, is to retain appreciated assets to avoid the tax.

ADMINISTRATIVE DIFFICULTIES
One of the most serious objections to a capital gains tax is the
unusual administrative burden which such a tax entails. To administer
the capital gains tax properly requires records of property held, the
length of time held, original costs and related costs, sales price, etc.
Developing countries are ill-equipped to cope with the task of recording,
unearthing old records, revaluating assets, etc. Inadequate real estate
records, including the lack of up-to-date property assessment rolls and
the underreporting of sales prices, contrive to make the proper admin-
istration of the capital gains tax difficult. Honest taxpayers pay their
41
See Nicholas Kaldor, Indian Tax Reform (Indian Ministry of Finance, New
Delhi,
42
1956), p. 32.
Robin Barlow, Harvey E. Brazer, and James N. Morgan, Economic Behavior
of the Affinen^ (The Brookings Institution, Washington, November 1966),
pp. 118-20. A similar conclusion was reached by a group at Harvard. Of the 746
investors interviewed, only 5.7 per cent reported that the long-term capital gains
tax influenced their investment decision. See J. Keith Butters, Lawrence E.
Thompson, and Lynn L. Bollinger, Effects of Taxation: Investments by Indi-
viduals (Cambridge, Massachusetts, 1953), p. 339.

©International Monetary Fund. Not for Redistribution

362 INTERNATIONAL MONETARY FUND STAFF PAPERS

liabilities while others avoid or evade the tax by resorting to under-the-

table deals or other avoidance schemes.
The widespread use of bearer shares makes it possible to transfer
shares with complete secrecy and to leave gains untaxed.48 As a result,
the capital gains tax tends to rest on real estate transactions, leaving
untaxed a large volume of transactions in shares and other claims to
property.

III. Capital Gains Tax Structure of Selected Developing

Countries
The tax treatment of capital gains varies widely in developing coun-
tries. At one extreme are countries which exempt capital gains from
taxation: Nigeria, Kenya, and Uganda (which have followed the British
tradition44 of excluding capital gains from the concept of income), the
Dominican Republic, and Nicaragua. At the other extreme, the Malagasy
Republic taxes capital gains at rates higher than those applicable to
ordinary income, and the Republic of China, Guatemala, Honduras, Iraq,
and Venezuela tax at the full income tax rate. In between are a number
of countries which tax capital gains at preferential rates.

DEFINITION OF CAPITAL ASSETS

Capital gains are generally defined as gains arising from the sale or
exchange of capital assets. Capital assets subject to a capital gains tax
are defined by statutes and generally represent only a portion of the
net wealth of a person or a business.45 Gains or losses from the sale of
assets not comprehended in the capital asset concept are taxed as
ordinary income at income tax rates rather than at the capital gains
tax rate, which is generally lower. Two different approaches are followed
in identifying "capital assets." One includes all assets except those
specifically excluded; the other approach specifies those assets chargeable
to tax. When the latter concept is used, the assets specified may be quite
43
For a discussion of the administrative problem involved in the discovery
of assets other than real estate, see Noboru Tanabe, "The Taxation of Net
Wealth,"
44
Staff Papers, Vol. XIV (1967), pp. 151-52.
The United Kingdom has recently introduced a capital gains tax on long-
term
45
gains. See Finance Act, 1965.
The problems and difficulties involved in giving content to the definition of
capital assets in the United States are very well described by Stanley S. Surrey,
"Definitional Problems in Capital Gains Taxation," in Tax Revision Compendium,
Vol. 2, pp. 1205-15 (U.S. House of Representatives, Committee on Ways and
Means, Washington, November 16,1959).

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 363

limited. Colombia, Panama, and Peru, for example, cover only real
estate, and Bolivia and the Malagasy Republic cover only urban real
estate.
Capital assets subject to the capital gains tax usually include neither
stock in trade nor those assets of the business that are not for sale to
customers. Such assets include machinery, equipment, buildings, and
land, and gains or losses realized from their sale are generally taxable
at ordinary income tax rates. Exceptions to this rule are found in
Ghana and India, where depreciable business assets and real estate
are considered capital assets and are treated in the same manner
as other capital assets.46 A going business, including good will, is
considered a capital asset, the gains or losses on its sale being subject to
a capital gains tax.
The concept of capital assets may also be narrowed by other exclu-
sions. In four of the countries studied (Argentina, El Salvador, Israel,
and Mexico), shares are not classified as capital assets. In 1965, Mexico
excluded from capital assets shares disposed of by individuals; Israel
excludes only those shares which are traded on the stock exchanges.
The announced purpose of this exclusion is to encourage investment
through the purchase of shares and to develop the capital markets.
In 1963, Israel's announcement of a tax on the gains of share trans-
actions aroused criticism of its possible adverse effects on investment.47
Argentina excludes gains on all securities while El Salvador exempts
only gains on proceeds that are reinvested in shares of other companies
and not sold within a period of four years.
Personal effects are specifically excluded from capital assets in
Argentina, Burma, India, and Pakistan. The disposal of personal effects
is most difficult to trace and to detect and to do so would involve
excessive administrative difficulties. Even countries which do not
statutorily exclude personal property tend, in practice, to ignore this
type of property.
Agricultural land is exempt from the tax base in some countries,
including Burma, Chile, Ghana, India, and the Malagasy Republic.
Such exemption is generally justified on the grounds that there is less
46
The calculation for capital gains and losses from the sale of depreciable
assets is generally as follows. If the sales price exceeds the book value of the
asset, the excess which represents accumulated depreciation is taxable as business
income,
47
and the remainder, if any, is taxable as capital gains.
The Economist, November 2, 1963, p. 506, commenting on the tax said:
". . . This could prove dangerous. The tax may also affect industry's ability to
raise capital through the stock exchange. The Israel stock exchange has only
recently begun to play a significant part here; to impose a tax now may clip the
bird's wings before it has left the nest." Israel introduced a capital gains tax on
shares in April 1964 and abolished it in November 1965.

©International Monetary Fund. Not for Redistribution

364 INTERNATIONAL MONETARY FUND STAFF PAPERS

speculation in agricultural land than in urban land and that prices for
agricultural land do not rise as much as prices for urban land. More-
over, capital gains taxes in many countries are aimed specifically at
recouping the speculative values arising from urban development.
Exemption of gains from the sale of agricultural land sometimes is
believed necessary to unlock investments in large agricultural tracts
held by relatively few owners.
Another type of asset, owner-occupied residential property, is com-
monly excluded from capital assets. The exclusion of the gains realized
from sale of this property is frequently limited by a provision that the
proceeds must be used to construct or to replace the property within
a certain period of time (usually one year). Chile provides an 18-month
replacement period from the date of sale; Mexico and India allow a
one-year interval. In India, a further condition is made that gains from
the sale of residential property are exempt only if the sales price does
not exceed Rs 25,000 and the aggregate fair market value of all real
property owned does not exceed Rs 50,000; in Chile, the sale of low-cost
housing is excluded from tax. Two reasons are given to justify this
exclusion: (1) a sales price that reflects replacement value leaves
the position of the taxpayer no better than before the sale; and (2)
home ownership is encouraged.

THE CONCEPT OF REALIZATION AND THE ACCRUAL METHOD

Since capital gains taxes are generally based on the realization
principle, it is important to determine when realization occurs. In
general, the disposal of an asset for a consideration is regarded as
realization; the simplest form is the sale of an asset, but it may include
as well liquidation of a business, expropriation of private property, and,
infrequently, gratuitous transfers. For example, Israel treats as a realiza-
tion the liquidation of a corporation and as capital gains the distribution
of capital assets in excess of their cost, the assets being valued at their
market price. Peru and the Malagasy Republic regard the expropriation
of real estate by the government as a realization. Mexico gives capital
gains treatment to securities redeemed or amortized at values above
their cost of acquisition. Ceylon and Panama appear to be the only
countries in this study which consider transfers by donation and by
inheritance as constructive realization.48
A comprehensive concept of realization closes possible loopholes for
48
In the United States, charitable gifts (which are deductible as contributions
at market value) remain exempt from the capital gains tax, as do transfers at
death. The new long-term capital gains tax of the United Kingdom considers free
transfers as constructive realizations.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 365

avoidance of the tax. Tax avoidance by means of free transfers has

often been cited as a problem in countries where these transfers remain
outside the capital gains tax regime. Nonrealization of transfers at death
is considered one of the most serious loopholes in U.S. capital gains
taxation.49
Taxing gains only when realized engenders a problem of bunching
income in the year of realization. Under a progressive income tax
system the bunching of capital gains pushes the taxpayer into a high-
income bracket, thereby subjecting him to a higher marginal rate, unless
the gains are spread by means of averaging (or unless an accrual
method is followed).
Holding-period provisions and various forms of preferential treat-
ment of capital gains are employed to mitigate the bunched income
effect. The accrual method of taxing the gains has found much support in
principle, but poses rather difficult administrative problems. The accrual
method includes in the tax base the net accrued gain or loss on capital
assets that occurs during a period whether or not realization actually
takes place.50
The accrual method is held to be more equitable than the realization
method in that
the owner of the appreciated [but unrealized] asset pays no tax on the
appreciation. Yet, in the broad sense of the term, his taxable capacity is as
great as that of the taxpayer realizing his gains. The former could borrow
against the rising value of his assets without selling them and in effect "live
off capital" without ever paying any tax on his capital gains.51
Another argument for the accrual method is that full recognition
of the unrealized gain would eliminate the lock-in effect of the tax. The
tax would encourage the asset holders to dispose of appreciated assets
which do not earn enough income to pay the tax currently due. As
Seltzer puts it,
when prices [of assets] were rising, investors with large unrealized capital
gains would no longer be "frozen" in their assets by their desire to avoid capital
gains taxes, and when prices were falling, the decline would not be accen-
tuated by the desire of those with unrealized losses to obtain a tax deduction
by selling.52
49
50
Brown, op. cit., pp. 368-72.
See, for example, Seltzer, op. cit., pp. 289-95; A. J. Merrett, "Capital Gains
Taxation: The Accrual Alternative," Oxford Economic Papers, Vol. XVI (1964),
pp. 262-74; Wilbur A. Steger, "The Taxation of Unrealized Capital Gains and
Losses: A Statistical Study," National Tax Journal, Vol. X (1957), pp. 266-81; and
Bernard Okun, "The Taxation of Decedents' Unrealized Capital Gains," National
Tax51 Journal, Vol. XX (1967), pp. 368-85.
52
A. R. Ilersic, The Taxation of Capital Gains (London, 1962), p. 46.
Seltzer, op. cit., p. 290.

©International Monetary Fund. Not for Redistribution

366 INTERNATIONAL MONETARY FUND STAFF PAPERS

The difficulties of valuation, especially of assets which are infrequently

traded and of unquoted shares, appear to make this approach admin-
istratively impracticable. In developing countries, the task of valuation
is even more formidable because of undeveloped capital markets and
of the type of assets widely held (e.g., equity in family corporations and
real est ate).
Moreover, owners of wealth may not be recipients of current income,
and therefore the taxation of unrealized gains would force many tax-
payers to sell their assets in order to pay their capital gains tax liability.
Although this may not be objectionable on grounds of wealth redistribu-
tion, it may have an unsettling effect on the economy.

THE HOLDING PERIOD AND THE RATE STRUCTURE

The capital asset holding period distinguishes short-term capital
gains from long-term gains, the former generally being taxed at ordinary
income tax rates, and the latter at reduced rates. The holding period
is intended to differentiate between transactions entered into for a profit
and those made for investment purposes. Short-term changes in value are
said to originate in speculative transactions, while investments are made
primarily for annual yield and growth in value.
Ten countries included in the study do not provide for a holding
period: Argentina, Bolivia, Burma, Ceylon, the Republic of China,
Ecuador, the Malagasy Republic, Panama, Peru, and Venezuela. Paki-
stan has adopted a six-month period as a minimum basis for determining
long-term gains, and Chile, India, and the Philippines a one-year period.
Colombia, Ghana, Israel, and Mexico use a system which reduces the tax
liability according to the length of the period for which the assets are
held. Ghana's procedure operated by means of a reduction in the tax
rate, as does Israel's. Mexico and Colombia reduce the percentage of
gains taxable as the holding period increases, and no gains are taxed on
assets held over ten years.
El Salvador, which has recently introduced a capital gains tax, is
experimenting with the method of averaging the capital gain over the
holding period. The average gain is added to the total ordinary
income to determine the total taxable income. A progressive rate
schedule is then applied to the taxable income. The resulting tax, in
turn, is divided by the total taxable income and half of this effective
rate is applied to the capital gains.
Various methods are thus employed to give preferential treatment to
capital gains: (1) reduced tax rate; (2) lower tax base at ordinary
income tax rate; (3) combination of reduced tax rate and lower tax base;
and (4) a system of averaging.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 367

The extent of preference or nonpreference given to capital gains

may be measured by the ratio of the capital gains tax rate to the ordinary
income tax rate. To what extent capital gains are given preferential
treatment under a schedular system of income taxation is, however,
difficult to determine. Under the schedular method, the rate of taxation
varies with different sources of income, so that the degree of differentia-
tion between the capital gains tax rate and other rates is not clear cut
as in a global system where a progressive rate schedule is applied to
aggregate income.
For purposes of analysis, three capital gains tax rate structures of
19 developing countries are used: (1) flat rate, (2) progressive rate,
and (3 ) percentage inclusion with progressive rates.

Flat rate structure

The flat rate structure is common to countries with a schedular
system. For example, Argentina charges 10 per cent, Bolivia 4 per cent
on gains from urban real property and 10 per cent on certain rural real
estate, and Chile 8 per cent for assets acquired before February 14,
1964 (otherwise, 20 per cent). All countries that use a flat rate charge
lower tax rates on capital gains than they charge on ordinary income.58
The first advantage of a flat rate structure is its simplicity. Second,
a flat rate tax has the advantage in that a taxpayer is less concerned
about spreading the realization of the capital gains over a period, because
the tax rate is the same whether or not all the gains are realized in
one year. A progressive tax structure (including the percentage inclu-
sion at ordinary income tax rates) may increase tax liability if realized
net gains are higher in one year than in other years, and the taxpayer
may withhold the sale of assets in order to minimize tax. Under a flat
rate system, the taxpayer is not concerned about gains realized in
one year against those in other years, as there is no tax inducement to
postpone the realization of net gains (assuming that no changes are
impending in the capital gains tax structure). An inducement to defer
realization under a flat rate system would, however, arise because the
taxpayer would realize savings from the interest on the amount of the
postponed tax payment. A third advantage of the flat rate structure
53
In Venezuela taxable gains from real estate were formerly reduced by 6 per
cent of the original cost of the asset for each year held, to allow for imputed
interest on the investment. This practice was criticized by the Shoup mission
in 1958 because the 6 per cent assumed income is not taxed under other schedules.
In the reform in June 1961 (Decree No. 580) the 6 per cent assumed income
added to the cost of the asset was still continued, but the law was recently amended
to tax capital gains at income tax rates. See Carl S. Shoup and others, The Fiscal
System of Venezuela: A Report (Baltimore, 1959), pp. 163-64.

©International Monetary Fund. Not for Redistribution

368 INTERNATIONAL MONETARY FUND STAFF PAPERS

is closely associated with the second: that is, the mobility of capital is
less impeded by a flat rate tax.
On the other hand, a flat rate tax may discriminate against low-
income groups and may benefit taxpayers in the higher income brackets,
because the differential between a flat rate capital gains tax and an
ordinary income tax is greater in the high-income brackets. The ratios
of the capital gains tax rate to the ordinary income rates in countries
with a flat rate (e.g., Chile) decline as income increases (Table 6). The
inequitable result of the flat rate system, therefore, is a point against it.

TABLE 6. SELECTED COUNTRIES: EFFECTIVE AVERAGE CAPITAL GAINS TAX RATES AS

PERCENTAGE OF AVERAGE ORDINARY INDIVIDUAL INCOME TAX RATES, BY
STATUTORY INCOME BRACKETS *

Statutoryr Net Inco»me in DC»mestic Currencies

Country 5,000 10,000 20,000 50,000 100,000

(f percentages0
Burma 101.0 75.1 48.9 37.9
Ceylon 100.0 Vol. XV 90.0 53.8 38.9
Chile
Assets held before
Feb. 14, 1964 10018 29.7 27.8 24.6 21.9
Assets held on and
after Feb. 14, 1964 84.4 74.3 69.7 61.5 54.8
_
Malagasy Republic — — 117.6
—
Peru 87.5 87.5 87.5 72.6 53.0
Philippines 66.7 51.9 62.1 70.6 76.0
1
Chile charges a flat rate on capital gains, and the other countries apply
progressive rates.

Progressive rate structure

Countries which tax capital gains at progressive rates include Burma,
Ceylon, the Republic of China, Ecuador, Ghana, Israel, the Malagasy
Republic, Peru, the Philippines, and Venezuela. With the exception of
Burma, Ghana, the Malagasy Republic, and Peru, these countries apply
the progressive ordinary income tax rates to capital gains. Ecuador
makes an exception for gains on occasional sales of securities, which are
taxed at a flat rate of 8 per cent. Ceylon applies the ordinary income tax
rates, with a maximum flat rate of 25 per cent; Israel also applies
ordinary income tax rates, with a ceiling of 25 per cent which is reduced

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 369

by 5 per cent a year and eliminated after 18 years.54 Peru and Burma
have preferential progressive rates depending upon the size of the
taxable gains. In Peru the rates applicable to individuals and corporations
range from 7 per cent on gains of S/. 10,000 to 15 per cent for those
over S/. 100,000. The rates for Burma are 20 per cent on gains of
K 5,000 to K 25,000, 30 per cent between K 25,000 and K 100,000,
and 40 per cent on gains over K 100,000.
The Malagasy Republic has a progressive capital gains tax of 10 per
cent, 20 per cent, and 30 per cent. The effective capital gains tax rates
are higher than the ordinary income tax rates for incomes of FMG 80,000
to FMG 1,000,000. On incomes of over FMG 1,000,000 the capital
gains rate is a flat rate of 30 per cent, against the ordinary maximum
income tax rate of 40.5 per cent.
A progressive tax structure is held to be more equitable than a flat
rate tax, since capital gains increase a taxpayer's taxable capacity.
The equity justification for a progressive rate structure is strengthened
by the fact that capital gains are distributed in favor of the propertied
class and the high-income taxpayers. A low flat rate favors investors and
speculators in property over other income earners.
Arguments against the progressive structure of capital gains taxa-
tion arise from two considerations: equity and capital mobility. As
capital gains realized in one year may have been accrued over a number
of years, graduated rates applied to gains in a single year may unduly
burden the taxpayer by pushing him into a higher income tax bracket.
Such higher tax on bunched income has been mitigated in some
countries by the use of preferential progressive rates. Another method
to reduce the burden of progressive rates is to spread the realized
gains over the number of years the asset is held, and to tax the average
annual increment at the taxpayer's marginal tax rate for that year. This
may, however, be too complicated to administer, especially in develop-
ing countries.55
The second argument against a progressive rate structure is that
54
Israeli rates here are apart from the rates of the Land Betterment Act of
1949. Under the Land Betterment Tax, the progressive rates of 20 per cent to
40 per cent is dependent upon the ratio of the gains to original investment: 20 per
cent on appreciation not exceeding 200 per cent of value; 30 per cent on apprecia-
tion between 200 per cent and 400 per cent of investment; and 40 per cent if the
gain/investment ratio exceeds 400 per cent. In Ceylon the maximum rate is
45 per cent if there is a change of ownership of property occurring on the death
of the owner or cessation of residence prior to the year of assessment 1964/65,
and55 for assessments prior to 1965/66.
Costa Rica's draft of the proposed income tax law is an attempt at using
the averaging device to tax long-term capital gains. The proposed tax rate would
be the result of dividing the marginal income tax rate by the number of years
the asset is held.

©International Monetary Fund. Not for Redistribution

370 INTERNATIONAL MONETARY FUND STAFF PAPERS

graduated rates encourage postponing the sale of the assets so as to

minimize the tax liability, and thereby impede the mobility of capital.
The sale of appreciated assets may be withheld to avoid bunching of
gains, sometimes until capital losses are realized on other assets in
order to offset any gains realized during the year.

Percentage inclusion at progressive rates

The percentage-inclusion plan apparently originated in Sweden and
continues to be used there. In the United States, the Revenue Act of
1934 provided for an inclusion of a percentage of capital gains in the
taxpayer's ordinary income corresponding to the number of years the
asset was held. This method of taxing capital gains was simplified in
1938 by a single holding period with the inclusion of one half of the
long-term capital gains.56
Colombia, Mexico, and the Philippines employ the percentage-
inclusion plan—charging progressive ordinary income tax rates on a
portion of capital gains realized during the year. The percentage of gains
included in the taxpayer's income is based on the length of the holding
period. The following data show the proportions included by Mexico:
Percentage of Net Capital Gain/Loss
Included in Taxable Base

Holding Period Individuals Enterprises

Up to 2 years 80 100
2-4 years 70 80
4-6 years 60 60
6-8 years 40 40
8-10 years 20 20
Over 10 years None None

In Colombia the amount of gains taxable is reduced by 10 per cent

for each year the property is held, including the years before the intro-
duction of the capital gains tax in 1960.
A simpler version of the percentage-inclusion method is to take a
portion of capital gains, regardless of the holding period above a certain
minimum, and to charge this portion either preferential rates or ordinary
income tax rates. Pakistan charges normal income tax rates on net
56
Anita Wells, "Legislative History of Treatment of Capital Gains Under the
Federal Income Tax, 1913-1948," National Tax Journal Vol. II (1949), pp. 12-32.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 371

capital gains minus PRs 10,000 or two thirds of the net capital gains,
whichever is greater, on assets held six months to five years. Normal
income tax rates are charged on gains minus PRs 20,000 or five sixths
of the net capital gains, whichever is greater, on assets held more than
five years. Companies are taxed at 20 per cent of capital gains on assets
held six months to five years and 10 per cent on assets held over
five years. The Philippines follows the U.S. system of including one half
of long-term capital gains in taxable income, but with no maximum
alternative rate (25 per cent in the United States).
The percentage-inclusion plan, combined with progressive rates,
takes into account the increased taxable capacity with capital gains,
and at the same time reduces the tax burden on a lumped income by
including only a portion of the gains. The step-scale inclusion method
used in Mexico and Colombia has the added advantage of differentiat-
ing taxpayers with net gains that have accrued over different periods.
Compared with full taxation of capital gains at ordinary rates (with or
without income averaging), however, the percentage-inclusion method
is especially advantageous to high-income groups.
The step-scale inclusion plan is criticized on the grounds that it
induces taxpayers to concentrate transactions at certain time periods.
The critics of the step-scale method in the United States pointed out
that the preferential treatment of gains based on different holding periods
gives taxpayers an incentive to take losses at the earlier high rates and
to postpone taking gains.57 For example, under its system in effect
between 1934 and 1938, 80 per cent of the gains were included in the
ordinary income if the assets were held between one and two years.
Data showed that taxpayers would tend to realize losses within the two-
year period but would postpone realizing gains after two years, when
only 60 per cent or less of the gains would be taxable.
Besides impeding transactions in appreciated assets, the step-scale
inclusion is administratively complex. The percentage inclusion with a
single holding period is an attempt to simplify the integration of the
57
The percentage-inclusion plan which was in effect from 1934 to 1938 had
the following steps:
Percentage of gain included
Period assets are held in ordinary income
1 year or less 100
Over 1 year but not over 2 years 80
Over 2 years but not over 5 years 60
Over 5 years but not over 10 years 40
Over 10 years 30
See U.S. Treasury Department, Federal Income Tax Treatment of Capital
Gains and Losses (Washington, 1951), pp. 26-29.

©International Monetary Fund. Not for Redistribution

372 INTERNATIONAL MONETARY FUND STAFF PAPERS

capital gains with the income tax concept and the administration of the
tax but still does not fully satisfy the objective of equity among all tax-
payers, i.e., between those who have gains and those who do not.

EXEMPTIONS
In addition to excluding certain transactions from the capital gains
tax, some countries provide for basic exemptions of certain amounts
from the gains. Table 7 indicates the exemption limits in absolute

TABLE 7. SELECTED COUNTRIES: CAPITAL GAINS AND ORDINARY INCOME EXEMPT

FROM TAXES

Capital Gains Ordinary Income Ratio of Col. 1

Exempt from Exempt from Tax to Col. 2
Country Tax (Single Individuals) (In per cent)

Argentina M$N 100,000 M$N 72,000 138.9

Burma K 5,000 Κ 4,200 119.0
Ceylon CeyRs 5,00ο12 Cey Rs 3,000 166.7
CeyRs2,000 66.7
India Rs 5,000 Rs 4,000 125.0
Malagasy Republic FMG 80,0003 FMG 100,000 80.0
Pakistan PRs 20,0004 PRs 6,000 333.3
PRs 10,000 166.7

Sources: Price Waterhouse & Co., U.S.A., Information Guide for Doing Business
in Argentina, February 1966; Board of Inland Revenue, Income Taxes Outside the
United Kingdom, 1966, Vols. 1, 2, 4, and 6 (London, 1967); Notice sur les impôts
droits et taxes (Tananarive, 1964).
1
If capital gains accrue to persons who have no other taxable income for that
year and the preceding two years, or the total assessable income for three years
did2 not exceed the total family allowances.
3
From the sale of movable property except shares and debentures.
Or five sixths of capital gains, whichever is greater, for assets held over five
years.
4
Or two thirds of capital gains, whichever is greater, for assets held six months
to five years.

terms and the ratio of the exemptions from capital gains to ordinary
income for individuals.
The ratio of capital gains exemptions to income tax exemptions for
these countries ranges from 66.7 per cent to 333.3 per cent; except for
Ceylon (movable assets) and the Malagasy Republic, capital gains
tax exemptions range from 1.2 times higher to 3.3 times higher.
Unlike ordinary income tax exemptions, however, capital gains tax
exemptions do not allow additional exemptions for dependents. It is not
clear what is the economic or equitable basis for granting capital gains
tax exemptions, as 5 out of 6 countries which provide for exemptions

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 373

have preferential rates for capital gains. The position in the Malagasy
Republic is different because rates on capital gains generally are higher
than ordinary income tax rates, and the use of exemptions is a way of
moderating the gains tax burden.
The exemption of a certain amount of capital gains may be desirable
from an administrative point of view. Because of the nonrecurrent
nature of capital gains and the relative ease of concealing capital trans-
actions—especially those involving small amounts—the provision of
an exemption limit would greatly reduce the number of cases requiring
enforcement and processing.

TREATMENT OF CAPITAL LOSSES

The treatment of capital losses has as important a bearing upon
equity and investment incentive as the preferential taxation of capital
gains; yet many developing countries neglect proper tax treatment of
capital losses. Several of the countries in the study apparently have
no provisions concerning the treatment of capital losses: Bolivia, Ghana,
the Malagasy Republic, Panama, and Peru. Except for Colombia,
where capital losses are allowable deductions from gross income with no
provisions for carry-over, the rest of the 19 countries limit the offset
of capital losses to capital gains, but with provisions for their offset
against capital gains of future years.
Ceylon provides an indefinite carry-forward of net capital losses.
Another interesting feature of the capital loss treatment in Ceylon is the
carry-back of capital losses at death against capital gains; if gains are not
sufficient to cover losses, they may be offset against ordinary income
for three years preceding the year of death.
In India, short-term and long-term losses are not distinguished for
the purpose of their deductibility from capital gains during the year of
assessment. Provisions for carry-forward allow only short-term capital
losses to be set off against future short-term gains for a maximum period
of eight years, while net long-term losses can be carried over for only
four years. A net capital loss of less than Rs 5,000 cannot be carried
forward. India's treatment of capital losses, aside from being asym-
metrical in its treatment of short-term and long-term losses, favors those
in the high-income group against the middle-income and low-income
earners. Those in the latter group are often at a disadvantage because
they have less chance of timing the sale of assets in order to realize
capital losses to offset capital gains, and because they are more affected
by the Rs 5,000 limitation.

©International Monetary Fund. Not for Redistribution

374 INTERNATIONAL MONETARY FUND STAFF PAPERS

In the Philippines, long-term capital losses can be deducted only

from long-term capital gains in the year of assessment. Any remaining
net capital loss, however, may be carried over to succeeding years as a
short-term capital loss and deducted from future short-term gains.
Since short-term gains are taxed at ordinary income tax rates, the carry-
over of a net long-term capital loss provides a tax benefit to those who
have net short-term capital gains.
Israel previously provided for an offset of capital losses against gains
of the previous two years and the succeeding five years, but now pro-
vides for a seven-year carry-forward.
Among the Latin American countries, Argentina has one of the most
liberal provisions for the carry-over of capital loss. Net capital losses are
deductible from subsequent capital gains for ten years. Chile has a
two-year carry-over, while in El Salvador and Mexico net capital losses
may be carried forward for five years.
Colombia's treatment of capital losses is unusual in that they are
deductible from other income, but the loss is reduced by 10 per cent a
year from the date of the acquisition of the asset to the year of sale.
In order to prevent fictitious sales prices, provision is made to disallow
a loss based on a selling price lower than the current assessed value on
the date of sale unless the taxpayer can prove that the selling price
corresponds to the market value. The 10 per cent per annum reduction
of losses applies to assets acquired before the law became effective in
1961. Thus, a loss on an asset which was acquired in 1958 and sold
in 1967 would be fully absorbed by the taxpayer.58
A fundamental problem with the offset of capital losses against
ordinary income is the opportunity given to the taxpayer to time the
sale of his assets so as to realize a loss. A system where ordinary income
rates are higher and more progressive than capital gains rates would
give an inducement to realize losses and to postpone the realization of
gains. Large investors are in a position to take advantage of such
manipulations because of their diversified investments.
Whatever the form of the allowance for loss—whether it be a loss
offset against capital gains during the year of assessment, carried over
against future gains, or against ordinary income—it is important to
consider the effect of such provisions on liquidity and risk taking. Loss
allowances not only ease the investors' financial strain but also
strengthen investment incentives by permitting losses to be shared by
the government.
58
Joint Tax Program, OAS/IDB, Fiscal Survey of Colombia (cited in foot-
note 18), pp. 27-33.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 375

IV. Revenue Yield

The capital gains tax yields little revenue in developing countries.
Data for 8 of the countries in Table 8 show that in a recent year revenue

TABLE 8. SELECTED COUNTRIES: CAPITAL GAINS TAX AND INCOME TAX

COLLECTIONS
(In thousands of national currency)

Ratio of
Capital Gains Income Tax Col. 1 to
Tax Collections Collections Col. 2
Country Year (1) (2) (In per cent)

Argentina 1961/62 818.2 26,863.7 3.0

Burma 1960/61 1.6 205,217.1 1

Chile 1965 1,971.5 553,358.6 0.4

Ghana 1966/67 6.0 63,334.0 1
India 1962/63 20,948.0 2 3,417,510.0 0.6
Israel 1963/64 18.000.0 689,000.0 2.6
Peru 1962/63 40,346.7 3 3,297,452.8 1.2
Philippines 1963 7,605.7 125,123.53 6.0
Venezuela 1963 51,662.0 2,497,300.0 2.1

Sources: Argentina: Ministerio de Hacienda, Memoria, 1965. Burma: Ministry

of Finance and Revenue, Budget Estimates, 1962-63. Chile: Norman D. Nowak,
"The Chilean Tax System," Bulletin for International Fiscal Documentation,
Vol. XX (1966), p. 453. India: Central Board of Direct Taxes, All-India Income-
tax Revenue Statistics, 1962-63, and Comptroller and Auditor General, Central
Government Finance Accounts, 1962-63. Peru: Contraloria General de la Re-
pública, Cuenta General, 1963. Philippines: Internal Revenue Commission, Annual
Report, 1964. Venezuela: Ministerio de Hacienda, Memoria, 1964.
1
2
Less than 0.05 per cent.
Amount collected for the Land Betterment Tax only; does not include the
capital gains tax collected from other private property.
3
Collection from individuals only.

ranged from less than 0.05 per cent of total income tax collections
in Burma and Ghana to 3 per cent in Argentina. In the Philippines the
capital gains tax on individuals amounted to 6 per cent of individuals'
income tax collections.
The relatively low yield of the capital gains tax can be explained
in part by evasion of the tax, including failure to disclose transactions
and the underreporting of the sales price. A report submitted to the
1960 Congress of the International Fiscal Association in Basle stated
that in Israel there was widespread evasion of the capital gains tax on
private property, and that administration of the tax was practically

©International Monetary Fund. Not for Redistribution

376 INTERNATIONAL MONETARY FUND STAFF PAPERS

ineffective.59 Argentina lowered the capital gains tax rate in 1960

principally because the high rate was believed to be one of the major
reasons of "hidden assets" and false declarations. In Ghana, where the
tax on gains was in effect for only a short time, real estate transactions
were rarely reported for capital gains tax purposes, even though they
were registered with the Lands Department and published in the Gazette.
Table 9 shows the trend of the capital gains tax yield in 4 countries:
Argentina, Burma, India, and Peru. In absolute amount, the capital
gains tax yield shows, generally, an increasing trend. An exception to
this is Burma where the yield had been declining, but a sizable increase
in revenue was registered in 1960/61. Capital gains revenue as a
percentage of income tax collections has been declining in Argentina
and Peru, but rising in India. The declining relative importance of
revenue from the capital gains tax collection in Argentina and Peru
has been due principally to the increases in income tax revenue col-
lected. Argentina's revenue from the capital gains tax increased by
about 68 per cent from 1955/56 to 1961/62, but income tax revenue
rose five times in the same period. The decline in the ratio of capital
gains tax revenue to income tax revenue in Argentina is also attributable
to changes made in 1958 and 1959 which narrowed the taxable base
for capital gains. In 1958, a provision for postponing the tax on gains
from housing (rollover) was introduced, and in 1959 securities were
exempted and the revaluation of assets was provided in order to mitigate
the impact of inflation.60 Peru's capital gains tax revenue increased even
more slowly—in 1962/63 revenue was about 1.7 times the 1955/56
yield, against a fivefold increase in income tax collections. In India, the
increasing ratio of capital gains tax revenue to income tax revenue can
be explained by the increase in the number of assessees and assessments
since the reintroduction of the tax in 1957/58.
Data on capital gains tax collections for other countries are unavail-
able because revenues are combined with income tax collections.

V. Administration of the Tax

Effective administration of tax laws rests largely on their simplicity
and public acceptance. Although it appears simple in principle, the
taxation of capital gains introduces many complexities in the tax laws
59
Joseph Stern (Rapporteur for Israel), in International Fiscal Association,
Cahier de Droit Fiscal International (Basle), Vol. XLII, September 1960,
pp.6094-95.
Enrique Jorge Reig, "Considérations sur l'imposition des gains de capital,"
Revue de Science Financière (Paris, 1962), p. 253.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES
TABLE 9. SELECTED COUNTRIES: CAPITAL GAINS TAX—YIELD AND AS PERCENTAGE OF INCOME TAX, 1955/56-1962/63
(Columns 1, 3, 5, and 7 in thousands of national currency)

Argentina Burma India Peru

(yield) (per cent) (yield) (per cent) (yield) (per cent) (yield) (per cent)
Year (1) (2) (3) (4) (5) (6) (7) (8)

1955/56 488.2 7.9 0.4 —i 2 24,181.53 3.8

1956/57 482.7 7.7 0.4 —i 2 29,726.83 3.8
1957/58 699.8 7.5 0.4 —ι 2,084.82 0.1 29,335.7 33 2.5
1958/59 873.8 5.7 0.3 —ι 3,880.022 0.1 38,401.3 2.4
1959/60 697.9 2.9 0.3 —ι 6,239.0 0.2 37,294.833 1.5
1960/61 702.2 2.3 1.6 —i 8,371.02 0.3 35,795.6 3 1.2
1961/62 818.2 3.0 13,984.02 0.3 38,983. 1 1.3
1962/63 20,948.02 0.6 40,346.73 1.2

Sources: Argentina: Ministerio de Hacienda, Memoria, 1960/61 to 1965; Burma: Ministry of Finance and Revenue,
Budget Estimates, 1957-58 to 1962-63; India: Central Board oí Revenue, All-India Income-tax Revenue Statistics, 1957-58
to 1961-62 (for 1962-63, the publication was issued by the Central Board of Direct Taxes), and Comptroller and Auditor
General, Central Government Finance Accounts, 1959-60 to 1962-63; Peru: Contraloria General de la República, Ba-
lance y Cuenta General de la República, 1957 to 1963.
1
2
Less than 0.05 per cent.
3
Assessments completed during the year.
Calendar year; year 1956 included under Fiscal Year 1955/56, etc.

377
©International Monetary Fund. Not for Redistribution
378 INTERNATIONAL MONETARY FUND STAFF PAPERS

that may not be apparent on first view. The requirements for administra-
tion of the capital gains tax have been cited as one reason for the United
Kingdom's reluctance prior to 1965 to adopt a tax on long-term gains.61
Malaysia repealed its capital gains tax in 1966, a year after its adoption,
largely for administrative reasons. Ghana also repealed its capital gains
tax in 1967, largely because of poor performance.
The administrative problems of capital gains taxation are involved
with (1) identification of taxpayers, (2) the problem of valuation, and
(3) its international aspects.

IDENTIFICATION OF TAXPAYERS
The problem of capital gains tax administration is accentuated by
the fact that capital gain or loss transactions are mostly nonrecurrent.
Since the roll of taxpayers with capital gain or loss differs from year
to year, a register of taxpayers is not so useful an administrative device
as in the case of income-tax payers. Information on capital transactions
must be obtained, and vigilance of indirect sources must be maintained.
The search for capital gains tax liability may be facilitated by access
to the following sources: (1) Income tax returns, especially those
showing high incomes or income derived from real estate and other
investments. (2) Declarations of assets for the purpose of a net wealth
tax, and statements of assets and liabilities sometimes required of all who
file income tax returns, as in Argentina, Brazil, and the Philippines.
(3) Record of property transfers kept by the valuation office or by the
registry of public transfers. (4) Records of real estate sales kept by
official notaries. In Venezuela, for example, official notaries prepare
"red cards" listing the parties to the transactions, and other information.
(5) Municipal records showing property taxes paid, building permits
granted, and lists of rental information, etc. (6) Advertisements in the
national and local press and in trade journals.
In many countries, gains derived from sale of personal property,
61
The Royal Commission, in rejecting the introduction of the capital gains
tax in its Final Report, stated: ". . . no measure for bringing capital gains under
taxation could be a simple one. Just because they fit so awkwardly into a scheme
of income tax that is steeply progressive, we must envisage a measure that is
complicated by a number of exemptions and qualifications; that has to provide
different treatment for long-term and short-term gains; and that has to establish
machinery for dealing with other problems . . . such as the relation of the tax
to property acquired by gift or inheritance, the valuation of improvements made
upon improvable property, the valuation of all realisable property as at the open-
ing date of the tax (unless it is to bring into tax increases of value accrued
before the date of its imposition). No doubt every tax seems complicated in
advance, before the officials and the public have become habituated to its
existence. But for all that it would be unrealistic to suppose that it would not
require a substantial addition of staff to administer it. . . ." Royal Commission,
op. cit., pp. 33-34.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 379

especially stocks and bonds, are more difficult to discover than real
estate gains. Sale and transfer of intangibles can be easily concealed,
while the sale of real estate is relatively easy to trace. The prevalence of
bearer shares, especially in Latin America, creates a special problem,
because there is no record of the transaction on company books. Another
problem arises in the transfers of rights rather than of titles to property,
not requiring registration. Unless the transfer of rights to property is
specifically considered a realization event, such transfers would avoid a
capital gains tax. This was the practice in Israel, which led to modifica-
tion of the Land Betterment Tax in 1963.
Aside from the problem of discovering transactions that result in
realized taxable gains, there is the problem of avoidance through free
(gratuitous) transfers. Kaldor's proposal for capital gains tax reform in
India in 1956/57 was to treat free transfers as capital gains transactions.
Kaldor maintained that
If ... transfers by way of gifts, bequests etc., are exempted, not only
will a considerable part of capital gains escape from taxation, but the tax-
payer will be given an unhealthy incentive so to manipulate his asset holdings
as to make net unrealised gains as large as possible, since all unrealised
gains are wiped out for tax purposes when the property passes hands on
decease. These exemptions may easily cut the potential long term yield of
the tax by two-thirds or62three-quarters and they do not seem to be justified on
any principle of equity.
For administrative reasons, however, the Indian Government continued
the exemption of gratuitous transfers.
It has been argued that capital gains which escape taxation through
gratuitous transfers are subject to gift taxes and death duties, since
these taxes are levied upon the total value of wealth, including increases
in capital value. However, in countries where gift taxes and death duties
are very low they would not be an adequate substitute for the capital
gains tax.
Two approaches are considered to deal with the tax treatment of
gratuitous transfers: (1) treatment of property transmitted at death
or by gift as constituting realization (presumptive realization) and
(2) carrying over the cost to the decedent or donee for the purpose of
computing the capital gains tax on transferred property. The admin-
istrative difficulties of both approaches would entail revaluation of assets
and considerable reporting of estates.

THE VALUATION PROBLEM

A tax on a change of asset value over a period of time presents a

serious valuation problem because of the need to establish both the
62
Nicholas Kaldor. Indian Tax Reform (cited in footnote 41), p. 34.

©International Monetary Fund. Not for Redistribution

380 INTERNATIONAL MONETARY FUND STAFF PAPERS

initial value and the sale or disposal value of the asset sold.63 The
introduction of a capital gains tax raises the question of what initial
asset values should be recognized. This is necessary to establish the tax
basis of the assets with respect to which the capital gain is measured.
There are two possibilities: (1) acquisition cost and (2) the market
value at an appointed day, usually the date of enactment of the tax.
(Sometimes gains are determined by applying to sales value a ratio that
reflects average changes in prices during the period.)
The initial value of the asset may be stated as the acquisition or
original cost to the taxpayer. Acquisition cost is defined as the amount
or value of the consideration which the person paid for the asset, together
with the incidental costs of acquiring the asset plus capital expenditures
on the asset after acquisition. For an asset which is not bought but
created (e.g., a copyright), the expenditure which the taxpayer incurred
wholly and exclusively in creating such asset is deemed its acquisition
cost. In practice, however, the acquisition cost of the asset to the tax-
payer is taken as the basis of initial value only when it was acquired
since enactment of the law. For equity reasons, most countries use
the market value as of the enactment date of the tax if the asset was
acquired prior to this date. By this rule, retroactivity of the tax is
avoided with respect to unrealized gains before the adoption of the law.
In any case, when a taxable transaction takes place, problems of
administration arise in tracing the basis for taxation of property. It
may be necessary to go back many years to reconstruct what the value
was at the date of enactment of the law, frequently on the basis of
inadequate records. In some countries—including the Philippines and
some Latin American countries—the cadastral value may be employed.
But this is not dependable because of the wide disparity that often exists
between cadastral values and market values, especially when there has
not been a recent revaluation. For this reason, the enactment of a
capital gains tax should be accompanied by a new cadastral survey
that updates all real property values. Sometimes this is accomplished
by the use of coefficients applied to an old cadastral value.
Different formulas have been adopted to update original cost or
cadastral values. In the Malagasy Republic, for example, initial value
63
Nicholas Kaldor, a proponent of capital gains taxation in developing
countries, recognizes that valuation is a real problem in the administration of
the capital gains tax. In explaining the difference between the valuation problem
of a capital gains tax and that of a net wealth tax, he says: "The uncertainties
and inaccuracies involved in the valuation of capital assets present a serious
problem also in the case of a tax assessed on the value of assets. But they weigh
far more heavily in the case of a tax assessed on the change in values over a period.
In one case errors of valuation have a more or less corresponding effect in the
calculation of the tax liability; in the second case they tend to have an altogether
disproportionate effect." An Expenditure Tax (cited in footnote 16), p. 38.

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 381

is determined by a coefficient which varies with the acquisition date.

According to this, original cost is multiplied by 50 if the asset was
purchased before January 1, 1920; 20, if before January 1, 1939; 6,
if before January 1, 1945; 2, if before January 1, 1949; and 1.5, if
before January 1, 1957. This approach ignores variations in the rate
of change in the value of individual properties and is quite arbitrary.
But it has the virtue of allowing for rapid changes in real estate value.
In Argentina, an optional revaluation of fixed assets was made in 1960
whereby fixed coefficients derived from official statistics for changes in
domestic prices were applied to original cost. Chile also determines the
initial value of an asset by applying to its original cost a coefficient
based upon a consumer price index.
A problem of valuation also arises when the asset is sold. Because
of the ease with which the price of property can be concealed, an
independent check is frequently necessary. Bhargava has pointed out that
in India realized gains were frequently much higher than reported to
tax authorities. However, in discussing this problem Bhargava states
When the seller tries to understate the price realised by him, it should be
noted that the buyer's interest will be to overstate the price he paid in order
to escape the C.G.T. [Capital Gains Tax] when he, in turn, effected a sale.
This conflict between the interests of the buyer and the seller was the
strongest safeguard of the interest of the state and no buyer was likely to
agree, in his 64own interest, to declare a lower purchase price than what he
actually paid.
The difficulty of ascertaining the actual sales price of an asset has
led to the use of a presumptive sales price which may be expressed as a
factor of the acquisition cost, the cadastral value, or the market value at
date of enactment of the law. The presumptive sales price would ordinar-
ily reflect changes in property values during the period the asset was held.
The presumptive approach is arbitrary and laborious, and is little used.
The capital gain itself may also be determined directly by the pre-
sumptive approach. The taxable gain would be fixed at a certain per-
centage of the sales proceeds regardless of the actual gain.65 Among
64
65
Bhargava, op. cit., p. 281.
Sweden in 1966 used a "standard method" of calculating the long-term
capital gains tax on shares. Taxpayers with long-term gains (on assets held more
than five years) include in the taxable income 10 per cent of the sales proceeds.
Capital gains tax is not paid if it can be shown that the gain is not higher than
5 per cent of the sales price. A standard annual deduction of SKr 500 is also
allowed. Thus, with a sales price of SKr 15,000 the tax is computed on the
following basis:
Taxable gain (10 per cent of sales price) SKr 1,500
Annual deduction 500
Gain to be included in income SKr 1,000
Net long-term capital losses are not deductible because they are already taken
into account in fixing the taxable portion of a long-term gain at 10 per cent
under the standard method. Norr and Hornhammar, op. cit., pp. 417-18.

©International Monetary Fund. Not for Redistribution

382 INTERNATIONAL MONETARY FUND STAFF PAPERS

the countries in this study, Ghana employed this technique as an alterna-

tive method of ascertaining the gain. If the historical cost could not be
determined, the capital gain was said to be 25 per cent of the sales
price less allowances for alterations, improvements, and the cost of
disposal. This method avoids the calculation of the initial values, but still
requires checking the correctness of the sales price. The major problem
is what per cent of the sales price should represent the gain. This can
be determined empirically on the basis of sample transactions. Once the
coefficient is determined, it need only be revised periodically to reflect
price changes.

INTERNATIONAL ASPECTS OF CAPITAL GAINS TAX

The international problems of capital gains taxation involve the
difficulty of taxing transactions of residents and of nonresidents. The
question arises of how to treat the capital gains or losses of foreigners
who sell shares of stock of a corporation deemed to be resident in
developing countries. Unlike dividends and interest income accruing to
foreign shareholders, capital gains realized by foreigners are difficult
to reach by a tax. Tax on dividends and interest can be easily collected
at the source, while withholding on capital gains is not practicable.
Another matter of concern is in regard to residents or citizens realizing
capital gains or losses in transactions abroad either on shares of
domestic corporations or on shares of foreign corporations abroad.
Depending of course on the jurisdictional rule followed and the admin-
istrative efficiency of the taxing country, there is a good chance that
residents can escape altogether a tax on capital gains.
There are two general ways of determining tax jurisdiction: (1) by
residence or nationality of the taxpayer and (2) by source of income.
Taxation by residence or nationality of the taxpayer would tax the
capital gains where the taxpayer is a bona fide or permanent resident
or a national of a country regardless of the country of source of income.
The residence or nationality rule is justified on the grounds that a
country protects its residents and citizens, and that this protection should
be matched by its right to collect taxes from them. The source rule
would require taxpayers to pay tax on income arising within the border
of the taxing country. Taxation at source is justifiable on the principle
that benefits received by foreigners are associated with income earned
in the country where the economic activity is performed.
The tax treatment of capital gains realized by residents and non-
residents varies among countries. There is, however, a trend among
developing countries to tax their residents and nationals on their world-

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 383

wide income as far as personal income is concerned. This trend is less

clear for corporations.66 In most instances, the tax rule governing the
jurisdiction over income applies to the treatment of capital gains. In
India, nonresidents are taxed on income deemed to accrue or to originate
in India and on income received or deemed to be received in India.
For residents, the residence rule applies in that all income is taxable
including that obtained outside India. A special provision is, however,
made for capital gains for both residents and nonresidents. According
to this rule, capital gains are taxable in India if the capital asset sold,
exchanged, or transferred is situated in India.67 The Philippines adopts
the residence rule in taxing its residents and nationals. Nonresidents,
however, are taxed on the basis of the source rule. Argentina, in general,
applies the source rule for both resident and nonresident taxpayers.
Resident individuals are taxed on foreign income received from "occa-
sional" activity carried on abroad. According to the Colombian income
tax legislation, resident nationals are taxed on all income, including
that from abroad; foreigners and nonresident nationals are subject to
tax on their income originating in Colombia. For the purpose of the
capital gains tax, nonresidents pay the Colombian tax on capital gains
resulting from the transfer of real property located in Colombia.
The allocation of taxing jurisdiction is often resolved by international
tax treaties. For example, the tax treaty (March 18, 1958) between
Germany and India provided that "capital gains arising from the sale,
exchange or transfer of a capital asset, whether movable or immovable,
may be taxed in the territory in which the capital asset is situated at
the time of such sale, exchange or transfer. For this purpose, the situa-
tion of the shares of a company shall be deemed to be in the territory
where the company is incorporated" (Article X). 68 On the other hand,
the tax treaty between the United States and India gives the jurisdiction
on taxation of capital gains from immovable property to the country
where the property is situated; but in regard to capital gains derived
from the contribution of capital by a resident in one country toward
the formation of a new company incorporated in the other country, the
country of residence of the shareholder has the jurisdiction over the
tax. Article IV of the Israel-U.S. tax treaty (September 30, 1960)
66
For a summary list of the tax treatment of residents and nonresidents in
developing countries, see Oliver Oldman, "Tax Policies of Less Developed
Countries with Respect to Foreign Income and Income of Foreigners," Taxation
of Foreign Income By United States and Other Countries (Tax Institute of
America,
67
Princeton, 1966), pp. 80-83.
Harvard Law School, International Program in Taxation, World Tax Series:
Taxation
68
in India (Boston, 1960), pp. 290, 296, and 300-301.
The same provision was made for the taxation of capital gains in the treaty
between India and Denmark that was signed on September 16, 1959.

©International Monetary Fund. Not for Redistribution

384 INTERNATIONAL MONETARY FUND STAFF PAPERS

provides that "gains, profits and income derived from the purchase and
sale of movable property shall be treated as derived from the country
in which such property is sold." Gains from the sale of real property
are deemed to be income in the country where the real property is
situated. Similar provisions in the tax treatment of capital gains between
the United States and Israel are found in the tax treaties between
Pakistan and India and between Japan and Malaysia.
A model tax convention which was formulated by the Fiscal Com-
mittee of the Organization for Economic Cooperation and Development
(OECD) would tax capital gains from immovable property in the place
where the property is situated. Capital gains from movable property
would be taxed in the country of the seller's residence.69 It is noted that
more and more tax treaties follow the OECD model in the allocation
of tax jurisdiction on capital gains.

69
Organization for Economic Cooperation and Development, Fiscal Committee,
Draft Double Taxation Convention on Income and Capital (Paris, 1963).

©International Monetary Fund. Not for Redistribution

 TAXATION OF CAPITAL GAINS IN DEVELOPING COUNTRIES 385

Imposition des gains en capital dans les pays en voie de

développement
Résumé
Cette étude porte sur 19 pays en voie de développement qui imposent
les gains en capital et elle examine les principales questions liées à cet
impôt, notamment la définition des avoirs en capital, la notion de
réalisation, les méthodes d'imposition des plus-values non réalisées,
la durée de possession, l'échelle des taux et les exonérations. Le rapport
attire l'attention sur le fait que le traitement des pertes en capital, bien
qu'aussi important que celui des gains, est négligé dans de nombreux
pays.
Dans les pays en voie de développement, la composition des gains en
capital n'est pas la même que dans les pays industrialisés; dans ces
derniers, la plus grande partie des gains en capital provient de ventes de
valeurs mobilières, et dans les premiers de ventes de biens meubles et
immeubles et plus particulièrement de biens fonciers. Dans les pays en
voie de développement, 1) la fortune est généralement concentrée en
biens fonciers, 2) les sociétés à capitaux étrangers prédominent et
le marché de leurs actions est international, 3) enfin l'usage d'actions au
porteur est généralisé et il est par conséquent difficile de percevoir
un impôt sur les gains en capital provenant de titres.
La forte concentration de la fortune et la légèreté relative des impôts
fonciers ainsi que les "plus-values non gagnées" dont bénéficient
fortuitement des particuliers par suite de la croissance économique de la
société soulignent l'équité d'une imposition des gains en capital dans
les pays en voie de développement. Cette imposition peut également
contribuer à freiner la spéculation, plus particulièrement la spéculation
foncière, et à décourager les investissements économiquement impro-
ductifs. Les répercussions nuisibles à l'économie que peut avoir cet
impôt sur l'offre d'épargne et sur la mobilité du capital doivent être
soigneusement pesées, en tenant compte du fait que la nouvelle réparti-
tion des investissements qu'il provoquera peut être moins bonne que celle
qui existait lorsque seul le revenu ordinaire était imposé.
Le rendement fiscal de l'imposition des gains en capital est faible
dans les pays en voie de développement et l'administration de l'impôt
est par ailleurs complexe et coûteuse. Un pays en voie de développement
devra donc évaluer les mérites de cet impôt non seulement en termes de
recettes fiscales, mais également en fonction de ses conséquences
économiques, sociales et administratives.

©International Monetary Fund. Not for Redistribution

386 INTERNATIONAL MONETARY FUNDgÉÉÉFF
NDgpbf PAPERS

La tributación de las ganancias de capital en los países en

desarrollo
Resumen
En este trabajo se examina la experiencia habida en 19 países en
desarrollo en cuanto a la tributación de las ganancias de capital y se
tratan los principales aspectos del impuesto, incluyendo la definición de
activos de capital, el concepto de realización, métodos de devengo, la
duración de la tenencia, la estructura impositiva, y las exenciones. Se
advierte el hecho de que, aunque el tratamiento de las pérdidas de
capital es tan importante como el de las ganancias de capital, en muchos
países se prescinde de él.
La composición de las ganancias de capital en los países en desarrollo
es diferente de la de los países adelantados; en los segundos, la mayor
parte de las ganancias de capital se derivan de las ventas de títulos o
valores, mientras que en los primeros se derivan principalmente de las
ventas de activos físicos, especialmente de propiedad inmobiliaria. En los
países en desarrollo: 1) la riqueza tiende a concentrarse en la
propiedad inmobiliaria, 2) predominan las empresas de propiedad
extranjera y las acciones por ellas emitidas se negocian internacional-
mente, y 3 ) se halla muy difundido el uso de las acciones al portador,
lo que dificulta la exacción de un impuesto sobre las ganancias de
capital procedentes de títulos o valores.
La elevada concentración de la riqueza y la relativamente baja
tributación de la propiedad inmobiliaria, junto con los "incrementos no
ganados", o sea los aumentos de valor que disfrutan los individuos
como resultado puramente fortuito del crecimiento económico de la
sociedad, subrayan lo justo que es en los países en desarrollo hacer
tributar a las ganancias de capital. Un impuesto sobre las ganancias
de capital puede coadyuvar también a coartar la especulación, espe-
cialmente en lo referente a la propiedad inmobiliaria, y a desalentar
las inversiones que sean económicamente improductivas. Hay que
sopesar con cuidado los efectos económicos adversos que un impuesto
sobre las ganancias de capital pudiera tener sobre la oferta de ahorro y
sobre la movilidad del capital. Para ello hay que tener en cuenta los
inconvenientes que puedan producirse, en cuanto a la distribución de la
inversión, cuando se grava el ingreso ordinario pero quedan libres de
impuestos las ganancias de capital.
La renta obtenida en los países en desarrollo con el impuesto sobre
las ganancias de capital es baja, siendo además compleja y costosa la
administración del mismo. Un país en desarrollo tendrá, por tanto,
que ponderar las virtudes de dicho impuesto no solamente en términos
de la renta que produce sino pensando también en sus consecuencias
económicas, sociales y administrativas.

©International Monetary Fund. Not for Redistribution

 In statistical matter (except in the resumes and resúmenes) throughout
this issue,
Dots ( . . . ) indicate that data are not available;
A dash (—) indicates that the figure is zero or less than half the final
digit shown, or that the item does not exist;
A single dot ( . ) indicates decimals ;
A comma (,) separates thousands and millions;
"Billion" means a thousand million;
A short dash (-) is used between years or months (e.g., 1955-58 or
January-October) to indicate a total of the years or
months inclusive of the beginning and ending years or
months ;
A stroke (/) is used between years (e.g., 1962/63) to indicate a fiscal
year or a crop year;
Components of tables may not add to totals shown because of rounding.

©International Monetary Fund. Not for Redistribution

 Publications of the International Monetary Fund
International Financial Statistics
This is a monthly publication which presents for most countries of the world
current data useful for analyzing international payments and problems of inflation
and deflation. Each issue contains about 360 pages. An annual supplement gives
comparable figures for prewar and early postwar periods. International Financial
Statistics is now available, at the option of the subscribers, in English only, or in
English, French, and Spanish. Subscription (for 12 issues and an annual supple-
ment), $10.00. Single copy, $1.50.

Direction of Trade
The great expansion in world trade in recent years has emphasized the im-
portance of current information on the developments and shifts in trade patterns
of the industrial and less developed countries. The Direction of Trade (DOT) has
been designed to meet this need.
DOT assembles and makes rapidly available detailed trade-by-country informa-
tion for almost all countries of the world, arranged in a uniform pattern of partner
countries and expressed in U.S. dollars. Monthly issues provide the latest data for
the current year and comparative data for the preceding year on each country's
trade with all other countries. Totals are shown for the major geographic and
economic areas. An annual issue gives detailed country data for several years and
includes world totals and a number of summary and analytical tables for major
areas. DOT is published jointly by the International Monetary Fund and the
International Bank for Reconstruction and Development.
Subscription for 12 monthly issues and the annual issue, $10.00. Single copies of
monthly issues, $1.00 each and of the annual issue, $3.00 each.

Balance of Payments Yearbook

This annual series, now issued monthly in looseleaf sections, provides compre-
hensive information on international transactions for more than 80 countries.
Subscription for each volume, $7.50.
* * *
University libraries, university faculty members, and university students may
subscribe at the reduced rate of $3.00 a year to any one of the Fund's four sub-
scription publications—Staff Papers, International Financial Statistics, Direction
of Trade, and Balance of Payments Yearbook—and to all four at the rate of
$10.00 a year.
Subscriptions are quoted in U.S. dollars but are accepted in the currencies of
most countries.

Address all inquiries to

The Secretary
INTERNATIONAL MONETARY FUND
19th and H Streets, N.W. Washington, D.C. 20431, U.S.A.