Written evidence submitted by Jeffrey
Owens[66],
Director of the OECD's Centre for Tax Policy Administration
MOBILISING DOMESTIC
TAX RESOURCES:
THE POST
DOHA TAX
AGENDA
The global economic slowdown will hit the poorest
nations hardest. Demand for their exports is falling. Prices of
raw materials are plunging. Flows of money from migrant workers
to families back home will shrink as unemployment rises elsewhere.
In these circumstances it is more important than ever that rich
countries deliver on aid promises. That is why the OECD has called
on the world's main donors to join an Aid Pledge to stick by their
commitments.
When world leaders met last December in Doha
for the UN meeting on financing for development they focused on
the six key areas identified in the Monterrey Consensus:
— Mobilizing domestic financial resources
for development—the focus of this note;
— Mobilizing international resources for
development;
— International financial and technical
co-operation for development;
— Enhancing the coherence and consistency
of the international monetary, financial and trading systems.
There is an ominous symmetry to this list. On
the one hand, there are the fundamental resources required to
achieve critical development objectives, such as the Millennium
Development Goals. On the other hand, this list also summarises
the resources that risk being hardest hit by the global economic
crisis.
One of the challenges we face relates precisely
to the degree to which the world economy has become integrated.
This makes it very difficult to talk about "mobilizing domestic
financial resources" without also talking about "international
trade", or about "international resources" without
also discussing "coherence". This submission, however,
will focus on mobilizing domestic financial resources for development
and in particular the role of taxation
Mobilizing domestic financial resources for development:
the critical role of taxation
On the face of it, taxation and domestic resource
mobilization might be low down the list of current priorities
given the current crisis. However, even in these difficult times
there are three compelling reasons for putting tax at the centre
of the domestic financial resource agenda.
First, tax provides the long term financial
platform for sustainable development. Tax is the lifeblood of
state services. In the current crisis when the poorest people
in the world stand to suffer most, taxation becomes even more
relevant to sustainable financing and development.
Second, tax matters for building effective states.
Bargaining between governments and taxpayers has played a central
role in the emergence of democratic governance. Citizens want
more responsive government. They want the state to be accountable
for its action or inaction and tax is the vital link between governments
and societies. Improved tax relationships between state, business
and population have provided a strong underpinning for broad-based
growth and state efficiency, for example, in East Asia.
This is not just a question of raising more
taxes, although this may be appropriate for many LDC. How and
from whom tax is raised matters, not just how much. It is clear
that a broad based but low tax rate system is effective in resource
terms. And a fair and transparent system that operates with social
consent is important for good governance.
Third, taxation combined with economic growth
is the antidote to long term reliance on aid. But it is important
to emphasise that tax and aid should be seen as complementary
measures.
Challenges to achieving a more effective taxation
But we have to be realistic about the challenges.
Poor countries often lack the resources and capacity to build
effective tax collection systems. Developing the institutions
and the human capacity to implement tax policy in a way which
enables transparency and certainty is a key challenge. And both
have to be maintained in the face of the constant threat of corruption
and competition from better resourced employers.
It may also be difficult to collect tax from
low income, agrarian economies with large informal sectors, and
to avoid coercion, especially at local level. Moreover, the poor
often already pay an equivalent of tax in the form of bribes and
informal fees.
Citizens may be unwilling to pay tax, perceiving
unfairness in tax collection through special exemptions (such
"tax expenditures" are very high in Latin America for
example) and partial implementation. They are likely to have a
clear perspective of the extent to which governments consistently
misuse public funds. The degree of fiscal legitimacy directly
reflects the confidence that the people show in their government's
performance in collecting and spending tax revenue. The credibility
of the tax system suffers when expenditure is regressive and widens
rather than narrows the gap between rich and poor. The role of
the taxation as an agent of transfer is critical. There is a direct
relationship between the quality of expenditure and the readiness
of citizens to meet their formal tax obligations. Hence, expenditure
must be better targeted to improve access to water and sewerage,
health care and education including secondary school enrolments
for the broad population base.
And tax collection problems do not necessarily
stay within borders. Tax havens deprive governments of revenues
needed for hospitals, schools and roads, forcing honest taxpayers
to pick up the tab. This applies as much or even more for developing
countries as it does for developed ones. If developing countries
are to take firm action to stop this loss of revenue and make
the most effective use of their domestic financial resources for
development, then they must have the tools to protect their tax
bases from capital flight and international tax evasion.
Tax havens undermine the tax base of both developed
and developing countries by offering secrecy and no-tax environments
to would-be evaders. Most estimates place the value of assets
held in tax havens to be in the order of trillions of (U.S.) dollars,
much of this from developing countries. If only a small percentage
of these assets (and the income they generate) go unreported to
tax authorities in the taxpayer's home jurisdiction, the problem
amounts to many billions of dollars of tax revenue that may go
uncollected.
The OECD has developed standards of transparency
and exchange of information that have been universally accepted.[67]
The implementation of these standards will allow developing countries
to improve taxation of their own residents' income not only in
respect of undeclared foreign assets but also domestic assets
since they reduce the attraction of shifting assets abroad. At
the same time it will force offshore financial centres to compete
on the basis of services provided rather than secrecy offered.
Reasons for optimism?
There are reasons for optimism. Simpler, more
transparent tax systems and a widening of the tax net can encourage
taxpayer mobilisation. More certain and transparent tax administration,
and more consultation, can improve relations with taxpayers, and
thus voluntary compliance. Bringing people into the tax net brings
other broader benefits too. Taxpayers, however small their contributions,
become part of the formal economy bringing rights and entitlements
to pensions or social security. And taxpaying can provide a foothold
into the credit system. In Malawi, for example, the banks use
a certification scheme for proof of tax paid as a rating of credit
worthiness. There are democratic dividends too. Tax payers become
registered voters able to participate in the democratic process.
Fiscal legitimacy and democratic legitimacy are two sides of the
same coin. As taxpayers see the impact of expenditure on their
lives, they are more likely to pay their share, thus acquiring
a direct stake in the system and to engage in the political process
itself enabling a shared dialogue on common developmental goals
agreed through business, public and government through a transparent
political process based on public access to information.
These issues are explored in a new publication
from the OECD: Taxation, State Building and Aid.
Change will only come when driven by people
in developing countries. And here the area of taxation provides
an example of a landmark initiative which deserves donor support.
The African Tax Administration Forum is currently being developed
by a Steering Group of African Tax Commissioners from Botswana,
Cameroon, Ghana, Nigeria, Rwanda, South Africa, and Uganda. It
is African led, based on African assessments of African needs.
It arose out of a meeting of 30 African Tax Commissioners
with OECD Commissioners, sponsored by the OECD donors and the
African Development Bank which took place in Pretoria in August.
The Forum's objective is to make a difference
through mutual co-operation: for governments to share experience
on good practices in taxation, for the benchmarking and tracking
of performance in tax administrations, for the development of
diagnostic tools and for a focus on capacity development programmes.
It will provide a focus to the work already going on in the region.
The results will be better service delivery and taxpayer education,
strengthened audit and human resource management capability, and
ultimately increased accountability of the state to its citizens.
This is an initiative which deserves to be supported by the international
community.
So what must we do now?
We need to develop a renewed focus on enhancing
domestic revenues through broadly-based taxation, alongside higher
aid flows at least in the medium term. Experience shows that this
will both increase and enable greater predictability of revenues.
It will also help guard against unpredictable aid flows directed
at assisting LDC in building up their tax capacity, ensure that
aid-funded investments are sustainable, and prepare for an orderly
exit from aid in the long term.
We need to help empower a broader base of citizens
through their involvement in the process of revenue raising and
expenditure. Promoting demand in civil society for fair and transparent
tax services strengthens the practical relationship between state
and society. Support by donors for the development of a new Tax
Payers Association in Kenya has had promising results. The closer
association of civil society in the revenue raising and expenditure
process will increase self-reliance by mobilizing domestic resources
across a broader base, thus increasing resources for growth, improving
democratization of the state, and reducing corruption.
We need to do more to support revenue raising
efforts in partner countries. In 2006, only 0.07% (USD 88 million)
of Official Development Assistance (ODA) from OECD countries was
dedicated to tax and revenue related tasks. Despite this low figure,
there is strong evidence suggesting that aid targeted at capacity
building in revenue administrations in Africa is money well spent.
In Rwanda, for example, donor support to the Rwanda Revenue Authority
resulted in a dramatic increase in domestic revenue: revenue as
a percentage of GDP increased from 9% in 1998 to 14.7% in
2005.
We need as a matter of urgency to help countries
retain and tax the profits attributable to them from global multinationals,
and to move forward in the implementation of the OECD transparency
and exchange of information standards in tax matters so that all
countries—developed and developing—can count on the
assistance of their neighbours to counteract international tax
evasion and avoidance.
We need to expand co-operation between international
organizations active in the tax area particularly the UN Committee
of Tax Experts, the IMF, World Bank and others to enable us to
work together with developing countries to improve tax policy
and revenue administration, which will diminish reliance on aid
in an uncertain climate. In this respect the UN may wish to consider
joining the International Tax Dialogue, an initiative of the World
Bank, IMF, EU and regional development banks which has shown that
it can act as a forum on for a global dialogue on taxation and
provide informal co-operation of assistance in the tax area.
We need to work above all with the people and
organizations who are transforming the landscape, to support initiatives
like the locally driven African Tax Administration Forum, recognize
that one size does not fit all and that many voices need to be
heard. A growing tax base and better tax compliance will enable
developing country governments to finance the skills and infrastructure
needed for a vibrant economy to generate employment-creating growth
and help to eradicate poverty. This is the task that we all share.
OECD, with 50 years of experience on tax that developing
countries can draw on, stands ready to work with individual countries
and international organisations to meet these challenges.
66 The views expressed should not be taken to represent
those of the OECD or it Member countries. Back
67
Reference to Tax Co-operation: Towards a Level Playing Field,
OECD, September 2007. Back
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