Written evidence submitted by Jeffrey Owens[1], 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 trade;

· International financial and technical co-operation for development;

· External debt; and

· 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[2]. 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. I n 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.

 

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[1] The views expressed should not be taken to represent those of the OECD or it Member countries.

[2] Reference to Tax Co-operation: Towards a Level Playing Field, OECD, September 2007.