The World Bank

Written evidence submitted by ActionAid

Introduction

1. The IMF and the World Bank have been giving advice to countries on their tax policies for several decades. This advice has been linked to loans provided by the International Financial Institutions (IFIs) often in the form of a condition for the continuation of that loan, or linked to a rating of the country. As a result the policy advice of the IFIs has been highly influential. Tax will have been a key concern to the IFIs as a means to ensure that developing countries can raise the funds needed to pay back their loans, as well as being a key contribution to their development.

2. Mary Baine, Commissioner General at the Rwanda Revenue Service says that "taxation is key to increasing our legitimacy and ability to make our own decisions." [1] Tax is a critical contributor to development, providing governments with the resources they need to build their own national infrastructure, whether that be physical infrastructure or the education, healthcare and other services that these countries must have if they are to develop as independent nations, eventually without aid. Tax is also a critical component of the contract between citizens and states. In order to build that relationship between citizens and state taxation must be fair.

3. It is clearly important that the Bank’s approach to taxation contributes optimally to these development objectives, whilst also ensuring policy space for developing countries to build tax policy appropriate to their own contexts, to this end, there are a number of areas the Committee may wish to enquire into further.

Tax policy advice and the World Bank

4. Tax policy has been at the heart of policy advice from the IFIs to developing countries for the last twenty years. Tax reforms became an increasingly important part of the larger structural adjustment programmes promoted by the World Bank and the IMF in developing countries from the late 1980’s. [2]

5. In 1990 the World Bank hosted a conference to review and discuss the results of a research project which examined tax reform experiences in a number of developing countries [3] . Some of the conclusions about developing country tax structures reached at the conference were that they showed:

· heavy reliance on import duties and export taxes: which undermines long term international competitiveness,

· consumption taxes are underexploited,

· narrow tax base and high rates of income and corporate taxes.

6. On the basis of this research, a set of policies on tax have been developed by the Bank as well as the IMF which have been regularly communicated through policy advice, loan conditionalities and technical assistance. These policies have been described by C. Adam and L. Bevan, "During recent decades, a powerful consensus has developed (which) has included not only the structure of taxes, but also the level of tax rates (…) to refuse to subscribe to it would be imprudent as well a incurring disapproval from (the IMF and the World Bank)." [4]

Some of the most prominent policy recommendations forming the basis of the IFI’s tax consensus have been;

7. Broadening the tax base and lowering tax rates are presented as the foremost goal of any tax reform initiative in developing countries. Broadening the tax base can generate higher revenues while also providing similar tax treatment to various individuals and activities in similar economic circumstances [5] .

8. Lowering import and export tariffs consistent with the Bank’s support for trade liberalisation has been support for lowering trade related taxes and the attempt to offset the subsequent revenue losses with the general implementation of VAT. As Emran and Stiglitz explain in a 2005 paper, "a reduction in the trade tax with a compensating or revenue-enhancing increase in VAT has been the centre-piece … and it has been implemented in a large number of developing countries under the structural adjustment and stabilisation policy conditionalities of the IMF and the World Bank" [6] .

9. Trade related taxes represent a key source of income for most developing countries. Indeed, some estimates show that developing countries rely on trade related tariffs and taxes to finance around 30% of their budgets (A. Caliari, 2009) [7] . The IMF has found that of 125 countries studied, "middle income countries had been able to recover between 35 and 55 cents per dollar of income from lost trade income, whereas lowest income countries had recovered basically nothing" [8] .

10. The value added tax (VAT) should form an important element of an agenda for sales tax reform in developing countries. This has been presented as the best way to increase tax revenues in a non distorting manner, consistent with the principle of neutrality [9] , although the overall distributional impacts of VAT are at best not clear [10] .

11. Improved tax administration is a prerequisite for the success of tax reform. Some of the factors behind the weak tax administration in developing countries are: selective and lax enforcement practices, ineffective tax administration due to political inertia, disenchantment with income taxes as revenue instruments in an environment where tax evasive behaviour is the rule rather than the exception.

12. World Bank advice on tax policy has not been limited to these issues but they form the basis of the recommendations the IFIs make.

Points for further investigation

Developing country ownership over tax policy

13. The regularity of the policy recommendations indicates that developing country governments may not always had the opportunity to develop a combination of taxes that they feel best suit the political and economic situation in their country. This is of critical importance because tax plays a crucial role in building trust between citizens and their government, if the consent of citizens is not a high priority then that trust will be lost, and tax compliance will fall. As in so many other areas, there are no one-size-fits-all solutions.

14. Sometimes tax policy has been influenced directly through conditions such as prior actions and benchmarks attached to loans. For example two loans were approved by the World Bank in 2009 for Ghana: the Second Natural Resources and Environmental Governance Development Policy Operation (US$ 10million); and a fast track Economic Governance and Poverty Reduction Credit (US$300 million), which is disbursed in tranches. [11] These agreements contained five benchmarks and prior actions on taxation, including one requiring the government to have ‘adequate fiscal and regulatory frameworks for oil and gas revenue management in place to prepare for their inclusion in the budget 2010 and developmental use’ [12] . This kind of conditionality causes concern as it can fly in the face of the important principle of country ownership of policy. The Bank accepts this and has made commendable strides over the last few years in reducing the number of conditions it attaches to loans.

Transparency in technical assistance

15. The importance given to improved tax administration has entailed the use of technical assistance by World Bank staff to help reform the structures and systems of revenue departments, making them autonomous, installing computer systems and training developing country revenue staff. This is likely to be very useful, but the extent to which policy advice is delivered alongside technical assistance is opaque as the content of the assistance is not made public.

16. For example, Ghana’s Economic Governance and Poverty Reduction Credit 2009 details that, "In the area of revenue collection and efficiency, the Government is taking a number of measures... Work on the taxation of extractive industries has also begun and, with World Bank technical assistance, a paper will be presented in 2009 to Cabinet with recommendations for improvements" [our italics.]

Influence of the Doing Business Indicators

17. The Bank continues to have significant influence through the messages it conveys through its Doing Business Indicators which are widely consulted by businesses and governments alike.

18. The Doing Business indicator on tax is composed of three equally weighted elements; time, total tax rate and number of tax payments per year. The lower the score for each of these criteria, the better; demonstrating where it is easiest to pay tax. While it is sensible to encourage tax administration for users to be simple in terms of number of payments and time taken, the implication that the lower the rate of tax the better is effectively a fairly blunt policy prescription that exerts one-size-fits-all pressure on developing countries to keep corporate income tax rates low. The top ten countries for paying tax include many low tax jurisdictions; the Maldives, Qatar, Hong Kong, United Arab Emirates, Singapore and Ireland head the list.

19. The report’s message has been that, in addition to reducing the burden of tax compliance, countries should reduce the amount that they tax businesses. Simeon Djankov, the senior World Bank economist who created the Doing Business series, described the philosophy, "There is a good rule in setting taxes, the poorer the country the lower the tax burden. This is for two reasons. First, poorer countries waste more tax money through corruption. Second, lower tax burdens for businesses lead to more economic activity. [13]

20. A  2008 report by the Bank's Independent Evaluation Group (IEG) on Doing Business concluded that it was "of particular concern [that] the paying taxes indicator relies exclusively on a single firm to provide both the underlying methodology and the data for 142 countries". That firm is PricewaterhouseCoopers. The IEG recommended that the paying taxes indicator needed to be changed because it involves ‘implicit judgements on complex issues of fiscal efficiency and equity.’ The evaluation recommended, "DB to reformulate the paying taxes indicator to include only measurements of regulatory burden such as the total cost of compliance. The Indicator has not yet been changed in line with this recommendation..

The International Finance Corporation (IFC) and tax havens

21. While the World Bank loans to Ghana described above called for enhanced fiscal regimes for the extractive industries in the oil sector, in February 2009, the board of directors of the World Bank’s International Finance Corportation (IFC) approved loans worth $US 215 million to Kosmos Energy and Tullow Oil for the exploitation of the newfound oil and gas reserves in Ghana. At the time, civil society organisations (CSOs) raised concerns that "Kosmos Energy Ghana HC is indirectly wholly owned by Kosmos Energy Holdings, a privately-held Cayman Island company." [14]

22. This is one of many instances where the IFC has provided loans to companies that are owned or partially owned by larger companies that are based in secrecy jurisdictions. Frequently, multinational companies use tax havens to avoid taxation in the countries where they operate. In a recent paper on Development Finance Institutions and the use of tax havens, it has been argued that ‘there would be no reason for incurring the cost of a tax haven intermediary for investment purposes if there was no tax saving as a result. As such we think it a tautology that tax is not paid somewhere whenever such structures are used’ [15] The World Bank is aiming to support developing countries to mobilise domestic resources for development, so it should not, on the other hand, provide financial support via its private sector lending arm, the IFC, to companies that are domiciled in secrecy jurisdictions [16] .

23. The IFC has strengthened its due diligence to the extent that a project document must include a rationale for using an offshore financial centre (OFC) in any investment as of February 2009.

Tax avoidance and evasion by multinational companies

24. This is a very important way that developing countries lose tax revenue. The OECD estimates that developing countries lose more money due to them as tax as a result of finance moved to tax havens than they receive from developed countries in aid .

25. Recently the International Accounting Standards Board has been considering adopting a requirement for country by country reporting by extractive industries. This would mean that companies must publish the revenues, cost figures, and further information, incurred in each country that they operate in, rather than just at a consolidated level. Country by country reporting is supported by civil society groups as a means to tackle tax evasion by multinational companies. In July, the Bank vice president Charles McDonough expressed welcome support for this reform, advocating the "inclusion in an IFRS of all the Publish What You Pay (PWYP) disclosure proposals on a country by country basis, including payments to governments and we would argue that it is justifiable on cost/benefit grounds." [17]

26. Discussions on CBCR, at both the OECD and the IASB, are moving towards a cost-benefit analysis of different proposals. While the costs to corporations are relatively straightforward to assess, quantifying the benefit to different stakeholders is more complex. The Bank could therefore make a useful contribution by fleshing out its support for CBCR with a full analysis of the benefits.

Tax neutrality and fairness

27. The IFI’s have supported tax neutrality whereby taxes are indirect at a flat rate and are designed not to affect market outcomes yet they also fail differentiate between the wealthy and the poor. The IFIs consensus policies have supported lowering corporate and personal income taxes and increasing VAT (with or without attention to distributional effects) and have paid less attention to wealth taxes such as property taxes [18] .

28. Jonathan di John has written that of the main policy proposals of the IMF and World Bank, VAT has been promoted not only because it is less distortionary (neutral) but because it is administratively and politically easier to implement than progressive income and property taxes. As a result equity concerns have been downplayed in many LDCs which may have important implications for political stability. [19]

29. In a study of 10 low income and 10 low-middle income countries Article IV agreements with the IMF it was found that VAT was recommended or endorsed in 90% of the sample but in only 5 cases (25% of the sample) were distributional consequences acknowledged or addressed, and of these only one was a low income country. Poverty and Social Impact Assessments are carried out by the World Bank and of 42 that were available on the World Bank’s website in 2007, only three, undertaken in Tanzania, Mozambique and Uganda had related to taxation [20] .

Questions about the World Banks tax policy

· Can the Bank outline how it consults with developing country finance ministers and revenue departments in order to support a greater variety of tax policies and administration?

· Can the Bank ensure that any technical assistance that is provided on the issue of tax administration is documented and made publically available?

· In particular can the World Bank elaborate on any advice that they have given to the Ghanain Revenue Department on how they should structure their oil and gas fiscal regime?

· Can the Bank change its Doing Business indicator on tax in order to simply measure the burden of tax administration? A crude measure based on headline tax rates sends the wrong message, and may prejudice democratic decision-making about corporate tax rates and the overall fiscal balance.

· Can the Bank ensure that any investment from the IFC does not contribute to the erosion of the tax base in developing countries – or indeed developed countries – either a) directly through the use of investment pooling or holding companies in tax havens to facilitate tax avoidance, or b) indirectly by providing business to tax havens and legitimising the kinds of corporate structure that facilitate tax avoidance and evasion?

· Can the Bank conduct a study to demonstrate the development benefits of country by country reporting, taking into account its use by a full range of stakeholders?

· Can the Bank conduct poverty and social impact assessments before making policy recommendations on tax policy?