To be published as HC 1821 -i

House of COMMONS









Evidence heard in Public Questions 1 - 72



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Oral Evidence

Taken before the International Development Committee

on Tuesday 28 February 2012

Members present:

Malcolm Bruce (Chair)

Hugh Bayley

Richard Burden

Mr Sam Gyimah

Pauline Latham

Jeremy Lefroy

Mr Michael McCann

Chris White


Examination of Witnesses

Witnesses: Martin Hearson, Policy Adviser, Economic & Social Development Team, ActionAid UK, Joseph Stead, Senior Economic Justice Adviser, Christian Aid, and Savior Mwambwa, Executive Director, Centre for Trade Policy and Development, gave evidence.

Q1 Chair: I bid you good morning and thank you for coming to give evidence. It is a slightly more formal engagement than last night, but it is good to see you here. Perhaps for the record you would first introduce yourselves.

Savior Mwambwa: My name is Savior Mwambwa and I am from Zambia. I work with a group called Centre for Trade Policy and Development on tax and development issues.

Joseph Stead: I am Joseph Stead. I am a senior economic justice adviser at Christian Aid.

Martin Hearson: I am Martin Hearson and I manage ActionAid UK’s Tax Justice campaign.

Q2 Chair: Thank you very much. This is the first evidence session of this inquiry, which is focusing on tax and development and how to raise revenue. We are looking in particular at mineral resources and the taxes that are or are not adequately levied on them, with Zambia being a case study. It is good to have you here to enlighten us, or indeed to direct us on the questions we should ask as we visit the country in a couple of weeks’ time. In your evidence you have tended to look at corporate taxation rather than other forms of taxation. Why do you think that is the higher priority? One can speculate that that may be where the capacity to collect tax is greater, but do you think it is right that corporate taxation is the main focus for increasing the revenue base in developing countries where there are significant corporate operations?

Joseph Stead: To clarify it, from the perspective of ActionAid there are a number of different priorities for developing countries of which corporate taxation is one. I think the question for us is: what is the priority for the UK Government? What is the value added for the UK, and what is the priority for you as a Committee looking at what DFID and the UK Government in general can do? In that area we felt it was important to make clear that, while there are many different things that DFID is doing, and can do, to support developing countries across the range of issues that need to be addressed-corporate taxation, individual taxation, administrative development and so on-there are many issues where policies elsewhere in Government, particularly the Treasury, have an impact in the area of corporate taxation. That is why we feel it is important for the Committee to look at that issue.

Savior Mwambwa: The Committee will be interested to know that, for countries like Zambia that are dominated by lots of foreign companies, lots of other non-tax benefits may come from such investment, but tax revenue is the most important one. By the very nature of the mining industry, it is not very integrated in the rest of the local economy. There are very few benefits in terms of employment and very little technology transfer, so for a Government like Zambia’s maximising tax revenue is the surest way to make sure that the benefits of such foreign investment are spread across the rest of the local people in the shortest possible time.

Q3 Chair: When we had a tele-briefing with DFID in Zambia last week they suggested that the situation had turned round in that country in recent years from a point where effectively the Government were subsidising the mining industries to the tune of about 4% of GDP. They are now getting a revenue base out of mining of about the same amount, so that is a turnaround of about 8%, which is obviously in the right direction. First, is that a fair summary of your understanding? Second, what is the potential for them to go further down that route? Is there scope to get more taxes out of the mining sector in Zambia?

Savior Mwambwa: It is true that the new Government have put in place very specific, positive steps to try to redress the situation, not only to increase tax rates but to deal with some of the regulations around the agreements between the mining companies and the Government, but, if you compare it with the potential revenue the Government can raise, there is still a long way to go. A lot of constraints face the country, especially the Government, which have to do not only with the existing structure rules in Zambia but also the international system around that. There is definitely a lot of political commitment by the new Government to try to turn round the situation.

Chair: To put that in context, this is our first evidence session. We will be visiting Zambia and, as it happens, Malawi, and we will be taking further evidence when we get back. We are hoping to be better informed to ask questions, particularly of British companies and their accountability, so anything you can say on that front will be helpful to us.

Q4 Jeremy Lefroy: I should declare an interest, in that I lived in Tanzania for 11 years and have been involved in business, corporate taxation and so on. While absolutely recognising the importance of corporate taxation issues, do you agree that personal income taxes, particularly those of the wealthy elite in many of these countries, are also a major issue? I was extremely concerned about the lack of income tax collected from people living in those countries who were extremely wealthy, whether nationals or expatriates. It is absolutely right to focus on corporate taxation issues, but I think we should cast the net a bit wider. Do you agree?

Savior Mwambwa: I cannot speak for Tanzania, but definitely for Zambia. I agree it is very important, but, if you look at the facts, it is quite clear that in Zambia income tax forms the biggest proportion of Government revenue compared with corporate tax. The mining companies in proportionate terms contribute far less to Government revenue. I agree with you, but that is not the case in Zambia. What we are trying to say is that more can be done by the international community-countries like the UK-and our own Government to have a proportionate balance.

Q5 Chair: Is there an issue of administration? Clearly, the people Mr Lefroy is talking about, who would be high earners paying tax-the elite-are one thing, but, if you go down the scale, I would guess that the administration of trying to collect a small amount of tax from relatively low earners could be quite burdensome in a developing country. Is it better to try to get those taxes in the form of VAT or indirect taxes that people pay on their transactions, and concentrate income tax on the higher end of the income scale?

Joseph Stead: First, there are some concerns about trying to go too far down the indirect tax route, because there are issues about how progressive that may be. Certainly, VAT can be very regressive in terms of putting high cost on very low income earners.

To come back to the point about personal income taxes, we accept that it is an area in which action needs to be taken. The way we have structured our submission is that, in addition to looking at corporate income tax, we have stressed the international financial system and the way that the structure of secrecy jurisdictions allows large amounts of capital flight. A lot of that is personal incomes. The fact that we have secrecy jurisdictions that allow that to be hidden from view creates a problem for personal income taxation. We think the UK can bring value to this by taking action to reduce the levels of secrecy globally, and that will provide the information that will allow developing countries to improve their efforts in collecting income tax. You have a situation where Africa is a net creditor to the rest of the world due to the amount of money flowing out from the continent. That is where we see the UK’s role in tackling that.

Martin Hearson: That is absolutely right. Many of the solutions that we advocate in terms of corporate taxation, particularly information exchange agreements, better coverage of those and a more effective mechanism to make that work, would also be a benefit in tackling high earners.

As to your point about going down the income scale, one of the things we are concerned about as NGOs is that there are moves to try to bring the informal sector into the tax system. That is something we encourage, because it means more people will have a stake in the fiscal contract, and ultimately more tax revenue is raised, but it has to be done in a way that is perceived to be fair. As these efforts take place in developing countries, insufficient analysis is being made, as happens here, of the impact on different income groups, for example by gender, of different tax measures. In looking at the question you ask, which is very important, I think more work needs to be done, which could be supported by DFID, to help developing countries do the kind of analysis we do here.

Q6 Pauline Latham: In terms of people working for NGOs in different countries, where do they pay tax? If somebody is working for ActionAid, Save the Children or Oxfam but they are working permanently in Zambia, or as permanently as anybody in any job, where would they pay their tax?

Savior Mwambwa: I worked for a British charity, WaterAid, in Zambia. I think the case may be true of other similar groups. You pay tax to the Zambia Revenue Authority, unless in the beginning when the organisation is setting up you apply for tax exemption, which is given in certain circumstances mostly for humanitarian organisations. I think that those who pay income tax, like my NGO and others, would pay it to the Revenue Authority.

Q7 Pauline Latham: So British people who are sent out there would pay tax in Zambia.

Savior Mwambwa: I do not know about British people.

Q8 Pauline Latham: I am talking about people whose origin is in Britain. Obviously, if you are a Zambian you will pay tax in Zambia, but I am talking about NGOs who send people from Britain to work out there. Where do they pay their taxes?

Martin Hearson: For ActionAid the vast majority of our staff working in a particular country are locals who are employed locally and pay taxes locally.

Q9 Pauline Latham: That is the vast majority. What about the minority?

Martin Hearson: As to that minority, we have some expat staff, and international tax rules define where your tax liability arises. It depends on from where you are earning it. Tax treaties will state the definition whereby your tax liability arises either in, say, Zambia or the UK if you are an expat. It is not up to us; it is defined by international tax rules.

Q10 Pauline Latham: So there are quite a few British NGOs working abroad who pay tax here and not in the country where they are working.

Martin Hearson: There is a small minority of NGO staff working in developing countries who may pay tax here.

Q11 Mr Gyimah: Moving to transfer pricing, which features quite prominently in your written submissions, can you briefly outline why you consider this issue to be so crucial?

Savior Mwambwa: Speaking from the Zambian perspective, I could give many concrete examples. Existing rules on transfer pricing make it very difficult for Government authorities in a country like Zambia to prevent the tax avoidance practices that companies undertake. A specific example in Zambia is one of the Glencore subsidiaries-just one company-which is believed to have avoided paying at least $50 million over two or three years, partly because it tried to manipulate the transfer pricing rules. That happened in spite of the existence of such rules in Zambia, but also current international rules like those of the OECD are insufficient to tackle that. It can get complicated for a poor country like Zambia whose authorities are short-staffed to police such rules. I think more can be done to have alternative mechanisms to create a disincentive for companies to do this.

Joseph Stead: The reason we see it as a key issue is that it is a global problem; all countries struggle with this, but it is especially marked in poor developing countries. The estimates of losses are huge. Christian Aid’s research into transfer pricing and false invoicing estimates lost revenue of $160 billion every year. One of the main problems is that at the minute a set of rules devised through the OECD works to some degree, not perfectly, for developed countries, but as it is applied to developing countries it is proving very difficult to get it to work effectively. There is a complex set of guidelines that does not necessarily fit the capacity or nature of the economies in developing countries to work adequately, and developing countries do not have a voice in how the rules are being developed. The OECD guidelines are formed by the developed countries, and that is an arena in which developing countries are not able to contribute. They are not members of the OECD and so it becomes very difficult for progress to be made to get those rules to work for developing countries. I think that is the nub of the concern.

Martin Hearson: You had a written submission from the African Tax Administration Forum, which brings together 35 tax authorities across Africa. It is an impressive organisation that is doing great work to try to build capacity on the continent. I have had the opportunity to talk to them quite a few times. One of the things to which they draw attention is that this is a particular area they will not be able to tackle without a combination of simplified or revised international rules and capacity building. As Joe says, it is a perfect example of an area where the UK, not just as an aid donor but also as a player in the international tax system, has an important role.

Savior Mwambwa: We filed an OECD complaint in 2010 regarding the Glencore case with a Swiss national contact point. They opened a formal inquiry but it could not go further because Glencore refused to co-operate. Given the nature of the way these things are designed-for example, they are voluntary, not binding-they do little or nothing to deter companies from engaging in that. The rules or even the mechanisms to seek recourse could be there, but in reality they are ineffective. There is a need to look at it again critically and reform existing mechanisms.

Q12 Mr Gyimah: Which is more important: strengthening transfer pricing or enforcing existing legislation?

Savior Mwambwa: I think it is both; it is not a question of either/or. You can enforce something only if it is proven to be effective in the first place. I think we have first to look at the design. Is what is in existence appropriate and effective? If not, what sort of reform do we need? Then we can look at the second step of enforcing much more effective rules.

Q13 Jeremy Lefroy: I entirely accept the point about transfer mispricing but would like to give a couple of examples. When I was involved in coffee in Tanzania, as an association we, together with the Tanzanian Government, introduced a scheme whereby coffee exports were measured against market prices, and it could not be exported without meeting those market prices. I thought that was a good scheme, but it was discontinued. I do not know whether it was discontinued because of pressure from the industry-I do not think so-but the Government could have continued with such a scheme but chose not to. That was a classic example of a good mechanism that was available but was not working. In another case I remember looking at some official statistics and seeing an incredible example of what I believed to be the blatant under-pricing of a particular commodity. I raised it with the official body in the country concerned; I wrote to them. Nothing was done about it. Do you not think this is a two-way thing? It is not just about companies that are always desperately trying to get away with things; it is about Governments and trade associations, or whatever, working together to come up with something that is transparent, workable and market-related. It takes both sides to do that, and in some cases there seems to be a lack of willingness on the side of Governments as well as the international business community.

Savior Mwambwa: Absolutely. There are things that are very much in the remit of national Governments, and also issues of political commitment. That is why, for example, we advocate transparency in terms of transactions in which companies engage across borders, or country by country. That would also help to deal with governance issues to do with corruption and the secrecy surrounding that. I agree with you, but there could be a much more effective way of unravelling these kinds of relationships if, for example, we go for the basic principles around transparency, especially for companies that work across borders. If there is a reference price, with internal trading and everything else, it is still very complicated if you do not shine the light of transparency on what is going on, even for Governments.

Martin Hearson: Certainly, the atmosphere in Africa has changed over the last few years. There is a strong willingness among revenue authorities, and in many cases Governments, in African countries to build capacity to deal with transfer pricing. That is why it is one of the main priorities for the African Tax Administration Forum. In many cases they are hamstrung by the fact they are told by donors they must use the existing international standards; there is no room to negotiate or change them.

So, in the kinds of discussions you are talking about, they are often discouraged from going down that route, which is the one Brazil has pursued. Brazil has its own tailored transfer pricing regime, which it has developed in consultation with business, based on market rates, and it is a much simplified approach. But other countries are actively discouraged by donor organisations, and in many cases by the Treasury here, from pursuing the same course.

You are right. That is precisely why the current transfer pricing rules are an obstacle rather than a solution to this. India has the biggest tax authority in the world. It has never won a single transfer pricing case that has gone to court; it has always lost. That is because the rules make it so hard for a tax authority challenging a multinational company to build a solid case.

Q14 Mr McCann: I have two questions for Joseph. First, in your written evidence you set out your objections to the controlled foreign companies rules. Can you explain to us exactly what your objections are to the rules?

Joseph Stead: I can. Possibly I should defer to ActionAid because they have done more of the research than I have. In fairness to Martin, I should let ActionAid take credit for some of this.

Martin Hearson: It is useful to set it in the context of a report produced last year in the run-up to the G20 summit in Cannes by the IMF, the OECD, the World Bank and the UN. The G20 asked them to come up with some recommendations for things they should do on tax and development. One thing they said was that in certain cases tax policy changes in G20 countries could have spill-over effects on developing countries. As an example, they said that effectively the controlled foreign company rule changes had the potential negatively to impact on developing countries. They recommended that Governments should conduct a spill-over analysis, which is to understand in as much detail as possible how this might impact developing countries and then think about steps to take to mitigate it either by legislation or capacity-building work. The Treasury refuses to do that, so we still do not have that analysis for the UK despite that recommendation from those key international economic advisers.

Our key concern is what the changes to the existing rules will do. To explain what they do, the CFC rules discourage the shifting of profits from the UK, or any other jurisdiction, into a tax haven because they impose UK tax rates on a tax haven company that is owned by a British company. So, if I have a subsidiary in Jersey and another in Ghana, and try to move my profits from Ghana to Jersey to get the tax liability in Jersey, the UK will impose the UK tax rate on the Jersey company. Therefore, it discourages me from doing that. Under the changes to the rules that will no longer apply unless I am shifting profits from the UK into the tax haven. If I am shifting it from any other country, such as a developing country, that will no longer apply, which means it is much more advantageous for me as a multinational company to shift my profits out of a developing country and into a tax haven. Because developing countries are at a much earlier stage of developing their legislation and administration, they are much less protected from those kinds of activities than developed countries.

Mr McCann: That is extremely clear.

Joseph Stead: We have asked the Treasury why they are unwilling to do such an impact assessment following the report to which Martin referred. The answer we still get back from the Treasury is that these rules are designed to look solely at the impact on UK tax revenue. That is the concern we have with the Treasury and why we believe they are not thinking about the impact on development of any of their policies. While the Treasury’s main focus will always be on the UK, we strongly believe-this is supported by the IMF, the World Bank, the OECD and the UN-that they need to look at the impact that UK policy can have on developing countries. It may not be the primary focus but they need to think what the impact will be, and we just do not see that. That is why we would like a Committee like this to ask those questions of Treasury, because so far we do not feel we have had satisfactory answers from them.

Q15 Chair: Is your assessment that the end result is that less tax is being paid overall, or that the tax is being paid but not to the benefit of the developing country in which the operation is taking place?

Martin Hearson: In the changes proposed in the budget, less tax would be paid both in developing countries and in the UK, so the changes have an impact both in the UK and developing countries. We think the impact is more significant in developing countries, but it would reduce overall the tax liability of companies.

Q16 Mr McCann: I have another question for Christian Aid, which I think you will be able to answer. Christian Aid have estimated the capital flight from developing countries to be $160 billion, but a number of organisations question that figure. How did you arrive at it?

Joseph Stead: It is not the capital flight; that is the lost revenue as a result of tax evasion. I can go through that if you want. We did address this before the Committee back in March 2009. I do not know whether you want to go back to that.

Q17 Mr McCann: Has it changed, or is it just the same?

Joseph Stead: It is the same explanation. I know there has been reference in other submissions to a report published that questioned our analysis on the basis that we had not gone down to a low enough level on the trade data. We had a discussion with the author of that report. They accepted we had done more than they assumed. We can provide you with further written evidence of exactly why that attack on our report was flawed, and the details of the conversations we had with the author, which said that their criticisms were not valid in the way they claimed.

Q18 Mr McCann: Can we get that information?

Joseph Stead: We will send that to you in writing.

Savior Mwambwa: Perhaps it is not surprising you do not have one agreed figure. By the very nature of the issues themselves, when investigating tax avoidance there is secrecy, so it is very difficult to get accurate figures. To illustrate it with an example, a few weeks ago the Zambian Minister of Mines announced that the Government would institute an industry-wide audit of most of the major mining companies, because it was believed that the Government of Zambia was losing $100 million in tax avoidance. So, whether it is $100 million or $50 million, you can contrast clearly the proportion of forgone income with, for example, DFID’s budget support to the Zambian Government.

Q19 Chair: The implication behind that is that DFID would be better occupied helping the Zambian authorities to collect taxes rather than handing over aid money.

Savior Mwambwa: One of the things is to build capacity, but you will not solve the entirety of the problem by that means. If we are arguing about figures, whether it is 10 million or 20 million, our own Government recognise this as a very big problem and one of the areas they need to deal with to close a major loophole, but they need support. A lot of the problem is not really about the local structure but the way the international network of systems and rules is designed. There is no question about the extent of the loss; it is in huge proportions, whether it is in Zambia or the rest of the developed countries.

Joseph Stead: The estimates come from looking at macro level statistics. We put all that together. It is not just Christian Aid; others have made the same estimate. Transfer mispricing appears to be a huge problem. Companies come back and say there is no evidence at the micro level in individual companies. We would love to be able to provide that evidence, but getting access to the information to do that is very difficult. Because of the way companies report and the information to which we have access, being able to find and then publish transfer pricing problems and things like that is very difficult.

We have been trying to do research into the transfer pricing of cobalt from the DRC to Finland. From the external evidence it appears that cobalt is being sold by GTL, which is the company in charge of cobalt production in Congo-it is based in Jersey, so you cannot get access to any of the company accounts-to Finland, where one of the joint venture partners has a huge cobalt smelter. From all the external evidence, it looks as though there is a huge problem of under-pricing of that cobalt to the tune of about $4 billion over 10 years, but because we do not have access to the accounts and we are unable to gain access to the information, there remain unanswered questions. We cannot get any resolution to take it any further. The companies challenge us and say, "This is not the situation as we understand it. Where are your concrete examples of it?" Because of the way systems and accounting are set up, it is very difficult to get access to that information and provide micro-level examples to support our macro-level figures.

Q20 Jeremy Lefroy: To put a quick definitional question, what would you define as a tax haven? Is the Republic of Ireland a tax haven, charging 10%?

Savior Mwambwa: From my perspective, it is not so much about the tax rate that exists but the secrecy a jurisdiction affords to the information, basically offering advantageous tax preferences. I think the common characteristic is secrecy, which is also backed by the legal protection of the authorities. One country could have a proportion of it with those characteristics. For example, the City of London is listed as a tax haven, in spite of counterintuitive factors.

Martin Hearson: I think the definitional point is less relevant than the properties of a particular jurisdiction. Ireland, for example, has a 10% tax rate and no CFC regime. The dismantling of our controlled foreign company regime that we are doing is exactly what Ireland has already done. Those are some characteristics that mean it is possible for a company to use that jurisdiction to avoid or evade tax in other countries. The same would apply to the Netherlands, for example. Various characteristics about the way it treats intellectual property, for example, make it very attractive. It does not generally appear on the list of tax havens and it is not particularly secret, but it has tax policies that are problematic. Then you have secrecy jurisdictions. Secrecy is an additional problem to low tax rates.

Q21 Jeremy Lefroy: What I am trying to get at is that pretty much every developed country I can think of could be described as a tax haven in one way or another, or has a very close relationship with one. France has Monaco or Andorra; the UK has the Channel Islands. It is very difficult to find a developed country that does not have one way or another of enabling people substantially to reduce taxes on corporate profits.

Martin Hearson: That is why we would go back to the recommendation made by the IMF, the OECD, the World Bank and the UN last year, which was that G20 countries should assess the impact of their tax regimes. They said that, first, you should do a baseline analysis and look at the entirety of your tax regime and the characteristics of it that may have negative impacts on developing countries before looking at changes to it. I think all countries-Ireland, the Netherlands, the US and UK-should be doing that kind of analysis to understand how their tax regime has a negative impact on developing countries; otherwise, all those countries are supporting capacity-building work in developing countries to help them build tax administration capacity, but it is poor value for them if, on the one hand, they are doing that and, on the other hand, their tax regimes undermine that effort.

Q22 Jeremy Lefroy: You are advocating the automatic exchange of information between tax authorities. What kind of information do you think should be exchanged?

Martin Hearson: I will give you an example from our work of the kind of case in which I think it would be useful. We published a report in 2010 on SABMiller, the brewing company, in which we uncovered a number of cases of what appeared to be strong evidence of transfer pricing abuses. There is some debate about whether this was tax avoidance or was closer to tax evasion; that is, whether it was non-arm’s length pricing or just a very clever use of that regime.

The revenue authorities of the African countries involved in that report, including Zambia, met and wanted to be able to discuss that report and consider a joint audit of the company. They were unable to do so because they did not have the legal treaty framework to permit them to discuss the affairs of one taxpayer in another jurisdiction. As part of the research I visited the site in Switzerland, which gave the report some additional colour. When I had a chat with some of their revenue officials, they said that was something they could never do, because in many cases they did not have access to the information they needed. If they were auditing one subsidiary of a multinational, they did not have the full financial information about another subsidiary. Those are two examples.

To me, the more important point is that you need a multilateral treaty framework. Within it you need some information that is exchanged on request and some that is exchanged automatically in order to make best use of that, but the first stage is to get to the point of having a multilateral treaty framework. Africa is going ahead with that; it is developing its own treaty framework. A number of countries in Africa are also joining the global treaty that has recently been created. Africa is moving ahead on this and it needs more support from the UK.

Joseph Stead: Looking at UK policy, it seems that we are actively moving away from that. Martin says that what is needed is something that is multilateral and an automatic exchange. When we see what the UK has done in terms of the deal it has signed with Switzerland, that is not an automatic exchange; it is on request. At best, a limited number of requests can be made, and it is not multilateral; indeed, it is undermining the efforts that are being made to put multilateral pressure on Switzerland. It seems that the deals done by the UK and Germany may scupper attempts by the EU in its savings directive to get a European deal to force automatic information exchange with Switzerland.

We see calls from other countries for automatic information exchange with Switzerland. America, through its FACTA regulations, is looking at trying to get automatic information exchange through banks; India has made it clear that it sees automatic information exchange with Switzerland as very important, yet the UK is actively undermining this by the deals it is signing with Switzerland. We believe UK policy could be much more proactive in this area and support those multilateral approaches towards automatic information exchange that, as Martin says, Africa desperately needs. At the minute, the economic power of African countries is not enough to bring to bear on Switzerland to get access to information that is needed. If the UK with other economically powerful countries makes it clear to Switzerland that they have to do this, I think we can finally break Swiss banking secrecy.

Savior Mwambwa: In the case of Zambia, for example, if we had such a mechanism in place with the automatic exchange of information, probably Glencore would not have engaged in the activities they did in relation to transfer pricing, management services in Mauritius, freight cost in the Netherlands and so on. I think it can also serve as a deterrent to companies that sooner or later the authorities will catch up with them.

Q23 Pauline Latham: Following on from automatic exchanges of information, would country-by-country reporting add anything extra?

Joseph Stead: Yes, I believe it would. Country-by-country reporting would do several things. It would help to restore trust and understanding of exactly what role multinational corporations are playing in the various societies and countries in which they are operating. There is a clear demand for people to understand exactly what a company is doing in every country where it is operating, so it would help with that. It would also make it much easier for revenue authorities in developing countries to identify where potential abuse of the tax system may be happening and thus be able to identify clearly where to focus their attentions and audit.

It would also help in the long-term process of being able to have a better understanding of exactly how multinationals work and international taxation operates. I think that to provide more data in an easier and more accessible format would allow a wider range of people to engage and take the debate forward; it would certainly help those in developing countries to formulate stronger policies and positions. If that is combined with efforts that are desperately needed to create greater space in those international fora, such as the OECD and strengthening the role of the UN in this, developing countries will then have a much more powerful and meaningful say in exactly how we get international tax rules and norms that work for all countries.

Savior Mwambwa: I think it promotes the kind of cooperation among countries in the region that we see, for example, with Sadiq Petroleum and Tricontinental Oil. Zambia and the DRC could co-operate more and more if there was country-by-country reporting. They could come up with common regional tax codes or cooperation, which would also help to prevent big companies playing one country off another. In most cases I think competition should not be among countries but among companies, but currently countries compete to have the lowest tax rates because companies are able to use the lack of information in one country to play one country off another. We need to flip that. Companies should be able to compete and say, "Zambia can offer the highest tax returns from investment compared with this country," and not the other way round. Therefore, country-by-country reporting would make it easier for Governments in the region to cooperate rather than compete.

Q24 Pauline Latham: Do you not think that might impose a financial burden on individual companies, and therefore it would disincentivise their investment in individual countries?

Savior Mwambwa: I think the cost of that is marginal compared with the gains that would come. Market information is one of the factors that can lead to efficiency. The problem with the current system is that only a few companies take advantage of that, so it is not a level playing field, but once you have country-by-country reporting it will lead to more transparency and access to information, the gains from which would far outweigh any costs of doing that.

Q25 Pauline Latham: You talked about Zambia working with DRC. Is that a reality, because individual countries do not necessarily relate terribly well to each other?

Savior Mwambwa: Because of the current system of secrecy, they feel they have to compete with each other, but not once they are sure there is more gain to be had from cooperating. A lot of things are happening. At AU level, a few days ago a high-level panel of experts led by Thabo Mbeki was set up to promote these kinds of issues. We also have the Africa Mining Vision, which has emphasised the need for that kind of cooperation. In Zambia the new President, Michael Sata, won the election on the fight against corruption and the need to get the most from tax revenue from mining. Already you can see these changes happening within African Governments themselves, so there is enough political drive and appetite. That is building, and it needs to be supported.

Q26 Mr Gyimah: To go back to the comment you made a few minutes ago about countries not competing on tax rates, I am not sure I understand fully what you mean. Are you saying they should all have the same tax rate?

Savior Mwambwa: Not necessarily the tax rate. For example, the structure as it is now is that Glencore can come to Zambia and say, "I want a mining licence, but in order for me to invest in your mining sector you give me X concessions or tax rates. If you don’t, I’ll go to DRC because there I will get the following." That need not be the case.

Q27 Mr Gyimah: Are those concessions corporate tax rates?

Savior Mwambwa: It is a range. They might include tax rates but they may include other things like tax breaks, or electricity subsidy for example, but as long as it is done in secrecy it is not easy for one country to know what the other country is offering. The Government of Zambia needs to sit in some formal setting with DRC and say, "What are the basics, the minimum and the principles about how we deal with multinational companies?" I am not saying they should have the tax rate, but that they could agree on similar things and have transparency. That would help them increase their bargaining and negotiating power with the companies, because transparency is one of the biggest tools countries can have against multinational companies.

Q28 Jeremy Lefroy: Given that the Chinese are by far the biggest buyers of some of these minerals and commodities around the world, are you pressing the same case you make here on the Chinese Government?

Martin Hearson: In terms of country-by-country reporting, we are calling for an international financial reporting standard, which would apply across the vast majority of countries in the world.

Q29 Jeremy Lefroy: Including China?

Martin Hearson: I am not sure on that factual point. I do not want to say one way or the other, but I know that the general move is towards convergence. For example, the US and India are now starting to adopt those standards, but the primary vehicle we have been advocating up to now has been the G20, which incorporates China. It is an interesting discussion, because back in 2009 at the London summit, when the issue of tax havens first came up one of the difficulties was that it was not just the UK that had its associated tax havens. China has Macau and Hong Kong as well. There was quite difficult negotiation there. We think it is very important that on a lot of these issues there is movement at global level, because it is at that level you can deal with the kind of issue you are raising. We as NGOs have difficulty influencing a country like China. That is what we have been calling for.

We have been pushing for country-by-country reporting, because we recognise that there is work to do on cost-benefit analysis and that it is not yet a finished proposal. That work has been taken forward by an OECD task force, which incorporates OECD member states but also developing countries and tax haven countries and a whole variety of stakeholders. That task force was set up by the OECD after pressure was exerted by the previous UK Government. It is a little disappointing that under the current Administration there seems to be much less enthusiasm for that work at an international level on tax justice, which is a shame, because real progress is being made to assess, by country-by-country reporting, the cost and benefits to work out what further research needs to be done.

Q30 Jeremy Lefroy: To challenge you on that, I have not come across anything that would indicate that this Government is less keen on that than the previous one. Are you able to give us some evidence of it?

Martin Hearson: Sure. This task force was established in 2009 under the auspices of the OECD. It has a number of working groups. One of those working groups looks at country-by-country reporting; another looks at transfer pricing; another looks at information exchange. Each of those working groups has a number of members from OECD Governments, NGOs, businesses and so on. When the task force was proposed, the Minister at the time, Stephen Timms, spoke up and put some funding in. They pressed the OECD to initiate this. They were very vocal and present at ministerial level at some of the meetings. Since the change of Government, often the one civil servant in DFID who has this brief is either not there or does not speak. I hear from people who are more engaged in the secretariat that, whereas under the previous Government it was felt the UK was the driving force behind the work on tax and development in the OECD, now it is not clear.

Q31 Chair: Which Government Department are we talking about?

Martin Hearson: This is precisely our point. DFID has had this relationship, although in the previous Government it was Stephen Timms, the Treasury Minister. David Gauke, Mr Timms’s replacement, would be in a position to engage much more in the OECD’s work than he has been doing currently.

Q32 Chair: Maybe we should follow that up, Mr Hearson.

Martin Hearson: We think that would be a really positive thing to do.

Q33 Jeremy Lefroy: We should ask David Gauke about it and allow him the right of reply to that charge, which is quite a serious one you are making. Would you acknowledge that, under the current Government-I am not saying the previous Government were not doing it-DFID are placing a great deal of emphasis on local revenue collection through things like the Trade Mark East Africa developments, which have substantially increased revenue collection in Burundi, for instance, and take both local and cross-border revenue collection very seriously?

Martin Hearson: In our preparation for this inquiry, way before we were asked for evidence, we made a submission-we did not use FOI-requesting a summary of all of the work that DFID was doing to support capacity building in developing countries. That was in August, and it took until the deadline you set for submissions for that information to be gathered. We understand that is because up to now there has been no centralised approach to the work that is done on tax and development. There are some very positive and successful isolated examples, but there is not a strategic approach. That is not just across DFID; it needs to be across the whole of Government. HMRC does a whole range of work as well, some DFID-funded and some entirely on its own initiative, to support capacity building. There are examples of things begun under the new Government. One of the really positive ones is the research centre, and in a few minutes you are to hear from Mick Moore, who leads that. That is a really great thing that has been done. But what is missing is a strategic approach that understands where DFID’s resources are best devoted to support the work that the African continent is already doing and is crying out for support, and where the rest of Government needs to look at its own policies.

Joseph Stead: We see some of the great stuff DFID does in this area, but it does not seem as though it adds up to a whole, so it is a matter of seeing that cohesiveness within DFID and, as Martin says, the idea that this project is shared across Government. In his Beyond Aid speech, Andrew Mitchell made it very clear that he saw part of DFID’s role to make the case for development across Government and ensure that other Government Departments saw themselves as having a role in development. We do not see that happening in this area, especially when the Treasury is such a key player. We need to see that. It is vital to make sure the Government deliver on this agenda; that the good stuff they do can be scaled up and communicated; that it fits in with the great efforts made in revenue collection in developing countries; and that a change in UK tax policy, or an approach in international fora, does not undermine the work being done by allowing further tax abuse to happen in another area.

Q34 Hugh Bayley: I would like to begin with a question to Mr Mwambwa. You talked about hundreds of millions of dollars in revenue forgone by the Zambia Revenue Authority. As a committee we are focused on the impact that UK policy can have on poverty reduction, for example as measured by the millennium development goals. Are you able to give us any feel in terms of poverty reduction how much $100 million of aid is capable of buying in Zambia compared with $100 million of additional revenue raised by the Revenue Authority? Of course, aid comes with conditionality; it might be earmarked for, say, schoolteachers’ salaries, whereas general Revenue Authority money is spent in the ways that the Government of Zambia think best.

Savior Mwambwa: As you are aware, apart from the European Union, which is the biggest provider of budget aid to Zambia, DFID itself has been providing aid to Zambia for a couple of years. Recent statistics from the Central Statistics Office in Zambia show that in spite of that poverty levels have not reduced. That is against the backdrop of previous dependency on aid. In this year’s budget at least the proportion of local revenue is about 70%, and it is estimated that 20% is aid money. Over the last five years Zambia has seen a sharp reduction in the amount of aid dependency. Of course, it is good that our country has become less dependent on aid, but what increased tax revenue will do is also strengthen local accountability and the ability of citizens to hold Governments to account. It also helps to deal with corruption. There are qualitative values in increasing tax revenue, aside from the resource utilisation aspects of it. The normal argument would be that maybe the advantage of aid over taxes is that donors have control over how it is used, but in terms of the actual impact that you want to have, it is quite clear that no amount of aid would substitute the country’s own ability to generate local resources because of all the other benefits that come from that.

Q35 Hugh Bayley: Perhaps I may ask one of you to describe the changes that the UN wants to see to the role and remit of the UN tax committee?

Martin Hearson: UN bodies do not always get a good press, and that is often justified, but it is important to say that in this case we are talking not about a big amorphous UN body but about a tightly focused committee of experts that produces tools that are used every day by revenue authorities in developing countries. In particular, its model tax treaty is well respected and is used a lot in negotiations of tax treaties by developing countries. The discussion is about the fact that the predominant set of international standards is still the OECD, which does not and cannot represent the interests of-

Q36 Hugh Bayley: I understood that distinction from your evidence, but what are the changes to the role of the UN tax committee that the UN’s Economic and Social Council is supporting and that you tell us the UK Government are not supporting?

Martin Hearson: The changes are proposed by the G77. The Economic and Social Council did not reach a decision because of opposition, so it is the developing countries that are advocating these changes. The changes were two-fold. The first was to increase the committee’s resourcing, because at the moment it has three staff in total. It is inadequately resourced; it does not have the resources to pay for the travel of members to all the meetings held, which means that developing country participation is reduced. So, the first aim was a considerable increase in resourcing. The second aim was to keep the committee of experts as currently constituted but to create a separate intergovernmental body, the reason being that the experts are represented in a personal capacity. It is interesting to have a body in which developing countries and developed countries are able to discuss international tax issues in an official capacity. That is the key thing that is missing and what is being proposed.

Q37 Hugh Bayley: I would like to draw two parallels. I understand from work I have done in years past on trade the value that UNCTAD has as a kind of forum that empowers developing countries, which the WTO does not do to the same degree. Nevertheless, if you do not reach agreement in the WTO, there is no deal. I think of the UN to some extent as a talk shop and a way of facilitating conversations and perhaps providing services to people from poorer countries, but it does not have the authority to impose decisions. I did work over 10 years to get the Bribery Act on to the British statute book. The OECD anti-bribery convention was a driver; the UN convention was much more decorative; it did not have a bite. Is there not a danger in undermining the OECD? Shouldn’t you be trying to strengthen the UN tax committee so it can provide better advice and services and a voice to developing countries? If you were to undermine the work that the OECD does, surely you would end up reducing the pressure on developed countries to become more transparent and address the very issues that you are raising with the committee.

Joseph Stead: The problem with the analogy of trade is that the WTO does at least have representation by the developing countries, so they have a voice in the WTO as well as in UNCTAD.

Hugh Bayley: That is true.

Joseph Stead: The problem with the OECD is that the developing countries are not there as members to have a legitimate voice in those discussions. The danger is that, if you keep the OECD as the driving force, it will pay attention to the interests of its members, who are the developed countries. Therefore, the developing countries do not get their voices and interests taken into account.

Q38 Hugh Bayley: Aren’t you cutting off your nose to spite your face? The OECD has a strong track record of making countries like Britain get real about things like bribery and anti-corruption and to change its law. The UN just does not have the leverage to make Britain, the United States, France, Germany and Japan change their laws. You might dream up a little utopia-or a big utopia-in the UN, but, surely, you need the OECD to make the rich countries of the world do the sorts of things you are advocating.

Martin Hearson: I make two points. Firstly, by no means are we saying there is not a role for the OECD. The way it works at the moment is that the UN committee takes the standards set by the OECD, adapts them for the needs of developing countries and then produces an equivalent. That works very well because the OECD has a strong role. That is very important to note. I had a second point but I have forgotten it.

Q39 Mr Gyimah: We have received some written evidence that suggests that the introduction of a mandatory beneficial ownership registry would be useful. Would you support that? What do you think the measure would achieve?

Joseph Stead: Essentially, we would support it. What it would achieve is that you would know who owned things. That is a huge problem at the minute. The existence of shell companies makes it very difficult to know who is behind things. There are countless examples where shell companies have been used for corrupt purposes. Politician or elites have been able to buy mineral rights or whatever and keep their involvement hidden, and that is clearly helping corruption. We had an example of the Northern Rock-owned Granite entity. No one knew who owned that. It is a problem in terms of the financial crisis in the UK. Not having clear ways to understand who owns things can create huge problems in accountability.

Chair: You will appreciate that we are in a dynamic situation. You have given us written and oral evidence. If you reflect on anything you have said to us, or anything we have said, that you feel you can add to following this evidence session, please feel free to pass that on to us. It will help us to ask questions if we have that kind of ammunition, some of which you have given us. Please do not regard this as the end of it. If you have anything else that you feel is important or relevant to the inquiry, I hope you will feel able to give it to us. We will be visiting Zambia in particular in a couple of weeks’ time and we will have an opportunity to explore these things in more detail, so it is particularly helpful that you have been able to be here today. We appreciate the fact that you have taken us through your perspective on that. Perhaps I may say formally thank you very much indeed. Obviously, you are welcome to sit in on the second half of the evidence this morning, if you wish to do so.

Examination of Witnesses

Witnesses: Professor Mick Moore, Professorial Fellow, Institute of Development Studies, Professor Tim Besley, School Professor of Economics and Political Science, London School of Economics, and Dr Jonathan Di John, Senior Lecturer, Department of Development Studies, School of Oriental and African Studies, gave evidence.

Q40 Chair: Good morning and thank you very much for coming in. You have been able to sit in on the first half of the evidence session. I shall ask you to comment on that in a minute. I would appreciate it if for the record you would introduce yourselves.

Dr Di John: My name is Jonathan Di John. I am a senior lecturer in political economic development at the School of Oriental and African Studies.

Professor Besley: My name is Tim Besley, School Professor of Economics and Political Science at the LSE.

Professor Moore: I am Mick Moore. I am an academic researcher on economics and politics. I am the Chief Executive Officer of the International Centre for Tax and Development, which is a research centre funded jointly by DFID and the Government of Norway.

Q41 Chair: You have heard some of the comments and, indeed, accusations made by the previous panel. Do you have any particular comments, either where you take issue with what they have said or you want to reinforce their position, if you feel that they are right? I ask each of you briefly whether you want to comment.

Professor Moore: I have three quick comments. First, Hugh Bayley, you asked whether aid to Zambia would be more poverty reducing than local taxation. There is a very important broader point here. Some recent research suggested that aid is probably the most unstable source of public revenue for developing countries. In a situation where a major source of revenue is unstable, it is almost true by definition that public expenditure will be very inefficient, because you do not know how much money you have. By contrast, taxation is the most stable source of revenue. There is a presumption that tax is better than aid, all else being equal. I think that is a strong presumption.

As to my second comment, some of our previous colleagues, in particular Mr Mwambwa, talked about transparency. I think transparency is a key thing running through a wide range of particular points here. Transparency about rules and their application is central to many of the things discussed, like transfer mispricing, tax havens and information exchange, but one issue that was barely mentioned is tax exemptions given by Governments of developing countries. For many developing countries these are very large and often unjustified. Typically, for many African countries, as far as we know, 5% of gross domestic product is given away annually in tax exemptions, and that might be a third, or even more, of actual tax collections. We are talking about a large amount of money. These exemptions are often given on a rather arbitrary basis and are not transparent at all. That is a very important issue to be taken into account here. I am not saying who is responsible for this, but it is a very big issue that should be mentioned.

As to my third point, perhaps my attitude differs a little from that of some of the previous speakers. I ask the Committee not to be sidetracked by the argument about the allegedly regressive nature of value added tax. Apart from the United States, value added tax is almost worldwide now. It is a slightly complicated but very efficient way of raising revenue. Almost all developing countries have adopted it and it is bedding down rather well. It is far from clear that value added tax is a regressive tax. Yes, it falls on consumption, but in many developing countries, as in Britain, a large number of basic goods are zero-rated, so it is not clear that it is actually regressive, and research shows we do not know the answer. But the important thing about its alleged regressive nature is what tax this is actually replacing. In a situation where tax authorities find it very difficult to raise revenue at all, if you have a good instrument that is doing a very good job, I would keep it and concentrate on other things. I would not want to raise that as a problem.

Professor Besley: I begin where Mick ended. I think the tenor of the previous debate was, for natural reasons, a little too focused on some of the multinational taxation issues, which I will come to in a second. It is important to recognise that the long-run project is to build broad-based taxation in the area of VAT and income tax. If we lose sight of that, we are losing sight of the main development problem. Apart from the benefits that Mick outlined, VAT has considerable benefits to encourage administration, because the process of administering VAT involves firms formalising and submitting proper accounts because they get the advantage of deducting the tax on their inputs. There are lots of long-run benefits from eventually introducing a well-administered VAT. The same goes for income taxation. The history of income taxation is that firms are predominantly responsible for complying, not individuals, even though it is an individual tax. The vast majority of tax in the UK is collected through PAYE, and the history of it is that you develop strong systems of firm-based taxation, so again there is a long-run development benefit built into trying to build those broad-based taxes.

I have a couple of comments on things that have been raised. There is a very big difference between resource and royalty taxation and corporate taxation in general. If you told me that the plan was to raise the cost of capital to multinationals operating in the developing world, in general I would say that is a very bad idea. In general, there is overwhelming evidence that the kinds of benefits that foreign direct investment bring to development outweigh the costs in almost all areas. Therefore, discouraging it by trying to increase the cost of capital to operate in the developing world as a general phenomenon would, I think, be a mistaken mandate. Of course, you want them to comply with broad-based rules.

Q42 Chair: A point was made about competition between different countries with tax exemptions, deals and lack of transparency. I just question, therefore, whether in those circumstances if a company declares that its operation in one country is loss-making and finishes up paying no tax but, by other transactions, picks up a profit elsewhere, it is not benefiting the country.

Professor Besley: That is absolutely right. I am not going to push back on that particular point, but China’s use of special development zones with tax exemptions has been a key part of its development strategy. India is now doing it. Of course, it has to be controlled, and it has to be recognised that there are wider issues of exactly the kind you describe, but I do not think there is a general issue here that says there should be a mandate to tax corporations more heavily in the developing world. But I would draw a distinction in the case of royalty taxation, which is a separate issue. The International Growth Centre to which I belong has been doing some work on royalty taxation in Zambia. We have someone working with the Zambian Government on alternative systems of royalty taxation, but that is a separate set of issues where I see a much stronger case for wanting to raise more taxes. We can come back to some of these issues.

Dr Di John: I make just a couple of comments. Firstly, the issue of tax exemptions is quite an important one and it was not emphasised. I also think they are not necessarily always irrational or arbitrary. A lot of it has to do with the types of privileges and subsidies given to powerful interest groups, elites and so on.

Q43 Chair: Which very often include Members of Parliament.

Dr Di John: That is correct. Secondly, aid is much more volatile than tax revenues, although one needs to distinguish between those countries that are very dependent on, say, oil as the dominant form of tax. Oil-dependent economies will have a much more volatile tax base, or historically have done so, than those with a more diversified one.

Thirdly, in the previous session I think there was unquestioned acceptance of the tax gap and how much tax revenues are lost to less developed countries, and OECD countries for that matter, because of tax havens. The Oxford Business Group has done important work on taxation, arguing that there might be serious overestimates of that gap: first, because there are a lot of tax exemptions from which elites benefit, so all the income tax lost because of a tax haven is not necessarily, or likely to be, taxed in a poor country; and, secondly, there are a lot of tax exemptions and tax holidays given to foreign investors as part of production strategies, so that money going back in will not necessarily be taxed either. There needs to be some more serious work on how big that tax gap is.

Chair: Those are interesting comments.

Q44 Hugh Bayley: To start with Dr Di John, why is the capacity of revenue authorities in countries that are broadly similar economically so different country to country? Why are some revenue authorities much more effective than others in introducing tax systems that work and raising revenue from them?

Dr Di John: That is a very good and complicated question, and it is one of the frontier questions of political economy research. One of the things has to do with the economic structure of a country, so countries that have taxes that are easier to collect, for example on oil and minerals, tend to be higher tax collection countries. Thandika Mkandawire of the LSE has done historical research on why, broadly speaking, southern African countries tend to have a higher tax effort and collection than the rest of sub-Saharan Africa. He found in some of the work that there was a colonial story to this, which was to do with the fact that in southern African countries-South Africa, Zimbabwe, Zambia, Botswana and so on-there was much earlier formalisation of the labour force than in other sub-Saharan African countries. Because of that there are many more registered workers. He finds that legacy has an important statistical relationship to why southern African countries collect tax.

I think the second reason is really a case-by-case one. The political economy, settlements and elite bargains in countries in terms of how big tax exemptions are tend to differ substantially among countries at similar levels of development.

Thirdly, I would argue that countries that have more well-developed national political parties-this is not always the case-tend to be able to mobilise tax better than those political systems at the same level of development that have more fragmented party structures.

Q45 Hugh Bayley: Professor Besley, what do you see as the relationship between the effectiveness of a tax authority and the prospects for economic growth in the country concerned? Is there a correlation? Which drives which?

Professor Besley: The answer is that neither drives either, but that does not mean it is unimportant. If you look at the history of the way states finance themselves, it is generally a move from narrow bases and forms of finance to broad bases. Broad bases have a huge advantage in fostering incentives for economic growth, because the fruits of that growth generally accrue in the form of public revenues. It is true that countries with broad-based taxation typically will have Governments that have very strong incentives to promote the market economy. Market economies, unlike non-market economies, are relatively easier to tax, so you set up a somewhat virtuous circle between the development of broad-based taxation and economic growth.

Where do you get that broad-based taxation in the first place? That is why I say it does not run in any direction. I think it comes back to the forces Jonathan mentioned. I would add that one very strong statistical correlative effect is a revenue authority’s strong checks and balances on the way Government operates. Typically, parliamentary systems raise quite a lot more revenue than presidential systems, because the latter have many fewer checks and balances on executive power. There is quite a strong correlation between the form of political institutions and the ability to raise taxes. That is a macro political factor when you drill down and look at checks and balances. That is an issue of accountability. Systems that have parliamentary scrutiny typically scrutinise public expenditures more effectively on average-of course, there are different cases-than those that do not.

Q46 Hugh Bayley: I was interested in Dr Di John’s illustration of southern Africa as having a relatively better developed series of tax regimes and authorities than other parts of sub-Saharan Africa. He seemed to be arguing that that was because of earlier development of a formal economy. What is the best way for a developing country to increase participation in the formal and taxable economy?

Dr Di John: Is that a question to me?

Q47 Hugh Bayley: It was addressed to Professor Besley, but whoever wants to answer can do so.

Professor Besley: Dr Di John may want to come in. The answer is a strong legal system. Why do people want to operate inside the formal economy? It is because there must be benefits from operating inside the law. In many countries you are concerned about, law is a rather arbitrary system. Therefore, operating inside the conventional legal system is problematic. What do you do? You operate outside in informal networks, and those informal networks are more reliable than operating through the formal legal system. I once did some research-I have not done it recently-on the time it takes to get a court case heard in India. If you have a commercial dispute it takes a phenomenal amount of time, so firms do not want to operate inside such a system. Formalisation and legal development go together very strongly. That is why throughout history the development of the legal system is absolutely central to the development of the tax system, through credit registries and the formalisation of land rights and other property titles. These two things historically have gone hand in hand, and people want to be part of the formal economy because they believe there are distinct advantages from operating inside it.

Dr Di John: I would broadly think of that as the main issue. A few studies have been done to attempt to register informal sector firms. Judith Tendler at MIT has done work on the poorest state, Ceará, in north-east Brazil. She found that firms were in the informal sector partly because they did not trust the legal system and partly because it gave them the competitive advantage of not paying tax. Her argument was that in Ceará in north-east Brazil the state government managed to register lots of informal leather and shoe firms by providing them with a deal. Her argument is that you need to give informal actors incentives to register because they are in the informal sector for a reason. One thing that happened there was that a push to raise tax registration among informal firms was related to a production strategy, and in return for registering, firms got access to micro-credit and distribution and marketing assistance from the state. There was a huge increase in informal firm registration because they perceived a benefit from it.

One of the things often missing in a lot of the tax discussions is a debate about how to collect more tax. That is often discussed in isolation from what to do with it and as part of other strategies. I think tax needs to be linked much more to production strategies and also to expenditure issues, because the classic reason people give for not paying tax is that they feel the Government will not spend it in a way that benefits them. There need to be more holistic discussions of how tax is interrelated with issues of production and expenditure, and the case of north-east Brazil is a classic example of how one might think about that.

Professor Moore: Tim is absolutely right. It is the legal system that needs to be changed. Tax administrations in developing countries have for a long time been trying to do something about extending the net to the informal sector. I think the message is, "Don’t expect a lot of progress very quickly." Experiments are taking place. The World Bank Foreign Investment Advisory Service has a series of different regimes with which it is experimenting in developing countries. Progress will be slow, one reason for which is that a national tax administration that is focused mainly on taxing the larger corporate sector finds it very hard organisationally to put a lot of energy into taxing small-scale informal enterprises in slums or rural areas. It is true, as many people argue, that if there is to be real progress in taxing the informal sector in developing countries, it will be done by local governments, not national tax administrations.

Q48 Hugh Bayley: In the earlier session, Mr Mwambwa said he would value in-country raised revenue more highly than aid because it would increase accountability locally. You, Professor Moore, said that you felt it was better because it was more predictable, but a moment ago, Dr Di John, you said that people in developing countries were reluctant to pay tax because they feared that, to put it bluntly, the tax would not benefit them, or certainly the country. You seem to be saying something rather different-that there is scepticism about how well used tax is and little accountability to the citizenry in developing countries. Are you saying something different from Mr Mwambwa?

Dr Di John: No. First, there is a wide variation in tax collection, so obviously the legitimacy of Governments in the eyes of the citizens varies across countries. To collect tax you need a certain level of quasi-voluntary compliance, as Margaret Levi always argued. If you had to collect it at the barrel of a gun, the transaction cost would be too high. Because there is a big variation across countries, that particular issue differs across countries, but a good baseline assumption to start with is that somehow expenditure patterns need to be seen as legitimate for tax collection to increase. It is a chicken-and-egg problem, but I do not think there is evidence one way or the other.

Q49 Hugh Bayley: Professor Besley, we have become used to seeing relatively high rates of growth in Africa and in other parts of the developing world in the last decade. They are much stronger rates of growth than we have in the OECD world, if you like. Is there a connection between an increased formalisation of the economy and increased growth?

Professor Besley: The answer is that it will vary enormously depending on the type of economy. If it is a resource-dependent economy, the growth comes primarily from increases in natural resource prices and you do not have a tax regime that taxes that in any way, the answer is that you will not increase collection. It is interesting that at the moment two countries that are quite concerned about trying to increase tax revenues as a share of GDP are China and India, both of whom have enjoyed considerable growth but have quite big structural issues in the way they levy and collect taxes. So there is no natural reason to believe that tax rates, for example, will grow faster than the rate of GDP or even at the rate of GDP growth, and since the demand for public services tends to grow faster than the rate of growth of GDP, you probably need to raise tax revenues more quickly than the rate of growth of GDP. It is not true that countries that have been successful in economic growth, even though they are thought of as countries that are broadly on good growth paths, are entirely satisfied with the way their tax systems are able to generate returns to Government from that growth.

Q50 Mr Gyimah: I want to explore briefly the relationship between the tax base and governance issues. There is a widespread consensus on the notion that countries that have a broad tax base, i.e. a high proportion of the population pay taxes, are likely to be more accountable to their citizens, and vice versa. Bearing that in mind, to what extent does the size of the tax base have implications for the quality of governance from your perspective, starting perhaps with Professor Moore, given the comments he made a few minutes ago about the formal economy and the fact it is more likely that a lot of developing countries rely on a few corporate taxpayers?

Professor Moore: I think we all share your intuition that there must be a connection. I have to say that the research evidence on this is a bit patchy. I cannot give you cast-iron evidence, partly because it is a very difficult subject to research for all kinds of reasons. I am sure there is something there but it is very hard to prove. As to the connection between paying taxes and accountability, in part it is a matter of who pays and in part to whom it is paid. If we focus on most countries in sub-Saharan Africa, I think the important constituency for them in paying tax and the relation to Government is the private sector, both corporate and non-corporate, because they are the taxpayers who tend to be organised-chambers of commerce, etc-and the people who can, if you like, actualise that relationship. That is where I would hope to see progress.

The other point is the local level. Generally speaking, in sub-Saharan Africa taxation at local level is a mess of all kinds, and it is a very unconstructive mess. Taxes are levied in all kinds of arbitrary ways, and it will not change very fast very quickly. International aid has not focused very much on this. The IMF has not focused on this until recently. There is a lot of scope for improving that, particularly through property taxes in medium and larger cities. Over a 20-year perspective I would hope to see quite a lot of improvement there and people paying significant local taxes and, therefore, being more interested in what happens to their money.

Q51 Mr Gyimah: Are there any comments to add to that?

Dr Di John: I want to add a couple of comments about the relationship between tax and governance. First, it is important to remember that, relative to an OECD country, what we mean by broad-based taxation, even when it exists in a low-income country, is that there are very few individuals or corporate entities paying tax or making up the bulk of tax. In a country like Tanzania, at best there may be 1,000 individuals and corporations that pay 80% of the tax base. The big challenge of governance is that you have a lot of demands for representation with very few people paying taxes. That does not mean the tax burden does not affect everyone-VAT does so-but it is much more skewed, and that is a big challenge.

It is also important to keep in mind what we expect from governance when the average tax take in per capita terms is between $50 and $350 per person per year. We have to think of that versus the position in an OECD country where the figure is between $10,000 and $15,000 per person per year. The implications of that are enormous and are not often discussed.

Finally, in terms of local government, the most under-utilised tax, and one that historically was very important in OECD countries, is property and land tax. That is a very under-utilised tax. It was a very big tax in the United States in the 19th century and in Japan in the Meiji restoration. It is a very important tax because it would be the main source of funding for local government, and it is negligible in even middle-income countries, let alone poor ones. Further, to develop property taxes means that you must develop land cadastres. To the extent you do that, it would help to improve the security of property rights. Very few countries have relevant cadastres. I think urban property taxes need to be much higher on the agenda both for their effect on property rights and also the financing of local government.

Q52 Mr Gyimah: An interesting point that Professor Moore introduces is: to whom do you pay the taxes? In countries where governance is poor, is it fair to say that an increase in tax revenues may not necessarily help development? Might it not simply enrich corrupt elites, for example?

Professor Moore: Yes. We should not expect over the next five years that people paying more tax will have any visible impact whatever on governance. We are talking of relationships that develop over decades, not years, so we could be naïve, but it is the long-term structural changes that are important. A couple of things have been mentioned here. Property taxes are important for reasons other than taxes; there are synergies here between things. Value added tax is important because it helps to develop corporate accounts. It is also a great tax because it gradually brings more small businesses into the tax net, or threatens to do so, and therefore focuses their attention on tax issues. A series of things can be done by way of slow but steady institutional changes that will add up quite positively over a couple of decades, not a couple of years.

Q53 Jeremy Lefroy: Continuing on the subject of the tax base, first I return to VAT. One extremely important caveat is that the VAT system has to work. Therefore, the VAT that is reclaimable by organisations must be capable of being reclaimed, and that is a major problem in many countries. They find it takes several years to get back the VAT, if at all.

As to the tax base, I would challenge one point made by Dr Di John, as well as agreeing with something else he said. Particularly in agricultural-based countries, where a large proportion of the population work in that sector, their tax rate is higher than the marginal tax rate of the richest people. Looking at the crop levies imposed, we see that in Ivory Coast in particular it is 40% on cocoa. They are paying a marginal tax rate of probably 80%, given that the income of small farmers-what they receive for their cocoa-includes the price of their labour. Therefore, if a Government takes 30% to 40% as a crop tax, in effect it is an income tax at a huge rate. From the limited work I have done on it, the people on the smallest incomes are paying the highest marginal rate of tax in a country. In most of these countries-think of Tanzania-the highest rate of income tax is 30%. Particularly when commodity prices are low, you find that the marginal rate of tax for farmers is higher than 30%, taking into account all their taxes. The base is very broad but it does not include the right people.

I put to you the question I posed to the previous panel: do you think that one needs to look not just at the question of multinational corporations, which I entirely agree must be part of this, but also the elite? Kenyan MPs pay no tax on very large incomes. I suspect that if you looked at the income tax paid by the elite in most countries it would be virtually zero. If we are talking about transparency, it would be very nice to publish the tax returns of the elite in a particular country, because you would find they do not pay a great amount, which is why I come back to property tax. The question I ask is: would you accept that it is not just a question of multinationals and corporations, important though they are, but the taxation of the elite and expatriates, looking perhaps at how one can reduce the tax burden through the indirect taxes that are in effect income taxes on people like farmers?

Dr Di John: I would agree broadly with what you have said. I have a couple of doubts about the marginal tax rate of Ghanaian farmers. There has been quite a successful economic liberalisation. One of the reasons marketing boards were unwound in sub-Saharan Africa was that the effective marginal tax rate on farmers was so high. It might be quite high; it is probably higher than elites pay, but that is partly because of elites avoiding it. In most sub-Saharan african countries that I know-I have studied the countries in eastern Africa-the tax rates on the agricultural sector is one half of every other sector, so that is not a normal case.

Q54 Jeremy Lefroy: Have a look at countries like Ivory Coast at times when commodity prices are low, and look at the marginal tax rates.

Dr Di John: I completely agree that the issue of domestic political settlements and what elites are allowed to get away with in terms of paying or not paying taxes is the biggest issue in terms of understanding the political economy of tax. I can refer you to a New York Times documentary last year on Pakistan called Elites Don’t Pay Taxes. That is particularly about how the biggest landowners in the country pay zero income tax.

I would point out that, in countries that do collect a lot of income tax, most comes from the PAYE system, so salaried workers contribute the vast majority of personal income tax. In a country like Mozambique, the top 15 corporations pay zero corporate income tax. That is part of a production strategy to attract foreign direct investment, but I agree that personal tax up to 0.1% or 1% is very low. In countries that collect a lot of income tax you have quite a progressive system, in the sense of personal income tax. It is very regressive in the sense that the middle class tends to pay a lot more personal income tax than the upper class. I think that is a common story, expect for South Africa.

Q55 Pauline Latham: To make a comment on that section, when we went to Rwanda we saw a fantastic scheme where they are registering all the land. Until other countries register all the land and have a proper registration of people, there is no way they can have a fair taxation system, because there are so many people who are double-registered or not registered at all; they do not know who owns the land, and they cannot tax people on it. Any developing country must have that system, which is quite sophisticated. It is based on voter registration, but it relates to people who could pay taxes. It is something that needs to be done in all the countries before they can get a proper broad tax base. I want to ask a couple of questions, one a general one and then a question specifically to Dr Di John. Dependency on natural resource taxation often leads to large fluctuations in tax revenues, especially when commodity prices go up and down. How can countries best cope with that?

Professor Besley: The answer is that it all depends on governance. There are countries that have devised effective schemes. One interesting case in point is that the Ghanaians are managing their oil revenues through the central bank because it is the one institution that people trust to take a long-term view and not spend too much out of short-term fluctuations. You might pick an institution like the central bank that you feel has enough credibility to deny what you might call excess spending during boom times, which means you get big fluctuations in revenues.

Pauline Latham: Perhaps we should have them here.

Professor Besley: That is a particular example, but there are questions about how you design those institutions and give them the incentives to make sure people understand the difference between a permanent and a temporary shock in prices. Even the best analysts will tell you that they cannot say whether the current spike in oil prices is temporary or permanent, so it is a difficult thing to do, but we know what is cautious and incautious behaviour in relation to spending in those fluctuations, so it is down to institution design. In other countries there may be very few credible institutions that can resist the political pressure to spend out of resource revenue that inevitably arises. The answer is that it depends. There are solutions available, but I do not think it is one size fits all in relation to giving it always to this or that particular institution.

Professor Moore: I would agree. There are all kinds of funds you can or cannot set up, which have had a rather mixed experience so far. If you want to do it, as a Government you can do so very easily.

Q56 Pauline Latham: I have a specific question for Dr Di John. On your work in Africa you have drawn particular attention to the gemstone sector. Will you comment briefly on the particular challenges in the gemstone sector in Zambia?

Dr Di John: It was quite a small part of the paper I did on the political economy of tax in Zambia, and it was mostly through interviewing politicians and business people in the sector. It is a sector that is largely unregulated. The estimate of its contribution to exports is $300 million to $400 million a year, and what is reported is about $20 million. Most of it goes to the DRC and tends to be owned by political party leaders and associated business people.

Before we talk about the gemstone sector, the argument I was making was that, from the historical perspective, if one thinks that elite bargains are important for creating political stability, as Douglas North and others have argued, economic liberalisation has created an important challenge for how states create privileges or economic rents to elites. Previously you could do it through cheap credit, tariff protection, jobs in state-owned enterprises and so on. Economic liberalisation has taken away a lot of the levers for the creation of economic rents to elites.

In a lot of interviews I found that the tax system, or lack of regulation of particular sectors, had been used as a way to create rents. There has been an increase in the tolerance of tax evasion among elites. I was interpreting the gemstone sector as one way that the dominant political party at the time, which was MMD, was distributing rents or privileges to various members. The challenge of maintaining political stability does not go away just because you liberalise, but liberalisation does mean that the old mechanisms of creating rents are not there. In this transitional period to a more market-based and pluralist economy, we are likely to see the tax system as a substantial source of rent creation in its various forms. That is how I view the lack of regulation of the gemstone sector. There are other examples of this in sub-Saharan Africa in places that are otherwise pretty good tax collectors. Zambia is one of the better tax collectors in sub-Saharan Africa; its tax collection is 17% or 18% of GDP, and it collects, relatively, a fair amount of personal and corporate income tax, especially personal income tax. That was my general interpretation of the sector but it was not a main part of the research.

Q57 Mr McCann: I move on to harmonisation between donors, in particular how you see DFID’s role. There is a perceived lack of coordination between donors in the sector. Professor Moore, you have suggested that DFID should be involved in this area, but not necessarily spend any more money. Is that realistic? Should DFID be focusing on multilateral agencies in order to cut down the number of players in the field, and therefore presumably get a quicker result, or should they also continue with their own individual efforts as an organisation?

Professor Moore: I think it makes sense to continue with individual efforts because you get credibility and knowledge from having projects in-country that you do not have if you are not funding any projects. That is fine. I would be very sceptical about scaling up the number of projects and the number of countries because so many other donors seem to be doing that at present. In a sense there are coordination problems at two levels. At the big level, especially in international taxation and transfer pricing, you have particularly the OECD and IMF who are not entirely congruent one with the other, which is a problem. If you go down to country aid level, you have an increasing number of bilaterals who were not in this business 10 years ago. Ten or 20 years ago the Germans and DFID were almost the only bilateral donors with significant programmes, working well with the World Bank and the IMF, but now you have a lot of bilaterals who have seen all these discussions on tax in the last few years and have been to these meetings. The Americans are a good example. Suddenly, they want a tax project, so they are going round spreading little bits of money here and there. I think we have so much experience to show that this is not a good idea. Co-ordination, harmonisation and pooled projects for tax activities are really important. Although DFID do not have the same prominence they once had in this field 10 or 20 years ago, they are still quite a big player and have the capacity to help coordinate others, partly because they have very good relations with the IMF and the World Bank, so they are really well placed to coordinate.

Q58 Mr McCann: To be clear, do you think that the bilateral operations are effectively pilots in order that we can see how things best work in-country and we can expand those? How do you then control them if the numbers expand and they are doing damage rather than helping?

Professor Moore: Solid evidence that they are doing damage is very hard to gain, but when you see several different aid agencies in the same country all funding a different aspect of the revenue authority, you know there is almost certainly a problem. A lot of that has occurred and often it is an excuse for no reform. Bangladesh has had a lot of that for a long time. I would not say the bilateral projects are just pilots; they give credibility. If a donor like DFID wants to go along and say, "We have a voice on taxation," the fact that you have a few projects in some countries, you are employing specialists and know something about it adds something to it, but DFID are doing that already.

Q59 Chair: Where the Government are engaged in budget support, that is a standard part of the package, very often in coordination with other donors. We saw that in Tanzania. It was not entirely transparent; it was more an ability to say, "We have coordinated what we have done. Their tax revenue has gone up and their aid dependency has gone down, so we think it is working." Could it be more scientific than that? But where one is dealing, as we are dealing now increasingly, with fragile post-conflict countries that are corrupt and incompetent, is it possible to construct a tax project that will make a difference in a country like the DRC?

Professor Moore: The Adam Smith Institute has been running a tax project in Afghanistan for some years. They claim that it has been rather successful. They have asked us to look at it and we have not yet done it, so I do not know whether it has been successful. South Sudan would be a very good example, where what you have is a revenue system that is a fragment of a lot of bits of things. It is not a revenue system in any significant sense. The idea of employing cadres of people-the stabilisation unit and Adam Smith Institute-to set up a taxation system on the ground seems to me to be quite plausible and sensible, because the technology of raising tax is a pretty transferable one. If you can do it in one country, with some adaptations you can do it in another. It is not like biological research, where agricultural research in one country has to be considerably adapted for another. If there is evidence that these kinds of on-the-ground interventions work-not just funding but sending in people-I would be in favour of them, but so far I do not know of any evidence that they work. You might want to look a little more at the Afghanistan case.

Q60 Chair: We will have an opportunity to do an inquiry on that, so we will follow it up.

Professor Besley: DFID is pioneering a somewhat different effort in this direction through its funding of the International Growth Centre. At the moment we are engaging with the revenue authority in Pakistan in a rather unique project where, by working with the revenue authority, we are doing an experimental intervention on incentives for tax inspectors to see what impact that has on revenue collection. That simply would not have been feasible Government to Government for lots of reasons, but by working with a DFID-funded centre from the LSE we are able to engage in what I think will be a really interesting research project. We also have some work going on with the Bangladeshi tax authority. I think a certain weight is attached to official development assistance in this area, and one has to consider what can be done directly and what indirectly.

Q61 Mr McCann: Professor Moore, you mentioned that new donors had come in and there were different ideas about South Africa and India. Have they brought anything new to the table, because they have emerged as developing countries and are moving forward? What is your take on that?

Professor Moore: What they have brought to the table are some of the international taxation issues, of which transfer pricing is an example. They are concerned about this, and clearly they will now just be much bigger players in the field, so there is a sense that, rather than the OECD countries trying to do something for the benefit of the south, as it were, we are much more into a game of mutual advantage. Both sides, north and south-at least the bigger BRIC countries of the south-have a real interest in progress, and that is positive.

In both India and South Africa there is an element of crusading about international taxation; at least they see it as a problem and want to do something about it. I also think it very important that, when you want to do work on tax, especially in sub-Saharan Africa, it works so much better if you send tax people to talk to tax people. Tax collectors are a fairly isolated breed in sub-Saharan Africa. With some exceptions of people who come in from the private sector recently at very high levels, you are talking mainly of people who have been in that career all their lives. They were probably not even graduates originally, so it is a rather isolated culture and they respond so much better to tax collectors from other countries as technical assistants, advisers or whatever. The more we can have South Africans, Indians and other people exchanging with sub-Saharan Africa the better.

Q62 Jeremy Lefroy: You spoke just now about India and South Africa. Clearly, China is a huge influence across the developing world, particularly in subSaharan Africa. What influence do you think China has as probably the major purchaser of commodities, agricultural but particularly minerals, in tax collection?

Professor Moore: I do not know the answer to that question. I would be surprised if they had any significant impact at present. I have no reason to think that their companies are any more corrupt or susceptible to tax evasion than companies from elsewhere. It is important to bear in mind that in the context of China we are talking about thousands of companies, some state-owned, some private and some quasistate owned. These are issues to which the Chinese Government are not paying attention, but that is more a guess than anything.

Dr Di John: From a different angle, I think the increasing role of China and also India in competing for natural resources could have a positive effect in the sense that, the more people there are bargaining over natural resources, you would think Governments should gradually be in a better bargaining position to get slightly higher royalty rates from some of the mineral and fuel deals that are done. From the longer-run perspective, I think the increasing presence of China, India, South Africa and Brazil-players that were not in subSaharan Africa-should increase bargaining power. Of course, the geological survey capacity of sub-Saharan African countries if woefully low. They do not know what they have in the ground; only multinational corporations do. Maybe the best thing donors can do is improve both their auditing capacity of firms in LDCs and also their geological survey capacity. That would give them an enormous bargaining chip and also enable them to appropriate more of the rents from natural resources than they currently get.

Q63 Chair: Do they underestimate their leverage? If you look at Brazil at the moment, it is expanding its offshore oil and gas industry in a very aggressive fashion. Basically, it requires any foreign agent, firstly, to put 1% of its turnover into research and, secondly, to operate through a 50%-owned Brazilian partner. Are countries in Africa missing a trick here? It may not be what foreign companies like, but they seem to be prepared to do it in Brazil. Why won’t they do it in Africa?

Dr Di John: To start with, in many sectors Brazil is as sophisticated as, or more sophisticated than, South Korea, so we are talking about a country at a completely different level of development, particularly in these particular sectors and heavy industry. A lot of it has to do with very differential capacity and level of skill.

Q64 Chair: Botswana got itself a capacity in the diamond business that has enabled it not just to take a 50% stake but to acquire expertise to add more value in-country. That is a good example. I gather that Namibia is following suit; some of the other countries are not. To take Zambia in particular, shouldn’t there be experts in copper, and are there?

Dr Di John: You would think so, but in the 1960s they exported 600,000 tonnes a year. By the late 1990s that was down to below 250,000 tonnes, so they did not seem too expert at running that industry. Relative to the previous session, one thing to keep in mind about a country like Zambia is that in the 1990s the copper sector represented losses of 10% of GDP per year because of employment padding, mismanagement and so on. They were losing $1 million a day in the copper industry, so, while they gain relatively little from royalties now compared with other mineral and fuel countries, it is certainly a lot better than minus 10% of GDP per year. People forget that historical perspective. I am not so sure they did know as much as you would have thought about the copper industry.

Q65 Jeremy Lefroy: You talk about royalties, which clearly is very important. We are talking here about two separate streams of taxation. There are royalties that can be defined perhaps more by tonnage, but earlier we referred to income tax, which is much more difficult to define. I think that is where the whole business of tax transparency arises. I just put the question again about countries such as China. Do you think that the same problems we are talking about as applying perhaps to western countries in terms of transfer pricing and so on would apply equally to countries such as China or India in their dealings with natural resource exports?

Professor Moore: I am not really expert on this.

Dr Di John: Neither am I.

Professor Besley: Neither am I.

Chair: Jeremy, you have beaten the panel.

Q66 Hugh Bayley: That gives me much more trust in all the rest of your answers. There are just two snippets I do not quite understand. Professor Moore, you talked about the OECD and the IMF pulling in different directions. Can you describe the issue? Professor Besley, you gave the example of incentivising tax collectors in Bangladesh and then said, as an aside, that it was not something you could do on a Government-to-Government basis. I am being very naïve here. Can you explain why?

Professor Moore: I am probably going to upset someone when this becomes public. It is not so much that they are going in different directions, but you would think that at this moment, and for the last few years, when there has been so much international interest in tax issues, especially international tax issues, the two leading organisations in the world would be making a lot of effort to coordinate and cooperate with each other, and frankly they are not.

Q67 Hugh Bayley: Give an example so I understand the problem.

Professor Moore: I refer to the OECD’s expert task force on tax and development. I think it is right. I am a member; the IMF is not.

Q68 Hugh Bayley: I see. So, you would like to see more institutional wisdom-sharing and so on.

Professor Moore: Yes, and cooperation. I understand where this comes from, because the OECD has been, if you like, the more activist recently in putting these issues on the agenda, and the IMF, for a range of reasons, has been a little more conservative and has not shifted as much, partly because it has limited resources to put into issues of domestic and international taxation. These are institutional rough edges; there is no reason to think that it is structural and fundamental. I hope it is not.

Professor Besley: To give a brief answer to the question, I think it comes down to what I call policy ownership. There is a world of difference between a Government feeling that it is initiating a policy and feeling that the policy is initiated on its behalf. In the growth centre, not just in tax areas but more generally, the mantra is demand-driven research. We engage with the Government and say, "What are your priorities? Is it to evolve a programme of work that comes from what you perceive the need to be?" That has some issues associated with it. There may be areas where the Government do not want to go that we could perceive to be priorities, but it is a very different model from one where the external donor with the money is essentially trying to set the policy agenda. We have noticed a big difference in the way we operate, because the initiation of policy agendas is from the Government itself. We then support that; that is where we come in. That just creates a very different climate. I think things are feasible in that mode that would not be feasible were it an external Government coming in to set the agenda.

Q69 Jeremy Lefroy: The title of this inquiry is "Tax in Developing Countries: Increasing Resources for Development". It has always struck me that one way in which resources could be increased, which is not often looked at, is the fact that we have in excess of $350 billion a year in remittances now going into developing countries. Yet I am not sure that in many cases the kind of tax breaks that a western donor would get, in this country through gift aid by making a donation either directly or through a charity, are either taken up or are available to the people who are doing the very same thing by sending remittances, often directly for development work. Will you comment on that and say whether it is perhaps worth exploring? Perhaps you can even put a figure on how much you think could be contributed that is not being contributed.

Professor Moore: I have to say that any mention of tax breaks in relation to developing countries is generally a bad idea. There are far too many tax breaks.

Q70 Jeremy Lefroy: Any of us who donate to Oxfam, Christian Aid or any of the other organisations that give evidence to us get a tax break; it is called gift aid, because they are organised to do that, quite rightly, and I fully support that. Every year $350 billion-plus goes in remittances from people who are working in developed countries and sending money back to their families for education, which is exactly the same kind of things that Oxfam, Christian Aid and so on are doing, and yet very often there is no mechanism for them to recover the income tax that they have paid in the developed countries. It seems to me this is one way of getting substantially increased resources for development through remittances that is not being taken up at the moment.

Professor Besley: Provided it could be policed and there was a proper public benefit test, I can see the merits. The problem is that it could just be a way of cycling money back to the UK through effectively creating a tax haven possibility. Assuming such a scheme could operate on the basis that you want it to operate, which is to create a clearly defined public benefit with the remittance, I would be in favour of it, but I would be somewhat sceptical that it would open up all manner of possible routes for people to avoid UK tax without necessarily generating a public benefit in the country concerned. That would be my only concern.

Q71 Chair: It has been the reputation of tax collectors down the ages that they have tended to operate in many countries as a franchise from which they skim a percentage. Is a lot of that still going on?

Professor Moore: Yes. If one looks at what the tax process is like, especially in many of the lower income and badly governed sub-Saharan African countries, you have people who, on the one hand, struggle very hard every month or fortnight to meet revenue targets set by the Government. If they cannot meet the revenue targets, they squeeze somebody else to make sure they meet them. It is not a pretty process. On the other hand, they are consistently skimming off a certain proportion of this money for themselves, or someone else higher up the system. If you look at the actual tax collection process, up close it is pretty ugly. The extent of reform of tax administration in sub-Saharan Africa over the last decade or so is quite impressive. A lot of what is happening on the ground is positive, so it is bad but there is a real possibility of it getting better.

Professor Besley: The schemes that we are looking at in Pakistan are precisely trying to incentivise, so they are not tax farming, which is at the extreme end, where you get to keep a proportion. Bonus pay has a bad name at the moment, but, frankly, the idea of trying it in environments where people are very poorly incentivised to do a decent job, on a controlled basis with the right safeguards, is something we should be doing.

Dr Di John: In broader terms, a much bigger issue, particularly for post-war economies like Afghanistan’s, is the extent to which the state has a monopoly over tax collection. The biggest challenge in a post-war country-this is some research that came out of the Crisis States Research Centre at the LSE-is that the probability of collapse is much greater when you do not have a monopoly over tax collection. That is a much bigger issue and is based on the structure of warlord politics, and so on. That is quite an important issue.

In sub-Saharan Africa another quite important thing is that in places like Mozambique and Tanzania, where you have dominant one-party states, there are competitive elections but the same party is winning. In the case of Mozambique and Tanzania, FRELIMO and CCM respectively collect a fair amount of taxes to finance party activities, so they are skimming off part of a political settlement or deal to finance their election campaigns, to give rents and privileges to party cadres and so on. That is quite an important problem. The Tanzanian state loses a fair amount of revenue and the CCM runs the Government. There is competition between the state and the dominant party that goes on in both countries. To give an example, FRELIMO runs the import and export scanning machines in Mozambique, so they are the customs officials. That is a privately owned FRELIMO company that is outsourced from the state. That is a bigger issue than whether tax inspectors are skimming 1% or 5%.

Q72 Jeremy Lefroy: I was going to ask almost precisely that question. What evidence do you have that the tax collection systems in these countries have been used as a revenue-raising operation by the dominant political parties? You have just answered that there is evidence, with which I would agree from my experience. The consequential question is: what problems does that bring for a multi-party democracy where one party is using its dominance of Government effectively to extort funds for its own political uses?

Dr Di John: It is certainly a big challenge to the opposition, although in Zambia, where I also uncovered evidence of MMD using the tax system to finance its activities, the MMD just lost an election. There is hope, but it does create a big advantage to the incumbent. In times of economic crisis you will see power turnovers. I think that Zambia, despite all its growth, has seen a huge de-urbanisation without much of an increase in the income levels of the rural poor. That has been the main reason why Sata won the election. Therefore, in crises it is not an absolute advantage, but it is certainly a big competitive advantage for dominant one-party states, or dominant party political systems.

Professor Moore: Maybe I am speaking in defence of African tax collectors. The mechanisms used for political funding vary a lot. We know very little about them. Even if the tax system is being used to raise revenue for the party, prime minister or president, it does not necessarily mean that it is the official revenue authority that is doing it. Often it will be done, for example, by Ministries with jurisdiction over forestry or fishing. They will have the right to raise revenue. It never goes to the revenue authority itself; it just goes directly from the Ministry to the politicians. This happens at local level. Customs does tend to be in most countries more corrupt. Often, there is a more institutionalised rake-off from customs than from domestic revenue, so there is quite a lot of variation in the way these systems are used.

Chair: Thank you very much indeed for a fascinating session. If I may say the same to you as I said to the previous panel, if on reflection there is anything you think you could add to our inquiry as it proceeds, we would be very happy to hear from you. Thank you for submitting your evidence and for coming here today. We have learnt quite a lot, and I hope we will learn a lot more by the time we get to the end of this inquiry. Thank you very much for your assistance.

Prepared 2nd March 2012