Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by Dr. Odd-Helge Fjeldstad, Dr Wilson Prichard and

Professor Mick Moore of the International Centre for Tax and Development

1. The International Centre for Taxation and Development (ICTD) is a research consortium set up by DFID for a five year period of research and based at the Institute of Development Studies (IDS). The ICTD is also supported by the Norwegian agency NORAD. The consortium combines technical expertise with concern for aid effectiveness and political economy. It recognises that weak tax systems in low-income and fragile countries are not only the result of poor policy, weak administration or the wrong technical instruments, but of poor governance - weak accountability, corruption, limited responsiveness to extreme inequalities and the needs of the population, and challenged legitimacy of the state. The ICTD's purpose is to build a stronger evidence base for those seeking to build more effective and legitimate institutions that deliver improved outcomes for poor people.

2. Dr. Odd-Helge Fjeldstad is based at the Chr Michelsen Institute, Bergen, Norway, and is Research Director of the International Centre for Tax and Development (ICTD). He has considerable research and consultancy experience on taxation in sub-Saharan Africa, but has been doing intensive research and advisory work for Norad in Mozambique, Tanzania, and Zambia over the past two years. During 2008/09, he served as member of the Norwegian Government’s ‘Expert Commission of Inquiry into Capital Flight from Developing Countries’. Dr Wilson Prichard is based at the University of Toronto and is also Research Director of ICTD. Professor Mick Moore is CEO of ICTD, a Professorial Fellow at the Institute of Development Studies and former Director of the Centre for the Future State.

3. The British aid programme has in the past played an important role in tax reform in developing countries, especially in sub Saharan Africa. In the 1990s, ODA/DFID, typically working jointly with the IMF and the World Bank, was responsible for considerable tax reform in Africa. In particular, it supported the creation of Autonomous Revenue Authorities. In recent years, the interest of DFID in taxation issues – and its professional capacity in taxation – declined appreciably. It is only very recently that it has begun again to re-build interest and capacity. Over this period, the global agenda and situation have changed, implying a need to develop a renewed focus on strategic areas of opportunity.

4. An effective British engagement in this field will be inter-departmental, involving in particular the Treasury and HMRC, as well as DFID. Compared to previous decades, global issues and international cooperation should feature more prominently in any future British programme. It is partly for that reason, and to add weight, that the Treasury and HMRC should be fully engaged.

5. In setting priorities, the starting point must be an understanding of the vastly changed context in which tax reform is being pursued, and donor support is being provided. There is now a much wider appreciation of the importance of taxation in development, and many more agencies and governments are active in the field. Unfortunately, this is now associated with frequently unhealthy competition among different aid and development agencies. One can see this at the global level, where there is competition between organisations like the IMF and the OECD for overall leadership in the tax and development field. At the level of individual developing countries, an unhealthy competition for individual aid donors to fund tax agencies, often on a small scale, is growing. This poses serious problems of duplication, wasted effort and fragmentation, with the latter potentially undermining reform efforts by diverting local resources, reducing local ownership and undermining the coherence of reform programs. It is therefore very important that the re-engagement of the British aid programme with taxation issues is planned strategically to minimise the danger that it will exacerbate these existing problems. Rather, one would hope that we will be able to contribute to the resolution of these problems.

6. DFID, Treasury and HMRC should seek to contribute to the resolution of these problems, by seeking to encourage coordination and cooperation and by contributing to identifying strategic opportunities for supporting reform efforts. An important implication of such an approach is that re-engagement should not simply be about earmarking additional resources. The financial requirements for reforming tax agencies are relatively modest. Money should certainly be available when there are serious commitments to reform. But giving more money may not be very helpful unless it is embedded in a broader strategy to strengthen overall donor support in this area.

7. In light of the expansion of donor activity in this area, an important part of DFID, Treasury and HMRC efforts should lie in seeking to support reform in strategic, and comparatively neglected, areas. The relative emphasis in tax administration reform should now shift both upwards, to the international level, and downwards to the sub national level, while increasingly taking account of political economy barriers and the need to develop local leadership of reform efforts. Considerable progress has been made in national level reforms, and many remaining barriers are related to the need to build political support for reform. There is a set of national level reforms that (a) have to some extent been adopted in developing countries, (b) are widely accepted as being generally appropriate to the conditions of developing countries, and (c) have been widely propagated and are relatively well understood by potential tax reform leaders within developing countries. While there remains significant scope for progress in these areas, continuing challenges are frequently rooted in politics, rather than in the absence of local understanding or funding. DFID, Treasury and HMRC efforts should correspondingly focus particularly on supporting and encouraging local efforts to overcome these barriers, while offering specific support where opportunities for progress emerge.

8. An important opportunity for building political support for reform lies in putting more emphasis on the ‘demand side’, i.e. in building broader citizen engagement around taxation. Public debates on taxation in Africa are mainly limited to taxation of multinational companies. While this is important, a broader engagement about the whole tax system is missing. This is also reflected in Parliamentary debates on taxation. In some countries DFID supports some civil society organisations engaged on tax issues. DFID also provides some technical assistance to building tax capacity/knowledge in the business community, especially small and medium enterprises. There are opportunities to expand this type of engagement.

9. In contrast with important progress at the national level, sub-national taxation has been relatively neglected and requires further attention, as the IMF acknowledged in its March 2011 revised policy statement on revenue issues in developing countries. Despite significant moves towards decentralisation across the developing world, fiscal decentralisation has been limited and not very successful. This effectively reduces the decision-making power and autonomy of local governments. It also potentially undermines many of the expected governance benefits of decentralisation, which are significantly premised on fostering bargaining around revenue and budgeting between citizens and government. Tax reform at the sub-national level has been held back by a combination of political constraints, capacity constraints and poor coordination between national and sub-national authorities. However, there is emerging evidence that even relatively small investments can yield significant revenue gains, with potential governance benefits as well.

10. Equally importantly, it is now widely accepted that there is considerable scope to address the international dimensions of weak tax systems in developing countries. There are opportunities to increase international cooperation among tax agencies and to change the accounting rules for transnational business, in order to reduce the degree of tax evasion that takes place to the cost of developing countries. This is particularly evident in resource rich countries in Africa. Challenges with respect to extractive industries have been exposed. The problems are also serious in renewable sectors such as fisheries, forestry and wildlife, though these have received little attention.

11. Alongside specific reform priorities, there remains a substantial need to build specialised expertise in national tax administrations. The basics are often in place, but expertise to do in depth tax audits in complex sectors such as extractive industries, banking/financial sector, tourism and telecoms is often absent. One consequence is that African tax administrations are often easy matches for multinational companies that can afford to engage the best and most skilled tax lawyers and accountants.

12. Finally, some of the larger emerging economies are beginning to play a significant role in international negotiations and discussions over taxation issues. This includes in particular South Africa and, more recently, India. In addition, regional organisations of tax professionals are increasingly prominent at the global level. CIAT (Inter American Centre of   Tax   Administration), the long established Latin American regional organisation for tax specialists, increasingly operates globally. Africa has a new organisation, the African Tax Administration Forum, funded in part by DFID, which represents Anglophone, Francophone, and Arabic speaking Africa. It is important that these organisations and countries from "the South" are accepted as full partners in any new British initiatives in the field. 

6 February 2012