Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by CBI

INTRODUCTION

The CBI is the UK's premier business lobbying organisation, speaking for more than 240,000 companies of every size, including many in the FTSE 100 and FTSE 350, mid-caps, SMEs, micro businesses, private and family owned businesses, start ups, and trade associations and in every sector.

GENERAL COMMENTS

We write in response to your call for evidence on Tax in Developing Countries: Increasing resources For Development. We believe this is an important issue, and are glad that the Committee are looking at this area. The people who work for member companies of the CBI share a common goal with the Government, NGOs, and others of helping to improve the living standards of those much less fortunate than ourselves in developing countries. We believe that a properly functioning tax system in these countries – one based on good tax policy and an efficient tax administration – is critical to the functioning of a stable, prosperous state that responds to the needs and wishes of its citizens.

We will respond first to the comments you make in your call for evidence, and then to the key issues listed.

A Link Between Taxation And Development

In relation to the first paragraph of your statement, we agree that there is a fundamental link between tax and development. The inability to collect taxes owed, as you note, is, therefore, a major concern. In looking into this issue, we would suggest a number of areas of focus. Perhaps the most important relates to tax policy. Whatever level of revenue a government decides that it requires should be raised in the most efficient way. This requires, before even getting to the question of efficient tax collection, sound tax policy. Therefore, policy support should also (in addition to collection assistance) be offered to countries to consider the right mix of taxes: income tax, wealth tax, property tax, VATs, as well as the appropriate relative burden on local individuals, local businesses and international businesses. There is much learning to be drawn on from developed countries such as the UK, but also from international organisations such as the OECD and IMF. Once the correct tax policy has been settled upon, then the question of tax collection can be dealt with in a much more focussed way.

We would note that many of our members are interested in investing in these markets, and they will be looking for the rule of law and the key benefits which flow from that: certainty, stability, and simplicity. These should all be the goals of good tax policy. That should then be carried through into an administration that can effectuate these policies.

B Revenue Lost, And Reporting Issues

In relation to your second paragraph, we would note that the $160 billion number has been disputed (as to methodology and quantum – see article by Bill Dodwell Tax Adviser, November 2009). However, we do not wish to get into a sterile argument about the exact number. We do feel it important that you understand that CBI members take their responsibilities to developing countries very seriously. Almost all of the suggested revenue loss number is said to come from "transfer pricing" abuse (the price at which companies sell their goods across borders to related parties). But that argument doesn’t necessarily hold up. Where the extractive industries are concerned, the prices for their commodities are established on world markets and can easily be checked. In the case of companies selling into these countries, transfer pricing almost always relates to the country of manufacture (not the developing country) rather than the country of sale. There may be other issues in some of these countries, but those relate to perceived unequal bargaining positions, and long-lived deals that some believe should be revisited. But, to emphasise this, these issues do not relate to tax avoidance.

In relation to your specific point in the second paragraph about extractive industries, we would point out that the Extractive Industries Transparency Initiative (EITI) has been very successful at shining some light on these issues. And it is uniquely successful because it allows "cradle to grave" monitoring, of not just the payments by companies, but also the receipt and accounting of those sums by governments. We believe that the EITI should be extended to cover as many developing countries as possible. That would lead to real improvement in transparency in certain countries.

C Scope of the Select Committee’s enquiry

On your third paragraph, we wondered whether you might not wish to extend your inquiry to another country or two with a more "normal" profile – that is to say one not so dominated by the extractives sector. For example, HMRC has done remarkable work in Rwanda, so that might be a fruitful example to study.

COMMENTS ON THE KEY ISSUES FOR THE INQUIRY

1 How can DFID better support Developing Countries to Improve Revenue Collection?

We have made a joint submission with ActionAid and Christian Aid and others on this question. We believe that DFID, primarily through the funding of HMRC support projects, can greatly aid the process of revenue collection (although we would refer to our earlier comment about the importance of also providing help in establishing sound tax policy).

In slightly more detail, we believe that it is important that any assistance should provide a strong focus on ethics, transparency, and anti-bribery issues. We believe it would be helpful to organise joint meetings with DFID, developing country delegates, and large business to explain how large businesses operate, and, in particular, their strict governance controls (board, shareholders, and statutory bodies).

We would, finally, point out that business has made a number of offers to HMRC and the OECD to provide personnel to explain to developing countries how businesses operate their tax affairs, and, in particular, their internal transfer pricing controls. Also, the Business Industry Advisory Committee (BIAC) to the OECD is in the process of assembling a team of experts who will be available to consult with developing country governments on questions relating to the practical application of Transfer Pricing.

2 How can DFID better support Developing Countries to use the Revenue Base Responsibly in order to improve Service Delivery and Development Outcomes?

We believe there are a number of areas where DFID may be able to help here, but, perhaps, the most important would again involve HMRC and HMT. That would be in relation to improving the capacity to forecast and budget revenue (the IMF has also noted this as a crucial issue). Especially with fluctuating commodity prices, Developing Countries need to have some idea of (and make some provision for) long-term trends. We believe that the expertise that exists inside HMRC and HMT could be particularly useful to these countries.

Additionally, we believe that DFID might consider the following projects. First, working with governments to enable them to set up clear accountability and transparency practices in government departments. Sec ond, sharing with Developing Country governments the benefits (through case studies) of long term infrastructure investment. Finally, helping governments with practical advice on how to tender contracts efficiently for large spend projects (with a focus on third party contracts).

3 Tax Evasion and Avoidance in Developing Countries by Private Individuals and Companies

In relation to individuals, and particularly, High Net Worth individuals (HNWI), HMRC can again offer significant advice, both in terms of, for example, patterns of spending that would indicate tax evasion, as well in relation to examples of successful international cooperation and cross-border cooperation that helps to end secrecy.

As far as companies are concerned, again, HMRC can offer advice on how to administer both income tax and VAT tax systems in ways that make evasion harder, including the cutting edge work done on risk profiling. We would also recommend that the government pursue the path of multilateral exchanges of information where the infrastructure and framework for that exchange is provided by developed country governments, such as the UK.

4 How effective International Efforts to promote Tax Disclosure and Transparency are likely to be

The CBI believes that some transparency in these countries which allows (as we said above) a tracing of payments from companies through into the government system can be very valuable. In that respect we would point out the considerable success of the EITI. Any way in which the EITI could be extended would be very beneficial. (In that regard, we would note that the United States has just agreed to join the EITI, and we believe that EU Member States could also set a positive example by signing up.)

We do not believe that Country-by-Country (CbC) reporting (as proposed by Publish What You Pay and other groups) would be as effective as an extension of EITI. Disclosures based on globally determined definitions will present developing country officials and civil society with a vast amount of information that may be difficult to interpret and reconcile with local fiscal terms and contractual arrangements (in addition to concerns about commercial competitiveness). Furthermore, the information called for under CbC would not enable governments to verify transfer pricing. That would require different information that could be more effectively gathered through the tax return in the form of a schedule detailing related party transactions, etc.

An important point to make clear is that all of this transfer pricing information is currently reported to developed country governments, and could be shared confidentially with developing country governments, rather than requiring Developing Country governments to build up this function straight away. We do believe that a combination of the combined company/ government reporting under EITI, and confidential multilateral exchange of information would work best.

5 Capital Flight and its Implications for Developing Countries

The CBI does not feel qualified to offer observations on this point, save to say that this does appear to be an issue in relation to HNWI, and our points in 3. Above, on HMRC’s expertise may apply equally here. We would, once again, also support the end of secrecy jurisdictions.

CONCLUSION

In closing, we would again thank you for raising this important issue. We do believe that the UK government has an important role to play in increasing the capacity of developing country governments to collect the sustainable revenue that underpins any successful state. We would also emphasise the interest of CBI members, who follow responsible business practices, in the establishment of flourishing societies where citizens are lifted out of poverty

3 February 2012