2 Country-level tax policy |
Forms of taxation
7. The appropriateness of a tax policy will always
depend upon the precise circumstances of the country concerned;
determining the tax policies of developing countries is a matter
for the governments of the relevant countries. Nevertheless, if
we are to assess DFID's work on tax collection, we must begin
by understanding the tax regimes of the countries in which it
works. Table 3 sets out the respective importance of different
forms of taxation in various Sub-Saharan African countries in
2008:Table 3: forms of taxation (% of GDP)
|Total revenues (including non-tax revenues)
| of which: revenues from extractive industries
||data not available
|Total tax revenues
| of which: income tax
| of which: VAT and sales tax
Source: IMF Article IV Reports. The figures from
extractive industries revenues include revenue sources such as
mineral royalties, which are regarded as non-tax revenues. These
figures have been derived from IMF taxation data, and may be underestimates.
The remainder of this section aims to set out the
advantages and disadvantages of each major form of taxation, drawing
heavily on our case study of Zambia.
Personal income taxation
8. In his oral evidence to us, Dr Jonathan Di John
reported 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".
We understood him to be implying that High Net Worth Individuals
(HNWIs), who are often self-employed, may be relatively under-taxed).
In the case of Zambia, however, Dr Di John acknowledged that "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."
If developing countries are to improve their collection
of tax revenues, it is imperative that elites within those countries
pay the correct amounts in personal income taxation, andcriticallyare
seen to do so.
9. VAT is the principal form of indirect taxationi.e.
taxation levied on consumption rather than on income. Certain
NGOs have raised concerns surrounding its allegedly regressive
nature. As an example,
Christian Aid argued that VAT "can be very regressive in
terms of putting high cost on very low income earners."
Christian Aid do, however, recognise that this problem can be
resolved by exempting key items from VAT (or 'charging VAT at
zero rate' on such items).
Moreover, as highlighted by Professor Mick Moore, Professorial
Fellow at the Institute of Development Studies:
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.
10. In its written evidence, the International Centre
for Tax and Development (ICTD) argues thatwhilst there
has been considerable progress in building the capacity of national
tax authoritiesthere has been relatively limited focus
on taxation at regional and local levels. It claims that this
represents a missed opportunity to enhance the autonomy and decision-making
power of local authorities, and to make them more accountable
to the public. Additionally,
in many countries including Zambia, local government is increasingly
responsible for the delivery of services, but lacks adequate resources
to meet these responsibilities.
11. Local property taxation not only provides a valuable
source of revenues for local governments; it also requires the
development of land registries. Land registries lead to improvements
in the security of property rights,
and enable people to use property as security against loans: the
Committee was particularly impressed with DFID's work on land
registries in during its visit to Rwanda in 2011. The Department
told us that the UK Land Registry had signed up to iFUSE,
a scheme facility under which UK public bodies provide technical
assistance to their developing country counterparts:
we warmly welcome this development.
12. During our visit to Zambia, we were told that
Mopani Copper Mines, which is majority owned by Glencore, was
in dispute with the Municipal Council of Mufulira in respect of
its local property tax bill. It was clear that the company's relationship
with the local community had been damaged by the dispute, and
we hope it can be resolved swiftly.
13. In many developing countries, there is considerable
room for improvement in the collection of non-corporate taxation.
Given its usefulness in promoting land registries, an increased
focus on local property taxation is likely to be especially fruitful.
DFID should seek to support the national revenue authorities
of developing countries as they attempt to improve the collection
of personal income taxes, VAT and local property taxes. DFID should
also encourage and support programmes that engage civil society
and trade organisations, academics, journalists and parliamentarians
in the tax policymaking process.
14. Corporate taxation represents an important source
of government revenues. In setting their corporate taxation policies,
governments must seek to strike a balance between the need to
raise sufficient revenues, and the need to attract investment.
Bearing this in mind, governments must decide on their preferred
corporate tax rate, and must also decide whether to offer any
tax incentives. Tax incentives divide opinion: some focus on their
adverse impact in terms of tax revenues foregone,
whilst many businesses consider them as a useful incentive to
15. Whilst tax incentives can be useful if applied
appropriately, arbitrary tax exemptions are generally damaging.
Professor Mick Moore suggested to us that in many African countries,
revenue authorities granted tax exemptions worth around 5% of
GDP, which may be up to one-third of total tax revenues.
ICTD told us that 'tax holidays' for new companies were often
manipulated, citing the example of existing hotel / tourism companies
which 're-constitute' under a new name so as to ensure their continuing
16. Our case study of Zambia allows us to explore
these issues in more detail. Prior to 1997, the Zambian mining
sector was nationalised, with the mines operated by the state-owned
Zambia Consolidated Copper Mines (ZCCM).
Between 1997 and 2004, the mines were privatised
(though ZCCM Investment Holdings, the successor company to ZCCM,
is 87% state-owned and retains a minority shareholding in the
17. It is clear that private investment in the mining
industry has brought many benefits to Zambia. We visited two mines
in Zambia, one run by Mopani Copper Mines and one run by Konkola
Copper Mines. Mopani Copper Mines employs 8 300 people, with another
8 000 contractors working on site. In a country where the national
minimum wage is US$81 per month, even the most junior of Mopani
employees earns US$508 per month.
We were informed that both companies also operated schools and
18. However, whether the mining industry contributes
an appropriate level of tax revenues is less clear. At privatisation
a highly business-friendly tax regime was implemented.
During a meeting held at the Zambian Ministry of Finance, we were
told that 'Development Agreements,' including preferential tax
terms, had been signedinitially with two mining companies,
and subsequently with several more. By 2004, we were told, those
mining companies which did not have development agreements had
become resentful of those which did. The Government thus decided
to 'level the playing field' by extending the same tax incentives
to all mining companies.
19. By 2008, as Figure 1 indicates, the copper price
had risen to an all-time high:
Figure 1: Copper prices
Data source: IMF data. Refers to LME spot price
for copper (grade A cathode), CIF Eiropean ports.
Thus the profitability of the mining industry had
increased. However, as a result of the tax arrangements it had
made, the Government gained very little in terms of corporate
tax revenues: copper exports stood at $2 billion per annum, yet
tax revenues from these were only $30 million: an effective tax
rate of 1.5%. Paul Collier has highlighted that according to World
Bank estimates, if the Zambian tax regime had been akin to that
of Chile (the other major copper exporter), tax revenues from
the industry in 2008 would have been closer to $800 million.
We note that Chile is a more mature economy than Zambia, but this
example still demonstrates the potential for Zambia to increase
the amount of tax it collects from the industry.
20. In 2008, the Government abolished the Development
Agreements, and introduced
a new tax regime. As well as introducing a new variable profits
tax, this regime focused much more heavily on turnover-based taxation,
i.e. taxing turnover rather than profits. Whilst turnover-based
taxation may be perceived as less progressive than profit-based
taxation, we were told during our visit that the former is much
easier to collect (more difficult to avoid or evade). This is
because profits can be shifted into low-tax jurisdictions (as
discussed elsewhere in this report), whereas turnover cannot.
In the case of the copper industry, turnover is relatively simple
to verify, e.g. by multiplying the price of the raw material (as
per the London Metals Exchange, or LME) by the quantity producedthough
systems must be in place to ensure that physical quantities can
be accurately measured.
In the case of minerals whose price is not listed on the London
Metals Exchange, of course, verifying turnover poses a greater
21. The 2008 tax regime expanded turnover-based taxation
in two principal ways:
· It introduced a windfall tax, rates of
which were to be determined by the LME copper price. (Indeed the
tax did not apply at all if the copper price was below $2.50 per
· It increased the mineral royalty rate
from 0.6% to 3%.
(The mineral royalty is calculated as a simple percentage of
total turnover, with the LME price used to verify turnover as
22. The windfall tax, however, was considered by
the mining companies to be overly punitive: some claimed that
they were under no obligation to pay, citing a 'fiscal stability
clause' in the now-abolished Development Agreements.
Ultimately the windfall tax was abolished in 2009;
the mining companies who had disputed its legality finally paid
their arrears in 2011. 
The unpopularity of the windfall tax amongst mining companies,
and its consequent failure, was attributed largely to flaws in
its design: the thresholds should have been set higher, whilst
the amounts paid should have been deducted from companies' taxable
profits before the regular corporate tax was charged.
23. During our visit, we were told thatfollowing
a change of government in September 2011the new Patriotic
Front (PF) Government had come under considerable pressure to
re-instate the windfall tax. Thus far it has resisted; it has,
however, increased the mineral royalty rate from 3% to 6%.
24. Our case study of Zambia thus provides an insight
into the thorny issues which surround corporate taxation. We recognise
that turnover-based taxation is a blunt instrument, and in countries
where the revenue authority has sufficient capacity to enforce
a profit-based taxation regime, turnover-based taxes should not
be used. However, for many revenue authorities with lower levels
of capacity, imposing a turnover-based tax may be the only reliable
method of collecting corporate taxes. In these circumstances,
turnover-based taxes are most valuable.
25. For reasons of transparency, it is highly desirable
for corporations' annual audited accounts to be made readily available
to citizens and civil society organisations in the countries in
which those corporations operate. In the case of Zambia, accounts
arein theoryavailable to the public on request,
for a fee of around $4. However, there is some disagreement as
to whether this happens in practice. For example, whilst Mopani
Copper Mines assured us that its accounts had been made available
in accordance with regulations,
ActionAid tells us that it and its partner organisations have
been unable to access the accounts.
Thus there appears to be something of a bottleneck. We urge
DFID to stressin its dealings with the national revenue
authorities of developing countriesthe importance of making
corporate accounts available to the public. In Zambia, to test
the allegations that the process is not working at present, DFID
should request access to the accounts of some of Zambia's main
corporations, using channels available to the ordinary Zambian
citizen. In its response to this report, the Government should
notify us of the outcome of these requests.
26. The Government should encourage the OECD and
other standard-setting fora to require the filing of public statutory
accounts in all jurisdictions. The Treasury should also press
Crown Dependencies to meet these standards.
Broadening the tax base
27. In many developing countries, informal economic
activityi.e. economic activity which falls outside the
tax 'net'is extremely widespread. In 2009, for example,
Senegal had a working population of 5 million, yet 4.5 million
of these were in the informal sectoreither operating as
sole traders and not registered for tax, or employed in unregistered
enterprises, which pay no tax on their profits and whose employees
pay no tax on their wages. Data from 2008 indicates a broadly
similar situation in Benin, Cameroon and Ethiopia.
The large size of the informal sector has gender implications:
a recent study of non-agricultural sectors in three Least Developed
Countries (LDCs) in Africa countries found that the female working
population was employed almost entirely in the informal sector.
28. In the case of Zambia, the working population
stood at 5.2 million in 2008, with the vast majority (4.7 million)
in the informal sector. As well as constituting the lion's share
of the economy, the informal sector was found to be growing more
quickly than the formal sector.
29. The level of formalisation within particular
economies is determined by a number of factors. Of principal importance
is the strength of the legal system: traders and enterprises which
have faith in the legal system are significantly more likely to
enter the formal economy than those which do not. The degree to
which traders and enterprises have confidence in their governments
to make effective use of tax revenues is also a factor.
30. Developing country governments might employ various
strategies to bring unregistered traders and enterprises into
the tax base. As an example, they might seek to offer incentivessuch
as distribution and marketing assistance, or micro-credit schemesin
return for registration.
In some cases a purely financial incentive might be offered: the
Parliamentary Under-Secretary of State for International Development,
Mr Stephen O'Brien MP, told us that this approach had worked well
in Sri Lanka. In
Zambia, meanwhile, the Government is currently considering a different
approach, namely to require all unregistered enterprises to pay
for a 'business licence' at a flat rate.
Additionally, governments can incentivise traders and enterprises
to register by charging VAT at a relatively high rate.
This incentivises registration because as well as charging VAT
on their salesregistered businesses are able to reclaim
the VAT they pay on their purchases.
31. In countries where the level of economic activity
is extremely limited, the cost and administrative burden of broadening
the tax base might outweigh the benefit. In most countries, however,
the benefits will be enough to warrant such initiatives.
32. In many of the countries in which DFID works,
informal economic activityi.e. economic activity which
falls outside the tax 'net'is extremely widespread. Formalising
the economies of developing countries would have significant implications,
both in terms of increased tax revenues and in terms of governance:
those who operate in the formal economy are much more likely to
hold their governments to account. To encourage unregistered traders
and enterprises to enter the formal economy, developing country
governments might offer a variety of incentives: examples include
distribution and marketing assistance, micro-credit schemes, or
purely financial incentives. DFID should support the governments
of developing countries as they seek to incentivise hitherto unregistered
enterprises to join the formal, taxpaying economy.
8 IMF projections indicate that - by 2012 - revenue
from extractive industries will have increased to 4.0% of GDP. Back
Q 54 Back
Q 56 Back
Ev 58; Ev 78 Back
Q 5 Back
Ev 78 Back
Q 41 Back
Ev 91 Back
Taxation, Resource Mobilisation and State Performance, Crisis
States Research Centre Working Paper no. 84 (Jonathan DiJohn,
November 2010, Error! Bookmark not defined. Back
Q 51 Back
Q 184 Back
Ev 93 Back
Ev 81; Ev w63, Ev w87 Back
Ev 85 Back
Q 41 Back
Q 132 Back
Ev 89 Back
Ev w53 Back
Ev 89 Back
Ev 127 Back
Ev 89 Back
Paul Collier, The Plundered Planet (London, 2010), p 86-87. It
should be noted, however, that mining industry will have made
a significant contribution to other (non-corporate) tax streams
during this period: employees of mining companies, for example,
will have paid personal income taxes. Back
Paul Collier, The Plundered Planet (London, 2010), p 87. Back
Q 134 Back
Meeting at Ministry of Finance Back
Ev 122. It should be noted that there is some inconsistency in
how the mineral royalty is imposed in Zambia: some companies pay
a percentage of their revenues from extraction; others pay a percentage
of their revenues from concentrate; and others a percentage of
their revenues from smelter output. See Robert F. Conrad, Zambia's
Mineral Fiscal Regime, in Adam, Collier & Gondwe (eds.),
Zambia: Policies for Prosperity (Oxford, forthcoming). Back
DFID, visit briefing Back
Q 147 Back
DFID, visit briefing Back
Q 147 Back
Ev w82 Back
Q 93 Back
Ev 71 Back
Ev w14 Back
Ev w15 Back
Ev w16 Back
Q 47 Back
Q 47 Back
Q 181 Back
Q 143 Back
Q 41 Back
Q41; "Introduction to VAT", HM Revenue & Customs,