Tax in Developing Countries: Increasing Resources for Development: Government Response to the Committee's Fourth Report of Session 2012-13 - International Development Committee Contents

Appendix: Government Response

The Government welcomes the opportunity to respond to the report of the International Development Committee on Tax in Developing Countries: Increasing Resources for Development. The Government agrees with the Committee on the importance of tax to development. Effective tax systems can help developing countries to fund service delivery and escape from aid dependency and they can help shape economic growth. Fair and transparent tax systems promote social cohesion and shape government legitimacy by promoting accountability of governments to tax-paying citizens and by stimulating effective state administration.

The report identifies the importance to tax systems of global-level as well as domestic issues and highlights the significance of extractives industries as a source of revenue for some developing countries. The report acknowledges the value of technical assistance provided by DFID and HMRC to national revenue authorities in developing countries and recommends that such work be scaled-up.

The Government's support for improving tax systems at the country level is largely provided through DFID's country programmes. Support reflects the country context, including demand for support, credibility of partner country plans, assistance provided by others and competing demands on DFID's resources. The context also includes the broader public financial management system of which the tax system forms a part. The benefits of increasing revenue through more effective tax systems will depend on how the extra revenue is spent. This will depend on the effectiveness of the country's budget system, through which resources are allocated and spent and subsequently accounted for and reported on. This should be considered when assessing the case for support to improve tax collection. In addition to its assistance for improving tax systems, DFID provides technical assistance to partner countries to improve broader public financial management.

The global-level issues referred to in the report have been getting more attention by international bodies in recent years. The G20, in particular has been active in this area. The Government is closely involved in these processes and seeks to keep the interests of developing countries in focus. The Government considers that improved arrangements for exchange of information between tax authorities, coupled with appropriate domestic powers to request information, is the best way to enable tax authorities to obtain the information they need to collect the tax due to them from entities operating in more than one tax jurisdiction.

Response to the recommendations

The Government's responses to the individual conclusions and recommendations set out in the International Development Committee's report are set out below.


1. 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, and—critically—are seen to do so. (Paragraph 8)

Agree. The taxation of elites is important in relation to governance as well as revenue. Personal income taxation commonly accounts for less than 10 percent of all tax revenue in low-income countries - compared to an average of more than 25 percent in OECD countries. Historically, entrenched power structures have been an obstacle to taxing elites although administrative weaknesses and errors in tax design have also contributed.

DFID support for improvements in governance more generally and, in particular in improving accountability, should help to facilitate more internal pressure to address such issues. Taxpayer education and increasing public awareness may also have a role to play. Improving the way in which tax receipts are used, by strengthening public financial management, may help to increase willingness to pay. Where there is a willingness to tax elites, and the problem is in carrying this out, the Government's work at the international level on improving exchange of information is very important with regards to taxation of individuals, as well as companies, where foreign assets and transactions are involved.

2. 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. (Paragraph 13)

Agree. As indicated in its evidence paper submitted to the Committee, DFID already supports the revenue authorities in a number of developing countries, whose remit includes personal income tax and VAT, to help them improve collection of taxes. DFID intends to continue to provide such support. DFID has had much less involvement in support for collection of local taxation, including property tax, and accepts that there is a case for the international community to do more work in this area.

DFID country offices are encouraging partner governments to establish systems and processes to engage with the public, civil society organisations and parliamentarians on a range of issues. As regards engaging such organisations in the tax policymaking process, one of the objectives of the International Centre for Tax and Development (ICTD), which DFID is funding, is to help stimulate dialogue within developing countries around tax issues. The ICTD works with a range of academics and civil society groups.

DFID also supports the International Budget Partnership (IBP), which promotes transparency and participation in the budget process in many countries, including through its bi-annual Open Budget Survey which ranks governments on the transparency of their budget data. Civil society organisations can use the rankings to encourage governments to make more information about budgetary planning available to the public. This is an important tool for citizens to be able to hold governments to account for their spending of tax revenues. Although the focus of the IBP has been primarily on the expenditure side of the budget, some IBP partners have worked on tax issues.

In addition, a number of current DFID programmes include support to local civil society on tax and fiscal issues, for example in Sierra Leone, Nigeria and Kenya. It is appropriate that consideration be given to these issues in tax programmes as well as programmes focussing more broadly on civil society support. DFID engagement with the ICTD and other international initiatives such as the IBP, and through work at the country level, should in time increase public participation in tax policymaking.

3. We urge DFID to stress—in its dealings with the national revenue authorities of developing countries—the 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. (Paragraph 25)

Agree. The UK Companies Act requires limited companies to publish statutory accounts information so that third parties can assess the financial health of the company. The Government would encourage jurisdictions that do not have such a requirement to consider its introduction. The Government believes the wider benefits of this in commercial decision-making justify the costs to companies and to government of fulfilling this obligation.

 Work to look at the benefits of public statutory accounts at the OECD Task Force on Tax and Development (to which DFID contributes funding) has highlighted some of the advantages of making accounts available from the point of view of increasing transparency and in particular providing information on transfer pricing transactions. The report has been welcomed by the Task Force and will soon be made available as a resource for jurisdictions considering the benefits of the public registration of the statutory accounts of unlisted companies. It should be noted that the accounting information is also valuable to investors and creditors although this dimension was not the subject of the Task Force report.

 The Government nevertheless recognises that a requirement for the public registration of statutory accounts may be made for a wide variety of reasons most of which are not related to tax issues and therefore it for each individual country, whether a developed or developing country, to make its own decision on whether to introduce such a requirement.  The report prepared for the OECD Task Force will provide a useful tool for countries when considering whether to introduce a public filing requirement.

As requested, DFID has tested the system for making corporate accounts available to the public in Zambia. Under Zambian law, public companies (PLCs) are obliged to file annual accounts with the Patents and Companies Registration Agency (PACRA). Members of the public are entitled to request copies of these accounts from PACRA. Using channels available to ordinary Zambian citizens, staff of DFID's office in Zambia requested copies of the accounts of 10 of the country's main corporations from PACRA. The fee for this service was the equivalent of £3.50 for each company. Requests for the accounts of five companies were submitted on 20 September and for a further five on 24 September. By 17 October, accounts had only been provided for one of these companies. The reasons for this are not clear although, on the basis of initial investigations with PACRA, concerning the first five companies, it appeared that accounts for four of these companies had had not been filed with PACRA. This experience appears to substantiate the allegations referred to by the Committee that the system is not working properly at present. DFID's office in Zambia will share the results of this exercise with the Government of Zambia.

For private companies, there is no requirement to file accounts with PACRA. The main mining companies operating in Zambia are private companies. A staff member of DFID's Zambia office was able to successfully access summary financial information for one of the major mining companies operating in Zambia, Konkola Copper Mines (owned by Vedanta Resources PLC listed on the London Stock Exchange), through the UK Companies House web-based information service. However, this process required use of a credit card with a UK address, so would not be readily available to most Zambian citizens.

DFID understands that, under the Securities Act, Cap 354 of the Laws of Zambia, all financial intermediaries conducting securities business in Zambia must be licensed by the Securities and Exchange Commission; that the licensing process includes submission of financial statements; and that these financial statements are available to members of the public. Whilst this mainly applies to financial institutions, some private companies are also registered as issuers of debt and equity instruments. However submission of accounts is only required at the time of licensing or renewal, not annually. The availability of accounts from the Securities and Exchange Commission was not tested.

4. 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. (Paragraph 26)

Partially agree. As noted above, the Companies Act requires limited companies to publish statutory accounts information and the Government would encourage jurisdictions that do not have such a requirement to consider its introduction.  The Government does not believe, however, that the adoption of a requirement for public statutory accounts by the OECD is a realistic prospect at the present time given the diversity of requirements existing across OECD members (and indeed while the OECD can develop standards it cannot set "requirements" as such). This is unlikely therefore to be the most fruitful approach to making progress on this important issue in the context of developing countries.

An important first step is, however, for jurisdictions to ensure that reliable accounting records are kept for all relevant entities and arrangements and that these are available to competent authorities, such as revenue authorities. These are both requirements of the international standard reviewed by the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Government would like to see as many jurisdictions as possible join the Global Forum. Once the requirement for accounting records is in place, it may be a relatively straightforward step to make accounting information publicly available.


Another important aspect of the process is how accounts are disclosed to the public. The method of disclosure at present varies from country to country and therefore ease of access is different from country to country. This issue has been raised in the discussions at the OECD Tax and Development Task Force and it has been agreed that the OECD Secretariat would explore the possibilities of working with industry on a partnership project to improve internet access by the public and by tax administrations to financial data that is already publicly available.


As regards the Crown Dependencies' requirements for statutory accounts and their meeting of international standards, the Crown Dependencies have provided an information note that is annexed to this response. The UK Government will continue to encourage the Crown Dependencies to maintain the highest international standards in relation to taxation and public accounting.

5. DFID should support the governments of developing countries as they seek to incentivise hitherto unregistered enterprises to join the formal, taxpaying economy. (Paragraph 32)

Agree. An overwhelming characteristic of most low-income countries is the very large number of informal enterprises. Over 20 DFID country offices have programmes to improve the regulatory environment by cutting red tape, increasing the predictability of regulations and reducing the cost of compliance to encourage firms to formalize and access new business opportunities. This includes not just improvements to tax administration but also business registration and licensing, contract enforcement, enhancing property rights, access to finance including secured transactions, debt resolution and streamlining customs procedures. In many cases DFID works closely with the World Bank Group to deliver these improvements.

DFID has partnered with the Centre for Economic Policy Research (CEPR) to launch in December 2011 a £15million research programme - Private Enterprise Development in Low Income Countries (PEDL) - which has a focused research area on "The dynamics of SMEs: Informality and entrepreneurship" to help us understand better what drives firms decisions to stay informal.There is a debate about whether informality enables business owners to escape excessive regulation or reflects unfair competition as some businesses escape efforts of the state to regulate the economy in a reasonable manner. This debate has direct relevance to poverty, as a large share of low-income households earn their living from informal employment. It is also relevant to the growth of the broader economy: informality may represent an entry point for nascent entrepreneurs, but if high-ability entrepreneurs are unable to grow because of barriers to formalisation, then small firms will be unable to exert competitive pressure on larger incumbents. The PEDL programme is awarding research grants to proposals that explore these and other hypotheses about the role of informal enterprise in low income countries.

The International Centre for Tax and Development (ICTD), which DFID jointly funds with the Norwegian development ministry, has a 5 year research programme with a research theme on informal taxation. The Government hopes that the findings from the ICDT and PEDL research initiatives will inform the development of a new generation of donor programmes that can better address the dynamics and incentives underpinning firm informality.

DFID also supports the International Growth Centre (IGC) which utilises the best of British expertise to provide independent, high-quality growth policy advice based on cutting-edge research to 11 DFID partner countries. The IGC has a specific research theme on firm capabilities that deals specifically with issues such as the impact of and barriers to formalisation. Specifically the IGC has undertaken enterprise mapping, in Ethiopia and Ghana, to examine the origination and capabilities of leading industrial companies, focusing on large and mid-size firms, in order to help build and expand these capabilities for increased growth. Specific recommendations included structural reform of the Ethiopian Investment Agency (EIA) to become more pro-active with licensed firms that are not yet operational and to encourage formal registration.


6. We recommend that the Government introduce legislation similar to the relevant section of the US Foreign Account Tax Compliance Act (FATCA), requiring tax authorities automatically to exchange information relating to UK citizens or corporations. The Government should also use its influence (via the OECD Tax and Development Task Force, and similar avenues) to persuade other governments to follow suit. (Paragraph 41)

Disagree. The Government is fully committed to tackling tax evasion and sees transparency and information exchange as key tools but does not regard the introduction of FATCA in the UK as an appropriate means to achieve this. FATCA is unilateral and extraterritorial in its approach and has created significant difficulties for the US as well as affected countries in its implementation. The UK approach is to work in partnership with other governments, including those in developing countries, to increase tax transparency and exchange of information. The Government works closely with the G20, EU and OECD to deliver real progress in international tax transparency and substantially increase levels of information exchange. The Government tailors its approach to best suit each circumstance, making use of exchange on request, spontaneous exchange and automatic exchange, as appropriate. An example very relevant to developing countries is the promotion of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which provides a very cost effective way to access the benefits of information exchange. The UK, as a party to the Convention, has sought to ensure that the criteria for joining the Convention are such that they do not act as a barrier to entry to developing countries. The aim of this overall approach is to develop a comprehensive network of tax information exchange agreements which will enable the UK, and others to gain access to relevant information held in other jurisdictions.

7. To help developing country revenue authorities to tackle transfer pricing abuse, DFID should stress—in its dealings with these revenue authorities—the importance of requiring 'related party transactions' (i.e. transactions taking place within the same corporation) to be declared on annual tax returns. (Paragraph 48)

Partially agree (pending further work on this issue). The question of how a specific schedule to a tax return detailing significant transfer pricing transactions can help tax authorities with risk assessment is currently under discussion in the OECD Task Force on Tax and Development. The formulation of a model schedule is an option being considered as part of this work. Where tax authorities believe they are currently unable to properly assess transfer pricing risk, the Government envisages that this would be an approach worthy of consideration.

8. In order to understand the perspective of multinational businesses on transfer pricing issues, HMRC should meet the CBI to discuss the issue. HMRC should also seek the views of trade unions and civil society organisations. HMRC should report back to the Committee before the end of 2012 to advise us of the outcome of these discussions. (Paragraph 49)

Agree. The Government accepts this recommendation, which it understands to relate more specifically to understanding multinationals' and others' perspectives on building transfer pricing capacity in developing countries.

HMRC already has a good understanding of the more general perspective of multinational businesses on transfer pricing issues. In addition to working with particular businesses, HMRC meets regularly with specialist practitioners and representative bodies such as the CBI, the Business Tax Forum and the Law Society. HMRC also works with UK business through the EU Joint Transfer Pricing Forum, which is composed of representatives from both business and tax administrations.

HMRC will meet with the CBI and civil society organisations later this year to explore how to bolster the transfer pricing capacity building in developing countries. 

9. As a matter of urgency, the Government should conduct or commission an analysis of the likely financial impact of the revised Controlled Foreign Companies rules on developing countries. Depending on the results of this analysis, the Government should consider whether to drop its proposals. (Paragraph 55)

Disagree. The Government is reforming the corporate tax regime in order to encourage investment and drive growth in the UK. A key part of this is the reform of the Controlled Foreign Companies (CFC) rules.  Without reform of the CFC rules, the UK economy would be damaged by more companies leaving the country.  The question of the impact of CFC reform on developing countries was debated in Parliament during the passage of the Finance Bill 2012.  The Government has been clear that any assessment would need to focus on the tax regimes of other countries, making it an assessment not of UK tax rules but the tax rules of other countries and their application to the relevant subsidiaries of UK headed groups. Therefore it is not feasible to produce an estimate that would be sufficiently robust or accurate to be of value.

Whilst the Government does not think that any such assessment would be feasible, it is committed to helping developing countries to build capacity and to access tax information on which they can act to collect the tax that they are due.

10. The Government should designate a DFID ministerial responsibility for the development impact of tax and fiscal policy. Furthermore there should be an administrative or legislative requirement for the government to assess new primary and secondary UK tax legislation against its likely impact on poverty reduction and revenue-raising in developing countries, and to publish that assessment alongside the draft legislation. (Paragraph 56)

Disagree. The development impact of UK tax and fiscal policy, as with all other areas of government policy, is a collective responsibility of all Ministers across government. DFID, the Treasury and HMRC already work closely together on all relevant tax matters and will continue to do so. The UK is committed to helping developing countries build robust, fair and sustainable domestic taxation systems.

The Government does not believe that it would be proportionate or feasible to introduce a requirement to conduct an impact assessment on poverty reduction and revenue-raising in developing countries for all primary and secondary tax legislation in the UK. Instead, the UK is providing focussed support through capacity building and technical assistance, to help ensure that developing countries are in a position to build and protect their own tax base and can access and act on tax information.

11. Given that the UK was involved in founding the Extractive Industries Transparency Initiative (EITI), we feel that it should now become an EITI candidate itself. Additionally, the UK should encourage EITI to broaden its scope: EITI should require participating corporations and governments to publish the contracts which exist between them, and should also require the publication of percentage figures in addition to absolute figures. (Paragraph 62)

Partially agree. As noted by the then Parliamentary Under-Secretary of State for International Development, Stephen O'Brien, in his evidence to the Committee the UK has not implemented the EITI in the past as it was not considered resource-rich by the IMF. Yet the UK is an active supporter of the EITI by providing financial and political support to encourage countries to join and then implement the Initiative. DFID provides support to the Secretariat, the EITI multi-donor trust fund which provides technical assistance to implementing countries and represents the UK on the EITI Board. DFID bilateral programmes also support EITI candidacy and/or implementation, for example in the Democratic Republic of Congo, Nigeria, Afghanistan and Burma.

The Government welcomes the Strategy Review of the EITI which is underway to develop a broader standard for consideration by the EITI Board, with a view to possible introduction in 2014. This aims to recognise countries which are prepared to go beyond revenue transparency and look at how to provide additional information along the resource chain so that citizens can see if their governments are getting a good deal from their extractives wealth. The UK is an active participant in the Strategy Review, which is a multi-stakeholder process considering a wide range of proposals which could be included in a revised standard. These proposals include disclosure of contracts, more disaggregated reporting of data and background on the sector, among other proposals.

12. Irrespective of whether EU-level agreement is reached, the Government should enact legislation requiring each UK-based multinational corporation to report its financial information on a country-by-country basis. Such information should include the names of all companies belonging to it and trading in each country, its financial performance in each country, its tax liability in each country, the cost and net book value of its fixed assets in each country, and details of its gross and net assets in each country. Additionally, the UK should continue to support the progress of similar legislation at EU level. (Paragraph 66)

Partially agree. The Government supports mandatory reporting requirements at the EU level, via changes to the Accounting Directive, to improve transparency in the extractives and forestry sectors by requiring companies to disclose tax and other payments made to governments. This will help to promote accountability for the use of these revenues and tackle corruption in resource-rich developing countries. The Government would also encourage other jurisdictions to introduce similar legislation.

The Government does not believe, however, that the case has been made in terms of cost and benefits of extending the current proposals for EU mandatory requirements, via the Accounting Directive, to report payments to governments beyond the extractives sector and loggers of primary forests, as has been suggested by the European Parliament.

The more extensive model of country by country reporting outlined in Recommendation 12 (and described in the Committee's report as the EURODAD model) is not aimed primarily at promoting accountability over revenue paid to governments. Rather, it is regarded by its supporters as providing the information necessary to allow third parties to assess whether multinationals pay correct amounts of tax in their countries of operation or whether abusive profit-shifting has occurred. This model has been discussed in the OECD Task Force on Tax and Development without any consensus being reached on its merits. The Government believes the case has not been made for the effectiveness of this model in achieving its objectives while minimising the costs to business. Moreover, it is not something that developing country tax authorities appear to be advocating.

Nevertheless, the Government agrees that many developing countries will need to improve their ability to assess transfer pricing risk and detect abusive profit shifting and other options, such as the transfer pricing transaction schedule described in Recommendation 7, could offer more proportionate and effective ways of achieving this.


13. We re-iterate our earlier recommendation, made in our Report on CDC last year, that the tax payments made by CDC's fund managers and investee companies should be published annually on a country-by-country basis. If certain fund managers or investee companies are unwilling to agree to this, CDC should use alternative companies which are willing to be more co-operative. (Paragraph 71)

Partially agree. One of the Government's main priorities for development is to foster successful private investment and enterprise in the poorest countries. CDC is an important actor in this; and to play its role it needs to act in a commercially viable way. The Government must be careful to maintain a balance between its commitment to openness and transparency on the one hand, and the need to understand and respect commercial confidentiality and contractual obligations on the other. Information on tax payments by the companies in which CDC and the investment funds managed by CDC's fund managers invest is not generally publicly available on a per company basis - and is typically subject to confidentiality provisions in contractual documentation. For these reasons, CDC is publishing on its website aggregated annual data on a country-by-country basis of tax payments by investee companies.

CDC is committed to obtaining further improvements in tax transparency and disclosure, but this will take time. Until then, the Government should be careful not to restrict unduly CDC's ability to mobilise investment and get capital to work in the poorest parts of Africa and South Asia by imposing disclosure requirements on CDC for businesses, fund managers and the other entities that CDC engages with that other investors do not require. To do so would constrain CDC's ability to invest in and alongside these entities and would likely result in CDC overall doing less investment in poorer countries and frontier markets rather than more.

CDC will consider ways, which may include further disclosure, to ensure the continued fair and full payment of taxes by its investee companies to the countries in which they are based. CDC will consult on this matter with the wider Development Finance Institution community.

14. We recommend that DFID scale up its technical assistance work with the national revenue authorities of developing countries. (Paragraph 75)

Agree. The Government agrees with the Committee's recommendation that there is a good case for scaling up DFID's technical assistance work with revenue authorities in developing countries. Detailed proposals are being developed for how this might be achieved. An option under consideration is funding for HMRC to increase the level of technical assistance it provides to developing countries. Discussions are ongoing between DFID and HMRC with a view to preparing a business case. If this approach and business case are approved the likely aim would be to put arrangements in place during the course of the 2013/14 financial year. Ministers will write to the Committee with details when any arrangements have been agreed.

More support will be provided to DFID country offices on tax matters and, for example, to assist with the scoping of tax projects and to ensure that the research work being undertaken through the, DFID funded, International Centre for Tax and Development helps to inform practice. This may result, over time, in an increase in tax work at the country level. However, decisions on individual country programmes will continue to be made on the basis of the local country context.

15. We recommend that HMRC be provided with additional funding, to allow it to scale up its own technical assistance work with developing country revenue authorities. (Paragraph 80)

Agree. As noted in the response to question 14 above, options are being developed on scaling up technical assistance work and one that is currently under active consideration is DFID funding for HMRC to increase the level of technical assistance it provides to developing countries. If this option is taken forward it is likely that arrangements could be put in place during the course of the 2013/14 financial year.

16. The UK Government should improve its reporting on its technical assistance on tax and development, reporting cross-departmentally and at a project level on work in this area. (Paragraph 81)

Partially agree. DFID will continue vigorous implementation of its Aid Transparency Guarantee policy and DFID's Open Data Strategy ( For example, since 2011, all project documents (Business Case, Annual and Project Completion Reviews, Log frames) are published online. This will includes all DFID projects which involve, in whole or in part, capacity building and technical assistance on tax.

As part of this process, The Government is committed to continue to improve the quality and accessibility of what is published, responding to the needs of people using this data. DFID will consider whether there are changes that can be made to its finance and performance reporting system and information platform ( to make it easier for users of data on tax, or indeed other subjects, to find what they are looking for. The priority will remain on achieving the Government's broader aid transparency objectives rather than providing issue-specific reporting on tax or other topics. DFID will however discuss with the OECD DAC Secretariat whether it might be appropriate to establish a specific classification code for tax-related interventions, which, if implemented across all donors, has the potential to help improve donor coordination as well as the monitoring and evaluation of tax-related projects.

DFID and HMRC are also exploring whether information on HMRC's technical assistance work (i.e. where this is not carried out as part of a DFID programme) can be made available through the DFID information platform.

previous page contents next page

© Parliamentary copyright 2012
Prepared 13 November 2012