Tax in Developing Countries: Increasing Resources for Development

Supplementary written evidence submitted by Christian Aid

In Christian Aid’s oral evidence to the Committee on February 28 2012 we agreed to provide further written evidence on the issue of our estimate that developing countries lose $160bn a year in lost tax revenue due to transfer pricing and false invoicing. We would also like to provide some further clarifications around some topics raised in our oral evidence.

Christian Aid’s Research Methodology

As we indicated in oral evidence, Christian Aid has previously given evidence to the IDC on our methodology on reaching our figure of $160bn. This was on 4 March 2009, in evidence given by Dr David McNair [1] . We also indicated that one of the reports criticizing Christian Aid’s research that was cited in written evidence by Jersey Finance was based upon flawed assumptions of Christian Aid’s research. The report ‘Transfer Pricing and Child Mortality’ makes much about Christian Aid’s report analyzing at too broad a level of trade data stating ‘some product categories simply contain too great a range for the [analysis] to have any meaning, for example: pharmaceutical products, which contains everything from aspirin to the latest heart disease pills [...]; the "vehicles other than railway stock" category that includes everything from a bicycle to a Ferrari; the category that includes computers, boilers and nuclear reactors [...]".’ However this is not the case, we actually used the most detailed commodity data available (e.g. ‘vulcanized rubber conveyor or transmission belts’) but to make the report a more practicable size these were then aggregated for publication, a fact that was clearly indicated in the report.

The methodology has been further debated at the World Bank [2] with the conclusion being a general agreement that it would be difficult to have done much better with the data that was available.

We acknowledge that the accuracy of any figure would be improved by improved data, but in the years since we published our research there has been increasing acceptance that there is a significant problem regarding developing countries ability to collect tax revenue, and that the issue raised by our research, transfer pricing, is one of the biggest issues within this (see original submission). While we therefore encourage further research into the scale of the problem, we would encourage an even greater focus on solutions to the problem.


In the evidence presented in the session immediately following ours, there was discussion about the impact of VAT style consumption taxes and we thought it would be useful for us to clarify our own position on this issue.

The role of VAT in developing countries is an area of ongoing debate, and is an area where more research and understanding is required. The main concerns of Christian Aid is the potential for VAT to be a regressive tax, though we accept that this impact can be reduced by either zero-rating or exemptions of essential goods and services. However in the specific question posed by the committee on the relative focus on direct or indirect taxes, as stated in oral evidence, we would be wary of paying too little attention to direct taxation. The levels of inequality both generally, and especially within tax systems in many developing countries [3] is such that attention must be given to tax policy with very strong levels of progressivity. Also many developing countries are already heavily dependent on indirect taxation [4] . So as developing countries seek to increase the overall tax take to rely on indirect taxation for this would increase this reliance still further and help perpetuate inequality, especially where government spending is not adequately targeted at the poor. Furthermore while the argument in favour of VAT style taxes for developing countries has often stressed the efficiency of the tax, there are questions over just how accurate this interpretation is [5] .

The main point we would stress is that developing countries need to be able to have both the capacity and space to be able to devise a tax policy mix that will deliver the revenue, equity and fairness required for sustainable development. What role VAT may play in this process is likely to vary, and this needs to be acknowledged in the advice that is being given to developing countries; a situation that does not appear to be the case currently [6] .

Automatic Information Exchange

Relating to our response on what kind of information should be included in the automatic exchange of information, we would like to add the following comments.

The Multilateral Convention on Mutual Assistance in Tax Matters states that: ‘The Parties shall exchange any information, in particular as provided in this section, that is foreseeably relevant to: the assessment and collection of tax, and the recovery and enforcement of tax claims, and the prosecution before an administrative authority or the initiation of prosecution before a judicial body.  Information which is unlikely to be relevant to these purposes shall not be exchanged under this Convention.’ [7]

This is a good starting principle; in practice this would be likely to include mean information such as; beneficial ownership information, bank account numbers, Tax Identification Numbers and assets, though this is not an exhaustive list.


Lastly we feel it is also appropriate to clarify our position regarding the OECD. We sit on the OECD Taskforce on Tax and Development, and we acknowledge and support the work of the OECD in the realm of tax and development.

However, in order to find solutions to issues of taxation that work for all countries we believe that all countries must be included in this process. Given the limited membership of the OECD, and the remit that it derives from that, we believe the current approach does not facilitate this. Notwithstanding some important progress being made by the OECD, we advocate a more inclusive alternate approach (e.g. through the UN tax committee) given the limits outlined above.

We would also like to reiterate our support for the IDC conducting this enquiry into tax and development and offer any further assistance you may require. Ensuring developing countries are able to collect and effectively spend their own resources will not only ensure that value for money of UK aid, but more importantly will allow for a future where developing counties move beyond aid dependency.

29 May 2012



[3] E.g. in Brazil

[4] On average developed countries get 35% of their taxes from direct taxation, this is significantly higher than Bangladesh (20%) and Ghana (22%), and especially Latin America (4%) – see Chapter 1 page 4.

[5] r l?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&cts=1331660148952&ved=0CCkQFjAA&url=http%3A%2F%2Facademicco m



Prepared 14th June 2012