House of Commons International Development Committee

Tax in Developing Countries: Increasing Resources for Development

Fourth Report of Session 2012–13

Volume II Additional written evidence

Ordered by the House of Commons to be published 22 and 28 February, 6 March and 24 April in the previous session of Parliament and 10 and 15 May, 13 and 26 June, 10 and 16 July

Published on 23 August 2012 by authority of the House of Commons London: The Stationery Office Limited

The International Development Committee

The International Development Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Office of the Secretary of State for International Development.

Current membership Rt Hon Sir Malcolm Bruce MP (Liberal Democrat, Gordon) (Chairman) Hugh Bayley MP (Labour, York Central) Richard Burden MP (Labour, Birmingham, Northfield) Mr Sam Gyimah MP (Conservative, East Surrey) Richard Harrington MP (Conservative, Watford) Pauline Latham MP (Conservative, Mid Derbyshire) Jeremy Lefroy MP (Conservative, Stafford) Mr Michael McCann MP (Labour, East Kilbride, Strathaven and Lesmahagow) Alison McGovern MP (Labour, Wirral South) Fiona O’Donnell MP (Labour, East Lothian) Chris White MP (Conservative, Warwick and Leamington)

The following members were also members of the committee during the parliament: Mr Russell Brown MP (Labour, Dumfries, Galloway) Mr James Clappison MP (Conservative, Hertsmere) Ann McKechin MP (Labour, Glasgow North) Anas Sarwar MP (Labour, Glasgow Central)

Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk.

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The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume.

Additional written evidence may be published on the internet only.

Committee staff The current staff of the Committee are David Harrison (Clerk), Louise Whitley (Inquiry Manager), Rob Page (Committee Specialist), Anita Fuki (Senior Committee Assistant), Annabel Goddard (Committee Assistant), Paul Hampson (Committee Support Assistant) and Nicholas Davies (Media Officer).

Contacts All correspondence should be addressed to the Clerk of the International Development Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 1223; the Committee’s email address is [email protected]

List of additional written evidence

(published in Volume II on the Committee’s website www.parliament.uk/indcom)

Page 1 Adam Smith International Ev w1 2 African Tax Administration Forum (ATAF) Ev w5 3 CBI Ev w6 4 Chartered Institute of Taxation Ev w8 5 Parliamentary Office of Science and Technology Ev w12 6 First Quantum Minerals Ltd Ev w23 7 Forum Syd Ev w25 8 Global Financial Integrity (GFI) Ev w26 9 Government of Jersey Ev w30 10 The Institute of Chartered Accountants in England and Wales (ICAEW) Ev w34 11 Jersey Finance Ev w35 12 Joseph H Guttentag Ev w37 13 The Latin American Network on Debt, Development and Rights Ev w40 14 London Mining Network and International Accountability Project Ev w43 15 London School of Economics and Political Science Ev w47: Ev w52 16 International Development Department (IDD) Ev w53 17 Organisation for Economic Co-operation and Development Centre Ev w55 18 Publish What You Pay Ev w61 19 Quakers Ev w66 20 Revenue Watch Institute Ev w67 21 Rio Tinto Ev w74 22 STEP Ev w78 23 Tearfund Ev w81 24 TUC Ev w84

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Written evidence

Written evidence submitted by Adam Smith International 1. Introduction Our company, Adam Smith International, has had extensive experience of delivering technical assistance relating to tax policy and administration in developing countries, financed by a variety of donors and countries. This work has ranged across a variety of countries, including Afghanistan, Burundi, Tuvalu, Nigeria, Zambia, Romania, Bulgaria, Turkey, Palestine, Sierra Leone, Oman, South Sudan, India, Mongolia, Zambia, and Uganda. We welcome this opportunity to provide input to this inquiry into this very important subject.

2. The Importanceof Revenue Reformfor Development Increased support to revenue reform is one of the most valuable forms of development assistance. By enabling countries to develop the revenue base to finance their own public services a sustainable source of funding is created, and one that helps improve the accountability of governments to their citizens. Assistance to revenue reform may be contrasted with budget support, which involves the direct transfer of funds to a developing country’s budget from developed country aid budgets on an annual basis. It is not a reliable source of income for the recipient countries. Moreover, given the absence of effective accountability systems in almost all of the countries which receive budget support, it is not possible for developed country taxpayers to know that their money has been spent properly. A greater focus on support to revenue reform is thus an extremely cost-effective means of enabling countries to improve public services on a sustainable basis. It is very high value aid. The following are some of the primary reasons why revenue reform is so important for developing countries: — Public services can be financed in a sustainable way, independent of donor financing, enabling governments to provide essential services for the population without recourse to external assistance. — A transparent, fair and efficient revenue system provides certainty and confidence for the private sector, thereby facilitating private sector development and increasing employment and income. This is especially important when effective and fair development of a particular sector is considered crucial to poverty alleviation, eg the extractives sector. — A reformed revenue system can be used directly and indirectly to allocate resources to the poorest people in society. — The impact of donor financing is multiplied many times in that it helps developing country governments help themselves in way that no other donor support can, ie with their own finances, raised on their own account, developing country governments are in position to support the full range of development initiatives, in eg health, education, private sector development etc. While other forms of donor support can lead to donor dependency and short-termism, revenue reform supports sustainability and long-termism. — More robust and transparent revenue systems reduce corruption and there is often a knock-on effect whereby the level of corruption falls across government and society. — Interaction with revenue systems. — Leads to more open, transparent and accountable government and politics, and educates society about its rights and obligations in relation to government. Businesses and individuals who pay taxes, customs and fees/charges are financing the government/political system and feel an increased need to hold it accountable. — The need to understand and comply with the reformed revenue system can kick-start the development of more sophisticated accountancy, legal and consultancy skills in the economy, which are widely beneficial in the long-term. Despite this long list of reasons why increased revenue is so important for developing countries, the revenue performance of these countries stands in stark contrast to that of developed countries. In high income countries, including non-OECD countries, average revenue as a proportion of GDP is over 40%, whereas in low income countries it is around 18% and below 10% in the worst performing countries. There is, however, clear evidence that appropriate revenue reforms in developing countries can improve this situation.

3. Some Examples of Successin Revenue Reform 3.1 Case study 1: Tax reform in Afghanistan since 2004 ASI has been engaged in supporting tax reform in Afghanistan since 2004, in programmes financed by DFID. Initially we helped develop a comprehensive tax policy and a modern, consolidated legal regime to reflect that policy. The bulk of the subsequent work was to design and implement a modern tax administration. cobber Pack: U PL: COE1 [E] Processed: [13-08-2012 12:00] Job: 020955 Unit: PG01 Source: /MILES/PKU/INPUT/020955/020955_w022_019470_w032_w012_Mark_TAX 12 TUC.xml

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The tax administration work involved setting up an Afghanistan Revenue Department (ARD) Large Taxpayer Office and Medium Taxpayer Office in Kabul and establishing/developing the tax administration along functional lines in accordance with a new, comprehensive self-assessment approach. This entailed putting in place HRM systems and supporting the recruitment/training/on the job development of a large cadre of tax officials in each functional area. We also supported ARD to understand where Afghanistan’s revenue was coming from both geographically and in terms of legal/administrative basis, and developing systems and capability to report and analyse revenue effectively. We developed the Revenue Trend Analysis System (RTAS), which tracks historical revenue by type and location over time. This is an invaluable planning tool that we have used to help the Afghanistan Government develop evidence based revenue policy. In recent years, with the tax base and the number of taxpayer cases expanding dramatically, both the international community and the Afghanistan Government has set increasingly ambitious revenue collection targets and it has been ASI’s job to support ARD to meet these targets while also continuing to lay the foundations for ARD’s sustainable future development as an organisation that can operate effectively without international support. More recently ARD has also taken forward new areas of modernisation, eg the project was rolled out successfully to the priority provinces of Herat, Balkh, Nangarhar, Kunduz and Kandahar and a nationwide tax administration computerisation system, SIGTAS, is being implemented. ARD reported revenue collection of US$ 1.77 billion for the 2010–11 fiscal year, a 26% increase year-on- year and more than six times the level of revenue collected in 2004–05, when ASI started working with ARD. By comparison, GDP grew 16% year-on-year in 2010–11, implying revenue as a proportion of GDP in excess of 11%, up from 9.7% in 2009–10. Revenue as a proportion of GDP was approximately 4% when ASI started working with ARD on tax reform in 2004–05.

3.2 Case study 2: Tax reform in Burundi since 2009 In 2009, ASI began working in Burundi to assist the Government of Burundi to establish a semi-autonomous revenue agency (OBR), which would manage tax and customs collection. Funding for our work is provided by Trade Mark East Africa, itself largely funded by DFID. We facilitated the transition of the Tax and Customs Departments to the OBR, the retrenchment of redundant staff and the consequent recruitment of 200 senior and middle level staff members for OBR, supported the development of day-to-day operations, and provided training and mentoring on tax and customs administration. Since July 2010, the team reported directly to the newly-appointed Commissioner of the OBR, an effective individual who had achieved great success in increasing tax revenue in Rwanda as head of the tax administration there. During the second stage, the project oversaw and advised on the procurement of a new IT tax system, the design and implementation of new revenue collection and management systems, the design of financial management and budget procedures and the provision of customs systems. Under the leadership of the new Commissioner OBR is now being run professionally and tax administration in Burundi has undergone a real transformation. The result is that since 2009 tax revenue has doubled. Around £160m of extra revenue per annum is now being raised. This is a very significant figure and can be expected to increase year by year as revenue performance continues to improve. There is zero tolerance of corruption and a constant effort to pursue defaulters, whether or not they have political connections. OBR’s quasi-autonomous status and flexibility in making decisions has helped it considerably in achieving this turnaround, although there are still challenges to overcome in that many systems and procedures still require modernisation and negligence and corruption amongst staff have yet to be completely rooted out. As in the Afghan case, very high value for money has been achieved by the UK-financed technical assistance, with large amounts of extra revenue now being raised on a sustainable basis.

4. How Donors can Better Support Developing Countries to Improve Revenue Collection 4.1 Holistic, integrated reforms Revenue reforms should be holistic if they are to have maximum impact and not be counter-productive. A common cause for concern is that revenue reforms are not joined up. This happens when reforms are focused very narrowly, ie dealing with one aspect of revenue policy, say VAT, without attention to other policies that should be reformed as well to ensure maximum impact of the VAT reform, ie most obviously excise taxes but also direct taxes. Putting in place a range of new policy measures and rates without specifying exemptions is also likely to cause problems as specific sectors and industries lobby for, and are granted, exemptions which are counter-productive long-term. Similarly, it is often the case that revenue policy and revenue administration reform are undertaken separately, which is a crucial flaw. Administrative capability is a constraint on policy and should inform which cobber Pack: U PL: COE1 [O] Processed: [13-08-2012 12:00] Job: 020955 Unit: PG01 Source: /MILES/PKU/INPUT/020955/020955_w022_019470_w032_w012_Mark_TAX 12 TUC.xml

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policies are adopted. In the same way, policy might be formulated without any thought to how to reflect that policy in law or without the prerequisite assessment of revenue potential. We recommend that donors should take a holistic approach to revenue reform, ensuring that their involvement is part of a comprehensive package of integrated reforms along the following lines.

4.1.1 Revenue potential study Revenue potential studies should identify what levels and types of revenue would be available under an adequate revenue system. In the poorest or most fragile countries this study would usually be top-down, using available macroeconomic data to get a general sense of the revenue gap. In more developed countries a bottom- up study can be used to identify the level of non-compliance from the known tax base in an extant tax system. Revenue potential studies are extremely important in laying the foundations for appropriate revenue policy, law and administration. Without it there is some danger that subsequent reforms will be poorly targeted and counter-productive. A classic example is increasing the tax burden on already compliant taxpayers through more taxes/higher rates when in fact low revenue is more related to the poor compliance of a different set of taxpayers.

4.1.2 Revenue policy Revenue policy support should culminate in a package of policies which together ensure effectiveness and efficiency across direct and indirect taxes, customs and fees/charges. The more sophisticated the economy, the more detailed the analysis behind the policy will need to be, including which taxes, customs and fees/charges to apply and at which rates, including thresholds and exemptions. Understanding the incidence of different taxes (who ultimately bears the burden of them) is absolutely critical, otherwise the reforms will be at best ineffective and at worst counterproductive/unfair. Policy can also include the sub-national level, especially in decentralised systems where states/provinces may have substantial revenue autonomy. In some cases revenue policy includes inter-governmental transfers, eg in decentralised systems where some states/provinces cannot raise sufficient revenue locally to support public services. Policy formulation requires widespread consultation and agreement with stakeholders.

4.1.3 Legal reform Legal reform should present the policy in the form of laws that can be implemented in practice. Once revenue policy is in place it should be reflected in the law, either in amended versions of existing laws or in completely new laws. Developing a reformed legal framework requires skilled drafting, excellent translation/ reverse translation and widespread consultation. It also requires support for parliamentary scrutiny and approval of amended laws, which can be a complex and lengthy process.

4.1.4 Revenue administration Revenue administration reforms should develop effective and efficient revenue administration. This is the final, and longest, stage of revenue development, often taking several years in low capacity environments. It requires intensive support to develop HRD/HRM/training; infrastructure and equipment; processes and procedures; organisation along revenue payer size/admin function lines; taxpayer communications/education; IT for revenue administration that speeds up processing times and reduces the need for human discretion. Implementing a modern, self-assessment tax system that shifts responsibility to taxpayers and requires the tax administration to act as a service provider is a huge cultural challenge. Building this capability necessarily requires hands-on work with revenue officers through co-location with management and other revenue officers over a long period of time. Developing a revenue administration from zero is a substantial effort. It is best to begin reforms in areas of the administration that collect most revenue, eg in the case of tax administration establishing and developing a large taxpayer office, followed by a medium taxpayer office. Similarly, it makes sense to begin administration reforms in geographic areas that have most revenue potential (linked to the revenue potential assessment described above), eg major economic or industrial centres, or busy border crossings in the case of customs.

4.1.5 Recipient government leadership and ownership Long-term sustainability of reforms requires that the recipient government is not only engaged and supportive, but actually leads and owns reforms. This means that the government is fully invested, that it will be held accountable for failures and take full credit for successes. Without this leadership and ownership, the chances of effective reform are much reduced and there is risk that reform efforts will be a wasted.

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government and implementing consultant, leading to a lack of ownership and poor results. The bureaucracy associated with multilateral mechanisms is cumbersome and costly, a fact noted by all stakeholders. It is our view that DFID achieves better revenue reform, and receives greater value for money, when it concentrates on targeted bilateral technical assistance.

4.3 The method and style of technical assistance is as important as its technical content We have noted that the technical substance of revenue reforms in developing countries is rarely disputed in any great detail. There is a general consensus around what is good and an agreement that revenue systems should be developed in certain ways, eg: — streamlining and minimising exemptions; — Implementing a broad-based VAT; — establishing a broad-based corporate income tax, at rates competitive by international standards; — extending the personal income tax base; — levying excises on a few key items; — strengthening real estate taxes, which is most important for local government finance; — administration by self assessment; — administration by function, through large taxpayer and medium taxpayer offices; — the use of an off the shelf IT package for tax/customs administration; and — a healthy debate regarding the pros and cons of a unified or autonomous revenue agency. What often makes the difference between the very best revenue reform programmes and those that fail, or are mediocre, is the method and style of how these reforms are implemented. Through our experience in revenue reforms around the world, we have come to identify the following as a selection of the important methods and styles that, taken together, can contribute very significantly to the success of revenue reform technical assistance.

4.3.1 Physical co-location with government counterparts Being physically co-located with government counterparts means sitting with them in their offices all day every day and being part of their daily work routine. Supporting them with these day-to-day tasks provides information and understanding about the real issues facing counterparts in their daily work. Working with counterparts in a supportive and problem solving capacity gets actual results in terms of achieving counterpart work objectives and also builds capacity as skills are transferred to counterparts both explicitly and tacitly. As trust grows, advisory support becomes easier and technical assistance becomes more productive.

4.3.2 A genuine commitment to capacity building Recipient governments are very often under tremendous pressure from the international community and from pressure generated internally within the recipient government itself, to focus all attention on raising revenue in the immediate term. In this environment, long-term capacity building is difficult. It is, however, absolutely critical to make capacity building a priority, ensuring that recipient governments own reforms and maximise lessons learned along the way.

4.3.3 Using national and local expertise Local advisers and consultants provide invaluable local knowledge, their local experience reduces the start- up costs of international consultants working in a new environment for the first time and using them is more cost effective over the long-term than using international consultants exclusively. Deploying international and local consultants together can lead to a dual skills transfer process with international consultants learning about the local environment and how to work in it more effectively, while local consultants learn from the deep and broad experience of international consultants and their background in the technical and operational detail of international best practice and reform in a wide variety of different contexts.

4.3.4 Long terms versus short term international advisers In our experience, long-term advisers, working on a full-time residential basis for at least a year at a time, sometimes several years, are usually the best solution for recipient governments. These long-term advisers should be able to build very strong relationships with their counterparts and with each other, adding much more value than could have been achieved through shorter-term inputs which focus on pure technical matters. It is however very difficult to cover the full range of technical expertise required by a project of such complexity without the use of tactical short-term inputs from time to time. It is therefore important to make use of experts on highly specific areas as required, eg preparation for implementation of VAT, intergovernmental fiscal relations, land tax, the effect of different tax amnesties, how to tax income from illegal sources etc. cobber Pack: U PL: COE1 [O] Processed: [13-08-2012 12:00] Job: 020955 Unit: PG01 Source: /MILES/PKU/INPUT/020955/020955_w022_019470_w032_w012_Mark_TAX 12 TUC.xml

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5. Tax Evasionand Avoidancein Developing Countries by Private Individuals and Companies The best way to help reduce evasion and avoidance is to support the holistic revenue reforms described in this submission. The weaknesses or lack of transparency/fairness may be in the policy, law or administration, indeed the strongest likelihood is that it exists in all three parts of the revenue system. As the tax system is strengthened and made fair and transparent, so avoidance and evasion will fall and compliance will improve. In our experience, the quality of audit functions and audit officers is critical in scrutinising the tax return of large companies, especially very large multi-national companies. A specialist large taxpayer office or unit should be staffed with very well trained audit staff who have the knowledge and the confidence to deal with the most sophisticated tax planning. This alone can have a significant impact on avoidance and evasion. 6 February 2012

Written evidence submitted by African Tax Administration Forum (ATAF) Comments on the Technical Assistance DFID Provides/Has Providedto National Tax Authorities 1. Africa recognises that effective and efficient tax administration is the bedrock on which economic development and accountability between state and citizens must be built. In recent times, African countries have also emphasized in various fora the important linkages between the need for the effective raising of revenues from domestic resources, the reduction of dependence on dominant single sources of revenue, and the diminishing of dependency on donor assistance. 2. In this regard, and through their membership of the African Tax Administration Forum (ATAF), they recognise that building effective tax systems is a vital and central part of the development process. ATAF thus strives towards promoting and supporting the mobilisation of domestic resources through the provision of a continental platform to improve the performance of tax administration in Africa. Better tax administration will enhance economic growth, increase accountability of the state to its citizens, and more effectively mobilise domestic resources. And this is highly reliant on efficient and effective tax systems within revenue authorities. ATAF is thus an organisation that, by focusing on improving African structures for harnessing African tax resources, would also ensure that many of the essential foundations for successful state building will be put in place. 3. While the ultimate aim is for developing countries to be in a position to generate sufficient domestic resources to fully finance their own development, assistance from more developed countries will still be required until this goal is reached. It is thus important for developing countries to be supported, both technically and financially, in their efforts to develop their own systems and structures that will have a catalytic effect on their development. 4. The DFID has, since the ATAF Inaugural Conference in November 2009, been an important development partner of ATAF. While it has in the past, and continues to, provide technical and financial assistance to individual African tax administrations, DFID’s direct support to ATAF and its workplan has made a significant contribution on an even broader scale in that ATAF is in a position to identify and focus its interventions on the real and direct needs and priorities of its members. In this regard, the DFID has contributed to the ATAF pooled fund, which enables the organisation to deliver on its annual workplan. 5. With the support of DFID and other development partners, ATAF has, to date, focussed much of its attention on developing the skills and capacity within the tax administrations of its member countries through its annual Capacity Development Programme. While this has been an important aspect of our workplan thus far, other matters requiring greater focus are the establishment of a permanent and sustainable Secretariat, and the establishment of the Technical Assistance Unit that would be able to respond to the needs of individual members. We are convinced that the DFID (and the UK through HM Revenue & Customs) would be able to play a significant role in developing African tax administrations through direct support and technical assistance to ATAF in these afore-mentioned areas.

Comments on the Role oftheUN Tax Committee and/or the OECD 1. The UN Taxation is central to implementing the development agendas of developing nations and, just as importantly, in achieving the Millennium Development Goals (MDGs) as initiated by the UN. The UN Committee of Experts on International Cooperation in Tax Matters has an important role to play in supporting the mobilisation of domestic resources. It is the only body within the UN system that focuses on those specific tools and systems of tax administration that would assist countries in developing home-grown solutions to diminishing their dependence on donor assistance. 2. The UN has the advantage of being at the forefront of international engagements. The UN Committee, therefore, should be used as a platform to further these debates at an international level while involving key role players from both developed and developing countries as well as international organisations. The importance of the UN Committee of Experts should be emphasised by increasing its resources and reach so that it can partake cobber Pack: U PL: COE1 [E] Processed: [13-08-2012 12:00] Job: 020955 Unit: PG01 Source: /MILES/PKU/INPUT/020955/020955_w022_019470_w032_w012_Mark_TAX 12 TUC.xml

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in collaborations with ATAF and other regional tax groupings on technical assistance programmes as well as capacity development initiatives. 3. The OECD’s Centre for Tax Policy and Administration (CTPA) has been a key development partner and important support of ATAF since its establishment. The CTPA provides regular assistance in the form of guidance and technical expertise for ATAF’s Capacity Development Programme as well as other important events on the ATAF calendar. There is a healthy degree of exchange of ideas between the two organisations. 4. ATAF does, however, feel that more should be done by the OECD to provide hands-on and direct technical assistance to developing countries to build the capacity and systems to implement those tax products that the organisation is so good at developing. Without this intervention, the OECD’s products (such as its Model Tax Convention and the Convention on Mutual Administrative Assistance in Tax Matters) will remain documents on paper that would be difficult to implement in developing countries without the necessary skills, resources and capacity. February 2012

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. cobber Pack: U PL: COE1 [O] Processed: [13-08-2012 12:00] Job: 020955 Unit: PG01 Source: /MILES/PKU/INPUT/020955/020955_w022_019470_w032_w012_Mark_TAX 12 TUC.xml

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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.

Commentsonthe Key Issuesforthe 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. Second, 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.) cobber Pack: U PL: COE1 [E] Processed: [13-08-2012 12:00] Job: 020955 Unit: PG01 Source: /MILES/PKU/INPUT/020955/020955_w022_019470_w032_w012_Mark_TAX 12 TUC.xml

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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

Written evidence submitted by the Chartered Institute of Taxation 1. Executive Summary 1.1 The failure to collect adequate levels of tax in developing countries is a major concern. Fear of corruption and absence of the rule of law are probably the biggest obstacles to effective tax administration in developing countries, along with lack of administrative expertise and/or lack of understanding of the broader international tax and reporting context in which multinationals operate. Measures to improve governance, strengthen the rule of law and develop expertise are at least as important to effective tax administration as any tax-specific measures. 1.2 We commend the UK Government’s existing support for capacity building of tax administrations in developing countries and would like to see its expansion made a priority. 1.3 In improving tax systems in developing countries, the key is to build simple and robust taxes. Developed countries should be cautious in imposing our own thoughts and standards: what is necessary and works well in highly developed countries may not be necessary nor work effectively elsewhere. 1.4 There is an absence of reliable estimates of the extent of transfer mispricing or of other abusive or illegal practices by business in developing countries. We would like to see more work done in this area using individual country and firm data. 1.5 Existing transfer pricing rules and international co-operation agreements are sufficient to enable a country’s tax authority to assess the correct level of taxation due in its territory, if it has the necessary expertise and capacity. Country-by-country reporting would create additional administrative costs for business without producing the benefits some anticipate.

2. Supporting Developing Countries to Improve Revenue Collection 2.1 The CIOT agrees that failure to levy and collect tax in developing countries is a major concern. We note the finding that, as a result of insufficiently sophisticated tax administration structures and processes, many developing countries capture only 40% of their tax potential, compared to around 90% for industrialised countries such as the UK.1 It is critically important that developing nations can maximise their tax revenues to break the cycle of dependency and poverty. 2.2 An effective tax collection structure requires: — competent, knowledgeable tax administrators with sufficient capacity to carry out their work; — well-managed and comprehensive tax record systems; 1 International Tax Compact (2011), “Benefits of a computerized integrated system for taxation”, iTax case study, Bonn, February 2011. cobber Pack: U PL: COE1 [O] Processed: [13-08-2012 12:00] Job: 020955 Unit: PG01 Source: /MILES/PKU/INPUT/020955/020955_w022_019470_w032_w012_Mark_TAX 12 TUC.xml

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— tax laws which are transparent and command broad public support; — collection mechanisms which are not disproportionately burdensome on taxpayers or tax collectors; — levels of corruption kept to a low level; — the rule of law, including independent mechanisms to resolve disputes between taxpayers and the authorities; and — access for taxpayers to affordable, professional, independent tax advice.

2.3 The UK Government, through HM Revenue and Customs, HM Treasury and the Department for International Development, already provides capacity-building support for tax administrations in developing countries. This includes sending staff on secondment to developing countries as well as a range of techniques for spreading good practice. We are aware of the particular success of work to help Rwanda improve its tax administration. We pay tribute to this important and valuable work and would like to see its expansion made a priority.2

2.4 The need for a legal framework

2.4.1 Developing countries benefit from the establishment of legal frameworks to enable their tax administrations to work together. There is a particularly obvious need for African tax administrators to work together. We therefore welcome the formation of the African Tax Administration Forum (ATAF) in 2009 and the support the UK Government has given to it.

2.4.2 Anecdotal evidence from tax advisers suggests that corruption and the lack of effective rule of law may be the biggest obstacles to effective tax administration—and to wider economic progress—in developing countries. Perceived bribery and corruption are not only denying governments much-needed revenues and undermining faith in tax systems, they are also deterring potential inward investors from investing in such countries. The objection is less to the total cost of doing business than to the unethical behaviour required and above all the sheer uncertainty of the costs of doing business. As one CIOT member explained of his client who decided not to invest in a particular country: “He was perfectly happy to pay the right rate of tax. He didn’t want to have to pay bribes and be left at the whim of local officials.” Measures to improve governance and strengthen the rule of law ar