House of Commons International Development Committee Tax in Developing Countries: Increasing Resources for Development Fourth Report of Session 2012–13 HC 130 House of Commons International Development Committee Tax in Developing Countries: Increasing Resources for Development Fourth Report of Session 2012–13 Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/indcom Ordered by the House of Commons to be printed 16 July 2012 HC 130 [Incorporating HC 1821, Session 2010–12] Published on 23 August 2012 by authority of the House of Commons London: The Stationery Office Limited £0.00 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. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/indcom. A list of Reports of the Committee in the present Parliament is at the back of this volume. 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] Tax in Developing Countries: Increasing Resources for Development 1 Contents Report Page Summary 3 1 Introduction 5 Country-level tax profiles 5 2 Country-level tax policy 7 Forms of taxation 7 Non-corporate taxation 7 Corporate taxation 9 Broadening the tax base 12 3 Global level tax policy 15 Automatic exchange of information 15 Tackling transfer pricing abuse 17 Implications of UK Finance Bill 2012 19 Role of Extractive Industries Transparency Initiative (EITI) 21 Country-by-country reporting 23 4 UK Government’s work on tax in developing countries 25 CDC 25 Technical assistance provided by DFID 25 Additional tax-related initiatives funded by DFID 26 Technical assistance provided by HMRC 27 Conclusions and recommendations 28 Formal Minutes 30 Witnesses 31 List of printed written evidence 32 List of additional written evidence 32 List of Reports from the Committee during the current Parliament 34 Tax in Developing Countries: Increasing Resources for Development 3 Summary Tax is an issue of fundamental importance for development. If developing countries are to escape from aid dependency, and from poverty more broadly, it is imperative that their revenue authorities are able to collect taxes effectively. The effectiveness of tax collection can be enhanced in a number of ways, including: • with respect to the extractive industries, a heavier focus on taxing volumes of extraction or turnover (as opposed to taxing profits), since turnover-based taxation is more difficult to avoid or evade; • improved collection of personal income taxation, VAT and local property taxation. Underpinning all this is an urgent need to provide incentives for hitherto unregistered enterprises to join the formal (i.e. taxpaying) sector. Again, there are a variety of ways of doing this. Whilst neither this Committee nor the Department for International Development (DFID) seeks to prescribe policy to developing country governments, DFID should support developing country governments as they attempt to resolve these issues. DFID should also support a broader dialogue around tax policymaking in developing countries. The capacity of developing country governments to collect tax is not, of course, conditioned solely by the policies which they themselves adopt. On the contrary, global- level regulatory issues play a major role. Requiring tax authorities to exchange information automatically with their counterparts in other countries would constitute a strong deterrent against cross-border tax evasion, whilst requiring corporations to report their financial information on a country-by-country basis would enable irregularities to be more readily detected. In the immediate future, the Government should enact unilateral legislation to achieve both these objectives: in the former case, the relevant section of the US Foreign Account Tax Compliance Act may serve as a model. In the medium term, the Government should also use its influence in international fora to persuade other countries to enact similar measures. One of the principal forms of cross-border tax evasion is ‘transfer pricing abuse.’ This occurs when a large corporation (i.e. one with multiple divisions) engages in intra- corporation transactions at non-market rates, with a view to ‘transferring’ its profits into countries where they will be taxed less heavily (tax havens). The scale of such abuses is disputed, and profits are also transferred for reasons unrelated to tax avoidance, but it is nevertheless a significant problem. To help developing country revenue authorities to detect this, 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. Since there is a risk that its revised Controlled Foreign Companies rules will encourage 4 Tax in Developing Countries: Increasing Resources for Development the transferring of profits into tax havens, the Government should conduct an analysis of the likely financial impact on developing countries. Depending on the outcome of this analysis, it should consider dropping its proposals. More broadly, the Government should be required to assess any new primary or secondary UK tax legislation against its likely impact on revenue-raising in developing countries, and should designate a DFID ministerial responsibility for the development impact of tax and fiscal policy. The Extractive Industries Transparency Initiative (EITI), founded in 2002 by the UK Government, is an excellent tool for identifying corruption. However, if the Government hopes to persuade more developing countries to take part, it must be willing to lead by example by becoming an EITI candidate itself. Additionally, we recommend that the Government support a further broadening of EITI in the coming years, under which participating companies and governments be required to publish the contracts which exist between them. Such transparency would allow any contracts which are patently unfair to be identified as such. DFID provides technical assistance to national revenue authorities in developing countries, as well as providing funding for technical assistance delivered by HM Revenue & Customs (HMRC). Much of this work has been greatly successful: DFID’s work in Rwanda is just one example. We recommend that DFID scale up its technical assistance work with developing country revenue authorities. HMRC should also be provided with additional funding to enable it to do likewise. Tax in Developing Countries: Increasing Resources for Development 5 1 Introduction 1. Tax is an issue of fundamental importance for development. If developing countries are to escape from aid dependency, and from poverty more broadly, it is imperative that their revenue authorities are able to collect taxes effectively. Tax revenues represent a more predictable and sustainable source of revenue than aid flows ever can.1 In addition, the ability to collect taxes also has implications for the quality of governance. Taxpayers have a legitimate right to expect something in return— namely a functioning state—so are more likely to hold their governments to account if they underperform. Citizens or companies which fall outside the tax ‘net’ are much less likely to do this.2 Country-level tax profiles 2. The position of tax revenues within the wider economy varies widely between countries. In developing