THE NEXT STEPS EDITION VOLUME 4, NUMBER 4 TAX JUSTICE FOCUS Tax and development Jeffrey Owens 1 EDITORIAL What a year! The quarterly newsletter of the tax justice network Nicholas Shaxson 4 FEATURE Measuring Tax Justice Edmund Valpy Fitzgerald and John Roche 6 NEWS Doha: A cup half-full? John Christensen 8 TAX AND DEVELOPMENT Tax systems for poverty reduction 10 S4TP – a project for South-South Why tax is important for development co-operation 10 BOOK REVIEWS Institutional competition No country has succeeded in developing a well functioning market based economy derived from tax with Indira Rajaraman 12 10% coming from without a broad based tax system and tax plays a key role in promoting democracy Economics of Tax Law non-tax sources, e.g. Alessandro Santoro 14 by making governments accountable to their citizens. Lack of dependence on fees and charges). citizens for tax revenues is a major cause of weak, unresponsive governance in This was confirmed at many poor countries, especially those which are heavily dependent on aid.1 the recent UN Doha meeting where tax issues ran throughout ID and TAX are both three letter Aid and tax should be seen as complementary: Jeffrey Owens the discussions. words, but that’s where the similarities poor countries will continue to need aid as they Astop. Tax encourages governments to set about building up their tax capacity. In fact, Yet as can be seen from Figure I, the ratio of be accountable to their citizens; aid to donors; aid can play a vital role in helping developing tax to GDP in lower income countries is, on tax can provide a predictable long-term source countries build up their tax capacity, decreasing average, about half of that in OECD countries. of revenue which is within the control of in the long term their overall reliance on aid. Nobody is suggesting that Sudan should move Editor: Nicholas Shaxson the government, aid is less predictable; tax to the tax levels found in Sweden, but clearly Contributing editor: John Christensen enable governments to use the money where The Monterrey Consensus recognised the there is fiscal space for many low income Design and layout: www.tabd.co.uk it is most needed, aid is often tied to specific key role of taxation in mobilising domestic Email: info(at)taxjustice.net countries to increase their tax take through Published by the Tax Justice Network International resources (90% of domestic revenue is usually projects. more effective tax systems. Secretariat Limited © Tax Justice Network 2009 For free circulation, ISSN 1746-7691 1 See “Taxation and Governance”, OECD, February 2008. FIRST QUARTER 2009 VOLUME 4 ISSUE 4 TAX JUSTICE FOCUS Figure 1. Tax to GDP ratio (2005) are facing a major challenge just to maintain governments need to ensure that the tax base. This may require reviewing their current revenue base. alternative sources of revenue are already the taxation of land and buildings; % 35 in place. This suggests that as the process exploring new ways to tax households; ii) Weak tax administrations: Many, 30 of liberalisation continues, there needs to re-examining the tax treatment of small- although not all, low income countries have be a phase-in period since all the sources medium size enterprises; introducing 25 tax administrations which are corrupt, of revenue which could replace tariffs – simple environmental taxes. It may also 20 with poorly trained and underpaid officials; personal or corporate incomes taxes; sales require moving towards a heavier reliance 15 antiquated administrative structures, often or VAT; taxes on moveable or immoveable on fees and charges. 10 still based upon the old colonial model property – are far more complex to 5 (e.g. separate departments to deal with administer than tariffs. iv) Reduce the outflow of funds to tax income and consumption taxes); weak havens: Over the last 10 years OECD 0 SS Africa LICs MICS OECD risk management and poorly articulated ii) Build up the capacity of the tax countries have established high standards of strategic goals. Yet a tax system is only administration: In most developing transparency and exchange of information as good as its tax administration and countries this will require creating an in tax matters which have achieved a global What are the Constraints faced by without a dramatic improvement in independent revenue service with well paid endorsement from the G8, G20 and United Developing Countries in raising their these administrations, it is unlikely that officials, free from corruption and political Nations Committee on Taxation. Regular Tax Take? developing countries will meet the interference. The Commissioner must be assessments are undertaken of how far on A typical developing country faces multiple Monterrey commitments. a strong visionary individual, and be able and offshore financial centres are meeting constraints in improving its tax capacity: to see tax in the broader perspective of these standards.2 Implementation of these cultural attitudes towards government; weak iii) Outflow of funds to tax havens: Tax developing a market based democracy. The standards is progressing. Twenty-six of tax administrations; narrow revenue tax base; havens have been referred to as “sunny old colonial divisions between direct and the 30 OECD countries already meet competitive pressures from other countries; places for shady people”. Whilst many tax indirect taxes need to be replaced with the standards as do the vast majority of corruption; capital flight; aggressive tax havens are sunny places, today they can be an integrated administration arranged on non-OECD countries. Of the 40 plus tax planning and many more. I will focus on what found throughout the globe. OECD defines functional lines. Risk management needs havens that the OECD identified in 2000, I see as the three major constraints: a tax haven as a jurisdiction which has no to replace a system based upon trying nine (The Netherlands Antilles, Aruba, or nominal taxation and lacks transparency, to control and audit the vast majority of Bermuda, British Virgin Islands, Cyprus, Isle i) Heavy reliance on cross-border tariffs: effective exchange of information and “real taxpayers. A balance between enforcement of Man, Guernsey, Jersey and Malta) are A typical African country relies on tariffs activities”. Many citizens of developing (and and taxpayer service must be achieved actively implementing the standards either for more than half of its revenue. Yet developed) countries now have easy access with the revenue service being seen as a by means of Tax Information Exchange this source of funding is under pressure to tax havens and the result is that these “friend” rather than “foe” of business. New Agreements (TIEAs) or tax treaties and the from trade liberalisation promoted by the countries are losing to tax havens almost technologies will have a role to play in international community needs to recognise WTO and regional blocks (e.g. SADC). three times what they get from developed modernising the tax administration but can this progress. Hong Kong is reviewing As countries join these initiatives so they countries in aid. If taxes on this income never, by themselves, provide a substitute its position on exchange of information. are required to reduce their tariffs. Trade were collected billions of dollars would for a well designed administration. Nevertheless, much remains to be achieved. liberalisation is in itself desirable, but it become available to finance development. There are still three jurisdictions on the comes at a price for a low income country iii) Broaden the tax base: Developing OECD list of unco-operative tax havens since tariffs are far easier to administer What Needs to be Done? countries need to explore how the tax than alternative sources of revenue (e.g. i) Phase-in trade liberalisation: Before base can be broadened and how people in VAT). Consequently, low income countries 2 The latest assessment of 84 financial centres was removing tariffs on cross-border trade, the informal sector can be brought within issued in September 2008 under the title Towards a Level Playing Field. 2 FIRST QUARTER 2009 VOLUME 4 ISSUE 4 TAX JUSTICE FOCUS Figure 2. Tax related assistance as a process of entering into negotiation of TIEAs. proportion of Official Development Developing countries can only continue to Box 1. Tax reform: The Governance Dimension in Rwanda Assistance (ODA) in 2006 benefit from the move towards less political DFID’s support to the Rwandan Revenue Authority (RRA) has resulted in a significant tolerance of countries that facilitate non- increase in domestic revenue (from 9% of GDP in 1998 to 14.7% in 2005). Costs of collection have also been reduced. This success is the result of strengthening internal organisational ODA for compliance with the tax laws. government structures and processes and of building accountable relationships with external partners, administration, What’s the Future Role of such as central and local government, a growing tax profession and taxpayers themselves. economic The RRA now plays an important role in strengthening relationships between citizens policy and Public International Institutions and NGO’s? and the state, helping to build a “social contract” based on trust and co-operation. Financial NGO’s have played an important role in Management linking tax havens and finance for development. Source: Department for International Development (DfID), 2007 ODA for tax They need to continue to build up political and revenue support for a truly global implementation related tasks In this context the recent initiative of African the amounts of revenue lost to tax havens. of the international standards. They must, and OECD Tax Commissioners to create an Ministries of Finance, Central banks and however, avoid endangering their case by African Tax Administration Forum deserves international organisations need to lead this unsupported claims of the amounts of strong support.