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. 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] 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 cobber Pack: U PL: COE1 [SO] 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 International Development Committee: Evidence Ev w1 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 Ev w2 International Development Committee: Evidence 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