Thursday, January 07, 2010

European Union Conference on Tax and Development

Submitted by guest blogger Simon Bond

The European Union recently held a conference on tax and development to fight poverty. By hosting such as event, the EU has raised the profile of an issue that many consider to be one of the most crucial concerns of economic justice and the pressing need for development to reduce global poverty. The conference reviewed the importance of the tax issue for developing countries and outlined the problems they face.

The critical role of tax systems and tax revenues lies at the heart of effective and sustainable development. Adequate tax revenues would enable developing countries to put in place essential building blocks of development, including transport & power infrastructures, education and health. In contrast, currently they generally have lower tax to GDP ratios than developed countries.

Taxation is part of the relationship between a state and its citizens, and bad government is often correlated with limited state reliance on tax revenues from its people and businesses. If a state does not need tax revenues from its people it has little need to listen to them and the prospects for accountability and democracy are weakened. The subject of taxes encourages citizens to engage with their government. Shockingly, the political and economic elite of some developing countries are not part of the tax base.

Domestic tax is also a more predictable way of financing government investment and spending than other sources of revenue such as international aid. Reliance on this source can lead to aid dependency.

The Problems faced by Developing Countries

Domestically, developing countries are faced with economic structures that not amenable to being taxed, weak administrative systems and inadequate tax legislation. These are compounded by the global system of financial transactions and the abundance of non-co-operative jurisdictions. These have given rise to illicit capital outflows and facilitated tax evasion and avoidance at low risk. Non co operative jurisdictions are generally known as tax havens, though secrecy jurisdictions may be a more accurate term.

The illicit capital outflows that are often channelled through or into secrecy jurisdictions have two sources. The larger source is international companies using ‘transfer pricing practices’ that are not in accordance with international standards, known as transfer mis-pricing. This is where part of an international group of companies exports products to another part of the same group at an unrealistic price (a non-market price) in order to minimise its tax liabilities. The other source is wealthy individuals and families transferring their assets into secrecy jurisdictions.

The conference report reviewed some of the estimates of the scale of these illicit capital outflows. A number of estimated have been made, usually measuring different aspects, though this is not a straightforward exercise due to the un-transparent nature of the flows. One speaker at the conference estimated that commercial illicit flows are over six times greater than the amount of aid flowing into the developing world. This means that the amount of lost tax revenues is a serious drag on the ability of these countries to develop their economies.

Of course, tax revenues are not the only source of finance for development. However, inefficient tax systems can distort decision making and this leads to what economists would call ‘sub-optimal outcomes’. One measure of a good tax system is that it minimises distortions and encourages the economically efficient use of resources.

Participants in the Conference

The conference was organised by two of the EU’s Commissioners and Eva Joly, a Green MEP who chairs the European Parliament’s Development Committee. Participants included speakers from developing countries who were able to provide case studies from Mali, Zambia and Ghana. Among the civil society organisations represented were Christian Aid and the Tax Justice Network.

The panel of speakers also included Jeffrey Owens of the OECD (Organisation for Economic Co operation and Development). He is an important player in this field, though the OECD has been criticised by civil society organisations for promoting an ineffectual system of tax information exchange agreements for tax havens. International co operation is important for tackling the challenges of illicit financial flows and tax evasion.

Conclusion

Combating illicit capital flight, including tax evasion and fraud, have been given a higher profile by the communiqués of G20 meetings since April 2009 and this EU conference helps to maintain the pressure for action. Grand statements of intent are one thing but the real test is action to remedy the injustice. Since April 2009, many developed countries have been taking action with respect to secrecy jurisdictions but it is crucial that changes also benefit the developing countries and help the fight against global poverty.

Jeffrey Owens’ presentation to the conference quoted from Lula da Silva, President of Brazil “We cannot go on living with tax havens”, Manmohan Singh, Prime Minister of India “bringing tax havens and non-co-operating jurisdictions under control.” And Pravin Gordham, Finance Minister of South Africa “Aggressive tax avoidance is a serious cancer eating into the financial base of many countries.”

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