Thursday, July 14, 2011

Report: IFIs and tax policy in developing countries

Our partners Actionaid and Eurodad have co-written an important new report looking at how international financial institutions such as the IMF have been advising developing countries on tax, and how things might be improved.

The paper looks at what has been meant by the Tax ‘Consensus’ - a concept which has been used by several authors (including this edition of Tax Justice Focus) to describe a consistent template of interlinked policy prescriptions that the IFIs have applied in their technical assistance and policy advice on tax policy in developing countries.

Tax reforms under this Consensus became an increasingly important part of the Structural Adjustment Programmes promoted by the World Bank and the IMF in developing countries from the late 1980’s. Key underlying principles of the tax consensus have been neutrality and simplicity; that taxes should not be used to redistribute wealth because this would distort market signals, and that the number of taxes, tax rates and exemptions should be reduced. Key policies have been to promote trade liberalisation and alongside it to recoup the lost revenue from trade taxes through introducing VAT. In addition there has been strong emphasis on administration.

So developing countries have been urged to reduce trade tariffs, introduce VAT, improve tax administration and remove exemptions. The latest paper also looks at the different ways the IFIs have used to influence tax policy, and then looks at the impacts of these policies.

Until early 2011 neither the IMF nor the World Bank had published an official account of their approach to tax policy in developing countries. This is astonishing, especially given that, as an earlier Actionaid report notes, if all developing countries were able to raise just 15% of their national income as tax revenue – a commonly accepted minimum figure – they could realise at least an additional US$198 billion in revenues - almost double the sums spent on foreign aid.

But things started to change in 2011 with the publication of a new and important paper by the IMF's Fiscal Affairs Department (which we commented on here, in a blog entitled "Is the IMF starting to get it on tax and development?"). While the IMF paper didn’t contain many huge surprises, it did give credence to the issue of fairness in tax systems. Which is absolutely crucial.

It also recognised the challenge developing countries face in dealing with transfer pricing techniques used by multinationals and recognised that country by country reporting is a means to improve tax transparency that merits further investigation. These are all core concerns of TJN.

Although Eurodad/Actionaid new paper recognises a progressive shift in IMF thinking, one area of remaining concern is the IMF’s continued preference for regressive impacts of consumption taxes to be remedied through government spending - even though it admits that the IMF has failed to adequately address this in the past.

There are also ongoing problems with the design of the Doing Business indicator on tax, and despite IMF technical assistance on tax policy and administration growing in scale there is still next to no transparency on the actual content of the advice delivered in this context.

All in all, an important contribution to the literature. We will add it to our Aid, Tax and Development page.


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