Wednesday, November 5, 2008

Developing Countries Hurt By Tax Troubles

Leading development nongovernmental organizations are increasingly focusing attention on the lack of transparency--of tax havens and multinational companies alike--that hinders developing countries' efforts to raise revenues. Christian Aid--the U.K. development NGO--recently launched a report, titled "Death and Taxes," accusing tax havens and multinational companies of depriving developing countries of $160 billion of tax revenues per year.

Christian Aid analysis. The report combines country studies with estimates of total developing-country cost of evasion:

Country findings. Christian Aid has worked with partners in Zambia and Tanzania to obtain and publicize details of confidential agreements between mining companies and governments. In each case, publication led to renegotiation. For example, in Zambia the agreed royalty rate was revealed to be 0.6%. The policy impact of such information highlights the importance of taxation transparency.

Macro analysis. Based on surveys and statistical analysis of trade data, the report contends that the shifting of illicit capital represents 7% of developing countries' trade. Combining this with marginal corporate tax rates, the implied tax loss is found to be $160 billion annually from 2000 to 2006. This loss is estimated to be responsible for the unnecessary deaths of 350,000 children under 5 each year.

Recommendations. The report calls for action in two main areas, which it claims will create the possibility for effective taxation systems:

1. Domestic policy space. Bilateral and multilateral donors are urged to reassess the validity of tax policies that encourage low rates of tax on income and profits; reliance on value-added-tax-type taxation; and elimination of taxes on trade.

2. International obstacles. The remaining obstacles are argued to be the lack of transparency in international financial flows. Two key areas of opacity are targeted, namely:

--the absence of an international accounting standard requiring multinationals to report country by country, including profits made and taxes paid, so that discrepancies are apparent and policy responses can be devised; and

--the lack of a multilateral process to require automatic information exchange between jurisdictions to prevent the secrecy available in tax havens and other jurisdictions from being abused to facilitate tax evasion.

Mobilization. NGO mobilization around tax issues is gathering momentum:

--U.K. development NGOs often lead shifts in the policy focus of their European counterparts; ActionAid, War on Want and the World Development Movement join Christian Aid in focusing on the issue.

--Key European development NGO bodies are now working to adopt positions.

--In the developing world, the Tax Justice Network for Africa (launched in 2007 at the World Social Forum in Nairobi) is being seen as a model for equivalent regional networks.

The U.N. Financing for Development meeting in Doha in November will see much discussion of domestic revenue mobilization as key to future development finance. The global economic downturn suggests that aid flows are unlikely to increase significantly, so attention will inevitably focus on taxes. Christian Aid's report marks another significant step in development NGOs' engagement on tax issues, as pressure from such organizations continues to build.

To read an extended version of this article, log on to Oxford Analytica's Web site.

Oxford Analytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world.