Nov 28, 2008

World - Tax evasion threat to development

Angel Gerri

The global economic slowdown will hit the poorest nations hardest. Demand for their exports is falling. Prices of raw materials are plunging. Flows of money from migrant workers to families back home will shrink as unemployment rises elsewhere. In these circumstances it is more important than ever that rich countries deliver on aid promises. That is why the OECD has called on the world’s main donors to join an Aid Pledge to stick by their commitments.

As world leaders head to Doha for a U.N. meeting on financing for development this Saturday (November 29), however, another dimension of the issue needs urgent attention: tax systems.

Efficient tax systems underpin development. Rich countries rely on taxes to finance aid flows. In developing countries, locally generated taxes are a much bigger source of development finance than aid. Effective tax systems, based on cooperative relationships between governments, businesses and individuals, are a bedrock for democracy and growth. When businesses and citizens form part of the formal economy, good tax administration can provide for pensions, social security payments and other instruments of the modern state.

But there’s a dark side. Tax dodgers in developed and developing countries deprive governments of revenues. Many take advantage of the lack of transparency in tax havens. Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid. If taxes on assets hidden by tax dodgers were collected in their owners’ jurisdictions, billions of dollars could become available for financing development.

Fighting tax evasion calls for cooperation between developed and developing countries. At home governments must enact fair and effective policies and make it easy for taxpayers to comply with their obligations.

Internationally, they must push for greater transparency in cross-border financial transactions.

As incoming G20 chair, Britain must take up this challenge. It has played a lead role in OECD work on countering tax haven abuse, but more is needed. Ties with Commonwealth countries and dependencies that operate as offshore financial centres make it uniquely well placed to push for improved standards of transparency. At the same time, it can give a lead in helping developing countries improve their tax administration.

We need to be realistic. Developing countries often lack the resources to build effective tax systems. Citizens may be unwilling to pay on the grounds that governments misuse the funds. It can be difficult to implement fair taxation in low-income, agrarian economies. And the poor are often subject to an equivalent of tax, in bribes and informal fees.

But something can be done. The OECD’s decade-long drive against tax havens and evasion is bearing fruit in the form of bilateral treaties aimed at improving transparency and exchange of information. The trend is spreading beyond the OECD, with China and South Africa joining this campaign. At the same time, donor countries are helping poorer nations develop fair tax services.

Significantly, developing countries are joining forces too. An African Tax Administration Forum is being developed under the leadership of Botswana, Cameroon, Ghana, Nigeria, Rwanda, South Africa and Uganda. By inviting governments to share good practices, it aims to improve service delivery and taxpayer education. Success will increase accountability, strengthen democracy and combat corruption.

In 2006, only $88m of a total $103bn in official development assistance from OECD countries was dedicated to tax-related tasks. But aid targeted at capacity building in revenue administrations is money well spent. Donor support to the Rwanda Revenue Authority brought a dramatic increase in tax revenue, from 9% of GDP in 1998 to 14.7% in 2005, with an equally significant effect on state accountability. We cannot allow the crisis to undermine such efforts.

The last time we faced a major global downturn, aid budgets fell dramatically — curtailing investment in agriculture, infrastructure, social welfare and political stability. Similar cuts now would be even more damaging, after volatility in commodity prices and a global food crisis have already hit the poor. Cuts may bring short-term savings to donor governments, but they would cost much more in the longer term in extra spending on security and humanitarian aid.

Earlier this week, OECD donors joined in an Aid Pledge to maintain aid flows consistent with promises at Gleneagles and elsewhere. If combined with a joint effort to fight tax evasion, the results for development could be significant. The OECD, as the leading international organisation with a mandate to work on tax policy, is committed to this objective. More effective tax systems in developed and developing countries would help to build a stronger, cleaner and fairer world economy. And they would help the poorest the most.

(Angel Gerri is Secretary-General of the Organisation for Economic Cooperation and Development.)

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