The Link between Tax and Development is Scrutinized by the UK Parliament

flickr / UK Parliament

Latindadd and other civil society organisations recently sent their contributions to the UK parliamentary inquiry into tax in developing countries. In its call, the International Development Committee of the UK parliament highlighted that “developing countries lose an estimated $ 160 billion each year through tax avoidance by multinational companies (including those based in the UK)” and the important role of the extractive industries, “where payments to governments are often not disclosed and may not contribute to development or poverty reduction.”

The Committee used Zambia as a case study due to its aid dependence (18% of the Government’s budget), high poverty levels (64% of the Zambian population live below the poverty line) and the large mining sector.

The Committee received thirty-two written comments – some of them from civil society organization, which are part of the tax justice community – and listened the arguments of representatives from Action Aid, Christian Aid and the Centre for Trade Policy and Development in Zambia.

Since the UK’s Department for International Development (DFID) plays a key role in the international cooperation in times of international crisis, the parliament also included specific questions on how DFID can better support developing countries to improve revenue collection and how DFID can support developing countries to use the revenue base responsibly in order to improve service delivery and development outcomes.

Latindadd’s submission welcomes an inquiry like this, highlights the importance of the link between taxation and development and examines what the UK should do to support developing countries’ efforts.

As the report to the G20 Development Working Group by intergovernmental organizations (IMF, World Bank, OECD and the UN) recognizes, “taxation provides governments with the funds needed to invest in development, relieve poverty and deliver public services. It offers an antidote to aid dependence in developing countries and provides fiscal reliance and sustainability that is needed to promote growth.”

Developed countries and particularly the UK, have an important role in setting up the global rules on tax matters. Their own tax systems affect the ability of developing countries to effectively increase tax revenues from multinational corporations.

It is worth noting that the abovementioned report to the G20 included the following recommendation: “It would be appropriate for G20 countries to undertake ’spillover analyses’ of any proposed changes to their tax systems that may have a significant impact on the fiscal circumstances of developing countries…in moving, for instance, from residence to territorial systems.”

In this regards, the committee should be aware of the potential development impact of the reform of corporate taxation that the government is currently undertaking. The core of this reform is to move from a residence tax system to a more territorial system, under which overseas earnings are exempt from UK tax. Whereas this reform would give MNCs a £840 million tax break, by relaxing the very rules designed to prevent tax-haven abuse, Action Aid has estimated that the reform may cost developing countries as much as £4 billion. This is a huge amount of money that an in-depth “spillover analysis” may reflect.

In line with previous commitments and policy coherence for development, the UK government should consider the following recommendations:

The UK government should follow intergovernmental organizations recommendations and undertake “spillover” analysis of tax policy changes.
The UK should take action regarding financial secrecy in the overseas territories, and work towards agreements, which enshrine automatic exchange of information at the G20.
DFID should support capacity building of tax administrations in line with the Paris principles of aid effectiveness and work with HMRC on technical assistance, reporting all of the government’s work on this issue.
DFID should support Non State Actors to hold governments and companies to account for their policies and operations.
The UK should support the implementation of Country-by-Country reporting to challenge tax abuse by MNCs.
The UK should support for a forum where developing countries have a say in norm setting of global tax rules – i.e. the UN Tax Committee.