With the Addis Ababa conference on Financing for Development in full swing, last minute suggestions on the right priorities are flooding in. However, two critical pieces of the puzzle for leveraging adequate financing for development have received little attention so far, namely more concrete commitments on tax justice and developing countries’ capacity to enforce public finance policies. While the importance of these issues is highlighted in the draft outcome document, the proposals on each point are unfortunately short of concrete ideas, activities and initiatives that will change the landscape of taxation in developing countries for the better. Both developed and developing countries need to show greater commitments here.
First, the Addis conference offers participating states the opportunity to put forth actionable commitments for the taxation of private sector players and, in particular, of multinational corporations in a way that achieves social and economic transformation in developing countries. The importance of this has already been stressed by the finance ministers of the G7 countries, who reaffirmed the importance of curbing systemic “base erosion and profit shifting” (BEPS) at their recent meeting in Dresden on 27 – 29 May 2015. It would be an important signal from the Addis conference to follow this lead and to go beyond the lofty phrasing in the current draft outcome document that “we will make sure that a fair share of taxes is paid where economic activity occurs and value is created”.
Concretely, the outcome document should include a commitment to implement the OECD BEPS Action Plan that already has support from the OECD members and the G20 countries. The action plan on base erosion and profit shifting is an attempt to address flaws in international tax rules such as transfer-pricing that allows multinational to shift profits to low-tax jurisdictions. Such practices effectively reduce developing countries revenues and make financing of development by developing countries themselves more difficult. More forward looking, the action plan also provides new ideas for taxing an internationalized digital economy, which steadily increases in relevance in developing countries as well. Since poor countries were not invited as equal negotiating partners in the BEPS process but were only consulted, the conference offers an opportunity for these countries to engage in shaping the implementation of the plan. In particular, a clear indication of where companies should pay taxes on money earned in developing countries should be at the center of debate and which is currently not part of the BEPS plan. There is also a need to include measures of support by developed countries to developing countries for implementing key recommendations made in the action plan that are too expensive or too technical for some of the poorest countries to put into action by themselves.
Further and alongside bringing the BEPS action plan to life, the Addis outcome document should include a clear roadmap and timeline on automatic exchange of tax information between national tax administrations to move from political statements to concrete implementation. A central problem in levying taxes at the national level are cross-border financial flows removed from the reach of national tax collectors because they simply don’t know about these outflows. In that case, the territoriality principle of taxation is undermined by a lack of information on assets that should be taxed at home, but are transferred abroad. As a remedy, FFD3 should include a commitment by industrialized and developing countries to harmonize tax regimes and to strengthen information exchanges on tax data at the administrative level within a five-year period. Such actionable points would considerably strengthen the Addis conference outcome and signal that domestic resource mobilization is possible and desirable.
Second, the outcome document must also provide specific ideas for strengthening the capacity of the public sector for dealing with finance and tax administration. Developing countries do have a responsibility to improve their public financial management and tax administration, otherwise the reforms mentioned above will be superficial and not bring the desired results. As such, developing countries must hold themselves accountable for improving tax collection. To make this a reality, the Addis conference should emphasize the importance of initiatives such as the “Collaborative Africa Budget Reform Initiative” and ensure commitments to scale up the peer-to-peer exchanges among national budget officials. Such informal exchanges should aim at a dissemination of good practices on taxation and the joint drafting of recommended practices that every tax administration can use to improve their policies and tax collection practices.
What is more, developing countries must commit to spending greater resources on domestic resource mobilization and collection in addition to technical reforms. Concretely, developing countries must commit to a yearly annual increase of financial and personnel resources for national budget and finance authorities. Further, the current draft document states that “no developing country that has set out credible plans for strengthening domestic revenue mobilization and tackling corruption will lack for international support to make these plans a reality”. This should be reworded into a commitment by donors to match the incremental increase in funds suggested above and to use the additional resources to train and reward public finance and tax administrations that underwent effective reforms and have improved tax collection.
While these are by far not the only ways to strengthen the Addis outcome document, they go beyond the vague language of the current outcome document by offering concrete and actionable ideas for strengthening the tax base of developing countries and ensuring that national budget institutions are capable of collecting taxes effectively. There is still time left to shape the final outcome document into one that truly changes the landscape of development finance for the better.
This article was also featured in the FfD3 UN Blog