Developing countries lose billions annually through tax avoidance and evasion. New UN-led initiatives are helping but global action is still required
This article was originally published by SPERI
Tax, not development aid, was the front and centre issue at last year’s UN Conference on Financing for Development in Addis Ababa. The aim of the event was to thrash out the international community’s plan for funding the new Sustainable Development Goals (SDGs), an ambitious new international development agenda that aims to eradicate world poverty, combat climate change, protect the environment and build peaceful and inclusive societies over the course of the next fifteen years. One year on from the conference last July in Ethiopia, has much progress been made on this critically important issue?
At the UN conference I heard many developing countries, energetically backed by NGOs, stress how action to combat tax avoidance and evasion was needed in order to help to deliver the billions needed to fund critical investments in infrastructure, health and many other areas. Tax avoidance and evasion is rampant, they said and deprives us of billions in resources annually (they are right – some estimates put annual tax revenue losses at between US$ 100 billion and US$ 240 billion for developing countries). They also called for all countries to have a seat at the table when it comes to decision-making on international tax rules. Currently most discussions on the international tax agenda take place within the Organization for Economic Cooperation and Development (OECD), which is comprised of 35 mostly high-income member countries. This frustrates many NGOs as it is perceived that the OECD represents the interests of its members first and foremost and therefore cannot be impartial on tax. Ultimately, developing countries did not secure the ‘inter-governmental body on tax’ they wanted, but they did manage to secure commitments from the international community to scale-up and strengthen international cooperation on tax, as well as promises that progress in this area should benefit all countries.
One challenge flagged by many developing countries is their lack of technical capacity to engage in complex treaty negotiations on tax, as well as the weak capacity of tax administrations at the national level in areas such as tax auditing and transfer pricing. This is especially the case for low-income countries.
One commitment made in Addis Ababa was to boost aid for fiscal administrations and to build skills for revenue collection at the country level. The United Nations Development Programme (UNDP) and the OECD also joined forces to scale-up the ‘Tax Inspectors Without Borders’ (TIWB) initiative, a programme that aims to support developing countries to build their capacities to audit multinational enterprises and to – ultimately – claim their fair share in tax revenues.
Under TIWB, an initiative I am managing for UNDP, tax experts from around the world are deployed to work alongside officials in tax administrations in developing countries on real, but anonymised, audit cases. The aim is to transfer tax audit skills and knowledge to local tax officials. Assistance can include pre-audit risk assessment and case selection, investigatory techniques, audit cases involving transfer pricing issues, anti-avoidance rules, or sector-specific issues relating, for example, to natural resources, e-commerce, financial services or telecommunications.
Does this type of project work? And are there challenges? The answer is yes on both fronts. Expert deployments in Albania, Ghana and Senegal have been successfully completed and results so far have identified over US$ 245 million of additional tax revenues. Programmes are also underway in Jamaica, Lesotho, Liberia, Nigeria and Rwanda. Ten other countries have requested assistance and there is high demand for this kind of technical assistance.
But there are also challenges. It’s critical to ensure that experts do not substitute for local audit staff or carry out audit work where no local audit personnel are involved. The programme must always be about sharing expertise by working side-by-side and building skills through practical, case-based cooperation. It can also be a challenge to secure the ‘right expert at the right time’ and to ensure that high quality advice is delivered every single time; tax auditors are prized possessions with many tax administrations reluctant to allow staff time-off to work in another country. Gradually however we are building a network of both retired and serving tax audit professionals – from both developed and developing countries alike – keen to work with us on this project and make it a success. Developing countries such as Brazil, India, Kenya and South Africa also have incredible tax audit expertise and are coming on board to share knowledge and best practices with other countries.
Some may ask whether this kind of programme addresses the symptoms rather than the causes of widespread and blatant tax abuses. And to a large extent they would be right. We have been very clear that international efforts to crack down on tax avoidance and tax evasion must continue, and it is positive that this issue now features so prominently in the media and international policy discussions. Just 10 years ago, the tax avoidance practices of large companies and the wealthy largely escaped public scrutiny and were not necessarily viewed as ‘bad’ or ‘immoral’. Today the public mood has shifted. Treasuries, desperate for cash in the wake of the 2008 financial crisis, have started to go after the tax ‘dodgers’. The brilliant grilling by Margaret Hodge MP of Amazon, Google and Starbucks bosses on their tax affairs – ‘We are not accusing you of being illegal, we are accusing you of being immoral’ – is one recent case in point and helped give the issue far greater prominence. More can be done of course; former British Chancellor, George Osborne, was perceived to have let Google off the hook when he secured just £130 million from them in a recent tax deal.
As development practitioners, we recognise that actions are required on multiple fronts simultaneously and that projects like TIWB can build tax capacity and help countries to ‘level the playing field’ between them and large corporations. Over the longer-term, efforts like these may also encourage a culture of tax compliance which is positive.
One year on from the UN’s Addis Ababa Financing for Development conference, the search for more resources to fund sustainable development is well underway. Tax Inspectors Without Borders is helping to achieve change but there is still more to do.
Video: Tax Inspectors Without Borders: Levelling the Playing Field in Liberia
Video: Tax Inspectors Without Borders: An introduction