Whether through broadening bases or closing loopholes, tax collection in the 21st century will continue to grow in importance, especially if the OECD is to realise its goal of replacing aid for developing countries with tax revenue.
“In the future, tax will replace aid,” Saint-Amans told International Tax Review.
It is an ambitious goal, and one shared by development agencies, though with a little more caution and a few more caveats.
“ActionAid believes that aid as we know it – support to poor countries to deliver basic services and alleviate poverty – could end within a generation,” said Martin Hearson, policy adviser at ActionAid. “While most developing countries would no longer depend on aid to fund public services, it would still be necessary for, for example, humanitarian aid, disaster risk reduction and climate change adaptation.”
This is a position supported by David McNair, principal economic justice adviser at Christian Aid. While he sees replacing aid with tax as a worthy long-term goal, and wants developing countries to be self-sustaining through tax revenue, he notes the “huge challenges for them to collect revenue”.
“Where the OECD can make a difference is looking at ways in which global tax rules are weighted against poor countries,” said McNair. “The Global Forum has made progress. But we need to pursue automatic information exchange.”
McNair believes OECD guidelines are too complex for developing countries and ways of simplifying them need to be looked at, along with alternatives to the arm’s-length principle such as fixed margins.
“If we get things right, tax revenue could provide the lion’s share of public revenue in the vast majority of developing countries, as it does already if you look at the African continent as a whole,” said Hearson. “Stronger tax policy and administration is an essential prerequisite for this, but it won’t be enough, unless it is accompanied by strong, inclusive and equitable economic growth.”
Hearson says that there is a big demand for capacity building on tax, including international tax, from developing countries.
“We welcome efforts by donors and international organisations to support them,” said Hearson. “But it is essential that we learn the lessons of decades of technical assistance in other areas of public administration.”
Capacity building will likely mean a greater tax bill for companies, but Hearson stresses that it will also lead to more efficient and certain relationships with authorities.
“We welcome the private sector’s interest, and we sympathise with businesses whose compliance burden is increased by the lack of administrative capacity in developing countries,” said Hearson. “Of course all stakeholders need to be engaged in the development of tax policy and administration, but this must be done in a way that safeguards the independence, neutrality and confidentiality of tax policymaking and administration.”
Hearson notes that one objective of strengthening policy and administration in developing countries is to reduce compliance costs for multinational businesses.
“Another is to raise more tax revenue by protecting source taxation and more effectively preventing tax avoidance,” said Hearson. “Businesses must therefore recognise that in many cases an indicator of success is likely to be a higher effective tax rate for them.”
McNair welcomes the participation of BIAC, the business advisory arm of the OECD, in providing advice and expertise to developing countries on transfer pricing and stressed the need for companies to look at tax as a corporate social responsibility (CSR) issue.
“Companies should be looking at tax as a CSR (corporate social responsibility) issue from a boardroom level,” said McNair.
If tax is to replace aid for developing countries, it will be important for NGOs to not only point the finger at wrongdoing and avoidance, but to convince companies that it is in their best interests to pay their fair share of taxes and to support poorer nations in capacity building.
For the full interview with Saint-Amans, read the February edition of International Tax Review.
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