The submission is premised on the proper use of tax proceeds by the
authorities and stresses the need for strict adherence to principles of efficiency,
neutrality, equity, simplicity, transparency as well as symmetry and inclusiveness in
the design and implementation of reforms.
It argues for tax reforms aimed at
- broadening the tax base in developing countries in order to, not only, increase tax revenue, but also enhance the accountability of governments to their citizens;
- softening the impact of VAT incidence on the poor and the vulnerable through low, zero rates or appropriate exemptions on basic necessities;
- eliminating tax fraud - evasion and avoidance;
- redistributing wealth, protecting the environment, promoting regional development and discouraging consumption of products harmful to health;
- fostering formal sectors of the economy and discouraging the growth of the informal sector, and,
- formulating policies to encourage safe disposal of toxic waste and substances and production of renewal energy.
The submission also points to the need for the DFID to
- provide expertise and financial support for the design and implementation of tax reforms and,
- re-focus the activities of the Commonwealth Development Corporation (CDC) on the elimination of poverty and avoid the use of offshore financial centres for routing investment.
It points out that the EPZs in general
- disregard the observance of core labour standards;
- cause substantial loss of potential tax revenue for host countries;
- offer few benefits in terms of forward or backward linkages with the rest of the economy;
- transfer outdated technologies to host countries; and,
- operate no social protection for workers in terms of retirement benefits.
The submission calls upon the IDC to
- look into costs and benefits of export processing zones for host economies and
- recommend strict compliance with internationally recognized core labour standards as a contribution to reducing poverty.
It calls upon developed countries to support developing nations in their efforts to eliminate tax fraud, evasion and avoidance.
It also calls upon developing countries to make careful evaluation of the needs in terms of human resources and introduce appropriate courses in public finance and taxation at tertiary level with a view to building the capacity to administer an efficient revenue collection system in the long-run.
The TUC welcomes this opportunity to put forward its views to the IDC Inquiry and hopes that they will be taken into serious consideration and reflected in the recommendations. In view of the significant loss of revenue due to trade liberalisation, regional integration, financial de-regulation, the growth in the informal economy as well as the implementation of Economic Partnership Agreements (EPAs) in many developing countries, the TUC considers it opportune to explore innovative avenues of revenue collection in addition to substantial reforms.
Taxation is not an end in itself, but a means to redistribute wealth within society and fund essential government expenditure to enhance the wellbeing of citizens primarily through the provision of vital public services, security and stability of the state and the promotion of economic growth, employment and equity. This submission which argues for increasing the revenue potential through the implementation of reforms of tax policies and administration is premised on the proper use of tax proceeds by the authorities. In addition, the TUC stresses the need for strict adherence to principles of efficiency, neutrality, equity, simplicity, transparency as well as symmetry and inclusiveness in the design and implementation of reforms.
There is evidence that many developing countries, especially, those in Africa, have not yet fully harnessed their revenue potential from businesses including multinational corporations operating in their territories and from other taxable sources and that they should undertake significant fiscal reforms. Moreover, capital flight, international tax fraud, avoidance and evasion cost developing countries substantial sums which they could use to develop their economies and bring about a sustainable improvement in the living standards of their citizenry.
Taxation can be a powerful policy instrument for governments for effective management of their economies, especially, in the implementation of national development strategies. Moreover, it could play a catalytic role in promoting economic growth, formal employment and equity through its impact on the redistribution of income and wealth, the informal economy, providing incentives for private sector investment and business registration, achieving social justice and in mitigating the effects of climate change and the depletion of natural resources.
The government tax revenue-to-GDP ratio is lower in many developing countries than in industrialised countries. The relative weight of various taxes in the composition of revenue differs substantially between the groups of countries. Personal income tax accounts for a small share of tax revenue in the developing world with few exceptions whereas customs duties and other taxes on trade constitute a significant part. Governments in developing countries attach importance to nominal progressivity with the maintenance of multiple tax rates as an indication of their commitment to social justice, although a plethora of exemptions, deductions, rebates and other concessions are usually allowed, which undermines the principle. Moreover, when the corporation tax rate is well below the income tax rates, professionals and small businesses to tend to engage in 'tax arbitrage' - using corporate form of business for tax purposes - to benefit from numerous exemptions and deductions and effectively avoid the payment of taxes at high marginal rates.
The inadequacy of tax base and consequent paucity of revenue compel governments to rely on development aid or borrow from international financial institutions, other governments through bilateral arrangements and/or in the open market. While the volatility of official development assistance (ODA) makes it difficult to sustain recurrent expenditure on essential public services, let alone capital expenditure, in the long-term, repayments of principle and interest payments will in the end force governments to raise more revenue through taxation. Broadening taxation can contribute to increased government accountability to their citizens and reduce reliance on external donors. While increased tax proceeds due to economic growth can theoretically facilitate the task, this is unlikely to be sufficient. The only viable alternative would then be the introduction of user fees for essential public services such as health, education and water and sanitation, which would inevitably impact adversely on the lives of most vulnerable sections of society. User fees for basic services will certainly add to the difficulties of achieving Millennium Development Goals (MDGs) in all but a few developing countries.
The TUC is aware of the initiatives by the Department for International Development to support developing nations in their efforts to increase the efficiency of revenue collection through tax reforms, notes that DFID's efforts have in general been successful, notably, in Rwanda and Mozambique and hopes that these initiatives will continue and that the recommendations of the 2006 Review will be implemented in line with the need for integrating tax reforms into the broader context of the development of the public sector.
The TUC takes the view that the broadening of the tax base is a prerequisite, for, not only does it increase the capacity to raise revenue essential for the maintenance and improvement of a variety of public services, but it also enhances the nexus between the government and the citizens and is likely to facilitate the task of holding the rulers to account. Governments reliant on revenue collection from a wider section of the population tend to be more sensitive to public opinion and accountable to its citizens for the appropriate use of tax payers' money than those, for instance, dependent on taxes on revenue derived from natural resources. It could also be a useful avenue for fruitful dialogue and effective engagement with citizens on resource mobilisation and distribution of benefits.
The phenomenal growth of the informal sector and the concomitant shrinking of the formal sector due to a variety of reasons including radical reforms in the public sector under the guidance of international financial institutions have deprived governments of potential revenue from taxation. Moreover, this has been compounded by the fact that the vast majority of informal sector workers, their families and communities, make purchases of goods and services also in the informal sector beyond the reach of tax administration. The majority of retail outlets used by informal sector workers are not often registered for VAT and any other forms of sales taxes. Carefully designed taxation on business through corporate income tax, social security contributions and/or VAT, can contribute to greater willingness to pay and formal business registration and slow down the growth of the informal economy.
The TUC recommends careful study of the costs and benefits of Export Promotion Zones (EPZs) - a common feature in many developing countries eager to promote foreign direct investment to increase employment opportunities and benefit from transfer of technology. There have been violations of human and trade union rights in free trade zones concerned with workers often not being allowed the exercise of the freedom of association and the right to collective bargaining through unions. The workers in general do not enjoy the rights and entitlements available to their colleagues in other sectors of the economy.
On the one hand, the countries concerned forgo substantial revenue by allowing investors duty-free access to raw materials and other inputs. On the other, the companies concerned often enjoy tax holidays and exemptions in various forms depriving the countries of potential revenue. Moreover, in some instances, leakages of exportable products into local markets undermine similar products from local manufacturers, which could lead to worsening of working conditions and/or job losses in local industries which do not benefit, for instance, from duty-free import of essential raw materials.
There is no compelling evidence of strong forward or backward linkages to the rest of the economy, as the duty-free import of plant and machinery and essential raw materials prevents any significant backward linkages. The purchase of raw materials or subcontracting of processes to local firms appears to be minimal. Due to the very nature of EPZs, forward linkages are even harder to establish, for the countries concerned have attracted foreign investors, as local industrialists are perceived to be incapable of producing exportable quality goods for international markets. There is no significant technology transfer or spill-over either, for EPZs often rely on low-skills and rarely use sophisticated high-tech production methods.
Furthermore, workers in EPZs are, in general, not entitled to any form of social protection in the form of pensions and similar retirement benefits available to workers elsewhere in the economy. Workers are, in general, recruited from among unemployed youth in remote villages and not in a position to negotiate seriously on retirement benefits. Companies seem to take advantage of their situation and comply with minimum legal requirements.
Corporation taxation tends to be complex and is often riddled with loopholes to be gainfully exploited by highly paid tax lawyers. The sectoral differentiation of tax rates is bound to lead to distortions and inefficiencies, except in clearly identifiable cases in which there are compelling reasons such as the need to encourage investments in green technology or the protection of the environment or regional development. The simplification of the system of depreciation, too, deserves serious consideration, for it often leads to abuses.
Many developing countries offer an impressive array of tax incentives in order to attract foreign direct investment. It is worth examining whether all of them are warranted and if there are no alternatives to achieve desired objectives. Tax holidays deprive a country of substantial revenue and might simply benefit the home country of the company concerned under bilateral arrangements on avoidance of double taxation. Furthermore, there is evidence that some companies attempt to disguise existing investments as new investments in order to secure tax benefits. In addition, tax holidays often encourage transfer pricing between companies and result in revenue losses not only to developing countries, but also to developed countries in which the parent company may be based. Although the transfer of technology is often cited as one of the key objectives, companies often set up short-run projects with outdated technologies.
The TUC supports the work of the Global Forum on Transparency and Exchange of Information for Tax purposes, appreciates the progress made so far and hopes that the membership of the GF will expand in future. Nevertheless, the participation in the GF by developing countries as a whole, with the exception of countries and territories considered tax havens, has so far been modest while the benefits from offshore compliance have accrued primarily to developed countries in Europe and North America. The TUC notes that the former colonial powers like Britain and the Netherlands bear special responsibility in that many tax havens are based in their overseas territories or dependencies.
The spread of the Value Added Tax (VAT) to developing countries in the last thirty years was a significant development which has considerably augmented the revenue potential. Although it is a tax on final consumption, it is charged at all stages of production, respects neutrality and generally lends itself to efficient tax collection. VAT being a consumption tax, its base is likely to be broad encompassing almost all goods and services consumed by the vast majority of the population and it often brings in substantial revenue. Its incidence on the poor and the vulnerable can be softened through the imposition of low or zero-rates or through exemptions on basic necessities for which the price elasticity of demand remains low. It is important to avoid the common mistakes made mostly due to complex legislations and poor administration of the refund system in the past.
The UK and other developed countries have a wealth of experience and expertise gained in the last 50 years in the design, introduction and administration of VAT and should assist developing countries to operate VAT efficiently. The modernisation of tax administrations involves significant investments in capacity building in terms of human resources and IT beyond the reach of Less Developed Countries. Countries should take a long-term view of the needs and develop expertise in public finance and taxation through the introduction of appropriate courses at tertiary education level with technical assistance from developed countries. Audit capacity and provision of taxpayer services and education should be given due consideration, especially, in the case of moving towards self-assessment and payment systems.
The TUC shares the concern expressed in many quarters over the use of off-shore financial centres by the Commonwealth Development Corporation owned by the DFID to route investment and the excessive remuneration of its staff and its alleged failure to focus adequately on poverty alleviation. It advocates more transparency on CDC operations and reiterates the need for greater focus on poverty alleviation and strict compliance with internationally recognized core labour standards.
The DFID should provide advice and expertise in modernisation of tax systems as well as computerisation of revenue collection including through PAYE schemes. The expertise and experience in the implementation of PAYE could be easily transferred to the administration of other withholding taxes, for instance, on income from dividends and interest. The UK's long experience acquired since 1944 in the administration of PAYE including the computerisation and the use of online transfer of data could be immensely useful to many developing nations grappling with the modernisation and computerisation of their PAYE systems.
Excise duties and similar taxes on some commodities are an important source of revenue . Excise duties on alcohol, tobacco and fuel have been common while taxes on mobile telephony, and gambling have been successfully introduced in recent times in developing countries. While being a significant source of revenue, often collected efficiently, excise duties can also be used to achieve socially desirable objectives. Taxes on alcohol and tobacco are meant to discourage their consumption and/or production, although it is hard to gauge the dissuasive effect.
Environmental pollution mainly caused by vehicular traffic and the disposal of toxic waste and substances is a serious problem with a deleterious impact on public health. Cognizant of the fact that governments in developing countries already rely heavily on tax revenue from motor vehicles, the TUC favours the phased introduction of a modest tax on fossil fuels and industrial waste. It would also encourage the replacement of aging vehicles and/or maintain them in good condition and safe disposal of toxic waste and substance, thereby minimizing negative environmental externalities. Similar taxes and /or fiscal incentives can be introduced to encourage the production and use of energy from renewable sources.
It is hard to measure the impact on tax revenue in the event of a tax similar to the proposed Financial Transactions Tax being implemented in developing countries. On the one hand, not all developing countries have well-functioning financial markets. On the other, some developing nations have already introduced similar levies on financial transactions and raise significant revenue through them. Tax proceeds will depend on the extent of the coverage of financial instruments - equities, bonds and treasury bills, foreign currencies etc -. Moreover, a tax on foreign currency transactions could have some negative effects in less developed countries having to purchase foreign currencies for genuine transactional purposes.
The establishment of a rational, modern and efficient tax administration necessitates the services of well-educated and well-trained personnel whose integrity, impartiality and competence in the discharge of duties are a prerequisite for its proper functioning. Many developing countries are not in a position to employ adequately qualified staff, at least, partly due to the lack of resources caused by the failure to collect sufficient revenue through taxes. Poor communication facilities, unreliable postal services, limited IT use and the lack of reliable statistics often compound these difficulties. Uneven income distributions often compel governments to tax the rich more heavily, which, in turn, results in important tax reforms being resisted by a minority of politically influential economically powerful elite.
Zambia expects about 17% of total tax revenue from Corporation Income Tax in 2012, Hon Alexander B Chikwanda, Minister of Finance, 2012, Budget Speech, 11 Nov 2011.
'The average tax-to-GDP ratio in sub-Saharan Africa increased from less than 15 percent of GDP in 1980 to more than 18 percent in 2005. But virtually the entire increase in tax revenue in the region came from natural resource taxes, such as income from production sharing, royalties, and corporate income tax on oil and mining companies'. Mobilising Revenue, Sanjeeva Gupta and Shamsuddin Tareq, Finance and Development, Sept 2008, Vol 45, No 3
In April 2008, James Boyce and Léonce Ndikumana of the University of Massachusets,
Amherst, published a research study estimating that capital flight from 40 sub-Saharan
African countries from 1970-2004 stood at $607 billion in 2004 dollars (including interest
earnings), compared to a total $227 billion external debt owed by those countries in
2004, quoted in Global Corporate Taxation and Resources for Quality Public Services, Educational International, December 2011.
85. 'Madam Speaker, it is estimated that developing countries lose about US$160 billion every year through transfer pricing fraud. Recent studies in the mining sector showed that Ghana loses about US$36 million a year through transfer pricing. Together with the Ghana Revenue Authority we have drafted regulations to strengthen existing tax legislation to deal with taxation of multinational companies and minimize the incidence of abuse of transfer pricing. The regulation will soon be presented to Parliament.', Ghanaian Minister of Finance, Budget Statement and Economic Policy, Government of Ghana 2012.
In South Africa, the levy on electricity generated from non-renewable and nuclear energy sources rose by 0.5c/kWh to 2.5c/kWh in April 2011.
The variation is as follows.
Low Income Countries 13.0
Lower Middle Income countries 17.7
Upper Middle Income Countries 20.7
High Income Countries -OECD 35.4, Carlo Cottarlli, Revenue Mobilization in Developing countries, March 2011, IMF, Appendix Table 2
The share of proceeds of personal income taxation in the GDP was only 1.6% in low income countries. Op cit
Income from PIT is expected to account for 34.1% of total tax revenue in South Africa, Budget Highlights, National Treasury, Pretoria, 201
Highest Marginal rate in Chad is 60% in 2008 while it is 50% for Cuba.
The trend in recent decades has been to reduce the number of tax bands even in developing countries.
Venezuela has 8 Marginal Tax Rates (2010), rising to 34% while Cuba has 6 Marginal Tax Rates.
Most countries apply complex rules on Capital Gains Tax, making it easier to avoid tax liability.
The magnitude of the problem can be gauged from the surge in enrolment in four countries in Africa - Malawi, Kenya, Tanzania and Uganda, see Raja Bentaouet Kattan and Nicholas Burnett, User fees in Primary Education, The World Bank, July 2004.
In Africa, raising the cost of anti-malarial bed nets from zero cost to $0.75 reduced demand by 75%; a small fee for deworming drugs led to an 80% reduction in treatment rates (Sumner, 2010), quoted in Economic Growth and MDGs, ODI Briefing Paper, June 2010.
16% of non-food household expenditure is devoted to education, op cit
User fees for other services like transport are quite common in developing countries. The recently opened Southern Expressway in Sri Lanka charges a toll, for instance.
Developing Capacity? An Evaluation of DFID-funded Technical Cooperation for Economic Management in Sub-Saharan Africa, Synthesis Report, EV667, June 2006.
The Rwanda Revenue Authority project made it possible for tax revenue-to-GDP ratio to rise from 9% in 1998 to 14.7% in 2005. See Tax for growth and poverty reduction in Africa Donor Committee for Enterprise Development Africa Regional Consultative Conference, Accra, Ghana, 5 - 7 November 2007
Customs revenue as a percentage of GDP doubled from 2.9% of GDP in 1996 to 5.8% in 2005 in Mozambique, op cit.
It is claimed that only about 600,000 people pay direct income tax in Tanzania, TAKNET Policy Series, No 012, 2010. The comparable figure for India is said to be around 33.3m (FY2008-09) - about 3% of the population, Stanley Gibbons, information published on website.
Does this then imply that government efforts to raise tax revenue have been a cause of greater public accountability? The basic answer is that, yes, the challenge of raising tax revenue has forced processes of implicit and explicit bargaining between state and society, and has been an important factor in causing political change. Wilson Prichard, The Politics of Taxation and the Implications for Accountability in Ghana, 1981-2008, July 2009
The share of the informal sector is estimated at 40% in Tanzania, TAKNET Policy Series, No 012, 2010
A Self-Employment Income Tax Revenue Enhancing Project has been set up in Ghana. The contribution from the self-employed was increased from 4% to 8% in 2012, Budget Speech Republic of Ghana, Para 81
Governance, Taxation and Accountability, DAC-OECD, 2008 http://www.oecd.org/dataoecd/52/35/40210055.pdf
'Despite changes in policies of some countries, there are continued reports of systematic violations of freedom of association in EPZs throughout the world.', William Milberg and Matthew Amengual, Economic development and working conditions in export processing zones, A survey of Trends, ILO, Geneva, 2008.
In some countries, for instance, Kenya and Sri Lanka, unions are allowed to organise workers by law. However, in practice, unions find it difficult to represent workers effectively.
'Long working hours, often in violation of national law, continue to be endemic in EPZs throughout the world. In nearly all of the country studies below, there is evidence that overtime continues to be a major problem.' William Milberg and Matthew Amengual, Economic development and working conditions in export processing zones, A survey of Trends, ILO, Geneva, 2008.
However, a study commissioned by the ILO Office in Sri Lanka and the Maldives makes, inter alia, the following recommendation.
c) Reform Labour Laws, that is, amend labour regulations to permit flexible downscaling, remove
restriction of maximum 10 hour working day, Sunil Chandrasiri, Promoting Employment Intensive Growth in Sri Lanka, Policy Analysis of the Manufacturing and Services Sector, ILO, Oct 2009, p.56
Some countries, for example, Bangladesh, do allow the sale of a certain percentage on local market.
Taiwan, South Korea and Malaysia, Mauritius have benefitted significantly from forward and backward linkages with the domestic economy.
Under statutory deductions, the employer is also supposed to deduct a specified amount to be submitted to the NSSF (NATIONAL SOCIAL SECURITY FUND) as a social security for retirement benefits: Maximum contribution is KShs 400 out of which the employer may recover KShs 200 as the employee's share, Doing business in Kenya, Export Processing Zones Authority, 2005, 9.2 (l) statutory deductions
Bangladesh offers a variety of financial/tax incentives including 5-7 years' tax holiday to investors, see Board of Investment website, Bangladesh.
In Bangladesh, the re-investment of repartriable dividends is treated as new investment.
The next meeting of the GF will be held in South Africa in October 2012.
The countries in Europe accounted for about EUR10bn of the EUR 14bn yield from offshore compliance.
Gibraltar, Turks and Caicos Islands, British Virgin Islands, Cayman Islands, Bermuda and Montserrat are Overseas Territories of the UK while Guernsey and Isle of Man are Dependencies of the Crown.
According to IMF sources, VAT accounts for about one-fourth of the world's tax revenue.
'For example, studies for Côte d'Ivoire, Guinea, Madagascar, and Tanzania all show that the poor pay less than their share of total consumption as their share of total VAT revenues, Liam Ebrill, Michael Keen, Jean-Paul Bodin and Victoria Summers, The Allure of VAT, Finance and Development, June 2002, Volume 39, No 2
Even in advanced economies like the UK, VAT rates vary. At present, there are three rates - 20%, 5% and 0%.
Multiplicity of rates, low thresholds, too many exemptions, poorly administered refund systems etc.
142... Mr. Speaker, in my budget speech last financial year 2010/2011, I highlighted the challenges facing the administration of Value Added Tax (VAT), especially the complexities in its administration and the ever increasing VAT refund backlog. Hon Uhuru Muigai Kenyatta, Minister of Finance, Kenya, Budget Statement, 8 June 2011.
UK Parliament calls for investigation of use of tax havens by development bank, Tax Justice Network.
See also CDC justification for use of OFCs, http://www.cdcgroup.com/faqs.aspx
See, for instance, Medical Levy in Zambia. The ML is chargeable on all interest earnings from banks and financial institutions in Zambia.
Excise taxes account for up to 30 percent of total tax revenue, with a good proportion of it being derived from tobacco products, in the East African Community member countries.
For instance, the growing mobile telephone sector in many African countries presents an opportunity for increasing revenue and broadening the tax base for governments. In fact, a review of 15 countries shows mobile operators contributed more than 8% of government tax revenues in seven of the countries, with Chad providing about 11%. Taxation for Investment and Development, An Overview of Policy Challenges in Africa, Para 15, NEPAD-OECD Africa Investment Initiative 2009
China levies a tax on the disposal of household and commercial waste, together with a separate tax on the disposal of waste water, The Green Tax Report 2009, Green Taxes in other developed countries.
Malaysia proposed a number of measures in this regard, See Advancing Green Technology, Prime Minister and Minister of Finance, The 2011 Budget Speech, 15 Oct 2010, p11
Brazil levies a financial transactions tax on capital inflows.
There is a share transactions levy at 0.3% in the Colombo Stock Exchange.
Issued: 29 February, 2012