CSO Submission On Tax & IFF Aspects To Africa Regional Consultations On FFD - March 24. 2015
CSO Submission On Tax & IFF Aspects To Africa Regional Consultations On FFD - March 24. 2015
CSO Submission On Tax & IFF Aspects To Africa Regional Consultations On FFD - March 24. 2015
Submitted by
Tax Justice Network-Africa (TJN-A)
On behalf of CSOs
March 2015
Introduction
It is now clear that the MDG process relied too heavily on overseas development assistance
(ODA). This shortcoming needs to be overcome and the issues of tax dodging and illicit
financial flows fully addressed, if the Financing for Development Conference, scheduled to
take place in Addis Ababa in July 2015, is to deliver on the financing needs of the Post-2015
Agenda. The Africa regional consultation on the FfD should also result in an African
Common Position on FfD. The recently launched High Level Panel Report on Illicit
Financial Flows from Africa1, endorsed by African Heads of State and Government on
January 30, 2015, comprises recommendations which African countries should promote
within the FfD process and commit themselves collectively to implement them within the
framework of continental cooperation and in individual African Countries. This position also
reflects the very recently published Zero Draft of the Addis Ababa Accord as presented by
the co-chairs.2
African countries should recognise the central role of taxation in development as a prominent
issue. Despite the perception that Africa survives on ODA, resources raised from taxation are
far superior to ODA. When a country depends on its tax revenue, the substantial burden of
coordinating between and reporting to multiple donors disappears. Countries become more
accountable to citizens and can pursue, in a more cost-effective and integrated manner,
national development goals. The accountability mismatch disappears as countries become
accountable for revenue-raising as well as the delivery of progress.
While a focus on self-financing through taxation has much to recommend it, it is also clearly
the case that many African countries are not collecting sufficient amounts via taxation
systems. New research finds that many non-resource rich African countries have tax
collection levels below 15% of GDP, 3 indicating the weak levels of tax collection across the
developing world. But it is also evident that there is a lot of room for improvement. Yet this
improvement cannot be at the expense of the people in poverty via focus on regressive taxes.
African countries lose too much due to tax evasion and avoidance, poor enforcement of direct
taxation of assets and income, and widespread tax incentives and exemptions, which result in
large fiscal losses. The substantial problem of illicit financial flows and the large amounts of
resources leaving African countries untaxed is now well recognised. As the HLP report
clearly demonstrates, illicit outflows are larger than inflows from aid and that a large
proportion is driven by tax abuse via trade mispricing practices. As a result national and
international tax issues are inextricably linked and are both fundamentally important in
financing for development (FfD) debates.
The purpose of this paper is to inform the Africa Regional Consultation on Financing for
Development taking place in Addis Ababa end of March 2015. It summarises
recommendations that should be incorporated in Africas Common Position on FfD and
ultimately in the final formulation of the tax relevant components of the outcome document
1
http://www.uneca.org/sites/default/files/publications/iff_main_report_english.pdf
http://www.un.org/esa/ffd/wp-content/uploads/2015/03/1ds-zero-draft-outcome.pdf
3
Prichard, Wilson, Cobham, Alex and Goodall, Andrew, The ICTD Government Revenue Dataset, The International
Centre for Tax and Development, Working Paper 19, 2014
2
of the Financing Development Conference which will take place mid-July in Addis Ababa,
Ethiopia.
Tax and the Financing for Development Agenda
Revenue-raising from taxation is now consistently recognised as an important part of the FfD
agenda. In addition, the attention paid to illicit financial flows and the commitment to
enhance efforts to combat tax evasion and avoidance via more international cooperation are
also welcome. Even though Articles 7 and 17 of the Zero Draft attempts to do so, there is
need for all countries particulary African countries to embrace the centrality of taxation as
both the most important source of financing for development needs and the key lever to fight
inequality.
While it is not sensible to ignore any financing options all forms of financing are not equal.
Tax is the most sustainable and reliable source of financing for all states. It enhances both the
accountability of governments to citizens4 and of businesses to society. It is also the key lever
to reduce income inequality in society. While ODA will still play an important role especially for the poorest countries - the importance of a well-functioning system of taxation
cannot be overstated.
However, this has not been well reflected in discussions which often have a significant
imbalance emphasizing heavily private finance.5 This is problematic for a whole host of
reasons. For example, it is already clear that foreign direct investment (FDI) flows to the nonresource rich African countries are very low. The quality of FDI and the benefits that African
countries ultimately derive have been repeatedly called into question, with many African
countries unable to ensure linkages with local firms, dynamic accumulation of capital,
technology transfer, high quality job creation and skills transfer. FDI flows are often
accompanied by significant outflows of resources and of course the profit-seeking nature of
FDI means this form of financing does not flow to many important sectors of public service
provision. While these limitations are not sufficiently addressed, conversely one of the
greatest benefits of FDI the tax it can yield - is insufficiently dealt with. Tax has been
historically ignored due to an over-reliance on ODA. It now appears that there is a danger
that the fundamental role of tax and the urgent need to reform international tax rules will be
overlooked in favour of a skewed focus on private finance.
Financing for Development and International Taxation Issues
While generally tackling tax evasion and avoidance, and the many shortcomings with
international taxation rules, have consistently received attention in FfD preparatory work,
there is still a lack of clarity in terms of the concrete measures to be taken. One of the biggest
priorities for the FfD process must be the creation of a properly functioning and resourced
international body with a mandate to deal fully with global taxation issues. The Zero Draft is
taking small step forward by changing the UN Tax Committee from an expert one to
4
See for example: Report of the Intergovernmental Committee of Experts on Sustainable Development Financing
(ICESDF), 8th August 2014)
intergovernmental one in Article 28. While a step in right direction, it is insufficient and
proper UN tax body with clear mandate to focus its effort on financing for development via
curbing tax evasion and avoidance is needed. We appeal to African countries to share this
position within the FfD negotiations, especially the upcoming drafting session taking place
from 13th April in New York. Currently a substantial part of work on international tax matters
takes place under the auspices of the G20 and is practically taken forward by the OECD. This
has meant that two important processes - regarding automatic exchange of tax information
and base erosion and profit shifting (BEPS) have excluded most African and other
developing countries from negotiations and decision-making. There have been repeated
requests to address this global tax governance problem, including from the G77 which has
proposed that the UN Committee of Experts on International Cooperation in Tax Matters be
upgraded to an intergovernmental body.
Financing for Development and Commercial Tax Evasion and Avoidance
A much greater acknowledgement is needed that the FfD process will ensure that
multinationals pay their share of taxes where their economic activities take place and value
is created. Given the shortcomings in current global tax rules and the ease with which MNCs
are able to reduce enormously the taxes they pay6 the fiscal losses for all countries are
momentous. Research has also shown that poorer countries generally suffer the greatest
shrinkage of the tax base as a result of corporate profit shifting and the multinational tax base
of some lower income countries could even be double their current size.7 Without a doubt this
is the most obvious area where a global effort to make things fairer would result in direct and
large revenue raising for African countries. This should be considered as one of the most
important means of mobilising resources to enable African countries to implement their
development goals.
African countries should stand together to ensure that FfD process not only recognises the
importance of measures to increase transparency and accountability within the private sector
as it does in Article 25 of the Zero draft but also that it commits the countries to act and does
not stop at toothless declarations. This is critical given the risks within the international
financial system that were revealed during the global economic and financial crisis, as well as
to ensure multinationals pay their fair share of taxes. While private sector investment - with
pursuance of legitimate profit making - will play an important role in promoting sustainable
development, the responsibility of the private sector in relation to tax must be more strongly
emphasized. The practice of multinational companies who promote, use and benefit from the
global tax avoidance industry is not compatible with the role of the private sector in
contributing to Africas development.
The OECD has found that some multinationals use strategies that allow them to pay as little as 5% in corporate
taxes when smaller businesses are paying up to 30%. See: OECD, Addressing Base Erosion and Profit Shifting, A study
commissioned for the G20, 2013.
7
Note that current data does not capture the global nature of profit shifting particularly in relation to developing
countries. See: Cobham, A. and Loretz, S., International Distribution of the Corporate Tax Base: Implications of
Different Apportionment Factors under Unitary Taxation, International Centre for Tax and Development, Working
Paper 27, 2014.
Commit to the principle of redistribution via taxation and ensure the global data
collection effort envisaged within the SDGs includes tracking the equity implications
of tax policy
Recognise that international cooperation on tax is the key priority related to financing
within the new global partnership for sustainable development.
United Nation, Doha Declaration on Financing for Development, International Conference on Financing for
Development, 2008
Make an explicit statement that MNCs paying their share of tax will be a major means
of financing the SDGs.