Supporting The Development of More Effective Tax Systems
Supporting The Development of More Effective Tax Systems
Supporting The Development of More Effective Tax Systems
Development of More
Effective Tax Systems
This report has been prepared by the organisations mandated at the G-20 Seoul Summit: the
International Monetary Fund, the Organisation for Economic Co-operation and
Development, the United Nations and the World Bank. These organisations have worked
with regional organisations, such as the African Tax Administration Forum and the Inter-
American Center of Tax Administrations, and its preparation has also benefitted from wide
consultation with other organisations working in the tax area. There has also been extensive
consultation with developing countries, Civil Society Organisations, academic and business
representatives through their participation in meetings and discussions organised by the IMF
and their participation in the Task Force on Tax and Development. The report is prepared
under the responsibility of the Secretariats and Staff of the four mandated organisations. It
reflects a broad consensus among these staff, but should not necessarily be regarded as the
officially-endorsed views of those organisations or their member states.
TABLE OF CONTENTS – 3
Table of contents
Abbreviations
Chapter 1
An Overview and
Recommendations for Action
Background
The Doha Declaration confirms the need to step up efforts to enhance tax
collection, investment and other private flows, with a view to supporting pro-poor
development. Yet half of sub Saharan African countries still mobilise less than 17% of
their GDP in tax revenues, below the minimum level of 20% considered by the UN as
necessary to achieve the Millennium Development Goals 1. Several Asian and Latin
American countries fare little better. In addition, many tax systems have little impact on
reducing inequalities in income and wealth and only a small proportion of citizens are
within the tax system. To help developing countries, the G-20, and the donor
community, need to ensure that the assistance directed at tax system development is
coherent and effective.
Moving towards simpler, more equitable and transparent tax systems and a
broadening of the tax base has been a concern in many developing countries for many
years, and the organisations preparing this report have been active in the area for
decades. But it has recently taken on a higher political profile as the wider development
community has increasingly recognised the centrality of taxation in development. This is
an extremely welcome and important development.
1
What Will It Take To Achieve the Millennium Development Goals? An International Assessment,
UNDP, June 2010, page 26.
This report responds to the G-20 request reproduced in the box below.
We ask the expanded OECD Task Force on Tax and Development, UN, IMF, World Bank and
regional organisations such as the Inter-American Center for Tax Administration and African
Tax Administration Forum and other relevant organisations to:
• Identify key capacity constraints faced by developing countries in their tax systems
and make recommendations on capacity building to (i) improve efficiency and transparency of
tax administrations and (ii) strengthen tax policies to broaden the tax base and combat tax
avoidance and evasion (June 2011);
• Develop a knowledge management platform and promote South-South Cooperation
to support the capacity of developing countries in tax policy and administration systems
(Medium-term);
• Survey and disseminate all G-20 and international organisations’ actions on
supporting tax systems in developing countries (June 2011);
• Set up objective measures to track progress in the capacity improvement of LICs’ tax
administration systems (June 2011); and
• Identify ways to help developing countries’ tax Multinational Enterprises (MNEs)
through effective transfer pricing. (June 2011)
The report focuses on how the G-20 can contribute to strengthening the
enabling environment in which tax systems can be developed, building on the extensive
work that has already been done by multilateral institutions and bilateral donors. It is not
a comprehensive plan for how tax can be used to promote development. Rather, it sets
out how the G-20 can show leadership and provides political support to ongoing
initiatives and identifies areas which need to be reinforced.
The issues discussed in this report are closely linked to those addressed in the
other pillars, especially infrastructure, social protection and investment, as well as the
issues in the G-20 Working Group on Corruption. Without adequate revenues
developing countries cannot invest in the physical and social infrastructure required for
sustainable development, and addressing governance issues in the tax area is critical to
wider governance reform.
The report first looks at the key issue of capacity building in tax administrations
and tax policy design (Chapter 2); then it examines issues related to transfer pricing
(Chapter 3). Chapter 4 addresses benchmarking and performance indicators and
Chapter 5 provides a survey of existing bilateral and multilateral actions to support tax
systems in developing countries plus proposals to develop knowledge management
platforms.
This report has been prepared by the organisations mandated at the G-20 Seoul
Summit: the IMF, the OECD, the United Nations and the World Bank. These
organisations have worked with regional organisations, such as ATAF and CIAT, and its
preparation has also benefitted from wide consultation with other organisations working
in the tax area. There has also been extensive consultation with developing countries,
CSOs, academic and business representatives through their participation in meetings and
web based discussions organised by the IMF 2 and their participation in the Task Force
on Tax and Development 3. The report is prepared under the responsibility of the
Secretariats and Staff of the four mandated organisations. It reflects a broad consensus
among these staff, but should not necessarily be regarded as the officially-endorsed
views of those organisations or their member states.
Significant progress has been made by many developing countries but weak
capacity, corruption and the missing reciprocal link between tax and public and social
expenditures remain as challenges. The vicious circle of low tax morale and
compliance — which reduces the lifeblood for funding public services — needs to be
broken.
Many of these and other tax challenges faced by developing countries affect
more advanced economies too. Specific challenges that loom especially large in
developing countries include:
5
See the Oslo Dialogue (http://www.oecd.org/dataoecd/14/0/47425987.pdf).
While the challenges are substantial, there are also grounds for optimism.
Several African and Latin American countries have made significant advances, often in
the most challenging governance environments. The call for change is increasingly
coming from developing countries themselves. In Africa, the creation of the African Tax
Administration Forum, driven, managed, and operationally funded by Africans, provides
a key platform for peer learning, capacity development and dialogue on domestic and
international tax issues. In the Americas, the Centro Interamericano de Administraciones
Tributarias (CIAT) is a well established platform for regional action. Other regions have
similar organisations. Increasingly the organisations and bilateral donors that work in
this area are strengthening their co-operation, including under the umbrella of the
International Tax Dialogue 6. This has led to a network of donors which encourages both
South-South and North-South Cooperation.
Moving forward
This report does not make recommendations for actions at the level of
developing countries themselves. It recognises that there cannot be a “one-size-fits-all”
approach to tax for development. What it does do is to set out what concrete deliverables
can be provided in response to the mandate given to international organisations at the
Seoul Summit. Proposals focus on strengthening the enabling framework, as shaped by
the G-20 countries, within which developing countries seek to raise their tax revenues in
ways which promote statebuilding and a fair distribution of the tax burden.
The chapters in this report include several specific actions that could be taken to
support the development of more effective tax systems; these are identified at the end of
each chapter. The box below summarises the key actions under three broad messages:
• Measuring progress.
6
The International Tax Dialogue (ITD) is a collaborative initiative involving the EC, IDB, IMF,
OECD, UK-DFID and World Bank Group to encourage and facilitate discussion of tax matters among
national tax officials, international organisations, and a range of other key stakeholders. CIAT, ATAF
and the UN now work with the ITD.
Summary of Recommendations
MAIN POLITICAL
SUPPORTING G-20 ACTIONS
MESSAGES
We will:
Message 1. Deepening • Review the level of our assistance dedicated to supporting tax systems
International in developing countries.
Co-operation.
• Undertake ‘spill over’ analyses of the impact of any significant changes
We commit to deepening in our own tax systems on those of developing countries, and support
international co-operation efforts to develop tools to counter tax evasion and avoidance in
and strengthening long developing countries.
term support to developing
• Share our efforts to identify, quantify and make more transparent tax
countries to help them
expenditures and request the international organisations to develop an
mobilise domestic tax
analytical framework to assess the cost & benefits of special tax
resources fairly and
treatments and develop guidance for countries using tax incentives to
effectively, as the
attract FDI.
cornerstone of
statebuilding, social • Make transparent our exemptions on ODA funded goods and services,
inclusiveness and better and encourage other donors to follow.
governance. • Link tax and expenditure in our assistance programmes, ensuring
taxation promotes statebuilding, accountability and equity, encouraging
other donors to do likewise.
We will:
• Promote the Multilateral Convention on Administrative Assistance in Tax
Message 2. Multinational Matters, support spontaneous information sharing in international tax
Enterprise transparency fraud cases and include anti treaty shopping provisions in our tax
and compliance. treaties with developing countries.
We will require • Request international organisations to advise G-20 leaders on how to
Multinational Enterprises make improvements in the transparency in the operations of MNEs in
to improve tax developing countries, taking into account the current debate on country-
transparency and by-country reporting, best practice in business, and developments in
compliance in developing national legislation (e.g. Dodd Frank in the US).
countries and place good • Strongly encourage MNEs to provide the relevant and necessary
tax compliance more firmly information to developing countries in which they operate, and apply
at the centre of their domestic rules to ensure that the transfer pricing practices of any
corporate governance and particular entity do not result in a misallocation of profit out of its
risk assessment systems. jurisdiction.
• Urge international organisations and other donors to strengthen their
programmes to assist developing countries to effectively implement
transfer pricing rules, in the context of their broader tax administration
capacity development efforts.
We will:
• Encourage international organisations to map assistance programmes
Message 3. Measuring on an ongoing basis, improve the reporting of those programmes, and
progress. develop dedicated knowledge management platforms.
• Share our own benchmarking of performance and structure of our tax
We commit to working with
administrations; support international and regional organisations
developing countries to
(e.g. ATAF) to benchmark tax administrations and to develop a core set
track results from their
of indicators to monitor and assess capacity improvement in tax
own revenue raising
administrations and other revenue related areas.
efforts and the efforts of
their international partners. • Urge international and regional organisations to improve the quality and
consistency of statistics on tax systems of developing countries.
Chapter 2
Introduction
Current situation
Background
7
DAC/OECD, The Challenge of Capacity Development, Towards Good Practice identifies three
analytical levels at which capacity development objectives may need to be pursued: 1) individual, 2)
organisational, and 3) the enabling environment. The first two of these are closely related to resourcing
issues; the focus here is therefore on the ability of G-20 countries to reshape the third.
8
Throughout this report, references to tax or revenue administration include customs administration as
well as domestic administration.
Revenue requirements for relieving poverty and improving physical and social
infrastructure are substantial. Achieving the Millennium Development Goals, for
instance, may require some low-income countries to raise their tax-GDP ratios by
around four percentage points. 10 But the quality of measures also matters: increasing
revenue by further taxing readily compliant taxpayers can worsen distortions and
perceived inequities; conversely, reducing reliance on trade taxes can bring real
structural gains that outweigh short-term revenue difficulties. More fundamentally, the
centrality of taxation in the exercise of state power means that more efficient,
transparent and fairer tax systems, and less corrupt tax administration, can spearhead
improvement in wider governance relations.
Experience shows that progress can be made. Given strong political will several
developing countries have significantly improved their tax performance over relatively
short periods. Common elements of success are sustained political commitment at the
highest levels, administrative reforms aligned closely with policy changes, and strong
leadership of the revenue administration—all of which may encounter powerful
opposition.
9
The summary assessment here of constraints and lessons in revenue mobilisation in developing
countries draws on IMF (2011), IMF (2011), “Revenue Mobilization in Developing Countries”, at
http://www.imf.org/external/np/pp/eng/2011/030811.pdf
10
United Nations (2005), Investing in Development (New York: United Nations).
11
By ‘potential revenue’ is meant the amount that, given the revenue raised in countries with similar
characteristics, it appears possible to collect. The formalisation of this concept, econometrics of its
implementation and results referred to here are in IMF (2011), op.cit and Carola Pessino and Ricardo
Fenochietto (2010), “Determining Countries’ Tax Efforts,” Hacienda Pública Espanola/Revista de
Economía Pública, Vol. 195, pp. 61-83.
increased its tax-GDP ratio from 6 to 13% over the 1990s to around 17% now. Some
have achieved sustained revenue increases of 4–5% of GDP in just a few years.
There are important design links between different tax policy instruments.
Perhaps most fundamentally, one theme is that pressures on revenue from trade
liberalisation, regional integration and tax competition mean that, absent greater
international policy coordination, the search for additional revenue will likely focus on
relatively immobile bases — most obviously labour, consumption, and real estate.
Whilst domestic political will and leadership is the primary driver of capacity
development, partnerships with international assistance providers can play an important
role. International organisations have been very active in providing technical tax advice
to developing countries for many years, although until recently tax has been somewhat
neglected by much of the international community as a development issue, relative to
expenditure issues. At present, only a very small proportion of international financial
support to development is aimed at improving the tax systems developing countries. 12
Each country must design its own reform package, and political will and
ownership are essential for success. There is no “one size fits all” — but there are
lessons that can help guide countries as they move forward in the tax reform process.
Perhaps most fundamental is the need to promote the virtuous circle by which
increased trust between both taxpayers (in the use to which revenue is put and in the
behaviour of tax officials) and tax administration (in the willingness of taxpayers to meet
their obligations) reinforces voluntary compliance and good governance To this end,
combining improvements in revenue administration with supportive — efficient, fair,
effective — tax policies is essential. While it may be too much to assert, as the adage has
it, that in developing countries, “tax administration is tax policy” — tax policy sets the
framework within which the revenue administration must operate — in practice, the
distinction between administration and policy is especially hard to make in developing
countries. But there is no doubt that weak and often corrupt tax administrations,
inadequately paid officials, extensive non-compliance and informality, weak
organisational structures and political interference remain a fundamental barrier to
effective and fair taxation, and to building wider trust between government and citizens.
12
“Taxation as State-Building: Reforming Tax Systems for Political Stability and Sustainable
Economic Growth—A Practitioner’s Guide,” World Bank Group/DfiD (2009), reports that of
USD 7.1 billion spent in 2005 on bilateral aid for administration, economic policy and public sector
financial management, 1.7% was devoted to tax-related assistance. OECD DAC reports that in 2009
USD 1.276 billion was spent on donor aid to non-tax public financial management activities, with
USD 45.7 million going to tax-related activities.
Specifically:
• Progress has been made in reforming revenue administrations, but modern risk-
management techniques are not yet widely applied;
• High-income individuals can and must be taxed more effectively, not least to
build the wider sense of fairness needed to support compliance more widely —
by removing opportunities for avoidance and strengthening detection and
enforcement;
• The value added tax (VAT) has greater revenue potential than most other
instruments, but realising this in many cases requires expanding the base — by
eliminating exemptions, unifying rates, and improving compliance — rather
than increasing standard rates;
• More systematic attention needs to be given to replacing revenue lost from trade
liberalisation — most middle-income countries have readily recovered lost
revenue from domestic sources, but the same has not been true of low-income
countries (though sub-Saharan African countries have on average done slightly
better than others in this regard); 14
or FDI into some other country. Tax-driven investment may also prove
transitory;
• The CIT is in any event likely to come under continued pressure from
globalisation in coming years, as international tax competition continues to lead
to lower rates of CIT around the world;
• Capacity within governments to carry out tax policy analysis is often weak, and
a significant hindrance to better design and fuller ownership;
• Sustainable tax reform can be obtained only with equally sustained political
commitment from the highest levels; even where reform is successfully begun,
backsliding can occur.
15
See for instance IMF (2010), From Stimulus to Consolidation: Revenue and Expenditure Policies in
Advanced and Emerging Economies, at http://www.imf.org/external/np/pp/eng/2010/043010a.pdf, and
SUPPORTING THE DEVELOPMENT OF MORE EFFECTIVE TAX SYSTEMS - 2011
CHAPTER 2 – 21
challenges that international mobility creates for taxing multinationals and high wealth
individuals are shared, to varying degrees, by all. These common issues and interests
provide a basis for intensified co-operation, as discussed below.
How the G-20 countries can better help developing countries’ efforts
At the same time, G-20 and other donors need to be alert to the risk that aid
itself may discourage recipients from strengthening their domestic tax regimes. General
budget support, for example, may provide a positive way of engaging government in
high level dialogue on issues related to improving the tax system in the broadest terms.
However, tax issues may not be priorities for policy discussion, disbursements may not
be linked to revenue objectives, 16 and fungibility with own source revenues could
the appendix on tax expenditures in IMF (2011) Fiscal Monitor, at IMF Fiscal Monitor -- Shifting
Gears: Tackling Challenges on the Road to Fiscal Adjustment, April 2011; see also Tax Policy Reform
and Fiscal Consolidation, Tax Policy Brief, OECD December 2010.
16
IMF conditionality does frequently focus on revenue issues. Fund-supported programs are making
increasing use of structural revenue measures as part of government-owned strategies to increase
There are two broad ways in which the G-20 countries can better work with
developing countries to support their revenue mobilisation efforts: leading by example in
addressing common issues and furthering common interests, and as shareholders or
members of the international organisations most closely concerned with taxation and
development.
Improving transparency
economic growth and reduce poverty. IMF (2011), Revenue Mobilization and Developing Countries, at
http://www.imf.org/external/np/pp/eng/2011/030811.pdf.
17
See “Appropriate Aid Modalities for Supporting Tax Systems,” Nathan Associates, for the
International Tax Compact of the German Federal Ministry of Economic Cooperation and
Development, German Financial Cooperation, and the OECD/DAC Tax and Governance Task Force
(GOVNET), draft March 2011.
18.
One aspect of the U.S. “Dodd-Frank Act” (2010), which in general implements wide-ranging
changes to the regulatory environment for the financial industry, mandates that certain companies
engaged in the extractive industries disclose in annual reports data concerning all “payments” made by
SUPPORTING THE DEVELOPMENT OF MORE EFFECTIVE TAX SYSTEMS - 2011
CHAPTER 2 – 23
Whether and how to extend EITI and the Dodd-Frank legislation to sectors
other than extractive industries is the subject of international debate. It is not yet clear
whether, and how, some of the recent calls for such “country-by-country reporting”
would if implemented be effective in the existing international income tax system.
Sceptics fear that excessive reporting may simply overwhelm tax administrations in
information which is not easily applied to measure legal tax burdens; advocates see it as
a potentially important advance in transparency, with many NGOs feeling that reporting
of this kind would facilitate a more informed debate between civil society, business and
government. The G-20 countries could encourage the international organisations
(including accounting and other bodies, as relevant) to accelerate exploratory work on
how to promote transparency, including through country-by-country reporting as a
standard for MNEs, and best practices currently used in the corporate sector, ensuring
throughout that any proposals be directed at assisting tax administrations in developing
countries.
the company (and all controlled subsidiaries or other entities) to governments. Until the SEC agrees
implementation regulations it remains unclear, however, how in practice the legislation will operate.
19
At http://www.imf.org/external/np/fad/trans/manual.html and
www.oecd.org/dataoecd/33/13/1905258.pdf respectively.
Tax expenditure analysis is itself just a first step towards a thorough evaluation
of preferential treatments and action on those found not to generate net social gains. No
country can be expected to change its domestic tax policy just as an example to others. It
remains the case, nonetheless, that developing countries often take how G-20 countries
address particular tax issues as the “right” answer, and — special treatment once granted
being extraordinarily hard to remove — that this risks entrenching inappropriate
preferential treatments. 21 The impediment to good practice this creates is not trivial. It
makes it still more important that the example provided by G-20 members is not only
reporting tax expenditures but also evaluating them and acting on the result.
Since such exemptions are often granted through special agreements negotiated
without the involvement of tax administrations or officials in charge of tax policy, they
can undermine the ability of the tax authorities to object to special tax exemptions
granted by other branches of the government through agreements related to private
investment projects (e.g. through an investment contract concluded with a foreign
20
CIAT in particular has established a working group for the measurement of tax expenditures, to assist
member countries that do not have significant experience in the area. This will be accomplished by
providing them with a Handbook of Best Practices being developed by delegates from six countries that
do have such experience. Along with the Handbook, the working group has been building a database of
existing tax expenditures in the countries subject to CIAT’s study, including their fiscal cost.
21
Reduced VAT rates on equity grounds, for instance, even though they are clearly highly inefficient
means to that end
enterprise planning a major investment). G-20 countries should encourage their resident
companies to ensure that, if tax exemptions are to be granted, the tax authorities of the
developing countries are fully involved in the negotiation and design of these
exemptions
Another form of exemption that has proved especially problematic for many
developing countries is the practice of exempting from taxation donor — funded
projects — sometimes in all respects, not merely from tariffs on importation. This
further stretches the limited administrative capacities of many developing countries,
risking leakage of “donor” goods into the economy without taxation. Where donors are
willing to provide direct budget support, insisting on such exemptions makes little sense.
The underpinning of any response to evasion and avoidance in both G-20 and
developing countries is the availability of timely and relevant information. The
availability of information at an early stage helps to improve risk assessment and to
make efficient use of the resources available, thereby improving overall compliance. At
the same time it allows the tax policy function to make timely and informed decisions on
the appropriate legal framework. Different strategies are being used to achieve this
objective, ranging from voluntary to mandatory measures including reporting
obligations relating to tax schemes or tax risks more generally.
22
See e.g. OECD (2011) Tackling Aggressive Tax Planning through Improved Transparency and
Disclosure, OECD, Paris, http://www.oecd.org/dataoecd/7/29/47020506.pdf and Barrie Russell,
Developing a Taxpayer Compliance Program,
http://www.imf.org/external/pubs/ft/tnm/2010/tnm1017.pdf.
Tax evasion (e.g. arising from informal but taxable activities) remains a large
and intractable problem for many G-20 and developing economies. There are no “silver
bullet” solutions enabling immediate success. Increasingly, the approach of the most
advanced economies entails the systematic use of risk management techniques, applied
at both strategic and operational levels, to identify, assess and treat the major compliance
risks, using a variety of risk treatment strategies (e.g. legislation, education, service, soft
and hard enforcement measures). G-20 countries could support developing countries by
providing structured guidance on the use of such techniques 23.
G-20 countries could support developing countries efforts to enforce tax laws
through spontaneous exchange of information, in particular in international tax fraud
cases. This would assist developing countries’ tax administrations in identifying
potential cases for investigation and generate information to help respond to global tax
threats and international schemes.
23
See OECD (2010) A Framework for Successful Offshore Voluntary Compliance Programmes, Centre
for Tax Policy and Administration, OECD, Paris; see also IMF Technical Notes and Manuals
TNM/10/03 (2010) Taxpayer Audit – Development of Effective Plans, Edmund Biber, 14 April 2010
24
Note the Multilateral Convention on Administrative Assistance in Tax Matters has been opened up
to all countries at the request of the G-20 with effect from 1 June 2011, see
www.oecd.org/ctp/eoi/mutual.
The G-20 countries’ lead role in the debate on international tax system creates
an obligation on them to ensure its smooth functioning. In that context, it would be
appropriate for G-20 countries to undertake “spillover analyses” of any proposed
changes to their tax systems that may have a significant impact on the fiscal
circumstances of developing countries. Trade agreements are an obvious example —
tariffs remain a key source of revenue in many developing countries. But there can be
important effects from other G-20 tax policies too, including in their international tax
regimes (in moving, for instance, from residence to territorial systems). 26 While such
25
See OECD (2009), Engaging With High Net Worth Individuals on Tax Compliance, Foreword by
Pravin Gordhan, FTA, OECD, Paris.
26
Reduced tax rates in capital importing countries may have more bite in attracting foreign investment
when the capital exporter operates a territorial rather than a residence system, because under the latter,
but not the former, the effect of that reduced rate is in principle undone when profits are repatriated.
The implication is that a movement to territorial taxation may intensify international tax competition.
See Peter Mullins, 2006, “Moving to Territoriality? Implications for the U.S. and the Rest of the
World”, Tax Notes International, Vol.43 (10), September 4, 2006, pp.839-53.
analyses will of course not necessarily alter the course adopted, they may point to
remedial measures to be incorporated into the reform and should be published for the
international community to reflect upon — at a minimum, to enable developing
countries to respond with parallel changes to their own systems if that would be helpful
in protecting their revenue bases. Ideally, a “baseline analysis” along these lines would
be undertaken immediately.
It is important that double tax treaties serve the interests of both partners, and
both the OECD and the UN are very alive to this concern in their models and continuing
work. Treaties can encourage investment not only by providing for reduced withholding
tax rates, but also through, for example, nondiscrimination clauses and dispute
resolution procedures. The extensive treaty networks of most G-20 countries with
developing countries reflect the belief, on both sides, that they generate very substantial
advantages. Nonetheless, where investment and income flows are unbalanced — as is
typically the case between developed and developing countries — treaties substantially
reducing or eliminating withholding rates on interest, dividends and fees can operate to
the revenue disadvantage of the source (developing) country unless the treaty package
adequately encourages offsetting revenue-producing investment or unless the burden of
the unreduced rate is effectively borne by the developing country payer. It is important
that G-20 countries recognise in their negotiations that reductions in a developing
country’s taxing jurisdiction may significantly erode its tax base. This is especially so if
the benefits of the treaty are effectively available to third country residents through
treaty shopping arrangements. G-20 countries should thus be prepared, for instance, to
include anti-treaty shopping provisions in their treaties with developing countries, and to
help those countries evaluate appropriate anti-treaty shopping policies, while preserving
the benefits to be derived from the treaty relationships.
could be more strongly made, not least in the context of fostering statebuilding. 27 Results
of such analysis can then be brought to bear in multilateral and bilateral technical
assistance — and most importantly, by the developing countries themselves. It will be
important to bear in mind, however, that such integrated analyses of tax and spending
measures can be quite resource-intensive.
The G-20 countries should encourage the IMF and World Bank, working with
other international and regional organisations as appropriate, to develop and make
available better revenue data sets for developing countries with consistent methodology,
building on data they currently collect. This would permit far better economic analysis
of developing country taxation, and more improvements in revenue administration in
those countries through better analysis of tax gaps, and effects thereon. Such data —
adjusted to be consistent, and stratified by revenue source and levels of government —
do exist for the OECD and EU countries, and greatly facilitate this sort of analysis for
these economies.
27
This issue is discussed extensively in OECD (2010), Citizen-State Relations: Improving Governance
through Tax Reform, OECD, Paris.
Summary of Recommendations
Estimate and publish tax expenditures, and the costs of special provisions, in regular
tax expenditure budgets. G-20 countries could lead and encourage a more rigorous
assessment of the costs and benefits of such provisions.
Disclose and consider reducing the scope of tax exemptions required by G-20
countries from country recipients of aid-funded projects.
Undertake “spillover” analyses of proposed changes to tax law in G-20 countries, for
example in trade and international taxation—which could have effects on the fiscal
circumstances of developing countries.
Encourage the IMF and World Bank, working with other international and regional
organisations as appropriate, to further develop and make publicly available consistent and
detailed revenue data sets for the developing countries.
The report has also identified the examination of improving the transparency of
MNEs, through country-by-country reporting for example, as an issue for further study.
Chapter 3
Introduction
Current position
The arm’s length principle is the basis of Article 9 of the UN and OECD
Model Tax Conventions and is discussed in depth in the OECD Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations. It provides that, for
the purposes of determining the taxable profits of associated enterprises, the conditions
of commercial and financial transactions between them should not differ from those that
would be made between independent enterprises in comparable circumstances. In the
absence of a common approach between governments, the application of transfer pricing
rules can potentially give rise to economic double taxation, which has the potential to
hinder international trade and investment. Tax conventions typically include provisions
designed to avoid double taxation and resolve disputes between countries over the
correct application of internationally agreed principles.
28
Some academics and NGOs have proposed alternative approaches (such as ‘formulary
apportionment’) that do not allocate taxable profits in this way, though no governments have used this
approach in an international context.
Many developing countries report that they face practical difficulties in effectively
implementing transfer pricing rules. Many of these difficulties are also common to developed
countries, but in practice such problems are likely to be more acute for developing countries.
These may include difficulties: a) in drafting clear legislation and guidance; b) in building
tax administration expertise and experience in transfer pricing to enable them to carry out
effective audits; c) in obtaining the information needed from taxpayers in order to select
cases for audit or carry out effective audits; and d) in obtaining public information on arm’s
length conditions, i.e. the conditions (for example, price or profit margin) in place for
independent enterprises conducting comparable transactions under comparable
circumstances. There is a very strong demand from developing countries to support them in
the adoption and implementation of transfer pricing rules in accordance with internationally
developed principles.
29
Supported where appropriate by the creation of national registries of unlisted companies.
Summary of Recommendations
a) Improving Support
G-20 countries and international organisations should strengthen their programmes to assist
developing countries diagnose their transfer pricing regulatory needs and adopt, and then effectively
implement, transfer pricing rules matched to their specific needs in accordance with their patterns of
international trade, administrative capacity, and their policy needs and priorities. Such assistance should
be focused on the areas described in the second paragraph above. Assistance needs to address more
than simply legislative needs, recognising that effective implementation of transfer pricing rules requires
an effective administrative framework and audit capacity.
G-20 countries should strongly encourage MNEs to provide developing countries in which
they operate with information that is relevant or required by law in order to allow each of them to verify
that MNEs follow country transfer pricing rules and that their transfer pricing does not result in a
misallocation of profit out of its jurisdiction. G-20 countries and international organisations should support
initiatives aimed at improving the ability of developing country tax administrations to require MNEs to
provide them with information that is relevant in the context of a transfer pricing audit, bearing in mind the
need to avoid imposing excessive and disproportionate documentation requirements.
G-20 countries and international organisations should support initiatives designed to assist
developing countries to identify and effectively address implementation issues (e.g. lack of comparables
in a domestic context, lack of relevant skills, lack of effective dispute prevention and resolution
mechanisms) that may hinder their effective application of transfer pricing rules. This should be enhanced
by ensuring that internationally developed guidance on transfer pricing is relevant to, and can be
effectively applied by, developing countries in a broadly consistent manner.
G-20 countries and international organisations should assist developing countries to enter
into, and develop their ability to effectively implement, bilateral and multilateral agreements to allow the
exchange of information with other counties (see recommendations under Action 2). G-20 countries
should also widen their network of bilateral tax conventions, as appropriate, with developing countries.
Chapter 4
In its technical assistance (TA) work the IMF has for many years used objective
measures to assess progress and guide the development of reform programmes (though
the confidentiality of advice means these are not published). The IMF also publishes a
wide range of books, papers, technical notes and manuals on issues of tax administration
and policy specifically aimed at developing countries and often integrating
administration closely with policy issues. The new donor-financed Topical Trust Fund in
Tax Policy Administration mandates the IMF to work on a benchmarking tool to
measure progress on administration reforms.
important aspects of tax administration that are not covered by the PEFA framework, the
WB has developed an "Integrated Assessment Model for Tax Administration" which
will be implemented as a pilot later in 2011.
Regional development banks and regional tax organisations have also been
working in this area with work between CAPTAC, CIAT, the IDB and the IMF
currently underway, including planned meetings to share their experience with ATAF.
The 2010 publication of the African Economic Outlook by the African Development
Bank and the OECD Development Centre also contains useful information on tax
administrations in Africa through its focus on Public Resource Mobilisation, as does
IMF (2011). The Asian Development Bank and SGATAR do not carry out any
systematic measurement of capacity in tax administration systems in Asia.
Recent work through the ITD (funded by DFID and led by the IMF) has piloted
the development of common indicators in sub-Saharan Africa. The pilot study set out
indicators following the example and methods in the work of the Forum on Tax
Administration. It also included elements of the IMF’s approach to identifying gaps in
capacity in its work with developing countries, and drew on substantial input from
ATAF. The pilot study has been published by the ITD (www.itd.org).
The survey seeks to compare, for illustration purposes only, approaches and
practices across participating SSA and Forum on Tax Administration (FTA) countries.
The survey aims to contribute to building a picture of tax administrations across regions
and levels of development. ATAF is working with the ITD to develop a second phase of
this work that will involve expanded country coverage in Africa and a further refinement
of the selection of indicators collected. In this way, a more complete picture of how
effectively tax administrations are working can be developed. The project is also
intended to build regional capacity through the process of indicator selection and
methodological discussion itself.
The intention is for ATAF and ITD to start work on the second phase of this
work soon with those countries involved, as well as developing plans for future work on
indicators in 2012 and 2013. The plan is expected to include showing how such
benchmarking type information feeds through into actual progressive reform of tax
administration.
As part of this process, the pilot study was discussed and participation in the
next phase encouraged at an IMF conference, with the participation of other
international organisations, on DRM in Kenya in March 2011. ATAF held a meeting in
April 2011 on the research conducted through the ITD to gain high-level buy-in from
heads and senior officials of African Tax Administrations, and discuss and agree the
process for this work programme in terms of survey instruments, country coverage,
mechanisms for delivering data inputs and their interpretation. This is the first step in
delivering a benchmarking type process that could provide diagnostic information for
revenue authorities and providers of technical assistance.
It is planned that the results of the analysis discussed above will be the basis of
further ATAF-facilitated regional workshops with tax officials from those participating
countries. These workshops will help ensure that the work on indicators of revenue
capabilities evolves in a way that continues to be operationally relevant to African tax
administrations over the long term as the operation of revenue authorities themselves
evolve, including in processes and technology. This exercise will also benefit from input
by CIAT, CATA and CREDAF along with the IMF and World Bank and other relevant
organisations including the FTA working in the area of tax administration.
While there are existing tools to draw on (including also those of the WCO), it
is imperative that further work is carried out to agree a group of core indicators that
would allow more meaningful assessment of tax administrations and the progress of
their reforms worldwide — which will be a challenging task.
More in-depth evaluations at regional level and amongst countries with similar
levels of development could form the basis of a performance self-assessment tool that
could inform governments and providers of technical assistance where the greatest
obstacles to improved revenue administration exist at country level. ATAF sees the
development of such a tool as a priority. This could include the development of both
quantitative indicators assessing the use of modern management practices as well as
more strategic qualitative assessments amongst smaller groups of countries.
Overall an effort should be made to try to pull together the FTA, IMF, WB, and
regional standards into a broadly consistent set of global standards, recognising that this
would need to reflect the different stages of development in different countries.
Summary of Recommendations
Asian G-20 countries could engage the ADB to facilitate the collection of similar
comparative information to that collected by the FTA.
Encourage all interested multilateral and regional organisations operating in the tax
field to work together in the development of a core set of indicators that would support
meaningful monitoring and assessment of capacity improvement in tax administrations and
other revenue related areas.
Ensure that improvements and lessons learnt in carrying out further measurement
and analysis of capacity improvements in tax administration systems in different regions –
especially that of emerging G-20 countries - is shared between regions and disseminated
effectively via knowledge-sharing platforms in the tax area to the wider tax policy and
administrative community.
Develop a strong partnership with ATAF, in the context of the ITD and its members,
to revise and extend the coverage of the ITD African pilot study by further developing and
agreeing a core group of relevant indicators of revenue body capabilities, efficiency and
effectiveness, ensuring wider country coverage to enable countries to self-assess their
performance, benchmark themselves against comparators as appropriate, and develop
related diagnostic tools so as to provide a sound basis for identifying key obstacles to
improved tax administration in the region and allocating resources to deal with them.
Chapter 5
and
Overview
Current situation
In the field of taxation, both donors and recipients already have a fair
knowledge of what they need and what is available, in particular at country level. But
more readily available and more detailed information in this area would help TA
providers and the agencies financing this assistance to design their support programmes.
It would also help country authorities to get a better sense of what kind of assistance
30
Confidentiality restrictions limit the information that can be shared on the substance of TA advice,
except by the recipient countries themselves. The focus here is therefore on the fact and broad nature of
advice being given.
may be needed and made available to them, and under what terms and procedures.
Information on particular expertise developed by bilateral agencies on some topics may
be very valuable and also help increased collaboration with multilateral agencies. This is
particularly relevant in the case of new South-South Cooperation that falls outside the
traditional development assistance (ODA). The more easily accessible information is,
the more it would help all agencies involved to improve their efforts to coordinate their
activities, to gauge whether funding for capacity building efforts is sufficient, and to
evaluate effectiveness of capacity building activities.
The ITD database 31 of technical assistance activities is a focal point for the
collection and sharing of information on bilateral and multilateral technical assistance
activities in relation to tax policy and administration. This information is publicly-
available and searchable on provider, location, topics, intended audience, type of activity
and dates for past, current and future activities (subject to confidentiality and security
concerns). Details of over 1 500 activities provided by all ITD partners (DFID, EC,
IADB, IMF, OECD and WB), CIAT, and USAID are currently available. In terms of
resources allocated to these activities, the OECD-DAC statistics 32 include some
information on past international financing for co-operation on capacity building in the
area of taxation. Both ITD database and OECD-DAC statistics are regularly updated so
capture the current status at any point.
IMF staff) 34. These (one-off) studies provide a static snapshot of activities, not a
dynamic picture over time.
34
Michielse, Geerten and Thuronyi, Victor (2010); “Overview of co-operation on capacity building on
taxation”; Report prepared for the UN Committee of Experts on International Cooperation in Tax
Matters; http://www.un.org/esa/ffd/tax/sixthsession/OverviewCapacityBldg.pdf
35
We do not discuss here mechanisms for tax co-ordination within trading blocs, such as WAEMU,
CEMAC, and the EAC, focused on delineating and enforcing common policies. The focus here is on
softer forms of co-operation.
by more than 100 officials from 37 countries in the region, as well as a global event in
Washington DC. The OECD’s Global Relations Programme brings together officials
from developing countries to exchange experiences in the area of international tax
issues, putting on an average of 75 events a year, with around 40 000 from developing
countries having participated since the programme began. The UN is, for example
increasingly bringing together key southern participants in meetings to share experiences
on specific issues such as transfer pricing and double tax treaties and their
implementation, including through its South-South Sharing of Successful Tax Practices
(S4TP) project (http://www.s4tp.org/), a partnership with the Special Unit on South-
South Cooperation of the United Nations Development Program (UNDP), and two
NGOs.
The IMF’s seven regional assistance centres 36 (with two more planned) 37 are
one of the best examples of South-South advice. Each has one or more resident tax
experts, normally recruited from within the region, and makes substantial use of local
experts in delivering advice, following programmes approved by steering committees
with strong representation from those countries. The IMF’s and other IFIs long-term
resident experts are commonly drawn from the region, and of course so are some of the
headquarters staff. ATAF, CIAT, OECD, the ITD and the UN also directly promote
South-South Cooperation.
In addition to the knowledge sharing fora discussed above, there are also a
number of ‘knowledge management (KM) platforms’. The term as used in this way
refers to IT-based systems for information pooling and access. KM platforms have a role
in South-South Cooperation (and in co-operation with and between advanced countries),
but the knowledge fora encompass a wider set of mechanisms and activities. These
might include, for instance, advice and discussion with counterparts in other developing
countries, workshops, conferences as well as online information access and online fora.
36
These serve: Eastern Africa, West Africa, Central Africa, the Middle East, Central America, the
Caribbean and the Pacific islands.
37
An additional centre in Southern Africa will open shortly, and another is planned for Central Asia.
The management and sharing of tax knowledge is not an end in itself. It only
helps if actually used by countries to adopt better tax policies and improve tax
administration.
1. The ITD is a well established IT forum for regular exchange of information and
good practice among a wide variety of countries.
2. The ITD operates a free, multilingual, multinational Internet site. Over 3 000
documents on tax policy and tax administration issues from around the world
are currently available online with new documents added daily. These come
both from contributing countries and from the organisations that are the ITD
partners. The ITD website had over 32 000 hits in January 2011 with more than
130 countries visiting this site.
3. ITD partners, particularly the IMF, the World Bank and the OECD generate a
wealth of knowledge through publications, annual meetings, Committee
meetings, workshops and conferences.
B. The United Nations (UN) - http://www.un.org/esa/ffd/tax:
1. The United Nations website platform in the tax area relates especially to the
work of the UN Committee of Experts on International Cooperation in Tax
Matters. The website of the Committee, maintained by the UN secretariat, is in
one respect a knowledge management platform in areas addressed by the
Committee, and is being re-developed to more fully meet this need.
C. Inter-American Center of Tax Administrations (CIAT)- http://www.ciat.org:
1. CIAT operates a bilingual (English, Spanish) Internet site.
2. CIAT also offers e-learning courses, which are aimed to complement rather
than to replace face-to-face capacity building activities.
3. CIAT has recently launched an e-forum (CIATalk) to facilitate an informal space
for opinion on matters of tax policy and tax administration to members of
MyCiat Community.
The ITD is currently working with regional agencies (e.g. ATAF and CIAT) to
help develop a regional forward-looking mapping of international co-operation on
capacity building. From this collaboration it is expected that TA providers and
recipients, as well as donor institutions and countries, will be able to benefit by avoiding
resource duplication, as well as improving the effectiveness of bilateral and multi-donor
funded fora.
• the reports delivered within the scope of the International Tax Compact;
• World Bank and IMF databases on technical assistance;
• the report prepared for the UN Committee of Experts (by IMF staff) on
capacity building; and
• the ITD database on capacity building.
Summary of Recommendations