DESA News Vol. 12, No. 10 October 2008


Race to the bottom in taxationRace to the bottom in taxation

Competition for investment is putting a strain on tax systems and impinging on national policy space as a result

Taxation is a clear area where international norms can facilitate investment, growth and development at the country level. The Monterrey Consensus on financing for development of 2002 recognizes that effective tax systems are an important means of mobilizing domestic resources for the sort of sustained economic growth that can reduce poverty. At a time when official development assistance flows have stagnated – and can come with significant conditionalities – developing countries see properly functioning tax systems as the main way to bankroll development strategies. Developing countries have also been competing intensely with each other, indeed racing to the bottom, to lower their tax rates to attract foreign investment, which has greatly reduced disposable resources and, in turn, the ability to tailor economic and social policies to the national interest.

To address these and other challenges, the Committee of Experts on International Cooperation in Tax Matters will meet in Geneva from 20 to 24 October. The Committee’s work includes updating the influential United Nations Model Double Tax Convention between Developed and Developing Countries of 2001 and the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries of 2003.

Agreement on the need for tax norms

The Monterrey Consensus recognized explicitly the importance of effective tax systems in mobilizing resources to ensure sustained development as well as the need for the voice and participation of all countries – both developing and developed – in shaping international tax norms and approaches that will impact upon them. While the role of domestic fiscal policies for each country’s economic development is highlighted, the Monterey Consensus also recognizes the global interconnectedness of national economies and the need for a supportive international environment to enable the progress of countries.

The text also calls for the equal participation of all countries, including developing countries, in shaping international tax norms which affect domestic mobilization of resources. To strengthen the effectiveness of the global economic system’s support for development, it was agreed in Monterey, that tax cooperation needs to be intensified through enhanced dialogue among national tax authorities and greater coordination of the work of the concerned multilateral bodies and relevant regional organizations.

Similarly, the draft outcome document for the Doha review conference on financing for development, which gets underway in a few weeks, builds on the Monterrey consensus and calls for fiscal reform as the key to enhancing macroeconomic policies and mobilizing domestic public resources. Enhanced international cooperation along with an improved transparency of public finance management, leading to a build-up of a sound and diversified financial sector are seen as central to the mobilization of domestic resources.

International cooperation is seen as indispensable in tax matters. The ultimate objective of broad participation by all countries in the development of international tax norms and rules would be an increase in tax revenues globally. Furthermore, countries propose to strengthen efforts to increase tax revenues through more effective tax collection and modernization of tax legislation including through simplification of the tax system, broadening of the tax base, and strongly combating tax evasion. To support individual country efforts in these areas, countries propose to enhance international cooperation in tax matters and broaden participation in the development of international tax norms and rules. Countries would also consider strengthening the UN tax cooperation committee by upgrading it to an intergovernmental body.

Complementing the work of the Committee is a project on South-South sharing of successful tax practices which is currently being undertaken by the Special Unit on South-South Cooperation of UNDP in close cooperation with DESA’s Financing for Development Office and two non-governmental organisations – the New Rules for Global Finance Coalition, and the Tax Justice Network. The project is designed to enhance cooperation among developing countries on tax matters by sharing experiences, and also to help identify areas where cooperation among developing countries needs to be enhanced to ensure that international tax norms are shaped in their development and application by developing country perspectives, experiences and realities.

Environment, natural resources, transfer pricing, corruption

Although the Committee is currently heavily involved in the updating of the UN Model Convention, which would facilitate both foreign direct investment and portfolio investment by, in particular, providing some assurance to investors that double taxation would be avoided, the Committee has a wide mandate dealing with tax and development issues. Given that effective, efficient and transparent tax systems have many impacts on sustainable development and poverty reduction, the Committee may in future choose to consider other aspects of international tax cooperation, such as environment and natural resource taxation, and transfer pricing.

Transfer pricing is an accounting practice of corporate groups or multinational enterprises by which profits and losses, and the applicable taxes, are reported in the most favourable jurisdiction. Under transfer pricing, corporate profits tend to be moved to the balance sheets of subsidiaries in low tax countries while losses and other deductions are registered as write-offs in jurisdictions where taxes are relatively higher.

Corruption is another important issue for both developed and developing countries, and experiences in countering it could usefully be shared, though it must be noted that definitional problems such as what constitutes corruption have yet to be resolved. With reference to the resources sector, initiatives such as the extractive industries transparency initiative should be recognized as important instruments in the fight against corruption and tax revenue authorities in developing countries should, therefore, strive for attaining higher levels of transparency in respect of revenue collections from the natural resources sector.

Addressing the tax skills deficit

The first meeting of the DESA-UNDP South-South project on tax practices was held on 22 and 23 May 2008, with high level representatives, including several heads of tax administrations, focussing on sharing successful experiences on taxation in a number of areas. Among them were: extractive industries including mining and fishing; maintaining an effective and independent judiciary body; balancing the interest of various stakeholders in the tax system; transfer pricing, including the treatment of intangibles, organising and modernising tax administration; compliance and the use of technology, including possibilities for closing the information and skills gap often suffered by tax authorities.

Experts at the meeting pointed out that an effective tax system, in both policy and administrative terms, is central to development, and political will and support for an effective tax system was critical. The tax culture of a country is also vital to sustainable development, since there had to be confidence in the system among the various stakeholders, including the general populace. For this reason there is a need to achieve an effective balance of education, assistance and strong compliance activity was central to effective tax systems and sustained development.

The “information deficit” and the “skills deficit” were other areas of great challenge for tax policymakers and administrations, and areas where sharing of successful experiences would be of particular benefit. The high costs of capital flight – including illicit financial flows due to tax evasion – brought out the need to cooperate, share experiences and address tax avoidance and evasion systematically, in addition to the cross-border flow of funds.

Global issues, global responses

Although, valuable work has been done in other forums to prevent double taxation and harmful tax practice as well as preventing tax evasion and avoidance, the United Nations is the only global forum for furthering international tax cooperation with a view to sustainable development, and the only venue for global responses to the immense challenges in this area.

The United Nations’ work will continue to assist developing countries to strengthen their efforts towards domestic resource mobilization, including encouraging investment but also combating tax evasion and avoidance. It will continue to emphasize the importance of effective tax systems to development, the value of international cooperation in achieving this, and the need to develop international tax norms that are shaped with the voice and participation of developing countries, yet draw upon the experience of developed countries and other interested sectors also, such as business and civil society.

Assisting developing countries to enhance their capacity to deal with both domestic and cross-border tax issues will remain one of the most important, practical and yet urgent ways to facilitate their self-sustained development. “In the longer term,” concludes Ambassador Trevor Manuel of South Africa, the Secretary-General’s special envoy on financing for development, “we should seek a world in which no country is dependent on aid. To do so, it is vital, as suggested in the draft outcome document for Doha, to strengthen the cooperation and capacity of developing countries in the area of tax collection.”

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Social equity gets a boostSocial equity gets a boost

Poverty and social impact assessments – the latest tool in the development handbook – force a rethink of the human dimensions of economic policy

Poverty is widespread around the world in large part because of the economic, social and political rights of people are routinely violated. In fact, human rights violations can be both a cause and a consequence of poverty. People living in poverty are excluded from society, and their ability to secure their own rights is particularly limited by their predicament. Poverty can be seen as a human condition of deprivation of resources, capabilities, choices, security and power necessary for the enjoyment of an adequate standard of living and other civil, cultural, economic, political and social rights.

The struggle against poverty has evolved more and more visibly into an overarching development goal of the international community. Poverty eradication, however, is not only a development goal. It is also a central challenge for ensuring worldwide recognition and realization of human rights. The international community has acknowledged that poverty is a violation of human rights and that promoting economic, social, and political rights can reduce privation.

The right tool for the job

In order to reduce poverty, tools for policy analysis need to be used that ensure development policies and projects in fact benefit the poorest. One such powerful tool is the poverty and social impact assessment. A poverty and social impact assessment is an analysis of the distributional impact of development policies and activities on the well-being of different social groups, with a particular focus on the poor and vulnerable. Impact assessments rely on quantitative and qualitative techniques, including stakeholder surveys.

Whatever the development activity, impact assessments provide a means to measure how different social groups will be affected by it. “The key issue is not to leave social development in a silo,” explains Isabel Ortiz, Senior Interregional Adviser in DESA’s Division for Social Policy and Development, “but to mainstream social impacts in all development interventions. Ultimately, what is needed are national development strategies and international agreements, for example on trade, that benefit all members of society.”

The World Bank has conducted over 150 poverty and social impact assessments in seventy-two countries over the past five years in structural, sectoral and macroeconomic policies. Such assessments are now routinely used in such countries as Kenya, Ghana, Malawi, Rwanda and Tanzania. The experience so far however, shows that the assessments are still viewed at the country level as a donor requirement, with limited national involvement in their preparation, and that funds to conduct them tend to be increasingly scarce. The assessments tend to be more frequently used in sectoral work and less in the analysis of macroeconomic policies, which can have deep and nation-state wide impacts on the poor.

For development interventions to truly benefit the poor, a wide range of alternate policy options need to be considered before any single one is chosen. Often, however, poverty and social impact assessments are applied to a very narrow range of policy options. Assessments conducted so far have cost in some cases several hundred thousand dollars each. There is an urgent need, therefore, to standardize methodologies for assessments and to develop low-cost, participative methods for their implementation. Poverty and social impact assessments should also be an integral part of poverty strategy preparation. Above all, the methodology for preparing assessments needs to be modified to reflect a human rights-based approach to development, with references to both international human rights norms as well as relevant national legislation.

Most importantly, both the process and the outcomes of the assessments should be the subject of debate at the national level in parliaments as well as in local forums involving stakeholders. Ideally, assessments need to lead to policy choices that enjoy broad-based support in the country. True national ownership of assessments would require that nationals have the knowledge and skills themselves to carry them out and to be significantly involved in them. This tends not to be the case at the present time. Many of these assessments have involved elite national or international NGOs rather than grassroots organizations of stakeholders. Both donor and domestic resources should be allocated to developing the human resources necessary for conducting social impact assessments. The further use of national personnel should also contribute to bringing down the costs of this instrument.

Poverty eradication as a human right

On 17 October, the International Day for the Eradication of Poverty, events at UN headquarters in New York and around the world will promote solidarity with people who struggle with extreme poverty every day. In recognition of the sixtieth anniversary of the Universal Declaration of Human Rights, the theme for this year's observance is human rights and dignity of people living in poverty.

Under the core human rights instruments, human beings are guaranteed among others, the rights to life, liberty and security of person, the right to the highest attainable standard of health, the right to just and favourable working conditions, the right to adequate food, housing and social security, the right to education and participation in the democratic process. Simply securing those rights for all – not only in word but in deed – would bring the world closer to poverty eradication.

The human rights-based approach to fighting poverty makes poverty reduction a legal imperative and obligation of the state, rather than mere charity, and so compels policymakers to implement strategies that allow the most vulnerable individuals and groups to escape poverty and deprivation.

The International Day for the Eradication of Poverty presents an opportunity to acknowledge the effort and struggle of people living in poverty, a chance for them to make their concerns heard, and a moment to recognize that poor people are the first ones to fight against poverty. Participation of the poor themselves has been at the centre of the day's celebration since the General Assembly first announced it in 1992. The commemoration of 17 October also reflects the willingness of people living in poverty to use their knowledge and expertise to contribute to the eradication of poverty.

While providing a platform for the poor to make their voices heard, the International Day for Eradication of Poverty will also provide an occasion to recall and raise public awareness about practical tools such as the poverty and social impact assessment which can serve to realize that human rights of those living in destitute conditions. As we pass the midpoint towards the achievement of the millennium development goals in 2015, of which halving the number of people living in absolute poverty is the most important, creating a widespread culture of poverty and social impact assessment among policymakers as well as ordinary stakeholders as a participative, nationally-owned exercise is particularly urgent.

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Time to inject new energy into global partnership for development – Ban

Time to inject new energy into global partnership for development – Ban

Secretary-General Ban Ki-moon told a gathering of world leaders and top figures from the private sector, foundations and civil society that it is time to inject new energy into the global partnership to meet the Millennium Development Goals if countries are to slash poverty, illiteracy and other socio-economic ills by the target date of 2015. “While we are moving in the right direction, we are not moving fast enough,” Mr. Ban declared as he opened the high-level event in New York on 25 September. By the end of the day, the gathering had generated an estimated $16 billion, including some $1.6 billion to bolster food security, $4.5 billion for education and $3 billion to combat malaria.

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