Domestic resource mobilization and taxation were crucial to achieving sustainable development, several panellists stressed today at a joint meeting of the Second Committee (Economic and Financial) and the Economic and Social Council.
The discussion, “Domestic Resource Mobilization: Where to go after Addis?”, spotlighted taxes as a stable source of finance and citizen participation in State accountability. Tax evasion and tax loopholes hampered development efforts in both developed and developing countries. The meeting, which also included an interactive discussion with Member States, underscored the need for strong cooperation between different organizations in the area of taxation.
The panel, presided over by Second Committee Chair Andrej Logar (Slovenia) and Economic and Social Council President Oh Joon (Republic of Korea), who also delivered opening remarks, heard an introductory speech from Alexander Trepelkov, Director of Financing for Development, Department of Economic and Social Affairs, as well as the following panellists: David Rosenbloom, Director of the International Tax Programme at New York University; Victoria Perry, Chief of Tax Policy, International Monetary Fund (IMF); Blanca Moreno-Dodson, Lead Economist for Tax Policy at the World Bank; Gail Hurley, Policy Specialist at United Nations Development Programme (UNDP); and Tatu Ilunga, Senior Policy Adviser at Oxfam America. Eric Mensah, Assistant Commissioner of Ghana Revenue Authority and Member of the United Nations Committee of Experts on International Cooperation in Tax Matters, joined the panel via video link from Ghana.
In his opening remarks, Mr. Logar emphasized that all sources of finance — public and private, domestic and international — would be needed to achieve the Sustainable Development Goals. Tax systems should make the task of paying taxes for those who honestly sought to meet their tax obligations “as painless an experience as possible”. Many developing countries had been able to significantly improve their tax-to-GDP (gross domestic product) ratio; however, that average ratio for low-income countries was still estimated to be around half of that of member countries of the Organisation for Economic Co-operation and Development (OECD).
Mr. Joon said the challenge was that more and more countries were hindered in their efforts to collect the taxes owed to them. Multinational companies and individuals had become increasingly aggressive in their tax planning and policies. As a result, tax evasion and avoidance was rampant. Recent estimates by the OECD showed that between 4 and 10 per cent of global corporate income tax revenues were lost annually, which translated to between $100 and $240 billion. The loss of corporate income tax was more strongly felt in developing countries. Curbing tax evasion and avoidance depended on cooperation between countries. Tax evaders and avoiders thrived on international gaps in cooperation and the lack of information exchange between countries.
Delivering the introductory statement, Mr. Trepelkov highlighted the importance of inclusive cooperation among tax authorities and technical assistance to strengthen the tax systems of developing countries. On extractive industries taxation, the United Nations Tax Committee had recently approved guidance on tax treaty issues and capital gains, including indirect sales. The Committee also discussed a draft code of conduct to promote transparency and international cooperation in addressing tax base erosion. Turning to the work of the Department of Economic and Social Affairs, he said its Financing for Development Office had carried out a small programme of capacity development in international tax cooperation. The programme had also developed practical tools, such as the United Nations handbook on protecting and broadening the tax base of developing countries.
Opening the panel discussion, Mr. Rosenbloom said that, for nearly 100 years, it had been well recognized that jurisdictions had a legitimate right to tax by reason of either the source of tax base or the residence of the taxpayer. It was widely accepted that taxation was appropriate as a means of seeking contribution to defray the expenses of Governments from which taxpayers had received benefits. In that regard, income taxation was the fairest form of taxation. The United Nations was best qualified to assist developing countries to defend their interests and deal responsibly with taxpayers from outside their borders whose affairs fell within those countries’ tax jurisdictions. The United Nations should involve itself directly in improving the skills of developing country tax policymakers and tax administrators.
Ms. Perry outlined IMF tools to assist lower-income countries in their tax administration and policy. Online tools and products could enable the international community to rally around a series of ideas to assist developing countries with their tax needs. South-South cooperation was critical in domestic resource mobilization, including regional and country-to-country cooperation. Developing States should work together to bolster tax bases and not compete to undercut them. Base erosion and profit shifting solutions could only be applied to developing countries with modifications. While cross-border tax issues were important, other items such as revenue administration, the effectiveness of value added taxes and proper enforcement of personal income taxes should be addressed.
Ms. Moreno-Dodson said that developing countries on their own could not resolve tax issues. The momentum now was ideal to work together, she said, crediting the Sustainable Development Goals for harnessing international cooperation on financing for development issues. The World Bank stood ready to gather different voices and tools to design a plan that would address domestic tax issues. The plan was to allocate more resources to help developing countries reinforce their capacity and improve dialogue with multinational and international institutions. Taxes on pollution, corrective taxation and telecommunication taxation could be new sources of funds and resources, she said, emphasizing the role of improved income distribution. It was important to come up with practical and collective solutions, rather than unilateral proposals. The focus must be on reinforcing partnerships between regional tax organizations and enhancing vital South-South relationships.
Ms. Hurley discussed the UNDP’s recently launched “Tax Inspectors Without Borders” programme, which focused on helping developing countries raise domestic resources. The initiative centred on increasing capacity in auditing and related issues, which was especially problematic in countries with weak administrative tax departments. Tax audit experts would not just be deployed from developed States, but also from developing countries, reinforcing South-South cooperation. Pilot programmes had shown that tax revenue could be increased. UNDP had a country presence and a local understanding of country-specific needs. While domestic resource mobilization was the most important source of finance, it was vital to take into account challenges faced by least developed countries, landlocked developing countries and small island developing States. The key investments that those countries needed to make were expensive and unlikely to attract private investment.
Mr. Ilunga said that, while the OECD Action Plan on Base Erosion and Profit Shifting was a first step towards addressing the taxation issues of developing countries, more needed to be done, such as increased capacity-building and international cooperation on tax issues. Administrative skills for revenue collection and increased administrative capacity for fiscal administration were important as well. A key component of capacity-building was political will and there was no one-size-fits-all solution. The action plan did not go far enough. Among its shortcomings was that multinational companies only had a reporting requirement in countries where they had headquarters. Developing States that had no tax agreements in place with the United States, for example, would have no access to information. As the international community got closer to the upcoming G20 meeting, a second-generation reform process should be developed to address those issues not covered by the Action Plan.
Mr. Mensah said that capacity-building was necessary in the areas of tax audit, transfer pricing and treaty negotiations, as developing countries needed the technical capacity to engage in international tax matters with the players on the international tax scene. From personal experience, he and his team of treaty negotiators had “stumbled from one negotiation to the other, literally giving away taxing rights on a silver platter”, but had benefited from capacity-building programmes by the international tax community, and were thus more able to effectively engage the system. The Action Plan was a “brilliant” initiative for tackling tax avoidance and evasion, but, while developing countries might benefit from the spin-off, that was not the Plan’s aim. On the OECD Automatic Exchange of Information, no “meaningful benefit” would be achieved until developing countries had the capacity and systems to tap into the global standards.
In an ensuing interactive discussion, the representative of Trinidad and Tobago, on behalf of the Caribbean Community (CARICOM), said that Governments in his region were faced with the challenge of raising tax revenue while simultaneously attracting foreign direct investment through fiscal incentives. Over the next 15 years, CARICOM planned to work towards tax reform with the goal of creating more efficient tax systems. To that end, it was critical to improve transparency within the international financial system.
The delegate from South Africa, on behalf of the “Group of 77” developing countries and China, said that illicit financial flows had an adverse impact on domestic resource mobilization and the sustainability of public finances, particularly for African economies. Emerging economies lost $6.6 trillion in illicit financial flows between 2003 and 2012, he said, pointing out that the result was billions lost in potential tax revenues.
The representative of the European Union mentioned several plans and approaches to support domestic tax recovery. The “Collect More, Spend Better” initiative focused on increased domestic revenue mobilization, closing the tax revenue gap and loopholes, and broadening the tax base.
The representative of Maldives, on behalf of the Alliance of Small Island States, said reforming the international financial and monetary systems was a priority. Small island developing States were highly indebted due to structural factors and required greater global cooperation in fiscal policies.
Ethiopia’s delegate said that structural transformation and economic diversification were central to domestic resource mobilization. Comprehensive national policies allocating resources to economic development projects with a maximum impact on poverty eradication were important.
The representative of the United Kingdom said multinational companies should pay taxes where they generated their profit and revenue. Domestic resource mobilization was a complex and political issue which involved national control of economic policy, he said.
Niger’s delegate pointed out that some countries had limited economic opportunity and required investment from developed countries.
Addressing the delegates’ statements and concerns, Mr. Rosenbloom said developing countries needed specific on-the-ground help. He had witnessed “too many developing countries receive assistance that really had not assisted them at all”. Ms. Perry said the world had come a long way in the past three years in recognizing its tax arrangement problems — they were not organized from the top nor overseen by anyone. Ms. Hurley emphasized that one source of finance did not substitute for another and there was much to build on, especially in terms of enhancing cooperation among key stakeholders. Mr. Ilunga said it was important to take note that citizens in industrialized countries were also victims of tax dodging and emphasized the need to raise awareness of that.
In closing remarks, Mr. Logar said the Addis Ababa Action Agenda had elevated taxation as a key development issue. Multinational companies were making use of international tax arbitrage and aggressive tax planning, which undermined revenue administration efforts and could only be tackled in a collective manner by balancing the flow of information between countries to counter tax avoidance.
Mr. Joon said the meeting had highlighted the contributions of different international organizations in helping developing countries build capacity in tax matters. The call for international tax cooperation to be universal in approach was underlined several times. It would be an important guiding light to the Economic and Social Council and the United Nations Tax Committee in their work over the coming years.