Helping countries to tax more

Tax havens and tax dodging by big corporations and the super-rich have generated much anger in recent years.  Most of all, they are a problem for developing countries, and they have long been recognised as such.

However, the biggest international push on developing countries at present is simply to raise more tax.  The stated purpose of this is to contribute to the huge costs[1] of the Sustainable Development Goals, which were approved by the United Nations General Assembly in September 2015.

But advocates of developing-country tax reform say more taxation is also necessary for what they call state-building.  They point out how few people in many countries actually pay direct taxes, and say this weakens accountability between a country’s government and its population.  An example is Tanzania, where in 2008 there were only about 400,000 names in the Taxpayer Identification System for a population of over 45 million,[2] whilst in 2010 under 400 large taxpayers (mostly companies) contributed about 80 per cent of government revenue.[3]

The Addis Tax Initiative

In July 2015 the aspiration of higher levels of taxation was embodied in the Addis Tax Initiative (ATI), which was launched at the third UN Financing for Development (FFD) conference in Addis Ababa, Ethiopia.  Its founding declaration included three separate commitments: for donor countries, aid recipient countries and both groups of countries together, respectively.  It is the first of these that really mattered because it alone provided a target: not to increase taxes, but to double by 2020 the value of foreign aid projects in this area (mainly to help administrative capacity-building).

But this did not go down well in all quarters, as tax justice campaigners saw it as a diversionary tactic.  Their demands were not about the SDGs but for new global tax rules to be determined by all countries together – not just the rich ones, which were already developing rules under the auspices of the Organisation for Economic Cooperation and Development (OECD).

Forced financial inclusion

Besides, in many countries – and not just the very poorest – most people have insufficient income and wealth to allow for any significant increase in their tax payments.  So where reforms concentrate on taxes on income or consumption, they can look like a form of forced inclusion in the financial system. That is not unlike the taxes used by colonial administrations to force people on to the labour market.

If it succeeds in increasing tax revenues, this aid could also enable developed countries eventually to cut back on aid to developing countries – or alternatively, to reduce the latter’s unhealthy dependence on aid, depending on your point of view.  That dependency is huge: for example, in 2017 net receipts of foreign aid were equal to 71 per cent of central government expenses in Mali and 76 per cent in Mozambique, while in Malawi they exceeded government expenditure by 28 per cent.  Where few people pay direct taxes, this effectively makes governments more accountable to foreign donors than their own citizens.

Nevertheless, most developing countries’ tax revenues are well below the levels found in developed countries.  Among the ATI’s developing-country members in 2016, tax was worth on average just 15 per cent of gross domestic product (GDP), while the average in the OECD countries was 34 per cent.[4]

Old warnings about revenue

There were warnings about this during the period of decolonisation.  In 1963 the economist Nicholas Kaldor wrote this advice (using the terminology that was current at the time):

The importance of public revenue to the underdeveloped countries can hardly be exaggerated if they are to achieve their hopes of accelerated economic progress…  foreign aid is likely to be fruitful only when it is a complement to domestic effort, not when it is treated as a substitute for it.[5]

But most newly independent countries were more interested in nation-building – creating a sense of nationhood and replacing European officials with national ones – than state-building.  Foreign aid was readily presented as a way not only to pay for services but design them, and it filled the revenue gap instead.

At best a guarded welcome

The jargon name for this push for more taxation is Domestic Resource Mobilisation (DRM) and as a broad aim, it is widely shared among donors.  However, it has met, at best, a guarded welcome from potential beneficiary countries.  In 2016 there were 98 developing countries with DRM projects in place, but by now only 23 have joined the ATI itself.  The ATI’s monitoring report for 2015 commented drily, ‘Other countries have refrained from joining as their current political priorities lie elsewhere too or the topic of domestic revenue mobilisation is considered a highly sensitive issue for such a visible commitment.’[6]

There has been foreign aid for improving tax administration since at least 1985: Tanzania has been in more or less continuous receipt of it ever since.  Most such aid goes to countries which – like Tanzania – have always been major aid recipients, and not necessarily those that need it most.  But even there it has been very patchy.  Thus, in 2016 Ghana received US$18 million worth of aid for DRM, but Ethiopia – one of Africa’s largest countries – got no more than US$1.8 million and its little neighbour, Djibouti, none at all.  The US$11 million worth of this aid received by Tanzania in 2015 came in the form of 13 projects from seven donor countries – Canada, Finland, Germany, Japan, Norway, the UK and the USA.

Even without such an evident risk of duplication, it is not clear whether this aid is effective, even in its own terms.  After 30 years of such assistance, Tanzania’s tax revenue was still only worth 12 per cent of its GDP in 2016.[7]

Sidestepping the issues

However, an urgent need to tackle corporate tax dodging remains.  In some DRM programmes (such as Norway’s) it is one of the ways pursued to raise more revenue.  But as long as the rules of corporate taxation are determined by the countries that transnational corporations come from, it will fall short of that need.

The OECD’s own package of measures to tackle tax dodging was ‘delivered’ in October 2015 and developed by 44 countries, including every member of the OECD and the Group of 20[8] plus an expanded ‘inclusive framework’ of 85 more.[9]  Taken together, these 129 countries are said to represent ‘more than 90% of the world’s economy and more than 75% of the world’s population.’[10]

But the final decisions were left in the hands of the 44 richest and most powerful countries.  Meanwhile, the problems are most acutely felt precisely in those other countries which have a quarter of the population but only 10 per cent of the world’s output.  Above all, it is that quarter of the planet that the SDGs were set up for, and their voices need to be heard.  The ATI effectively sidesteps these issues and can even be seen to perpetuate a global system that is inequitable and flawed.


[1]  Estimated at US$5-7 trillion per year until 2030.  See United Nations (2018), ‘Financing for SDGs: Concept Note,’ New York, www.un.org/pga/72/wp-content/uploads/sites/51/2018/05/Financing-for-SDGs-29-May.pdf (March 2019), citing UNCTAD, World Investment Report 2014, Geneva.

[2]  Fjeldstad, O.-H. (2013), ‘Taxation and Development: A review of donor support to strengthen tax systems in developing countries,’ Helsinki: UNU-WIDER, Working Paper no. 2013/010, www.wider.unu.edu/sites/default/files/WP2013-010.pdf (March 2019), p. 10, citing O.-H. Fjeldstad and K. Heggstad (2011), ‘The Tax Systems in Mozambique, Tanzania and,Zambia: Capacity and Constraints,’ Bergen: Chr. Michelsen,Institute.

[3]  Fjeldstad (2013), p. 10.

[4]  Addis Tax Initiative (2018), ‘ATI Monitoring Brief 2016: ATI Commitment 2,’ Berlin: International Tax Compact, www.addistaxinitiative.net/documents/2016_ATI_Monitoring_Brief_2.pdf, p. 8; K. Markensten (2018), ‘Sweden’s Development Support to Tax Systems,’ Stockholm: Expert Group for Aid Studies (Expertgruppen för Biståndsanalys): April, https://eba.se/wp-content/uploads/2018/04/Taxes-Markensten-Webb.pdf, p. 9; and Ministry for Foreign Affairs of Finland (2018), ‘Finland’s Development Policy Results Report 2018,’ Helsinki: https://um.fi/documents/35732/0/UM+KPR+2018+ENG+WEB.pdf/944cf817-9d4a-43ca-07a7-2aebd6053801, p. 37 (all visited in March 2019).

[5]  Kaldor, N. (1963), ‘Will Underdeveloped Countries Learn To Tax?,’ Foreign Affairs, Vol. 41, No. 2 (Jan., 1963), pp. 410-419, www.jstor.org/stable/20029626 (January 2019), p. 410.  Cited in Fjeldstad (2013), p. 2.

[6]  Addis Tax Initiative (2017), ‘ATI Monitoring Report 2015,’ Berlin: International Tax Compact, www.addistaxinitiative.net/documents/Addis-Tax-Initiative_Monitoring-Report_2015_EN.pdf (March 2019), p. 26 (emphasis in the original).

[7]  Addis Tax Initiative (2018), p. 9, Fig. 2.

[8]  OECD (2017), ‘Inclusive Framework on BEPS: Progress report July 2016-June 2017,’ www.oecd.org/tax/beps/inclusive-framework-on-BEPS-progress-report-july-2016-june-2017.pdf, p. 3 (March 2019).

[9]  These are listed by the OECD at www.oecd.org/tax/beps/inclusive-framework-on-beps-composition.pdf (March 2019).

[10] Fung, S. (2017), ‘The Questionable Legitimacy of the OECD/G20 BEPS Project,’ Erasmus Law Review, No. 2, December, doi 10.5553/ELR.000085, www.erasmuslawreview.nl/tijdschrift/ELR/2017/2/ELR_2017_010_002.pdf, p. 76 (March 2019).

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