Tax and development presentation at UNDP conference, Johannesburg, February 2013

1. Mobilising domestic resources
Martin Hearson
Pre-meetings of the Global Thematic
Consultation on Governance and the
Post 2015 Agenda
Pan African Parliament, February 2013

2. Tax is already the biggest source of
public finance in Africa
Tax Aid

3. An idea of the potential
• Tax/GDP across low & lower-middle income
countries grew 0.23% per year during 2000s.
• It can go down as well as up…average among
those that increased is 0.44%.
• For all developing countries (excl. India &
China) that would be an increase of $18.5bn
each year…total of $1.02 trillion over 10 years.

4. Domestic resource mobilisation
• Large unrealised potential
• Sustainability
• Sovereignty
• Governance benefits
• Accountability
• Redistribution can reduce inequality
• More effective tax systems improve
environment for businesses

5. Limitations of domestic resource
mobilisation
• Tax and growth are mutually dependent
• Tax potential does not correspond to revenue need
– It is quite low for some countries
– Tax potential as a criterion for aid?
• Raising revenue to be balanced with distributional
impact (income, region, gender).
– Progressive taxes place a greater proportional burden on
those who have more, but how to define and measure
this? Individual taxes, all taxes, tax and spending?
• Political risk: DRM is a way out for donor countries
• Quid pro quo: budget transparency/monitoring

6. A word about corporation tax
• Developing countries are already twice as
dependent on CIT than developed countries.
• Tax avoidance, illicit capital flight, tax
incentives all cost large amounts of revenue.
• BUT, what about the rules allocating taxing
rights? They determine the global distribution
of the tax base of a multinational company.

7. $1.5 trillion annual corporation tax revenue
distributed by income group
Low
7%
Lower middle
15%
Upper middle
12%
High
66%

8. $1.5 trillion annual corporation tax revenue
distributed by income group
Low
7% India & China = 12%
Other LIC middle = 10%
Lower + LMIC
15%
Upper middle
12%
High
66%

9. Challenges for a radical DRM agenda
1. Understand the potential and limitations of tax
as a source of revenue for different countries.
2. Define progressive fiscal policy, reconcile with
growth.
3. Potential for a global (re)distribution of taxing
rights.
From ‘domestic resource mobilisation’ to
‘international fiscal redistribution’?

10. What might a radical post 2015
tax settlement look like?
Martin Hearson
Pre-meetings of the Global Thematic
Consultation on Governance and the Post
2015 Agenda
Pan African Parliament, February 2013

11. $1.5 trillion annual corporation tax revenue
distributed by income group
Low
7%
Lower middle
15%
Upper middle
12%
High
66%

12. What determines the size of
developing countries’ slice of the pie?
Domestic tax
policy (rates,
incentives, etc)
Tax avoidance International
& evasion tax policy
(relative to (treaties &
wealthier transfer
countries) pricing)

13. Tax treaties
• Keeps some of the
extra tax revenue
• Leaves some of it with
Part of the right to levy: the multinational
• Corporation tax
• Withholding tax
• Capital gains tax
Developing Developed
country
TAX TREATY country
• Investment
• Tax sparing clauses

14. Tax treaties
• Sub-Saharan countries have concluded over
300 tax treaties
• All tax treaties shift the balance from source
(developing) countries to residence
(developed) countries, though some more
than others
• The OECD model does so more than the UN
model

15. Transfer pricing
• Rules allocate the tax base of a multinational
based on distribution of value in the free market
• This is not a neutral concept: e.g. India and China
have started to claim more than their share
• Why follow the terms of trade, then these
disadvantage developing countries?
• Other issues may reduce developing countries’
revenue: enforcement, mutual agreement/
arbitration.

16. Transfer pricing
“[The OECD] guidelines on transfer pricing only
reflect the agreements amongst Government of
those countries that are members of OECD
(developed countries) and accordingly tend to take
care of interest of only developed countries. The
guidelines do not give right of taxation to source
countries accordingly eroding taxing rights of
developing countries.”
- Letter from Indian Government to the secretariat
of the United Nations tax committee

17. What if a post 2015 settlement
deliberately redistributed the
corporate tax base towards developing
countries?
A 1% shift might increase revenue by $10bn per
year
(Assumes 2/3rds of corporation tax revenue comes from MNCs)

18. The global governance of
international taxation
Transfer pricing Transfer pricing
guidelines Model tax
manual (no
(soft law) treaties
official status)
OECD
UN tax
committee
OECD
observers

19. The global governance of
international taxation
Transfer pricing Transfer pricing
guidelines Model tax
manual (no
(soft law) treaties
official status)
OECD
UN tax
committee
South OECD
Africa observers

20. The global governance of
international taxation
Transfer pricing Transfer pricing
guidelines Model tax
manual (no
(soft law) treaties
official status)
OECD Nigeria Ghana
UN tax
committee
South OECD South Senegal
Africa observers Africa

21. Conclusion
• Available tax revenue in developing countries is
determined by international tax rules, as well as by tax
dodging and domestic policy.
• These rules allocate the tax base of MNCs between
developed and developing countries.
• A post-2015 settlement could include a recasting of the
rules to shift the balance of taxing rights towards
developing countries.
M.Hearson@lse.ac.uk
@martinhearson // martinhearson.wordpress.com