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Mobilising domestic resources
            Martin Hearson

  Pre-meetings of the Global Thematic
  Consultation on Governance and the
           Post 2015 Agenda

 Pan African Parliament, February 2013
Tax is already the biggest source of
       public finance in Africa




         Tax          Aid
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.
Domestic resource mobilisation
•   Large unrealised potential
•   Sustainability
•   Sovereignty
•   Governance benefits
•   Accountability
•   Redistribution can reduce inequality
•   More effective tax systems improve
    environment for businesses
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
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.
$1.5 trillion annual corporation tax revenue
         distributed by income group
                       Low
                        7%
                                Lower middle
                                   15%




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




                                   Upper middle
                                      12%
      High
      66%
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)
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
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
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.
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
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)
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
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
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
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

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Ideas for a post 2015 settlement on mobilising domestic resources

  • 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