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Gurria Confirms Importance Of Tax In Mobilising Resources For Development

by Ulrika Lomas,, Brussels

04 December 2008

Speaking recently at the International Conference on Financing for Development, Organisation for Economic Cooperation and Development Secretary-General, Angel Gurría stressed the important role played by taxation in this area, somewhat unsurprisingly, given the Organisation's traditional stance on all matters tax-related.

He told those attending the conference that:

"One of the challenges we face relates precisely to the degree to which the world economy has become integrated. This makes it very difficult to talk about 'mobilising domestic financial resources' without also talking about 'international trade', or about 'international resources' without also discussing 'coherence'."

And continued:

"On the face of it, taxation and domestic resource mobilisation might be low on the list of priorities, given the current crisis. However, even in these difficult times I see three compelling reasons for putting taxation at the centre of the domestic financial resource agenda."

"First, taxes provide the long term financial platform for sustainable development. Taxes are the lifeblood of state services."

"Second, taxation matters for effective state-building. Bargaining between governments and taxpayers plays a central role in the emergence of democratic governance. Citizens want more responsive government. They want the state to be accountable for its actions or inaction and taxes are the vital link between governments and societies. Improved tax relationships between state, businesses and society have provided a strong underpinning for broad-based growth and state accountability in East Asia, for example."

"I am not arguing for tax hikes across the developing world. How and from whom tax is raised matters, not just how much. One can easily imagine that a broad-based but low rate tax system is effective in resource terms. And a simple, fair and transparent system that operates with broad social consensus is important for good governance and compliance."

"Third, taxation combined with economic growth is the antidote to long term reliance on aid. As my friend Trevor Manuel has famously said, the correct spelling of the word ‘aid’ is ‘T-A-X’."

Mr Gurria went on to suggest that there is a need to be realistic about the challenges, as poor countries often lack the resources and capacity to build effective tax collection systems, and developing the institutions and the human capacity to implement tax policy in a way which enables transparency and certainty is often challenging, and is often threatened by corruption.

He observed that:

"It may also be difficult to collect taxes from low income, agrarian economies with large informal sectors, and to avoid coercion, especially at local level. Moreover, the poor often already pay an equivalent of tax in the form of bribes and informal fees."

"Citizens may be unwilling to pay tax, if they perceive unfairness in taxation through special exemptions (such ‘tax expenditures’ are very high in Latin America for example) and/or partial implementation. They also have, or believe to have a clear perspective of use or misuse of public funds. The degree of fiscal legitimacy directly reflects the confidence that the people show in their government’s performance in collecting and spending tax revenue. The credibility of the tax system suffers when expenditure is regressive and widens rather than narrows the gap between rich and poor."

"The role of taxation as an agent of equality and fairness is critical. There is a direct relationship between the quality of expenditure and the readiness of citizens to meet their tax obligations. Hence, expenditure must be better targeted to improve access to services like water and sewerage, health care and education, for the broad population base."

The OECD chief went on to take a – not entirely unexpected – pot-shot at offshore finance centres, which he dubbed 'tax havens', arguing that:

"Tax havens deprive governments of revenues needed for hospitals, schools and roads, forcing bonafide taxpayers to pick up the tab. This applies as much for developing countries as for developed ones. If developing countries are to take firm action to stop this loss of revenue and make the most effective use of their domestic financial resources for development, then they must have the tools to protect their tax bases from capital flight and international tax evasion. (And let me commend the UN, with assistance from countries such as France, Germany, Norway and South Africa, for putting the issue at the centre of our discussion over the next two days)."

He further claimed that:

"The OECD has developed standards of transparency and exchange of information that have been universally accepted. The implementation of these standards will allow developing countries to improve taxation of their own residents’ income not only in respect of undeclared foreign assets but also of domestic assets, since they reduce the attraction of shifting assets abroad. At the same time, it will force offshore financial centres to compete on the basis of services provided rather than secrecy offered."

Returning to domestic tax issues within developing countries, Gurria stated that:

"Change in developing countries will only come when driven by people in developing countries. There is an example of a landmark initiative which deserves donor support. The African Tax Administration Forum is currently being developed by a Steering Group of African Tax Commissioners from Botswana, Cameroon, Ghana, Nigeria, Rwanda, South Africa, and Uganda. It is African led, based on African assessments of African needs. It arose out of a meeting of 30 African Tax Commissioners with OECD officials, sponsored by OECD donors and the African Development Bank, which took place in Pretoria last August."

And suggesting a way forward, the OECD chief argued that:

"We need to develop a renewed focus on enhancing domestic revenues through broadly-based taxation, alongside higher aid flows at least in the medium term. Experience shows that this will both increase and enable greater predictability of revenues. It will also help ensure that aid-funded investments are sustainable, and prepare for gradual exit from aid in the long term."

"Promoting demands in civil society for fair and transparent tax services strengthens the practical relationship between state and society. Support by donors for the development of a new Taxpayers Association in Kenya has had promising results."

He added:

"We need to help countries retain and tax the profits attributable to them from multinationals, to increase transparency and to implement internationally agreed standards on exchange of information to counter tax evasion and other abuses."

"We need to expand co-operation between international organizations active in the tax area particularly the UN Committee of Tax Experts, the IMF, World Bank and the OECD itself to enable us to work together with developing countries to improve tax policy and revenue administration, which will diminish reliance on aid in an uncertain climate."

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