In recent years, issues around tax base erosion, in connection with globalization and the aggressive tax planning by multi-national firms, have attracted international attention and media coverage. More recently, the Panama papers have revealed a clear connection between tax avoidance, tax evasion and, more generally, illicit financial flows. These dynamics undermine developing countries’ efforts to build state capacity and enforce a legitimate contract with taxpayers.
The global tax agenda has mainly focused on these issues from the fiscal revenue generation perspective (tax base erosion and tax rate “race to the bottom”) and efficiency viewpoint (uncertainty of tax regimes for foreign direct investment and long term profitability of firms). Less attention has been given to how these tax trends are affecting developing countries and who the winners/losers are at the global level.
The objective of this one-and-a-half day conference is to discuss the issues around global “tax wars” affecting developing countries, draw on related areas in global taxation and shed light on topics that need more analytical work. It will feature lead experts from a variety of backgrounds and experiences, and include discussions of how improved design and enforcement of tax policy, as well as better tax cooperation, can help protect developing countries from negative consequences of these trends. The conference will also explore global solutions to global tax cooperation challenges.
As governments in developing countries – which are often the host and not the home of multi-national firms – see corporate income tax revenue foregone, they try to raise other taxes on the rest of the economy, including on lower income segments of the population. However, they often face structural challenges due to their own socio-economic and institutional constraints, aggravated by the perception that the richest individuals and large companies are not complying with their tax obligations, which further weakens their credibility.
In addition to facing corporate income tax avoidance and evasion, governments in developing countries also have pressure to reduce the scope and rates of taxes on personal income, capital gains, real estate and other wealth assets. As they struggle to use these tax instruments more widely to generate additional fiscal revenues by better covering personal income and wealth in the tax base, they find social, political and administrative hurdles difficult to overcome at the national level.
Initiatives to enhance domestic resource mobilization (DRM) efforts in developing countries, in order to meet the Sustainable Development Goals (SDGs), could fail if those with higher ability to pay taxes, firms and individuals, do not contribute their fair share. This could also entail a bias towards low/middle income taxpayers who often do not own capital or physical assets, but only have their human capital and labor skills to offer, further increasing the perception that tax systems hurt the poor. In addition, lack of transparency enforcing tax rules on those with higher ability to pay would only contribute to aggravate this perception of unfairness. Developing countries alone will not be able to meet their DRM objectives without global solutions to these challenges that are largely beyond their control.
On the other side of the spectrum of tax “war“ pressures emerging from avoidance and evasion schemes, new consensus seems to be emerging to globally enforce corrective tax instruments, on goods whose consumption creates social negative externalities, such as tobacco and CO2 emissions. Tobacco taxes could represent a win-win for developing countries in terms of improving public health, while generating additional fiscal revenues. Similarly, carbon taxes could help mitigate climate change and contribute to reduce the welfare divide between developing and more advanced countries. In both cases, regional and global tax coordination and tax cooperation will be necessary to achieve those ambitious goals.