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The American writer Lewis Mumford, faced with a series of challenges, said that he was 'very optimistic about the possibilities but pessimistic about the probabilities'. Many tax authorities feel the [...]

The idea of using economic, and in particular fiscal, instruments or environmental protection is gaining support; indeed, a number of experiments have taken place in OECD countries. In particular, the [...]

Governments rely increasingly on taxes on general consumption - and on value-added taxes (VAT), in particular - to raise revenue. The percentage of GDP revenue from consumption taxes has doubled [...]

How do tax measures affect the environment? And what tax regime can best promote environmental protection without damaging production? The OECD has just published a report on taxation and the [...]

Can different corporate tax regimes co-exist in a world where the globalisation of business activities has increased and where most non-tax barriers to international flows of capital, services and technology [...]

Taxpayers' Rights and Obligations Governments grant tax authorities wide powers to enforce taxation. These measures are necessary to ensure that all taxpayers pay the correct amount of tax. Non-compliance is [...]

Direct investment by foreign companies can play an important role in helping the former Communist countries evolve toward a market economy. It can supply them with scarce capital and bring [...]

Options for Tax Reform What tax reforms are currently underway or proposed in central and eastern Europe? Can they be compared with trends in OECD member countries? And what role [...]

People in developed economies struggling to close burgeoning deficits incurred in the crisis by raising taxes or cutting spending could be forgiven for thinking that developing countries are concerned with the same priorities. But even in good times, dealing with fiscal challenges is an ordeal. Forget about tax rates or tranches, poor countries often quite simply lack the resources and capacity to build effective tax-collection systems. Despite some recent improvements in revenue-raising efforts, half of sub-Saharan African countries still mobilise less than 15% of their GDP in tax revenues, as against an average of around 35% in OECD countries and 23% in Latin America. This makes it difficult for the state to function properly, let alone to deliver on wider roles, such as social services or a better business environment. Developing countries know that, for their economies to grow and to attract business and jobs, and ultimately eliminate poverty, they must build capacity, strengthen infrastructure, combat corruption and develop transparent financial systems. They also need to work on a global level if they are to retain their already scarce resources by combatting illicit financial flows and reduce the impact of tax havens. Tax revenue is central to achieving all these objectives. It is about providing a stable and predictable fiscal environment to promote growth and, in the longer term, reducing dependence on development aid. Taxation is also about "good governance", because tax systems work as vehicles for enhancing state-society relations and improving public accountability. In other words, how taxes are raised matters as much as how much. What is more, the evidence shows that reforms which begin in tax administration may inspire the reform process in other parts of the public sector, which would be good news for those developing countries wishing to jumpstart their reform efforts. Making tax systems work is easier said than done. Attitudes have to be changed. Ordinary people may be unwilling to pay tax, frequently reflecting an accurate perception that officials themselves may be corrupt, and that governments consistently misuse public funds. Elites are equally hard to tax and may be able to use havens or evade taxation. It is also difficult to collect tax from low-income, agrarian economies with large informal sectors or to avoid coercion to raise those taxes by local officials. The external environment also poses new challenges. There has been an international shift away from taxes on trade, and this has added to the problems of domestic revenue-raising (African countries typically rely for more than 40% of their revenue on trade taxes). Striking the right balance between an attractive tax regime for investment and growth, and securing the necessary revenues for public spending is a key policy dilemma. Globalisation may also exacerbate fiscal problems, as internationally mobile capital becomes more difficult to tax. Large firms and investors have increased their bargaining power over governments, forcing a "race to the bottom" among developing countries competing to provide the most attractive tax incentives. At the same time, governments are under pressure from trading partners and local citizens to ensure their tax systems are transparent and fair. These challenges have created major new capacity needs in developing countries that the donor community has yet to fully recognise. Up to now, support for revenue and customs sectors has attracted a minimal share of aid, of around 0.1% of official development assistance annually. Donors could increase that amount and see aid as a way to kick-start the move towards sustainable tax systems. Such assistance should be seen as an investment in the future of these countries. Despite these challenges--and also because of them--now is a good time for tax reform. A shift away from indirect trade taxes in favour of VAT has made tax more visible and consequently provided a base for direct interaction (and formalisation) between state and small businesses. We now know more about how to make tax systems simpler and more transparent, about encouraging more compliance and about effective tax revenue solutions, such as broadening the base for taxation of financial sector profits rather than imposing financial transaction taxes, and so on. There is now a growing international consensus around these policy themes, backed up by an increasingly powerful and well-organised global community of tax professionals. The call for action is increasingly coming from developing countries themselves. In Africa, the creation of the African Tax Administration Forum, driven, managed and, over time, operationally funded by Africans, provides a key platform for peer learning, capacity development and dialogue on domestic and international tax issues. The other good news is that there is evidence to show that aid directed at capacity development in the revenue and customs sectors in the developing world is money well spent--an important consideration given the mixed record of technical assistance and donor fatigue in many other areas. With the economic crisis, the G8 and the G20 have made considerable advances with the assistance of the OECD, IMF and others towards addressing illicit flows, tax evasion, avoidance and tax havens. With more than 300 exchange agreements being signed in 2009, more progress has been made on this front in the last year than in the last decade. Nearly one hundred countries are now committed to transparency and exchange of information standards and are in the process of implementing them. This number will grow quickly as developing countries become directly involved in the debate. The key issue now is how developing countries can best be supported to take advantage of the more transparent international environment to strengthen their tax systems. If they can achieve that, they will strengthen their development potential significantly. Visit www.oecd.org/tax References Brautigam, Deborah, Odd-Helge Fjeldstad and Mick Morre, eds. (2008), Taxation and State-Building in Developing Countries, Capacity and Consent, Cambridge University Press, Cambridge. OECD (2009), Taxation, State Building and Aid, Factsheet, Updated December 2009, Paris. Available at www.oecd. org/dac/governance OECD (2008), Governance, Taxation and Accountability: Issues and Practices, DAC Guidelines and Reference Series, Paris. Owens, Jeffrey and Richard Parry (2009), "Why tax matters for development", in OECD Observer, No 273 June 2009, available at www.oecdobserver.org/tax For information on the OECD Global Relations Tax Programme, see www.oecd.org/tax/globalrelations For information on the OECD's work on countering tax avoidance, see http://www.oecd.org/ dataoecd/25/61/44431069.pdf Jeffrey Owens, Director, OECD Centre for Tax Policy and Administration, and Richard Carey, Director, OECD Development Co-operation Directorate

In 2008 a US senate subcommittee issued a report alleging that banks located in tax havens cost US taxpayers some $100 billion a year in lost revenue. That is a considerable leakage, especially in light of US laws, institutions and other mechanisms to help control tax evasion. But if parking money offshore leaves an intolerable dent on the legitimate tax revenues of wealthy countries, just imagine the gulf it leaves in those of developing countries where the legal and institutional apparatus to stop tax evasion is far weaker. Tax abuse not only debilitates efforts to fight poverty but also weakens the fiscal base needed for sustainable economic development. According to the World Bank, illicit flows of cash from developing economies amount to between $500-$800 billion a year. How much of this is in the form of tax evasion is unclear, but it is not unreasonable to estimate that the lost revenue is equivalent to many times global bilateral development aid and more than the national income of several poor countries combined. It is money foregone that could be spent on healthcare, education and infrastructure. It means lives are lost that could be saved. The ratio of tax to GDP in poorer countries is only about half of what it is in the developed world. Though sub-Saharan Africa is not expected to match Scandinavian levels of taxation, many low-income countries could boost their tax take by improving their fiscal systems, and by doing so reinforce development. This is not a theory, as, for example, reforms in Rwanda have shown. The Rwandan Revenue Authority, with strong international support, carried out changes to strengthen internal organisational structures and training, as well as relationships with local government. The result was a sharp increase in domestic revenue from 9% of GDP in 1998 to nearly 15% in 2005 in what has been one of Africa's better performing economies. Tax is more than just a source of revenue and growth. It also plays a key role in building up institutions, markets and democracy through making the state accountable to its taxpayers. Just as excessive tax burdens might hinder growth in wealthier countries, in developing economies a lack of tax structures is a major cause of weak, unresponsive governance. It also leads to an overreliance on aid. With tax, the public can hold governments to account for their decisions, and not feel tied to the will of aid donors. And because tax revenues are relatively predictable, governments can plan ahead with greater certainty. True, developing countries need aid and will continue to do so, but they can also use it to help strengthen their tax capacity, increase their autonomy and reduce their long-term dependence on external assistance. This idea is not new. Indeed, rich and poor country governments have agreed on the importance of tax for development for years. The 2002 Monterrey Consensus, for instance, which launched a new focus on development, recognised the key role of taxation in mobilising domestic resources--90% of domestic revenue is usually derived from tax. However, recognising the importance of tax is one thing, improving its impact and operation is another bearing in mind cultural barriers, institutional weaknesses, and corruption, as well as international factors including capital flight, aggressive tax planning and trade pressures. Consider tariffs, which many African countries rely on for over half of their government revenue. Though opening up trade is expected to bolster long-term economic growth, countries participating in initiatives such as Doha are required to cut their tariffs. This presents a major challenge to maintaining current revenue bases, let alone increasing them. In other words, trade talks are more than just about reducing tariffs and subsidies to improve market access, but about tax systems too. Before removing tariffs on cross-border trade, governments must feel assured that alternative sources of revenue are already in place. This is a complex task, which is why weak tax administrations must be strengthened. Corruption is just one major obstacle. Developing countries have the misfortune to have tax systems run by poorly trained and underpaid officials working in antiquated administrative structures, often still based upon the old colonial models, with their separate departments to deal with income and consumption taxes. A dramatic improvement in these administrations is needed if developing countries are to move beyond the poverty trap, with the confidence to reduce tariffs and carry out reforms, such as broadening the tax base. Improvement requires independent revenue services led by strong visionary tax commissioners, working with better paid officials within an integrated administration. It requires clear direction and focus including risk management systems that strike a balance between enforcement and taxpayer service, as well as between public and business demands. These improvements will be extremely hard to achieve without renewed and carefully targeted efforts on the part of aid agencies and civil society groups, as well as donor governments, to support projects aimed at improving tax capacity in poorer countries. In 2006 less than 0.1% of aid went into the tax area. If development is to take off in the years ahead, this ratio will have to be dramatically increased. Aid used in this way can provide the seeds for African-driven development. The recent initiative of African tax commissioners from 30 countries to create an African Tax Administration Forum deserves strong support. This is an initiative designed by Africans, for Africa with bilateral and multilateral donors, including the African Development Bank and the OECD, playing a supportive role. The International Tax Dialogue-a grouping of the EU, IMF, Inter-American Development Bank, World Bank, the OECD and the the UK's Department for International Development--can also help co-ordinate donor efforts and provide benchmarks for measuring and guiding progress among tax administrations. This work would be reinforced if the UN and more national aid agencies joined the grouping. Strengthening and improving tax administration will not happen overnight. In the meantime, the pressure on tax havens must continue. Tax havens which have no or nominal taxation and lack transparency, effective exchange of information and "real activities" are everywhere, and those with wealth to invest from developing and developed countries have easy access to them. If taxes on income flowing to these jurisdictions were collected by the rightful authorities, then billions of dollars would become available to finance development. The OECD knows this, which is why for over a decade we have been leading the fight against tax havens by encouraging countries to agree to higher standards of transparency and exchange of information in tax matters. Our tax standards have achieved a global endorsement from the G20 and the UN, and implementation is moving forward (see box, page 22). There is much left to be done of course, including on the technical side. New efforts are required to develop an internationally accepted methodology to measure the actual size of the offshore sector and the precise amounts of revenue lost to tax havens too. After all, though we may have a handle on the global loss of revenue to tax havens generally, for policy responses to be effective, we need to know how much specific countries, and particularly developing countries, are losing to particular offshore jurisdictions. The global economic crisis has refocused public and political attention on the importance of defeating illicit tax abuse and improving bank transparency. It has ushered in a long-overdue public and political intolerance of regimes that flout tax laws and standards and deprive countries of their rightful earnings and assets. Properly and transparently organised tax systems are now accepted as engines of development, not constraints. Accepting this message is important for all countries, and implementing it would be a major step forward for developing countries. References * Visit www.oecd.org/tax Jeffrey Owens and Richard Parry OECD Centre for Tax Policy and Administration

In February 2009, Singapore and Hong Kong, China, undertook to bring tax transparency up to international standards and relax bank secrecy laws for tax purposes. Hot on the heels of these announcements were others from the Cayman Islands, Jersey, Andorra and Liechtenstein, and more recently we have seen Austria, Belgium, Luxembourg and Switzerland signing up to the OECD standard on exchange of information. Why is this happening now? World leaders meeting in London on 2 April called for new controls over tax havens and strict bank secrecy jurisdictions as part of the G20's response to the financial crisis. But despite the welter of recent commitments to improve tax-information sharing, there are still plenty of voices calling for the havens to be left alone, on the grounds that the advantages they offer to business and private investors are irrelevant to the financial sector reforms called for by the crisis. So is this simply a case of bullying and buck-passing on the part of the large and developed economies, or is there a genuine need to tackle what many economies increasingly see as a key faultline in the global financial system? Improved sharing of tax information is essential in a reformed global financial system. It is not that the taxation--even non-taxation-regimes of havens and secrecy jurisdictions have contributed disproportionately to the causes of the current financial crisis and economic downturn. What is at issue is the shielding of business and private investor transactions from legitimate tax scrutiny in their home country. Recent financial-sector deleveraging has been sharp and painful. Secretive tax-driven arrangements were partly to blame for the gearing up that brought about that pain. Circular, "double-dip", financing arrangements that give companies fiscal advantages both at home and offshore ensured that normal tax benefits for debt financing were magnified out of all proportion to any conceivable tax policy justification, resulting in tax subsidies for excessive debt as well as for high-risk investments that would otherwise have been unviable. Tax savings for borrowing engineered through such artificial and circular transactions clearly boosted financial sector balance-sheet and share values. But they added no real value to the global economy and served simply to further inflate global asset bubbles. Governments have long been alert to tax-avoidance opportunities from what is euphemistically known as "structured finance", but the involvement of secretive jurisdictions in complex chains of structures and transactions has often hampered their attempts to counter this distortive scandal. Tax havens are also home to the majority of the funds--mutual funds, hedge funds, private equity funds-investing in high-yield securities and highly leveraged shareholder investment that drove the pre-crisis credit boom. Investors in offshore funds are of course responsible for reporting their offshore income and gains to their own tax authorities, and there are of course reasons other than tax minimisation for locating funds offshore. But tax secrecy can tip the balance between an unattractive, taxed investment and one which is only attractive on the basis of non-taxation. Some would argue that tax is inherently distortive, and that all tax systems are far more complicated than they should be. It's true that most countries' tax systems have an inbuilt bias to companies financing themselves with debt. It's also true that complexities and differences between many countries' tax systems offer opportunities for tax arbitrage that can distort investment decisions, irrespective of the level of transparency. And it may be that administrative burdens, complexity, or perceived ineffectiveness of some tax systems encourage taxpayers to evade or avoid tax, with or without the use of tax havens. However, if so many countries are now signing up to OECD's tax information exchange standards, it is because they recognise that with the privilege of participation in the global financial market comes the responsibility of cooperation and transparency-not just for the benefit of the tax revenues of other countries, but also for the stability of the financial sector as a whole. All countries have a responsibility to use their tax systems to promote, and not distort, sustainable economic growth, and to bear down on tax-driven distortions in the economy, while addressing local public expenditure needs. That is a tall order for any country, even within its own tax system. At an international level, it calls for an open, co-operative approach. It is inconceivable that any country could be part of a future stable, global financial market without a clear commitment to that approach. This is the message that came out clearly from the G20 summit, and that the OECD will continue to promote. * The views expressed in this article are those of the author and do not necessarily reflect those of the OECD or its member countries. Jeffrey Owens, Director OECD Centre for Tax Policy and Administration

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