The EU Position in Taxation and Development

Abstract

Tax is a core part of a state building and one of the most visible signs of the social contract between citizens and the State. Fair, transparent and efficient tax systems demonstrate good governance and shape government legitimacy by promoting accountability of governments to tax-paying citizens and by stimulating effective state administration and good public financial management. Supporting developing countries in mobilizing domestic resources and fighting tax evasion is crucial in efforts to eradicate poverty and to achieve the Millennium Development Goals (MDGs) as well as help developing countries reduce dependency on foreign assistance. According to a Norwegian Government Commission, it is estimated that in 2010 illegal money flows from developing countries amounted to a total between 640 and 980 bn US $, thus at least 7 times higher than the Official Development Assistance. This huge volume of illegal cross - border financial transactions is facilitated by tax systems vulnerable to harmful tax practices, various incentive systems and the attractiveness of an increasing number of “tax havens” and other non - cooperative jurisdictions (many of them having a “developing country/ emerging market” status and, therefore, eligible to receive Official Development Assistance ). “Tax havens” are commonly understood to be jurisdictions which are able to finance their public services with no or nominal income taxes and offer themselves as places to be used by non-residents to escape taxation in their country of residence. The OECD has identified three typical confirming features of a “tax haven”: - lack of effective exchange of information, - lack of transparency, and - no requirement for substantial activities. In addition they often offer preferential tax treatment to non –residents in order to attract tax bases from other countries. “Tax havens” therefore compete unfairly and make it difficult for non -” tax havens” to collect a fair amount of taxation from their residents. In the developing countries the average tax- to- GDP ratio ranges between 10 to 20% as compared to 25 to 40% in more advanced economies. Broader, more effective, transparent and well managed tax systems are needed. Tax issues and more effective tax regimes and administrations are also central to the implementation of the “Monterrey consensus” on Development Finance by which developing countries committed themselves to improve their tax efforts in order to mobilize the domestic resources required for poverty reduction.