Foreign Aid

The EU agrees: No representation without taxation

Brady Yauch
Probe International
April 27, 2010

Nobody likes taxes. That is why we demand political and economic accountability from our governments when we pay them. Now, the European Union thinks this might be a good idea for developing countries too—helping to establish a relationship between taxpayers and their political leaders is a vital step towards achieving the Millennium Development Goals, they say. Raising revenues from taxes will ensure that developing countries establish sustainable public services and ultimately lead to improved economic and political governance and a better quality of life for its citizens.

Put more simply, replacing foreign aid with tax revenues will promote a democratic society where political and economic leaders can be held accountable by their citizens. Not only should there be no taxation without representation, there will be no representation without taxation.

Read the full story below.

Further reading from Probe International:

Tax and development: promoting good governance in taxation as part of development cooperation

Why do we need a Communication on Tax and Development?

Supporting developing countries in mobilising domestic revenues and in fighting tax evasion is key in efforts to eradicate poverty as measured by the Millennium Development Goals. Increasing domestic revenue enables these countries to spend more on sustainable public services needed to achieve these goals. Efficient, fair and sustainable tax systems are also critical for state building and promoting democracy and improved economic governance.

The EU is committed to tackling the issue of tax governance in developing countries, and to drawing attention at the international level to the considerable impact that taxes have on development.

Taxation has global consequences – all over the world, governments lose billions in revenue every year because of harmful tax practices – both developed and developing countries are affected. According to a Norwegian government commission illegal money flows from developing countries were at least seven times higher than official development assistance. Plugging these tax “leaks” requires International tax cooperation and making developing countries benefit from international initiatives.

Why is it so important right now?

Developing countries have been big loosers in the economic crisis. Supporting them to increase their own revenues will help them improve the situation.

There are important reasons for sending a strong signal now:

Firstly, the United Nations MDG High Level Event to review progress on the Millenium Development Goals will be held in New York in September 2010. This provides an opportunity to take stock of progress so far on the MDGs with a view to clarifying direction up to 2015, the deadline for the MDG initiative. For this landmark event, the EU needs to have a position on the global dimensions of taxation and how it affects countries.

This Communication will feed into the preparation of a common EU position for the September event; it is part of a wider package of thematic papers on other MDG issues – food security, health, education, gender, as well as the 2010 Spring development package which will highlight progress so far towards the MDGs.

Secondly, in Monterrey in 2002 and Doha in 2008, the international community committed to stepping up its efforts to enhance tax revenues through modernized tax systems, and to combat tax evasion. To that end, in spring 2009, the Council invited the Commission to propose concrete EU action “on dialogue with, and assistance to, developing countries on promoting Good Governance in tax matters and more effective national tax systems in order to achieve development goals”. This is also a key priority of G8 and G20.

The Lisbon Treaty provides the opportunity for the European Commission to take initiatives to promote coordination on development cooperation. This Communication reflects this new environment.

Why the EU?

Tackling poverty in general and issues affecting poverty is something no one country can achieve alone. These are global challenges, and need a global response.

The EU is by far the largest aid donor in the world, accounting for over half of all official development assistance worldwide. The EU is also the world’s largest trading partner, giving it influence on the world stage.

The EU model is respected, and is based on solidarity and partnership.

What is the main focus of the Communication?

This document follows on from the April 2009 Communication on Promoting Good Governance in Tax Matters1.The latter presented concrete actions that could be taken to better promote the principles of good governance in the tax area, transparency, exchange of information and fair tax competition.

This Communication aims to improve synergies between tax and development polices, to make them more effective. It identifies the difficulties encountered by developing countries in the mobilisation of revenue through taxation, including domestic and international factors. It suggests ways in which the EU can do more and make better use of its existing funds and instruments. For example, in 2009 the Commission disbursed € 117 million and committed an additional € 49 million to support public financial management, including tax policy and administration, in developing countries. The Communication sets out a consistent approach to provide enhanced support in building efficient, fair and sustainable tax systems and administrations and in introducing tax reforms.

What actions does the Communication propose?

The Communication proposes the introduction of a more comprehensive and consistent policy approach to all aspects of taxation, taking into account the local economic situation and international environment, and the broader governance and public finance management context.

A number of actions to assist developing countries are set out, such as supporting multilateral and regional initiatives, strengthening public finance management, deepening regional integration, improving donor coordination, and encouraging participation of developing countries in relevant international fora. The following are among the main ones:

  • Making more effective the EU’s support to developing partners’ capacity to increase domestic revenue, and provide technical assistance to partner governments where necessary
  • Make the best use of its relevant dialogue and assessment tools in monitoring of domestic revenue issues and good governance commitments, and better integrate tax issues into budget support programmes
  • Increase support to international capacity development initiatives, particularly when developing international standards of tax cooperation
  • Improve regional integration and cross-border links between developing countries, and strengthen monitoring capacities in the fight against illicit financial outflows
  • Include, as appropriate, a specific reference to strengthening tax systems and to the principles of good governance in all future development cooperation agreements with third countries
  • Support the adoption and implementation of the OECD transfer pricing guidelines in developing countries, and the ongoing research on a country-by-country reporting requirements as part of a reporting standard for multinational corporations, notably in the extractive industry.

What are the next steps?

The Development configuration of the Foreign Affairs Council of 10-11 May should discuss and endorse the proposal.

The paper should guide the EU position on taxation issues in development cooperation at the UN Summit in New York from 22-24 September 2010.

Read the original document here. [PDFver here]

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