Taxation and International Policy & Institutions

Tetteh Hormeku, TWN-Africa

International Tax Academy, 1-6 Dec, 2014 Machakos, Kenya

TAX JUSTICE NETWORK-AFRICA

Introductory

• Unlike WTO, World Bank, IMF, etc, International Tax “System” is not a Coherent Regime but is a patchwork of:– multilateral and bilateral “legal” compromises around:– differential and shifting national tax traditions, principles and cultures– national and transnational economic interests and power– “community of (international) tax specialists”*, located in different a

range of inter-governmental institutions [OECD, IMF, UNDP] which have varrying degrees of power, academia, etc.

• Africa marginal in shaping this patchwork, but taker tax norms and constructs:– especially in the post-SAP years, at variance the fiscal policy

imperatives deriving from its fundamental developmental challenges

• Expressed even in some of the platforms of resistancew

Approach

• Evolution of Fiscal Policy and Tax Forms in Africa– (immediate) post-independent period;– structural adjustment decades..

• Intersection with International “regime” for international business taxation has affected key elements of this

• Elements of the Tax Justice Platform, and what can be fine-tuned for sensitivity to African-specific economic developmental (transformatory) imperatives.*

Tax and Development: A Tale 2 Paradigms

• Incentives versus Resources– Enough resources, only incentives to put them to act.– Not enough; not of the character for ready invesment; public action to

induce and mould

• Role of Govt/Public Sector in Economy, and Tax– Public Sector Supplement to Market as Primary: Or Public Sector Place

in its own right. Public and Private as Equal Players. (Ricardo (Britain) versus Kantian/Cameralist Germany

– Not simply ideological; But different paths in evolution of capitalism. And different issues at critical stages.

• Immediate post-independence period:– Period of Keynes, etc. Public Sector Role Affirmed in Economics in

General and Development Economics in Particular

Taxation as Means of Inducing Economic Development

• Public resources are necessary for economic development– Public resources for essential economic

infrastructure: education, health, communication, – Public expenditure, demand creation and

economic growth– Public Sector investment for pioneering and/or

focusing strategic economic initiative:• “pioneer capitalist state”, entrepreneural state,

economic nationalist state, developmental state

Issues in Development TaxationNicholas Kaldor

• Taxation Potential and Capacity to Tax• Taxation Potential:– Economic Surplus: How Much, and in What form?– Distribution between Private Accummulation (i.e.

investment for expanded (re)production as against luxury consumption) and Public Investment (i.e productive investment as against unnecessary and/or wasteful consumption-e.g. military, monument, and corruption

• Taxation can shape the surplus. But the forms of taxation must reflect the nature of the surplus

Taxation Potential in Underdeveloped Economies

• Per Capita Income• Actual Distribution of Income, Levels of

Inequality, related to forms of wealth: income from landed and other property v work, etc.

• Sectoral distribution of outputs-income – agric, minerals, manufacture, services, etc

• Political Economy of production and distribution in a specific economy

Political Economy

• Weight of agriculture; nature of agricultural labour and property– (plantation and export cash crop agric)– Smallholder (one acre or less) with a family of five; traditional land

tenures; territorial. Petty commodity production relations even when within cash economy

• Nature of Enterprise in Secondary and Tertiary Sectors– Preponderance of small enterprises– A few medium to large with sea

of artisans, etc

• The Role and Importance of Foreign Enterpise (Also High Surplus Area)– Mining, Plantation Agriculture and Export Agricultural Trade – Import-Export Trade and Top-Tier Distribution– Finance

Taxes (Forms)

• Dual Mandate: Increase Economic Surplus; Direct as Much of This into Re-investment– Personal and Corporate Income Tax– Agricultural Marketing Boards: (Attract and reinvest agric surplus)– Commodity Taxes: Domestic and International Trade.

• “Frontier” tolls; import duties and export taxes– Foreign Enterprise: E.g Mining Sector

• Royalties, Corporate Tax; Export Duties (a la Kaldor*); Controls on Profit Repatriation, Joint-Ownerships

– Compulsory Levy– Wider State Economic Activity:

• State Trading Companies; State Enterprises; State Financial Institutions: Commercial and Development Banks, Insurance, Pensions

Structural Adjustment and Neo-liberalism, (and maybe Ricardo’s Revenge)

• Comparative Advantage and Its Misapplication Under SAPs

• Taxes as Distortion of Market, A Necessary Evil That Must be Minimised.

(political economy, when the simple principles of it are understood, is only useful as it directs governments to the right measure of taxation, Ricardo)

Re-defined role and form of taxation

• Market is best left to its own• Public sector must limited to upholding

specific conditions for the market – property rights, law and order, essential public goods, redefined.

• Taxation to raise revenue to support this. But it must be done so that it does not interfere with the market.

• Question is what is the best tax instrument?

Example: Mining

“The recovery of the mining sector in Africa will require a shift in government objectives towards a primary objective of maximizing tax revenues from mining over the long term, rather than pursuing other economic or political objectives such as control of resources or enhancement of employment. This objective will be best achieved by a new policy emphasis whereby governments focus on industry regulation and promotion and private companies take the lead in operating, managing and owning mineral enterprises.”

Strategy for African Mining – World Bank, 1992

Implications

• Gravitation towards personal and corporate income taxes at low levels

• Dismantling of (many or all) other tax devices:– commodity and international trade taxes– commodity boards

• Dismantling of other means of direct public participation in attraction surplus for investment– privatisation of state enterprises—one-off returns to state coffers;– more seriously in strategic areas: finance, insurance, development

banking.

• Later adoption of VAT and others to make-up

Example: Mining

• Attract Foreign Investment. In context of race to the bottom. Thus, roughly similar over-generous tax regimes in all countries:- No VAT - No import or export taxes (except SL)- CIT rates down from 40% during 70s/80s to 30% or lower- Extremely low witholding taxes (between 10 and 15%) on dividends,

loan interest and consultant fees compared to other mining economies (20-35%).

- No windfall or additional profit taxes - Very low royalties: average 3%- Stability agreements

Elements of International regime

• Patchwork of Double Taxation Treaties– Formulated on the Appropriate to Capital Exporting as against capital

importing– Advanced Industrial Countries as cross-importers and exporters– Against Developing Countries as net importers– In addition vitiates Africa’s non-revenue use of taxes– Africa (and other developing) countries have shied away from DTT,

but:• Central concepts and principles still influence international business taxation: .e.g.

profits to permanent establishment, arms length principle in transfer pricing• More are being signed

• Trade and Investment regimes– Tariff and Financial Liberalisation in WTO; More aggressive expanstion in EPA

Effects

• Loss of Revenue• Public Deficit Trap:– Loss of broader means of revenue not compensated

• Collapse of the Transformatory Role of Fiscal Policy and of Capacity of the African State– Case of Rural Tranformation

• Taxation and Agricultural Serviees• RuralCase of Rural Credit: Cross-subsidised rural banking and post-

office saving and other financial institutions versus micro-credit.

Tax Justice Platform• Two mainstream Goals:

– Revenue: Maximising: TNCs, Illicit Flows– Strengthened Social and Public Goods Role.

• A new dimension: tax as medium of promoting representative democracy:– Shaky grounds both theoretically and historically IBattle of the Two Deborahs) – But effect is to privilege income-based taxation

• Both as a result of this focus, and explictly, the Africa-specific developmental role minimized/ignored– E.g. Attitude to Informal sector- taxation in return for services vis-a-vis the

economics of petty commodity production and transformatory investment – that is the various devices and forms where fiscal policy can intervene (in)

directly in the creation economic surplus and its re-directing towards the strategic investment for structural economic transformation

Another Approach

• Common Goals: Around TNCs• But Differentiated specifity of fundamental tax

imperatives:– Advanced Industrial World– Africa