0423 GMT October 22, 2017
Its ostensible aim is to aid developing countries in enhancing the administrative capacities of tax authorities as well as reducing informal economic activities and corruption, while promoting growth and investment. All well and good, until we get into the details, according to IPS.
First, the Report advocates not only administrative efficiency, but also lower tax rates. Any country that reduces tax rates, or raises the threshold for taxable income, or provides exemptions, gets approval.
Second, it exaggerates the tax burden by including, for example, employees’ health insurance and pensions and charges for public services like waste collection and infrastructure or environmental levies that the businesses must pay. The IMF’s Government Financial Statistics Manual correctly treats these separately from general tax revenues.
Third, by favorably viewing countries that lower corporate tax rates (or increase threshold and exemptions) and negatively considering those that introduce new taxes, DB is essentially encouraging tax competition among developing countries.
Thus, the Bank is ignoring research at the OECD and IMF which has not found any convincing evidence that lower corporate tax rates or other fiscal concessions have any positive impact on foreign direct investment.
Instead, they found net adverse impacts of tax concessions and fiscal incentives on government revenues. According to the research, factors such as the availability and quality of infrastructure and human resources were more important for investment decisions than taxes.
Moreover, the World Bank’s Enterprise Surveys do not find paying taxes to be high on the list of factors that enterprise owners perceive as important barriers to investment. For example, the Enterprise Survey for the Middle East and North Africa found political instability, corruption, unreliable electricity supply, and inadequate access to finance to be important considerations; paying taxes or tax rates were not.
Yet, the World Bank has been promoting tax cuts and tax competition as magic bullets to boost investment. Not surprisingly, thanks to its still considerable influence, tax revenues in developing countries are not rising enough, or worse, continue to fall. According to some estimates, between 1990 and 2001, reduction in corporate taxes lowered countries’ tax revenue by nearly 20 percent.
Instead of encouraging tax competition, therefore, the World Bank should help developing countries improve tax administration to enhance collection and compliance, and to reduce evasion and avoidance. According to OECD Secretary-General Angel Gurria, “developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid”.
Global Financial Integrity has estimated that illicit financial flows of potentially taxable resources out of developing countries was $7.85 trillion during 2004-2013 and $1.1 trillion in 2013 alone!